Ammerman v. Callender

• Decision Date: 23 March 2016
• Docket Number: G049880
• Citation: 245 Cal.App.4th 1058,200 Cal.Rptr.3d 38
• Court: California Court of Appeals Court of Appeals
• Parties: Douglas K. AMMERMAN et al., as Trustees, etc., Plaintiffs and Respondents, v. Cathleen CALLENDER et al., Defendants and Appellants; Donald Lucky Callender, a Minor, etc., Defendant and Respondent.

245 Cal.App.4th 1058

200 Cal.Rptr.3d 38

Douglas K. AMMERMAN et al., as Trustees, etc., Plaintiffs and Respondents,

v. Cathleen CALLENDER et al., Defendants and Appellants;Donald Lucky Callender, a Minor, etc., Defendant and Respondent.

G049880

Court of Appeal, Fourth District, Division 3, California.

Filed March 23, 2016

Rutan & Tucker, Theodore I. Wallace, Jr., Lisa N. Neal and Gerard M. Mooney, Costa Mesa, for Defendant and Appellant Cathleen Callender.

Sheppard, Mullin, Richter & Hampton, Randolph B. Godshall, Jacqueline A. Gottlieb, Costa Mesa, and Karin Dougan Vogel, San Diego, for Defendant and Appellant Catherine T. Callender.

Heaton & Heaton, Richard L. Heaton, Richard LaGrand Heaton; and Donna Bader, Laguna Beach, for Defendant and Respondent Donald Lucky Callender.

Jeffer Mangels Butler & Mitchell, Gordon A. Schaller, Irvine, and Neil C. Erickson, Los Angeles, for Plaintiffs and Respondents.

OPINION

THOMPSON, J.

This appeal concerns the interpretation and administration of the Donald W. Callender Family Trust (Trust), executed by Donald W. Callender (Donald) as the settlor and original trustee in 2003.¹ Defendant and appellant Cathleen Callender (Cathe), defendant and appellant Catherine T. Callender (Katy), and defendant Donald Lucky Callender (Lucky),² the primary beneficiaries of the Callender Trust (Beneficiaries), are at odds primarily about how the residuary of the Trust is to be divided. The bulk of the assets which comprise the residuary are cash and other liquid assets, real property, and royalty agreements for licensing of the Marie Callender name. The Trust provided that upon Donald's death, the residuary was to be divided into thirds and vested in each of the Beneficiaries.

Plaintiffs and respondents Douglas K. Ammerman (Ammerman) and Janet Feldmar (Feldmar; collectively Trustees) succeeded Donald as the trustees upon his death in January 2009. When disputes arose among the Beneficiaries as to division of the residuary, they filed a petition for instructions.

After trial, the court ruled the Trust residuary should be divided based on what the parties referred to as the "changing fraction method." The effect of this method is that when non-pro rata payments and distributions were made, including most prominently estate tax payments by Cathe and Lucky only, the Beneficiaries' fractional interests were to be revalued and changed from the original one-third allocations to each.

The central issue on appeal is whether the court erred in ruling the changing fraction method applied to the residuary. Cathe argues, based on the terms of the Trust that initially divided the residuary into one-third interests for each of the three Beneficiaries, those percentage interests remained fixed and the changing fraction method does not apply. More specifically, she asserts the Beneficiaries' percentage interests in the residuary did not change when the estate taxes were paid by Cathe and Lucky, or when other non-pro rata payments or distributions were made.

Katy and Lucky argue to the contrary that the payment of the estate taxes immediately reduced Cathe's and Lucky's percentage interests in the Trust residuary to approximately 25 percent each, and simultaneously increased Katy's percentage interest to approximately 50 percent.³ Katy and Lucky further contend those changed percentage interests in the Trust residuary must be applied to future payments and distributions, and must be recalculated every time non-pro rata payments and distributions are made, using the changing fraction method.

This substantial difference in approach dramatically affects the ultimate division of the residuary assets of the Trust. And it is especially important as applied to the most valuable asset in the residuary, the royalties payments resulting from licensing of the Marie Callender's name, valued at $37 million on the federal estate tax return and perhaps worth substantially more now.

As a second issue, Cathe contends the court erred when it ruled she was responsible for a portion of the estate taxes on a piece of real property left to her outright, because the Trust stated she was not to be liable for any taxes.

We conclude Cathe is right on both of these issues. The court erred in ruling the changing fraction method applied to the Trust residuary, and that Cathe should be charged taxes on the gift of her property. Therefore we reverse the judgment.

