In The Matter Of Trust D Created Under The Last Will And Testament Of Harry Darby.

Decision Date25 June 2010
Docket NumberNo. 103,108.,103
Citation234 P.3d 793
PartiesIn the Matter of TRUST D CREATED UNDER the LAST WILL AND TESTAMENT OF Harry DARBY.
CourtKansas Supreme Court
COPYRIGHT MATERIAL OMITTED
Syllabus by the Court

1. The Internal Revenue Service is not bound by modifications to an irrevocable trust instrument that have been approved by a district court unless they also have also been approved by the highest court of the state.

2. We have de novo review of cases decided on the basis of documents and stipulated facts. We also have unlimited review when an appeal requires that we construe and apply Kansas statutes.

3. A support trust exists when the trustee is required to inquire into the basic support needs of the beneficiary and to provide for those needs.

4. K.S.A. 2009 Supp. 58a-411(b) permits modification of an irrevocable trust if all qualified beneficiaries consent and the modification is not inconsistent with a material purpose of the trust.

5. Material purposes of a trust instrument are not readily to be inferred. A finding of such a purpose generally requires some showing of a particular concern or objective on the part of the settlor, such as circumstantial or other evidence indicating that the trust arrangement represented to the settlor more than a method of allocating the benefits of property among multiple intended beneficiaries or a means of offering to the beneficiaries (but not imposing on them) a particular advantage.

6. In Kansas, a spendthrift provision is presumed to constitute a material purpose of the trust.

7. A spendthrift trust has been defined as a trust created to provide a fund for the maintenance of a beneficiary and at the same time to secure the fund against his or her improvidence or incapacity. Provisions against alienation of the trust fund by the voluntary act of the beneficiary or by his or her creditors are its usual incidents.

8. Under the facts of this case, a proposed modification to increase the specified annual distribution payable to the first generation beneficiary of an irrevocable spendthrift trust is inconsistent with a material purpose of the trust to preserve excess funds for future generation beneficiaries.

9. K.S.A. 58a-412(a) permits modification of an irrevocable trust if, because of circumstances not anticipated by the settlor modification will further the purposes of the trust.

10. Courts have generally been more willing to allow modification of an irrevocable trust for unanticipated circumstances where there are truly unforeseen events resulting in economic hardship, the incapacity of a beneficiary, the impossibility or imprudence of a trust provision, or the diminution in value of a trust asset. Kansas courts have allowed such modifications in precisely such unanticipated circumstances.

11. Upon a finding of unanticipated circumstances, the court must further determine whether a proposed or contemplated modification or deviation of the trust would tend to advance or detract from the trust purposes. It is appropriate that courts act with particular caution in considering a modification or deviation that can be expected to diminish the interests of one or more of the beneficiaries in favor of one or more others.

12. Under the facts of this case, we conclude that funding an increase in the first generation beneficiary's monetary distribution will inherently frustrate the intention of the settlor for income growth as well as jeopardize-or at least reduce-distributions to the second and third generation of beneficiaries. For these reasons, the proposed modification to increase the first generation beneficiary's annual distribution cannot be validated based on an unanticipated circumstance under K.S.A. 58a-412.

13. K.S.A. 58a-416 permits modification of a trust to achieve the settlor's tax objectives if consistent with his or her probable intent, but a modification of trust provisions to achieve tax benefits cannot be validated when it would alter the dispositive provisions of the trust.

Jeffrey R. King and Phillip Johnson, of Overland Park, were on the brief for appellant Marjorie D. Alford.

GREENE, J.:

In this appeal we must decide the propriety of the district court's order approving modifications to an irrevocable testamentary trust created by the Last Will and Testament of Harry Darby, deceased. Marjorie D. Alford, a daughter of Darby and a first generation beneficiary of the subject trust, was successful in achieving an order of the district court approving the modifications, but she has perfected this appeal because the Internal Revenue Service (IRS) is not bound by such modifications unless approved by the highest court of the state. See Commissioner v. Estate of Bosch, 387 U.S. 456, 87 S.Ct. 1776, 18 L.Ed.2d 886 (1967); In re Estate of Keller, 273 Kan. 981, 985-86, 46 P.3d 1135 (2002). For this reason, we granted Alford's motion to transfer the case from the Court of Appeals pursuant to K.S.A. 20-3017.

