Trust Terms Required Farmland Be Sold Or Distributed Within Three Years – Six-Year Contract Sale Not Allowable

April 15, 2013 | Erika Eckley

In this case, the father established a revocable trust during his lifetime. After discussion with his children regarding the family’s farmland, he revised the trust to include an option in favor of one of his sons to purchase the farmland.  The trust terms gave the son three years from the date of the father’s death to exercise the option.  Until the earlier of the son’s purchase of the land or the option’s expiration, the children, as beneficiaries, were to receive the income from the land. If the son did not exercise his option to purchase the land, the land was to be sold and the proceeds distributed to all of the children. The trust document also included a no-contest clause to prevent legal fights regarding the trust.

The trustees, one of whom was the son who had the option to purchase the farmland, allowed the son to exercise the option by executing a six-year contract sale at five percent interest. Another son sought an accounting from the trust and challenged the contract sale as contrary to the terms of the trust.  The trial court upheld the trust’s provision authoring the trustees to sell the farmland to the son, but also held that the son’s lawsuit violated the no-contest clause of the trust resulting in his disinheritance.

On appeal, the Kansas Supreme Court held that the trust terms required a sale of the farmland within three years – within the timeframe of the option. Because the contract sale would not be completed within three years, and might not even be completed within six years if the purchaser defaulted, the Court held that the contract sale was not permitted under the terms of the trust.  The pertinent provision stated as follows:

Upon my death, my Trustees shall have the farmland appraised. Based upon that appraisal, DENNIS HAMEL, has the option to purchase any or all of the farmland for three years immediately following my death at the appraised price. During such time period, the trust shall continue to hold the farmland not yet purchased by DENNIS HAMEL. All net income from the farmland shall be distributed annually to the beneficiaries in accordance with the above listed beneficiary’s fractional share of the trust. If DENNIS HAMEL has not purchased the farmland within the allotted time period then it shall be divided in accordance with the above beneficiary’s fractional shares.

The Court believed that the trust language showed a clear intent that the farmland would be disposed of within three years of the decedent’s death either to the purchasing son or by a division of the farm property among the beneficiaries. Thus, the contract sale for six years contravened that intent. The Court clarified that the trust did not specifically indicate that the trust would terminate in three years, but this was different than the clear intention that the farmland be sold or distributed within three years.

Because the terms of the six-year contract for deed violated the express provisions of the trust requiring disposition of the farmland within three years, the trustees were not authorized to sell the farmland to the purchasing son under the terms set forth in the contract for deed.  However, because the purchasing son had paid the full contract price before the expiration of the three year period, there was no need to set aside the contract.

Also, the Court held that the challenging son did not violate the terms of the no-contest clause because he had probable cause to challenge the trustees’ authority to enter into a contract for the sale of the farmland that extended beyond the trust’s three-year term.   That probable cause arose from the Court’s conclusion that the trustees improperly entered into a six-year contract for sale of the farmland to the son.  As such, the challenging son did have probable cause and should not have been disinherited through the no-contest clause.  Accordingly, the Court remanded this issue to the trial court for further proceedings consistent with their conclusion. The Court also remanded the issue of attorney fees to the trial court because fees had originally been assessed against the challenging son as the losing party, which he no longer was.

A dissenting opinion was filed.  The dissent believed that the six-year contract for deed was a valid purchase of the farmland within the time period established by the trust. According to the dissent, the formality of a contract for deed accompanied by the facts that the purchasing son acquired the right of possession, retention of income, duty to pay taxes and upkeep of the farm is sufficient to establish a purchase authorized by the trust instrument occurred.  Hamel v. Hamel, No. 102,744, 2013 Kan. LEXIS 238 (Kan. Sup. Ct. Apr. 5, 2013).