Pezza v. Pezza

• Citation: 690 A.2d 345
• Decision Date: 26 February 1997
• Docket Number: No. 94-244-A,94-244-A
• Parties: Olga PEZZA v. Michael PEZZA et al. ppeal.
• Court: United States State Supreme Court of Rhode Island

Page 345

690 A.2d 345

Olga PEZZA v. Michael PEZZA et al.

No. 94-244-Appeal.

Supreme Court of Rhode Island.

Feb. 26, 1997.

Henry M. Swan, Providence, for Plaintiff.

Anthony Mignanelli, Providence, Guy J. Wells, Greenwich, for Defendant.

James P. Marusak, Providence, Amicus Curiae.

OPINION

BOURCIER, Justice.

This case comes before us on appeal from a final judgment of the Superior Court. The plaintiff below, Olga Pezza (Olga), had filed a petition seeking a declaration of her rights in four parcels of real estate that her deceased husband, Anthony Pezza (Anthony), had transferred prior to his death into an irrevocable trust for the benefit of his children by a former marriage. The trial justice found that the trust created by Anthony was valid, constituted a completed and absolute inter vivos transfer by the time he died, and would not be declared invalid for the purpose of satisfying Olga's statutory survival interest, as codified in G.L.1956 § 33-25-2. ¹

Anthony owned and operated a garage door sales and installation business in Johnston, Rhode Island. His son, Michael Pezza (Michael), and his daughter, Patricia Pezza (Patricia), were both at one time or another employed in that business. Both Michael and Patricia were children of Anthony's first marriage, which ended when his first wife, Flora, died.

On February 21, 1973, Anthony married Olga, whose first marriage had ended in divorce. At some point during their marriage, Olga was listed as the joint owner of a residence in Florida that Anthony had inherited from his mother. Olga and Anthony also shared several joint bank accounts.

On December 29, 1983, Anthony created an inter vivos trust in which he named himself trustee and his son, Michael, successor trustee. Four parcels of real estate, acquired by Anthony prior to his marriage to Olga, were conveyed to that trust. Also conveyed to the trust were the shares of stock owned by Anthony in his garage door business corporation. Anthony's intent when conveying his real and personal property into the trust, as expressed to his attorney who drafted the trust documents, was to have his children own the property after his death, in satisfaction of a deathbed promise he had made to his first wife. ² However, despite his conveyance of the property to the trust, Anthony continued to occupy one of the parcels as his marital estate. Furthermore, he continued to collect rents from the other three parcels. Additionally, as part of the trust agreement, Anthony retained the power to revoke the trust and the power to demand payment of the principal.

Anthony's will, executed simultaneously with the trust, contained a "pour-over" provision that provided that any of his remaining assets would be placed into and become part of the trust upon his death.

On June 25, 1986, following a disagreement between Anthony and Olga, Anthony resigned as trustee of the trust created on December 29, 1983, and pursuant to the provisions of the trust agreement, appointed his son, Michael, as his successor trustee. Anthony also on that same date waived his right to revoke the trust.

On November 14, 1986, Olga commenced divorce proceedings against Anthony.

On December 5, 1986, less than a month after commencement of the divorce proceedings, Anthony disclaimed his power to demand payment of the trust principal, to be effective as of June 25, 1986, that being the date when Michael was appointed successor trustee and Anthony waived his right to revoke the trust.

Anthony died testate on August 18, 1990.

In her complaint for declaratory relief filed in the Providence County Superior Court on January 17, 1991, Olga contended that Anthony's transfer of his real property into the trust for the benefit of his children from his first marriage was a fraudulent attempt on his part to deny her of her marital rights granted pursuant to § 33-25-2, which provides that a surviving spouse becomes entitled to a life estate in all of his or her deceased spouse's real estate owned in fee simple at the time of his or her death. Olga contended that the trust should be declared invalid and that she should be declared to have a life estate in the real property that Anthony had deeded to the trust.

