Estate of Canales, In re

• Citation: 837 S.W.2d 662
• Decision Date: 17 June 1992
• Docket Number: No. 04-91-00476-CV,04-91-00476-CV
• Parties: In re ESTATE OF Praxedis CANALES, Deceased.
• Court: Texas Court of Appeals

Page 662

837 S.W.2d 662

In re ESTATE OF Praxedis CANALES, Deceased.

No. 04-91-00476-CV.

Court of Appeals of Texas,

San Antonio.

June 17, 1992.

Rehearing Denied Aug. 5, 1992.

David Diaz, Robert M. Zamora, Tom C. Wheat, Kathryn F. Green, Kleberg & Head, P.C., Wm. DeWitt Alsup, Alsup & Alsup, Corpus Christi, O.C. Hamilton, Jr., Atlas & Hall, McAllen, Hubert W. Green, Robert D. Reed, Green, McReynolds & Reed, San Antonio, for appellant.

Kim Cox, Cox & Robinson, Corpus Christi, J.G. Adami, Jr., Perkins, Oden, Warburton, McNeill, Adami & Paisley, Homer E. Dean, Jr., Tracy L. Spoor, Dean & Hunt, P.C., Alice, for appellee.

Before BUTTS, PEEPLES and BIERY, JJ.

PEEPLES, Justice.

Tomas Canales appeals from an order that (1) denied his motion for summary judgment to declare his father's trust arrangement invalid, (2) denied his motion to remove his brother Terry as executor of his father's estate, (3) granted Terry's motion for summary judgment declaring the trust valid, and (4) allowed the estate to be closed. At stake is whether the estate of Praxedis Canales passed in trust to Terry Canales as trustee for Praxedis' three adult children (Terry, Tomas, and Teresa), or whether the trust arrangement failed and their shares passed to them free and clear.

On February 22, 1982, Praxedis Canales executed two instruments: a trust agreement and a will. The trust agreement established two different kinds of revocable inter vivos trusts. The first trust provided that Praxedis would have income during his lifetime, and that upon his death the trust assets would pour into separate standby trusts for the benefit of his three children. ¹ This second set of trusts consisted of the three standby trusts, which would receive the poured-over assets from the first trust and the assets from Praxedis' probate estate.

One issue in this appeal is whether both sets of trusts failed for lack of funding. In the trust agreement, Terry as trustee acknowledged the receipt of $1.00 in cash and the property listed on "Schedule A" as the trust property of the first trust. At the time of Praxedis' death, however, approximately two months after he signed the will and the trust agreement, "Schedule A" remained blank. The standby trusts were not funded, nominally or otherwise. Praxedis died in April 1982, and the will was probated in May.

In April 1988, Terry (the executor of the estate and the trustee of all the trusts) filed his petition for final accounting, distribution, closing of estate, declaration of rights, termination of trustee, and release and discharge of executor and trustee. Tomas and Teresa answered and filed counterclaims, and the case was transferred to the district court. In his original counterclaim, Tomas alleged usury and mismanagement of the estate by Terry. He later amended his counterclaim and challenged the validity of the entire trust arrangement. Tomas and Teresa filed separate motions for summary judgment. Terry also filed his motion for summary judgment, and the Unborn and Unascertained Beneficiaries of the Estate of Praxedis Canales were allowed to join in his motion. The court granted Terry's motion in part and denied the motions filed by Tomas and Teresa. Teresa has not appealed.

The judgment upheld the validity of the will and both sets of trusts created in the trust agreement. The court also found that the beneficiaries had received benefits under the will and trust agreement, and had ratified and were estopped to deny the dispositive provisions of both instruments. Tomas appeals not only the granting of Terry's motion but also the denial of his own motion, which asked the court to declare the trust agreement invalid. See Jones v. Strauss, 745 S.W.2d 898, 900 (Tex.1988); Tobin v. Garcia, 159 Tex. 58, 316 S.W.2d 396, 400-401 (1958). Prior to ruling on the summary judgment motions and after hearing several days of testimony, the court also denied Tomas' motion to remove Terry as the executor of the estate and allowed the estate to be closed. Tomas asserts in five points of error that the court erred in its rulings on the summary judgment motions, in refusing to remove Terry as executor, and in closing the estate. By cross-point Terry challenges an order directing him to make disbursements from a spendthrift trust directly to the beneficiary. We reverse the summary judgment declaring the will and trusts valid because Terry's motion did not request that relief; we affirm the remainder of the judgment.