Katy filed a cross-appeal, raising three issues. First, she disputes the revaluation of the assets in the residuary after values were established for the federal estate tax return. Second, she challenges how the court applied an income tax overpayment. Finally, she claims it was error for the court to exclude more than $2.5 million attributable to her life estate in several pieces of residential real property from the value of the residuary. These issues are all based on application of the changing fraction method. Because we conclude the changing fraction method is not applicable and reverse the judgment, these issues are moot.

Cathe's request for judicial notice regarding a related case filed by Katy is not relevant and we deny the request.

Additional facts are set out in the discussion.

FACTS AND PROCEDURAL HISTORY

1. Terms of Trust and Distributions and Payments

Cathe is Donald's daughter from his first marriage. Katy is Donald's surviving widow. Lucky is Donald's son with Katy.

On Donald's death the assets of the Trust included cash, securities, real estate, and trademark license agreements (License Agreements) paying royalties (Royalties) for use of the name "Marie Callender's." The total value shown on the federal estate tax return was approximately $143 million. The most valuable assets were the License Agreements. From Donald's death until the time of trial, $67 million in Royalties had been paid.⁴ The remaining Royalties were estimated to be worth between $64.8 million and $83 million.

The Trust provided for specific gifts, including real property in Corona del Mar (Goldenrod Property) to Cathe. (Article IV, Section B, Paragraph 2b.) According to the Trust this gift "shall be free from any federal estate taxes, inheritance or succession taxes, generation skipping transfer taxes, or any other taxes payable upon or resulting from or by reason of the death of the settlor." (Article IV, Section B, Paragraph 2h.)

The Trust directed that "[o]n the death of the settlor, and after the [specific] distributions" are made, "the trustee shall divide the trust estate ... into separate parts or shares. This division shall be made either by physical segregation of the assets or by assignment or transfer of undivided interests in the whole or any part of the trust property." (Article IV, Section B, Paragraph 3a.) The assets were to be divided, one-third each, to subtrusts for Cathe, Katy, and Lucky (Cathe's Trust, Katy's Trust, & Lucky's Trust, respectively; collectively Subtrusts).

The Trust allowed the Trustees to withhold payments to the Subtrusts during an initial holding period, although the Subtrusts continued to have the right to receive income from the assets. (Article V, Section F, Paragraph 13.) The Trust further provided that "[w]henever the trustee is directed to make a distribution of trust assets or a division of trust assets into separate trusts or shares on the death of the settlor, the trustee shall have the discretion to defer such distribution or division until six months after the settlor's death. However, the interest of the settlor's spouse in any marital deduction trust or outright distribution qualifying for the marital deduction shall vest immediately on such settlor's death." (Article V, Section E, Paragraph 17b.)

The Trustees did not either physically or on paper create the three Subtrusts and show assets going into those Subtrusts.

The Trust required that upon Donald's death, the Trustees were to pay all estate taxes and apportion them to the Subtrusts. (Article VIII, Section A.) Katy's Trust was not to "be reduced by any inheritance, estate or transfer taxes." (Article IV, Section C, Paragraph 2.) As a result when the Trustees paid the estate taxes they were to charge them to Cathe's and Lucky's trusts. (Article VIII, Section A.) The taxes were to be "collected from or charged to those persons before distributions from the [Trust] or any subtrust." (Ibid. )

The Trust allowed the Trustees to make advances or loans to the subtrusts. (Article V, Section E, Paragraph 6.) Such an advance or loan was to bear interest at the current rate. (Ibid. )

In October 2009, the Trustees deposited $38.8 million for the federal estate taxes, and debited $19.4 million each of principal from Cathe's Trust and Lucky's Trust.

In January 2010 the Trust filed the federal estate tax return, showing the value of Katy's Trust as $40,534,798 (47.714 percent), Cathe's Trust as $22,479,541 (26.461 percent), and Lucky's Trust as $21,939,541 (25.825 percent).⁵ After the IRS audit, there were two subsequent slight adjustments from a refund and then an additional payment.

In May 2012, the Trustees sent a letter to the Beneficiaries (May 2012 letter) proposing to distribute the residuary to the Subtrusts according to slightly revised percentages (46.795 percent, 27.042 percent, and 26.173 percent to Katy's Trust, Cathe's Trust, and Lucky's Trust, respectively). They asked the Beneficiaries to agree to those percentages, which each of them did. The Trustees then distributed a total of $18,080,257 in principal to the Beneficiaries in those percentages. The Trustees had also distributed tens of millions of dollars in unequal proportions to the Beneficiaries when they requested or needed a distribution. By December 2012, distributions totaled $39,760,510.91 from Katy's Trust, $21,041,956.52 from Cathe's Trust, and $18,170,251.86 from Lucky's Trust. Payments on account of the estate taxes are not included in these amounts.

Jack Barcal was the attorney for administration of the Trust. He had been Donald's lawyer and drafted the...