After trial without a jury on February 14 and 17, 1994, the trial justice, in a written decision entered pursuant to Rule 52(a) of the Superior Court Rules of Civil Procedure, found that Olga had failed to prove a fraudulent transfer on the part of Anthony in creating the trust and that no legal basis had been shown for invalidating the final trust agreement executed by Anthony on December 29, 1983. The trial justice determined initially that the trust became irrevocable and nontestamentary in nature as a result of Anthony's actions taken on June 25 and December 9, 1986. The trial justice in his decision noted further that, in deciding whether to enforce the trust agreement, there existed a conflict between two competing policy concerns, namely, the right of a property owner to freely alienate his or her property interests and the right of a surviving spouse to some continuation of his or her interest in the property owned by his or her deceased spouse in fee simple at the time of his or her death, the latter right being the policy concern that was once protected by dower and curtesy prior to their abolition by § 33-25-1. Section 33-25-2, which grants a life estate to a surviving spouse, replaced dower and curtesy as the means through which a surviving spouse's rights are protected.

The trial justice, after reviewing various court holdings from other jurisdictions, concluded that there were basically two tests utilized by the courts in situations such as were present before him, one being the intent to defraud or fraudulent transfer test and the other being the illusory transfer test. After consideration of the relevant policy concerns inherent in each and after thoroughly reviewing both the relevant case law and the relevant facts in the trial record, he concluded that the illusory transfer test, as espoused in Newman v. Dore, 275 N.Y. 371, 9 N.E.2d 966 (1937), provided the best and fairest means of analysis. The trial justice consequently held that transfers of property that serve to defeat a surviving spouse's statutory share are invalid only if illusory and that an intent to defraud is, standing alone, insufficient to invalidate an irrevocable trust agreement. The trial justice found additionally that on the basis of the facts in the trial record, Anthony's transfer of his real estate to the trust, although arguably testamentary in nature when first made in 1983, was later transformed into a real and nonillusory inter vivos trust by 1986 when he appointed his son, Michael, as trustee and made the trust irrevocable. Accordingly, the trial justice found that at the time of Anthony's death the trust was real, valid, and not illusory, and the property that had been transferred into the trust was not therefore subject to the life estate provided by § 33-25-2.

This Court has not yet considered the question of whether an inter vivos trust can be used to defeat a surviving spouse's statutory right to a life estate in his or her deceased spouse's real estate. Therefore, when an issue of first impression is presented to us, we generally look to other jurisdictions for guidance.

Those other jurisdictions that have previously considered the question of whether an inter vivos trust can be used to defeat a surviving spouse's statutory survival interest in real estate have used various approaches in their analyses. The two primary tests employed by the various courts examining this issue are known as the fraudulent intent test, otherwise known as the intent to defraud test, and the illusory transfer test. In the fraudulent transfer test, the court examines several case-specific factors in order to determine whether in the particular case before it the deceased spouse had at the time of the transfer of property into the trust an intent to defraud his or her spouse of his or her statutory survival interest. Those factors are "if the transfer was made without consideration; the size of the transfer in relation to the [spouse's] total assets; the time between the transfer and the [spouse's] death; relations which existed between the husband and wife at the time of the transfer; and the source from which the property came." Sherrill v. Mallicote, 57 Tenn.App. 241, 417 S.W.2d 798, 802 (1967). Once those factors have been considered, the court must then decide whether the transfer was made with an intent to deprive the surviving spouse of his or her statutory share, and if the court determines that such an intent to deprive was present, the court will invalidate the transfer and make the trust property available for distribution to the surviving spouse pursuant to the jurisdiction's statutory survival share statute. See also Hanke v. Hanke, 123 N.H. 175, 459 A.2d 246 (1983).

The illusory transfer test involves an approach different from that of the fraudulent intent test. It focuses not on the intent of the transferor-spouse but, instead, on the substance of the transfer itself, that is, whether the transfer was "real" or "illusory." In Newman, supra., the most often cited case involving the illusory transfer test, the New York court noted that most jurisdictions have declined to adopt the fraudulent intent test either because to do so would "cast doubt upon the validity of all transfers made by a married man [or woman], outside of the regular course of business" or because it was "difficult to find a satisfactory logical foundation for it." 9 N.E.2d at 968. The court opined that the fraudulent intent of the spouse making the inter vivos transfer to a trust was not relevant to the court's inquiry because the law in New York at the time Newman was decided gave a surviving spouse only an expectancy interest in the...