I. VALIDITY OF FIRST TRUST.

Tomas contends that his motion for summary judgment should have been granted because the first trust was never funded and therefore never existed under Texas law. Article IV of the will provides, "If the Trust Agreement is not in existence at the date of my death, I give all of the residue of my estate to those of my descendants who survive me per stirpes." Tomas argues that the trust agreement failed and the estate should be distributed per stirpes.

If the first trust was never funded, we do not see how Tomas was harmed. The first trust existed totally for Praxedis' benefit during his lifetime. It terminated when he died. If it was not funded, that has no effect on the validity of the standby trusts. If the first trust had no corpus, all of Praxedis' assets were in his probate estate, which he left to the three standby trusts.

Tomas seems to assume that if the first trust failed, the standby trusts failed also. But if the first trust and the standby trusts had been created in two different instruments, the invalidity of the first trust would have no bearing on the validity of the others. We see no reason why their creation in one instrument should make a difference.

In any event, the first trust was in fact funded. Nominal funding is a sufficient corpus; a nominally funded trust is considered legally in existence and ready to receive the real assets at the proper time in the future. See Ronald R. Cresswell, Revocable Inter Vivos Trusts and Other Disability Planning Tools, in STATE BAR OF TEXAS ADVANCED ESTATE PLANNING & PROBATE COURSE Q-3 (1990); Thomas M. Featherston, Jr., Revocable Trust Planning v. Traditional Testamentary Planning, in STATE BAR OF TEXAS ADVANCED ESTATE PLANNING & PROBATE COURSE J-32 (1991). Moreover, even though Schedule "A" was left blank, abundant property can nevertheless be identified from other provisions of the trust agreement. Section 1.6 provides in part:

This trust shall terminate upon the death of the Grantor. Upon termination, the Trustee shall distribute the assets of the trust (which remain after the payments provided in section 1.5, or subject to obligations for taxes and expenses as provided in section 1.5) as follows, subject to the provisions of Article II: ²

(a) The La Cabra Ranch (excluding the surface rights to the La Cabra Ranch Headquarters) and all of the cattle on the La Cabra Ranch....

(b) The surface rights to the La Cabra Ranch Headquarters....

(c) All real property located in Duvall County, Texas....

(d) That 232 acre tract of land (more or less), located in Cameron County, Texas, which is on the Rio Grande River and is known as MARIA TERESA.... (Emphasis added.)

The first trust did not fail for lack of funding.

II. VALIDITY OF STANDBY TRUSTS.

Tomas challenges the validity of the standby trusts on two grounds: (a) because they did not exist before his father's death, the standby trusts could not receive assets from the estate because the trust agreement was not executed with the formalities required by the Probate Code; and (b) the standby trusts do not qualify as proper standby trusts under section 58a of the Probate Code because they were not funded.

The trust agreement provides: "This [first] trust shall terminate upon the death of the Grantor. Upon termination, the Trustee shall distribute the assets of the trust [after paying taxes and expenses] as follows, subject to the provisions of Article II: ..." The instrument then directs that certain assets be given to each child and channels the residue equally into the three standby trusts.

A.

Tomas first argues that standby trusts, which are set up to receive assets upon the settlor's death, must be executed with the same formalities as the probate code requires for wills. Citing the language from Article II quoted above, Tomas argues that the three standby trusts were testamentary because they did not come into existence until Praxedis' death. The supreme court stated in Land v. Marshall, 426 S.W.2d 841 (Tex.1968), "If the death of the trustor is a condition precedent to the creation of a trust, the requirements for the execution of a will must be met." Id. at 844. The typewritten Trust Agreement is not witnessed and therefore would not satisfy the probate code. See TEX.PROB.CODE § 59 (Vernon Supp.1991).

But the court in Marshall was referring to testamentary dispositions, not inter vivos trusts that are revocable during the settlor's lifetime, as its citation to the restatement of trusts makes clear. The restatement reporter's note, cited in Marshall, makes this distinction:

There is a difference between the situation where the death of the settlor is a condition precedent to the creation of a trust, and the situation where the trust is created during the lifetime of the settlor, although he reserves power to revoke it. In the former case no trust is created unless the requirements for the execution of a will are complied with. In the latter case the trust is not testamentary and may be created without compliance with the requirements for the execution of a will.

RESTATEMENT (2D) OF TRUSTS § 57 Reporter's Notes (1959). The standby trusts that Tomas attacks are inter vivos trusts, not testamentary dispositions; they were set up to receive property from a testamentary disposition. The trusts took effect on Praxedis' death only because at that time he lost the power to revoke them.

This reading of Marshall and the restatement is consistent with the Texas statutes. The...