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SJC-11698
MARY-KATHLEEN O'CONNELL & another,1 trustees,2 vs.
GEORGE C. HOUSER, JR., & others.3
October 28, 2014.
Trust, Reformation. Taxation, Generation skipping transfer tax.
The trustees filed a complaint in the county court seeking
reformation of the trust established under Article Fourth of the
Mary R. Houser Trust -- 1991 to correct a drafting error that
they contend frustrates the intent of the settlor and her
husband to provide for their descendants in an efficient and
tax-advantageous manner. Apart from the Commissioner of
Internal Revenue, who has not appeared, the parties with
competency to do so have stipulated for themselves and their
minor, unborn, and unascertained issue to the facts underlying
the complaint and assented to the relief requested. A single
justice of this court reserved and reported the case to the full
court.4
1
Dennis J. Phillips.
2
Of the trust established under Article Fourth of the Mary
R. Houser Trust -- 1991.
3
Charlene D. Houser, Addison Houser, Austin Houser, George
C. Houser, III, Victoria Houser, Julia Houser, and the
Commissioner of Internal Revenue. The complaint also names
"others," referring to "unborn and unascertained issue of Mary
R. Houser."
4
The parties have moved to dispense with appointment of a
guardian ad litem for any minor, unborn, and unascertained
descendants of Mary R. Houser. "[I]t is preferable that this
2
Background. As part of their estate plans, George C.
Houser (George Sr.) and Mary R. Houser (Mary) established trusts
to provide income for their sons, George C. Houser, Jr. (George
Jr.), and Horace M. Houser (Horace), while preserving principal
for future generations. The George C. Houser Trust -- 1980
(George Houser Trust) became irrevocable on George Sr.'s death
in 1983. It established two trusts for Mary's benefit during
her lifetime, and gave her a power of appointment over one of
the trusts (the marital trust). On Mary's death in 1993, the
principal remaining in the George Houser Trust was divided into
two "share trusts," one for each of the Housers' sons. Each son
was given a power to "appoint by his will" any property
remaining in his respective share trust on his death "to such
one or more of the Donor's issue" or to trusts for their
benefit. The parties represent that the property contained in
the share trusts is not subject to the Federal generation
skipping transfer (GST) tax.5 The George Houser Trust provided
that each share trust:
"shall terminate whenever after the death of said child of
the Donor [George Sr.] no issue of said child is living, or
upon the expiration of twenty-one (21) years after the
death of the last survivor of the Donor, the Donor's wife
MARY and all of the Donor's issue by blood living at the
Donor's death, whichever shall first occur." (Emphasis
added).
After George Sr.'s death and enactment of the GST tax, Mary
established the Mary R. Houser Trust -- 1991 (Mary Houser
Trust). She exercised her power of appointment over the marital
trust property by appointing it to the trustees of the Mary
Houser Trust. She directed that, on her death, an amount equal
to her GST exemption be held in a family trust established under
court be furnished with and have the benefit of an independent
guardian's opinion concerning the possible consequences of the
reformation for those beneficiaries." Fiduciary Trust Co. v.
Gow, 440 Mass. 1037, 1038 n.7 (2004). In the circumstances of
this case, we allow the motion.
5
The parties state that the assets contained in the George
Houser Trust (and the share trusts created under it) and the
distributions from it are exempt from the Federal generation
skipping transfer (GST) tax because the trust became irrevocable
prior to September 25, 1985, and it is therefore
"grandfathered." See generally Morse v. Kraft, 466 Mass. 92, 94
n.7 (2013).
3
Article Fourth of her trust. The parties state that
distributions from the family trust to Mary's grandchildren and
more remote descendants are fully exempt from the GST tax.
According to its terms, the family trust will terminate:
"(i) whenever after the death of the Donor [Mary] no issue
of the Donor is living or (ii) upon expiration of twenty-
one (21) years after the death of all of the Donor's issue
living on the date of the Donor's death, whichever event
shall first occur." (Emphasis added).
When George Sr. died in 1983, and Mary died in 1993, their
"issue by blood" were the same: George Jr. and Horace, and
George Jr.'s children, Charlene Houser and George C. Houser,
III.
