In re Estate of Rutter

• Decision Date: 06 September 2001
• Docket Number: No. 99-0208.,99-0208.
• Citation: 633 N.W.2d 740
• Parties: In the Matter of the ESTATE OF Henrietta P. RUTTER, Deceased. Dennis W. Rutter, Appellant, v. Dwight E. Rutter, Appellee.
• Court: Iowa Supreme Court

633 N.W.2d 740

In the Matter of the ESTATE OF Henrietta P. RUTTER, Deceased.

Dennis W. Rutter, Appellant, v. Dwight E. Rutter, Appellee.

No. 99-0208.

Supreme Court of Iowa.

September 6, 2001.

Rehearing Denied October 3, 2001.

Robert W. Sackett of Sackett & Sackett, P.C., Milford, for appellant.

Michael J. Houchins of Zenor & Houchins Law Office, Spencer, for appellee.

TERNUS, Justice.

This case arises from an unfortunate dispute among the beneficiaries of the estate of Henrietta Rutter. The executor of the estate, Dennis Rutter, appeals the district court's ruling sustaining some of the objections made by a beneficiary, appellee, Dwight Rutter, to the executor's accounting, final report, and proposed distribution. The beneficiary cross-appeals from the court's refusal to impose sanctions on the executor for his handling of these matters.

Upon our de novo review, we affirm the trial court's ruling that the beneficiaries made an oral agreement to forgive debts owed by two of the beneficiaries, Dwight and Douglas Rutter. We reverse the trial court's finding that this family agreement did not include an understanding that the beneficiaries would forego any challenge to the claim of the executor that the decedent had gifted two pieces of farm equipment to him prior to her death. In addition, we also affirm the trial court's denial of extraordinary fees to the executor and his attorney. On the cross-appeal, we reverse the trial court's refusal to remove the executor as a sanction for his handling of the estate. We remand for appointment of a new executor and attorney and for the preparation of an amended accounting, final report, and proposed distribution in accordance with this court's decision on appeal.

I. Background Facts and Proceedings.

The decedent, Henrietta Rutter, died testate on September 2, 1995. Four children survived her: Douglas Rutter, Dwight Rutter, Dennis Rutter, and Jane Ann Stout. Henrietta's husband and the children's father, Dean Rutter, had predeceased Henrietta in 1982. In order to understand the objections made to the final report and distribution of assets in Henrietta's estate, some history of Dean's estate is helpful.

Dean was a farmer, as are Dean and Henrietta's three sons. When Dean died, he bequeathed specific parcels of farmland to his sons, with each son receiving approximately one half section. Henrietta inherited Dean's fifty-percent interest in Rutter's, Inc., a family farm corporation that also owned farmland. Henrietta, by virtue of her ownership of the other fifty percent of Rutter's, became the sole owner of the corporation.

The Rutter brothers decided to defer payment of the federal estate tax owed on the land they inherited. See I.R.C. § 6166 (West 1984). Under this election, the tax was to be paid over a fifteen-year period at four percent interest, with only interest payments in the first four years. In the initial years, each brother paid one-third of the estate tax installment. From 1988-1990, however, Dwight was unable to pay his share. During this period, Douglas and Dennis each paid one-half of the taxes when they came due. In 1991, Dwight was financially able to resume payment of his share of the yearly estate tax obligation. From that time until his mother died, Dwight paid one-third of the annual tax installment.

On April 4, 1989, Henrietta signed a new will. In this will, she provided that after payment of administration expenses and some specific bequests, all assets and funds remaining in her estate were to be placed in a trust. The trustee was directed to pay one fourth of the annual income of the trust to Jane Ann, and use the remaining income to satisfy the deferred estate tax liability on Dean's estate. Any remaining trust income was to be distributed "for the use and benefit of [her] three sons" as provided in her will. The trust was to terminate "after November 1997," and upon termination of the trust, the remaining trust assets were to be distributed equally to her four children. Henrietta nominated her son, Dennis, to serve as executor and trustee.

Henrietta's will also disposed of Henrietta's shares of Rutter's, Inc. Jane Ann was to be paid a sum equal to twenty-five percent of the value of Henrietta's shares within eighteen months of Henrietta's death. After this payment, the three brothers were to become the sole shareholders of Rutter's.

