Saturday, December 22, 2012

Boilerplate trust drafting, debts secured by non-trust assets, a second marriage with children by a first marriage, a bad economy, and a trust with different beneficiaries than the estate beneficiary, combined to spawn “over 7 years of litigation in three states – Florida, Illinois and Minnesota”, culminating in the recent Minnesota Supreme Court decision, In the Matter of the Pamela Andreas Stisser Grantor Trust, 818 N.W.2d 495 (MN, 8/1/2012).

In this case, Pamela Stisser (the “Decedent”) married Vernon Stisser in 1983. The Decedent provided in her Will that all of her property in her own name, consisting of her roughly $3 Million Schwab brokerage account, pass to Vernon on her death, and she provided in the Pamela Andreas Stisser Grantor Trust (the “Trust”), the Decedent’s revocable trust, that her trust property, valued at approximately $9.1 Million, would be distributed equally to her three children from her first marriage and Vernon’s four children from his first marriage. Vernon was designated to serve as her Personal Representative and Decedent’s brother was the Trustee.

At the time of Decedent’s death in 2002, there was a total of approximately $4.3 Million in loans outstanding: (1) a margin loan on her brokerage account, (2) a mortgage on a residence in IL owned jointly by Decedent and Vernon, (3) a mortgage on a Naples, FL residence owned jointly by Decedent and Vernon, and (4) a mortgage co-signed by Decedent on commercial property owned by Vernon.

The Trust provided that “The Trustees shall, if requested by the legal representative of my estate, pay … my legal debts.” Vernon made demand that the Trustee pay the $4.3 Million in debts of the Decedent on the basis that the Trust required such payment under the language directing payment of “my legal debts”. The Trustee disagreed that this provision required such payment, but nonetheless offered to pay the debts if Vernon agreed that the property Vernon had owned jointly with the Decedent would be given to the seven children provided for in the Trust on Vernon’s death. Vernon found the offer unacceptable and ended up filing multiple law suits against the Trustee to force the Trustee to pay these secured debts.

In construing the language in the Trust concerning the direction to pay “my legal debts,” the Court discerned the Decedent’s “dominant intention” was to provide for the 7 children. While the Court stated that in construction actions the court generally construes “words and phrases according to their common and approved usage” unless the grantor uses technical words, in which case the court would generally apply the technical meaning associated with those words. The Court then reviews the use of the direction routinely included in wills “that all my just debts shall be paid out of my estate.” While the Court noted that this language originally had real meaning, this general direction to pay debts had become “boilerplate will language” that could be ignored as superfluous flowery language as a personal representative had the statutory ability to pay general debts of the decedent. The Court further stated that this “boilerplate will language has a commonly understood “technical meaning” that “does not authorize a testator’s personal representative or executor to pay the testator’s secured obligations.” The Court then applied this reasoning to construing the language in the Trust, which is basically a “will substitute” and concluded that the Trust language does not require the Trustee to pay the Decedent’s secured debts. The Court bolstered their construction by the fact that the Trust specifically stated that the Decedent had “intentionally omitted from this instrument any provisions for my spouse.” Since the payment of debts secured by property that would otherwise pass to Vernon would benefit Vernon, in contravention of the Decedent’s statement that she was intentionally not benefiting Vernon, the “pay … my legal debts” language could not have required the Trustee to pay Decedent’s secured debts.

The 7 years of litigation could have been avoided had the Trust provision directly addressed the fact that there were secured debts, secured by property that would not ever become part of the Trust, by providing either that all debts were to be paid, including debts secured by property not passing under the Trust, or by specifically limiting the direction to pay debts to include only those debts that were either unsecured or were secured by Trust property.

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