In re Harris Testamentary Trust

Decision Date06 June 2003
Docket NumberNo. 89,179,89,179
Citation69 P.3d 1109,275 Kan. 946
PartiesIN THE MATTER OF THE JOHN P. HARRIS TESTAMENTARY TRUST.
CourtKansas Supreme Court

Greg L. Musil, of Shughart Thomson & Kilroy, P.C., of Overland Park, argued the cause, and Christine M. Graham and John S. Schmidt, of the same firm, were on the brief for appellant trustees of the John P. Harris Testamentary Trust.

No appearance by appellee.

The opinion of the court was delivered by

DAVIS, J.:

The trustees of the John P. Harris Testamentary Trust (Trust) brought this action to reform the Trust. All interested parties including all beneficiaries entered their appearances and filed their written consents to the proposed reformation. The trustees appealed from a favorable ruling by the district court requesting by motion that the appeal be decided by this court instead of the Court of Appeals based upon the holding in Commissioner v. Estate of Bosch, 387 U.S. 456, 18 L. Ed. 2d 886, 87 S. Ct. 1776 (1967). We transferred the appeal on motion of the trustees. Our jurisdiction is based on K.S.A. 20-3018(c).

John P. Harris died on April 13, 1969. His will was admitted to probate. Among other provisions, his will created the John P. Harris Testamentary Trust, appointing his son, John G. Harris, The First National Bank of Hutchinson, and Peter Macdonald as trustees. The corpus of this trust constituted the remainder of Harris' estate less certain specific bequests.

Income from the trust property was to be paid to Harris' wife, Rosalie, and his son, John G. Harris, in equal shares. In the event of Rosalie's death, her share of the Trust income was to be paid to the natural children of John G. Harris, Kathy Sue and Carol Lynn, and then to their survivors or the survivors of them. In the event of John G. Harris' death, his share of the trust income was to be paid to his natural children, and then to their survivors or the survivors of them. The trust will terminate 20 years and 9 months after the death of the survivor of Kathy Sue or Carol Lynn, or any survivors of John G. Harris' other natural children. Upon termination, the corpus of the trust is to be paid to Kansas Philanthropies, Inc.

Proceedings Before the District Court

On May 23, 2002, the trustees of the Trust, pursuant to Chapter 59 of the Kansas Statutes Annotated, filed their petition for reformation of trust. There is no mention of the third trustee, and we assume that Peter Macdonald is deceased or for some reason no longer serves as a trustee. John G. Harris individually and as trustee filed a separate entry of appearance, waiver of notice, and consent to reformation of trust, which gave his consent to the reformation as trustee and beneficiary under the Trust. The First National Bank, as a trustee of the Trust; the granddaughters of John P. Harris, Kathy Sue (Harris) Beshears and Carole Lynn (Harris) Fitzgerald; and Kansas Philanthropies, Inc. also filed similar entries of appearance, waivers, and consents on the same day. The entire probate file is not included in this record on appeal, but Harris' will containing the Trust which the trustees seek to reform, together with some of the proceedings in the original probate proceeding, are included in the record.

In their petition, the trustees requested three changes in the Trust. First, the trustees requested a change in their discretionary powers over the corpus of the Trust property. They claimed that a mistake was made in drafting the Trust and that "[r]eformation of a trust is appropriate where a mistake occurs that prevents the intent of the testator from being carried out," citing Restatement (Second) of Trusts § 333 (1957) and its Comments. Second, the trustees requested another change in their discretionary powers over corpus of the Trust property by changing a word from "shall" to "may," thereby preserving the original intent of John P. Harris in protecting the corpus from creditors of the beneficiaries. The trustees claimed that a recent decision from this court justifies the change and further claimed that such a change "would be in the best interest of the Trust and its beneficiaries to reform the language. . . to preserve the discretionary nature of the principal distribution clause." Finally, the trustees requested that the district court authorize the trustees to divide the Trust into three separate shares to enable the Trust to qualify as a qualified Subchapter S Trust (QSST). The trustees contended that the failure to include flexibility for such a change was a mistake and the change "is in the best interest of the beneficiaries."