On March 3, 1992, Henrietta drew a codicil to her will to clarify her intent with respect to distribution of the trust funds. Referring to the fact that not all of her sons had been able to fully meet their obligation to contribute toward the tax liability assumed by them with respect to Dean's estate, she stated that it was her "intention that those who did pay those tax bills will be fully reimbursed, with interest, before any other distribution would be made to or on behalf of ... [the] children" not making their required payment.

As previously noted, Henrietta died on September 2, 1995. Dennis was appointed executor of the estate and Robert Sackett was appointed the attorney for the executor. On October 7, 1995, a family meeting was held in Sackett's office to read the will and to discuss the estate. What was said at this meeting is greatly disputed, but the brothers concur that a family agreement to settle various matters was discussed.

The executor maintained several accounts during his administration of Henrietta's estate, including separate accounts for the estate and for the trust. During the course of the administration of the estate, Jane Ann was paid one-fourth of the value of Rutter's as required by Henrietta's will. This payment was made from the trust account.

On July 1, 1997, Dennis filed a final report, proposed distribution, and application for discharge in the district court. The report stated that Jane Ann had received her one-fourth share of Rutter's, Inc. and that Dennis, Dwight, and Douglas would become owners of all shares of the corporation. The report included an accounting of the trust account, showing an ending balance of approximately $120,000, and an accounting for the estate account, which showed an ending balance of just under $17,000. The proposed distribution was calculated by adding the balances of these accounts together, subtracting attorney fees and probate expenses, and then dividing by four, to arrive at an initial proposed distribution to each child of $29,450.¹ It was undisputed that Dwight had never repaid his brothers for covering his share of the federal estate tax obligation in Dean's estate from 1988 to 1990. Dennis, as the executor of Henrietta's estate, determined that under the terms of the codicil, Dwight was required to pay this sum back with interest before he could receive a distribution from the trust fund. Using an interest rate of six percent, Dennis calculated that Dwight owed his brothers $21,823. This amount was deducted from Dwight's share, leaving him with a final distribution of $7,627. One-half of Dwight's debt was then added to Dennis's and Douglas's shares, leaving them each with a final distribution of $40,362.

Upon receipt of the final report and proposed distribution, Dennis and Douglas waived notice of hearing. Jane Ann filed no response, and Dwight filed objections. After much wrangling over discovery issues, a hearing on the final report and accounting and on the objections to that report and accounting was held. All three brothers testified at the hearing, and Jane Ann, over Dennis's objection, testified by phone. The substance of their testimony will be discussed in detail later in this opinion.

Dwight contended at the hearing that his proportionate share of the federal estate tax obligation on Dean's estate was less than one-third due to differences in the value of the real estate received by each son from Dean's estate. Second, Dwight asserted that some farm equipment owned by Henrietta had been improperly considered gifts to Dennis and that these items should have been included as assets of the estate. Third, Dwight claimed that it was agreed at the family meeting in Sackett's office that Douglas's $24,000 debt to his mother would be forgiven in exchange for forgiveness of Dwight's debt with respect to the federal estate tax obligation on Dean's estate. Dwight also contended that the estate accounting was improper, requiring that the distribution be amended. Finally, Dwight argued that because of the inaccuracies in the accounting and the proposed distribution, Dennis should be removed as the executor of the estate and a new executor should make a new accounting of the estate.

In a motion for sanctions filed after the hearing, Dwight renewed his request that Dennis be removed as the executor. In the alternative, he requested that the executor and his attorney be denied any fees.

The district court subsequently entered a ruling on the objections to the final report and Dwight's motion for sanctions. The court found that all parties in interest had agreed to forego collection of the past due installments of federal estate tax owed by Dwight. The court also held that even if no agreement had been reached with respect to Dwight's estate tax obligation, the codicil was unenforceable because "[t]he collection of the federal estate tax payments made by Douglas Rutter and Dennis Rutter is actually a matter outside the administration of this estate." With respect to the $24,000 loan, the court found that Douglas owed this sum to Henrietta at the time of her death and that the children had agreed at the family meeting that this debt would also be forgiven. Regarding the alleged gifts of equipment to Dennis by Henrietta, the court ruled that Dennis had failed to prove that a gift had occurred. Therefore, the court stated, these items should have been included in the estate.

The court ruled that the accounting was "incomplete and lack[ed] appropriate detail." The court also noted that the accounting was incorrect in that...