Factual Overview

On July 15, 1986, Darby executed his last will and testament, which established several trusts for the benefit of his daughters and sister. The only trust at issue in this appeal is that denominated by his will as “Trust D,” which was to be established at Darby's death by a specific bequest in the amount of $240,000 to the trustee, The Commercial National Bank of Kansas City, to be administered and distributed as follows:

“A. The trustee shall, at convenient intervals but not less frequently than annually, pay an amount (as defined in the next sentence) each taxable year from Trust D to my daughter, MARJORIE D. ALFORD, if she is living at the time for the payment of such amount. The amount to be paid from Trust D in any taxable year as provided above may be paid in such installments during such year as the trustee deems advisable and shall be in the amount of Twelve Thousand Dollars ($12,000.00). I strongly recommend (but this recommendation shall not be deemed to be mandatory) that the payments to be made from Trust D shall be in monthly installments which shall be as nearly equal as possible. The amount to be paid shall be paid first out of the net income derived from Trust D and then out of the principal of Trust D if said net income should not be sufficient. Any excess income not needed to make the above payments shall be added to the principal of Trust D at such times as the trustee deems advisable.
“B. Upon the death of the last to die of my daughter, MARJORIE D. ALFORD, and me, the funds then comprising Trust D, shall remain in trust, and thereafter the trustee shall continue to pay at convenient intervals the sum of Four Thousand Dollars ($4,000.00) each to the three daughters of MARJORIE D. ALFORD, namely, DIANE CHRISTINE MUNKSGAARD, MARY CUBBINSON RESTER, and JEAN ANNE ALFORD, for their lifetime, and upon the death of each, the trustee shall pay one-third of the funds then comprising Trust D to the issue per stirpes of the decreased daughter of MARJORIE D. ALFORD.”

In addition to these provisions, the will contained numerous provisions applicable to all of the trusts so created, including the following provision restricting the powers of the beneficiaries:

“J. During the entire duration of the trust, each and every beneficiary of the trust shall be without power, voluntarily or involuntarily, to sell, mortgage, pledge, hypothecate, assign, alienate, anticipate, transfer, or convey any interest in the trust estate or the property constituting the trust estate or the income therefrom until the same is actually paid into his or her hands, and no interest of any beneficiary in, or claim to, the trust estate or any part of creditors of any beneficiary, or to judgment, levy, execution, sequestration, attachment, bankruptcy proceedings or other legal or equitable process.”

In January 1987, Darby executed a codicil to his last will and testament, which increased the amount of the bequest establishing Trust D to $480,000, increased the amount of the annual distribution to Alford to $24,000, and increased the annual distributions to the second generation beneficiaries to $8,000 each. No further changes to the trust were effected by this codicil. Darby died 9 days after executing this codicil.

On July 27, 2009, Alford filed her Petition for Modification of Testamentary Trust under the Kansas Uniform Trust Code” seeking modifications to the trust provisions as follows:

“Trust D shall be held, administered and distributed as follows:
“A. The Trustee shall distribute at convenient intervals, but not less frequently than annually, an amount equal to Forty Thousand Dollars ($40,000) annually to my daughter, MARJORIE D. ALFORD. Beginning January 1, 2010, this amount shall by adjusted on January 1 of each year by the same percentage change in the Consumer Price Index-Urban Wage Earners and Clerical Workers (CPI)-US City Average ALL ITEMS 1967-100 since January 1 of the prior year. I strongly recommend, but do not require, that such payments be made in monthly installments which shall be as nearly equal as possible. The amount to be paid shall be paid first out of the net income derived from Trust D and then out of the principal of Trust D if such net income is not sufficient. Any net income not so distributed shall be accumulated and annually added to principal.
“B. Upon MARJORIE D. ALFORD's death, the assets then held in Trust D shall be distributed to such federal or state taxing authorities for payment of estate taxes as Marjorie D. Alford may appoint by a Will or other signed writing that is acknowledged before a notary public specifically referring to this power of appointment. In default of appointment or insofar as an appointment is not effective, the Trustee shall divide the Trust D into a number of equal shares so as to create one equal share for each of Diane Christine Munksgaard, Mary Cubbinson Rester and Jean Anne Petrick who is then living and one equal share for each of Diane Christine Munksgaard, Mary Cubbinson Rester and Jean Anne Petrick
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