There has never been opposition to the proposed changes; all interested parties agreed and encouraged the district court to adopt the requested changes. The district court granted all relief requested by the trustees with the following brief comments of the court:

"3. The allegations of the Petition are true.
"4. The relief therein sought is in the best interest of the Trust and the beneficiaries thereof and that each of the interested parties named in the Petition have consented to the proposed reformation as evidenced by the Entries of Appearances, Waivers of Notice and Consents signed by each of them and filed contemporaneously with the Petition."

The court granted the first two proposed changes by adopting the following language suggested by the trustees:

"(e) Notwithstanding anything hereinabove contained to the contrary, if at any time while the trust herein created is in force, any financial emergency arises in the affairs of any of the primary beneficiaries of such trust, or and if the independent income of any of such beneficiaries and all other means of support are insufficient for the support of such beneficiary, in the judgment of the Trustees, the Trustees may shall pay over to such beneficiary out of the corpus of the trust, at any time and from time to time, such sum or sums as the Trustees shall deem necessary or appropriate in their sole discretion; provided, however, any distributions made pursuant to this provision can only be made for the support of such beneficiaries as such term is defined in Section 2041 of the Internal Revenue Code of 1986, as amended." (Emphasis added.)

Consistent with their third request, the district court authorized the trustees to create "three separate and independent shares" in the one trust, authorizing the trustees to "segregate assets in kind so that the fair market value of the assets in each share on the date of the division is equal to the above fractional amounts." Each beneficiary was ordered to receive income from his or her respective share and discretionary distributions of principal were to be made from the beneficiary's respective share. Distributions from the principal were limited to the ascertainable standard set forth in the modified version of Paragraph (e). All other terms of the Trust were left unchanged.

The trustees filed an appeal from the district court's final order to the Court of Appeals pursuant to K.S.A. 60-2102(a)(4). The trustees moved pursuant to K.S.A. 20-3017 and Supreme Court Rule 8.02 (Kan. Ct. R. Annot. 55) to transfer their appeal to this court. The grounds set forth in the motion suggest that the IRS is not bound by a reformation of a trust by any authority other than the highest court of the state, citing Bosch,387 U.S. at 465. The trustees further note that in the recent decision of In re Estate of Keller, 273 Kan. 981, 46 P.3d 1135 (2003), we transferred an appeal involving the construction of a will. Kathy Sue (Harris) Beshears, Carole Lynn (Harris) Fitzgerald, and Kansas Philanthropies, Inc. filed letters indicating they did not intend to file briefs or argue before this court because, as in the district court, they supported the trustees on appeal.

Application of the Kansas Uniform Trust Code

The district court entered its decision in this case on May 23, 2002. Approximately 6 months after its decision, Kansas SB 297 became effective January 1, 2003. Senate Bill 297 is a substantial adoption of the Uniform Trust Code (UTC). See Kansas Uniform Trust Code, K.S.A. 2002 Supp. 58a-101 et seq. (KUTC). K.S.A. 2002 Supp. 58a-1106(a)(1) provides that except as otherwise provided "[t]his act applies to all trusts created before, on, or after its effective date." K.S.A. 2002 Supp. 58a-1106(a)(3) further provides:

"(3) this act applies to judicial proceedings concerning trusts commenced before its effective date unless the court finds that application of a particular provisions of this act would substantially interfere with the effective conduct of the judicial proceedings or prejudice the rights of the parties, in which case the particular provision of this act does not apply and the superseded law applies."

K.S.A. 2002 Supp. 58a-1106(a)(4) provides that "any rule of construction or presumption provided in this act applies to trust instruments executed before the effective date of the act unless there is a clear indication of a contrary intent in the terms of the trust."

We conclude that application of the KUTC, K.S.A. 2002 Supp. 58a-101 et seq., would not substantially interfere with the effective conduct of the judicial proceedings before this court or prejudice the rights of the parties. Moreover, the rules of construction provided in the KUTC apply to the instrument we are asked to construe. The facts are not in dispute, and all parties have entered their appearances before the district court and request that the proposed changes be adopted and affirmed by this court. Nothing in the record or in the KUTC prevents application of the code to this case.

The trustees suggest that the KUTC applies, and they urge this court to apply it. Other than very general suggestions, the trustees do not offer analysis of how the KUTC may support their position. The trustees do argue that the appropriate standard of review in this case is one of abuse of discretion. At the same time, the trustees acknowledge...

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