Discussion. Horace died on December 9, 2009, without
having had any children. He exercised his power of appointment
over his GST-exempt share trust by directing that the property
be added to the GST-exempt family trust. The trustees contend
that the GST-exempt status of the property held in Horace's
grandfathered share trust is lost if a power of appointment over
the property is exercised:
"in a manner that may postpone or suspend the vesting,
absolute ownership or power of alienation of an interest in
property for a period, measured from the date of the
creation of the trust, extending beyond any life in being
at the date of creation of the trust plus a period of 21
years."
26 C.F.R. § 26.2601-1(b)(1)(v)(i)(B)(2). Because the duration
of the family trust as drafted is not measured solely by the
lives of Mary's "blood issue" -- it potentially includes the
lives of adopted persons -- the parties state that termination
of the family trust may extend beyond the termination of the
George Houser Trust. They contend, therefore, that unless the
family trust is reformed by adding the words "by blood" to its
termination provision (as with the George Houser Trust), the
GST-exempt property appointed to the family trust by Horace not
only will lose its tax exempt status, but it will also make
administration of the trust cumbersome.
Where, as the result of a drafting mistake, a trust
instrument fails to accomplish the settlor's intent, or leads to
results inconsistent with that intent, reformation is
appropriate. See Rockland Trust Co. v. Attorney Gen., 463 Mass.
4
1004, 1005 (2012), citing Walker v. Walker, 433 Mass. 581, 587
(2001); Bindman v. Parker, 459 Mass. 1004, 1004 (2011).6 We
require clear and decisive proof that the instrument as drafted
"fails to embody the settlor's intent," and produces "tax
results . . . clearly inconsistent with the settlor's tax
objectives." Walker v. Walker, supra (citations omitted).
Here, the trustees have adduced the requisite proof. From the
trust instrument itself, Mary's and George Sr.'s over-all estate
plans, the affidavit of Mary's attorney, and the proof of other
circumstances known to Mary at the time she created her trust,
it is clear that she intended the family trust to complement her
husband's estate plan and to operate as a vehicle to preserve
Houser family property for the benefit of the Housers'
descendants with the least GST tax burden possible. Among other
things, after the enactment of the GST tax, Mary exercised her
power to appoint her taxable marital trust property to a
separate trust, executed the family trust, and then funded it
with her maximum GST exemption amount, with the understanding
that a single trust (containing GST-exempt property) would be
the most efficient and tax-advantageous way to provide for
future generations.
In these circumstances, we are satisfied that omission of
the words "by blood" was not intentional and that it was,
instead, the result of a mistake in drafting. The affidavit of
Mary's attorney and the agreed facts further support this
conclusion. Omitting the words "by blood" in the family trust's
termination provision had the unintentional effect of decoupling
the settlor's plan from that of her husband, and inadvertently
frustrates her estate planning objectives. Without reformation
to include the omitted language, Horace's exercise of his power
of appointment to add property from his father's trust to the
family trust will defeat her purpose.
Finally, we announce a change in procedure for future cases
such as this. On October 1, 2014, the court voted to adopt the
"Amended Report of the Supreme Judicial Court's Ad Hoc Committee
on Bosch Litigation" and to accept the committee's
recommendations contained in the report. Consequently, in the
future, cases like this -- which involve no novel or unsettled
issue of Massachusetts law, require only the application of
6
Cases like this raise issues of State law, which the
parties ask us to resolve because of their Federal tax
implications. See Walker v. Walker, 433 Mass. 581, 582 (2001);
Kirchick v. Guerry, 429 Mass. 215, 217 (1999) (in reformation
cases, court decides State law issues, not Federal law issues).
5
settled Massachusetts legal principles to a particular set of
facts, and have no particular significance beyond the specific
parties and the specific facts involved -- should ordinarily be
heard and decided in the Probate and Family Court. The report
is available online on the court's web site and in the offices
of the clerks of the county court and the full court.
Conclusion. A judgment shall enter reforming the family
trust (subsection 2 [ii] of Article Fourth of the Mary R. Houser
Trust -- 1991), by inserting the term "by blood" after the
phrase "all of the Donor's issue."
So ordered.
The case was submitted on briefs.
Mary-Kathleen O'Connell, Jennifer Locke, & Janet
Rickershauser for the plaintiffs.