The Superior Court Illustrates How Careless Estate Drafting Comes at a Price.

Last week (12/20/24), we wrote about how complex even simple estate planning can become in a blog that discussed “alternate wills” using electronic means. We gently offered that while packaged estate planning documents are now freely offered on-line, these come with their own dangers. One day before our post, on December 19, 2024 the Superior Court showed in a case we’ll call Estate of Michel, just how a subtle difference in language can pack a powerful wallop to some beneficiaries.

The sense of the case is that this is a second marriage case where the parties hoped to use a trust to keep things peaceful between the unrelated children of the couple. The parties put their assets in a trust which allowed them to draw both interest and principal for their own care, comfort and maintenance while they were living. Those provisions would also apply to the surviving spouse for his/her lifetime.

But the language in the 1994 trust didn’t quite say that. Rather, it said:

D. Upon the death of either one of us the survivor shall continue to receive the net income from this trust, but shall only ever have the right to withdraw, receive or have paid for their benefit up to one-half (1/2) of the principal of this trust during the survivor’s lifetime so that there are assets left to be distributed to our children as provided in Article II below, with the value of the amount of principal subject to withdrawal determined as of the date of death of the first of us to die; however, notwithstanding this restriction on the withdrawal of principal, the principal may be invaded even to exhaustion for medical expenses not covered by insurance.

II. Trusts After Our Death: After the death of both of us, our trustees shall distribute all of the remaining principal and any accumulated income to our five (5) children, [named below in the trust] per stirpes.

Note: per stirpes is, a legal term that is somewhat complex. For this case, it essentially meant five equal shares.

So, in this case, it is the wife who dies first in 2007. In the ensuing years, the survivor husband started employing trust income to fund acquisitions of real estate which he later distributed to his children alone and the exclusion of his wife’s kids. When he died, the wife’s kids figured out that their step-father had siphoned about a million dollars out of the trust using the provision which placed no limitation on his withdrawals of (a) interest and (b) principal so long as it did not exceed half of the trust assets. They sued the trustees trying to recoup these assets for the trust in accordance with the general provisions for equal treatment.

They lost because neither the trial nor the appellate court could find language in the trust preventing the surviving husband from raiding what was his entitlement under the language specified above. From the inception of the trust, both spouses were entitled to take income and principal without limitation. It did not have to be need based. Then, once one spouse died the fifty percent limitation came into play but it was only measured arithmetically at the date of the husband’s death.

Part of the claim was that in 2010 surviving husband drafted a revised after wife’s death naming his kids as beneficiary of his estate including the income he was taking after wife’s death. During the original estate planning process, both husband and wife had prepared wills directing the residue of their estates to go to the trust they created. The will giving wife’s share to the trust was in effect when wife died.  Husband’s will at the time did the same but then he made the switch to his kids. The clear intent would seem to be that he should not have been permitted to change his will after wife’s death but nothing in the trust instrument or any other document contained that kind of limitation. A 1978 Supreme Court case, Estate of Kester holds that any language intended to limit a testator’s power to control disposition of his/her estate needs to be shown by clear and convincing proof.  383 A.2d 914, 918 (Pa. 1978). While they had made the same provisions in their wills when they prepared them and executed the trust.

The Superior Court opinion suggests that husband took the $1 million to acquire half-interests in about 19 properties using his trust income only. But, it would appear that he could have pulled principal as well because there was no limit on the purpose of the withdrawal, so long as it did not exceed half.  One of the challenges this could have presented would be the measurement date. In this case wife died in 2009. At that time the S&P500 was sitting at about 1,200. Let’s assume the husband came back from the funeral and made an instant pull of his entitlement to up to half the trust value during his lifetime. If the trust was a million dollars, he would have been able to “take” $500,000 and still collect all of the income on the remaining $500,000. In an S&P 500 index world, he took at the bottom of the market and his “separate” estate would be $1,500,000 today. When he died in July 2021, his kids inherited that $1,500,000 and would receive half of the income from the $500,000 husband could not take. That would be another $1,500,000. So his family got the benefit of $2,250,000 and wife’s family would have the benefit of $750,000. So, the dream of an even split between the amalgamated families now looks more like a 75/25 split and wife’s family has all of theirs in trust while husband’s trust share is 25%.

Was this intended? The answer seems to be: not likely. But the trust and wills did not sow up the deal in way that was intended. Bear in mind that while the plan is for assets to increase over time, market volatility provides its own spin on things and while the right to take “half” of the trust assets seems fair on its face, market timing can create a very untidy result from the estate “plan.”

Most of us who are married do joint estate planning and that typically involves what estate lawyers term “I love you” wills where each spouse names the surviving spouse as beneficiary. Here, because a second marriage was involved, the parties sagely decided to employ a trust to keep thing equal. Two takeaways from this. Section 2701 of the Estate Law in Pennsylvania makes clear that just because you think you remain your spouse’s beneficiary and saw him/her sign the same document you did, does not mean they don’t have a right to change their will a day or a decade later (20. Pa.C.S. 2701). The second takeaway is to be careful how the limits on any trust work. Here, there is little doubt what was intended but the language in the trust instrument allowed the surviving spouse to alter what was “intended” when the estate plan was created. Bear in mind that in this case it seems the husband used only the income from the trust to fund his separate estate. Wife’s family claims this was a foul even though he never touched the principal despite his entitlement to draw up to half.

We captioned this article using the word “careless.”  But, it’s not clear how the draftsman could have avoided part of this problem. The wills could have been locked down through an express contract not to modify the remainder beneficiary (i.e., the trust). The problem is that the surviving spouse could still have employed the trust income and part of the principal to buy things and then give them to whomever he wanted on an inter vivos basis. What the couple wanted was to provide that the survivor would enjoy the same lifestyle the couple had while living together; not more or less. That’s tough to forecast in a world where stocks and interest rates are constantly changing. And it’s even tougher to regulate in estate planning documents.

Hay v. Michel, 472 EDA 2024