Walz, Matter of

• Decision Date: 27 July 1981
• Docket Number: No. 3-1280A373,3-1280A373
• Citation: 423 N.E.2d 729
• Parties: In the Matter of the Living Trust Created by the Decedent, John G. WALZ, Prior to his Death, for Lorraine I. Walz, Donald Walz, and Jacqueline Keown. Donald Walz and Jacqueline Keown, as Appellants Lorraine I. Walz; Michael Scot Walz; and Hoosier State Bank of Indiana, as Trustee and Appellees.
• Court: Indiana Appellate Court

Page 729

423 N.E.2d 729

In the Matter of the Living Trust Created by the Decedent John G. WALZ, Prior to his Death, for Lorraine I Walz, Donald Walz, and Jacqueline Keown Donald Walz and Jacqueline Keown, as Appellants Lorraine I. Walz; Michael Scot Walz; and Hoosier State Bank of Indiana, as Trustee and Appellees.

No. 3-1280A373.

Court of Appeals of Indiana, Third District.

July 27, 1981.

J. Philip Klingeberger, Komyatte & Freeland, P.C., Highland, for appellants Donald Walz and Jacqueline Keown.

M. Jean Rawson, Munster, for appellees Lorraine I. Walz and Michael Scot Walz.

STATON, Judge.

As trustee for the inter vivos trust of John Walz, Hoosier State Bank petitioned the probate court for instruction. ¹ One issue presented to the probate court was whether Michael a child adopted by John Walz after his execution of the trust was a beneficiary under the following provisions:

"The balance of the income may be accumulated by the trustee or in its discretion may be distributed among the descendants of the Grantor, per stirpes. Upon the death of Lorraine I Walz, the remainder of the trust property shall be divided and distributed among the children of the Grantor, namely Donald Walz and Jacqueline Keown, equally, share and share alike or to the Grantor's descendants per stirpes, as their absolute property forever."

The probate court found Michael to be both an income and remainderman beneficiary under these provisions. We reverse.

John and Lorraine Walz were married in 1966. From previous marriages, John had two children, Donald Walz and Jacqueline Keown; Lorraine had one child, Michael. On August 18, 1971 John executed a trust and transferred substantial property to the trustee. John Walz adopted Michael six months thereafter on February 8, 1972.

The majority of the trust provisions are specific and unambiguous. During his lifetime, John was entitled to the "earnings, avails and proceeds" of the trust. Upon his death, the trust property was to be divided into two trusts Trust A and Trust B. Specifically identified property was to be transferred to Trust A for the benefit of John's mother. The remainder of the corpus and the Trust A property upon the death of John's mother was to be transferred to Trust B. The provisions of Trust B, in toto, are as follows:

"In the event that Lorraine I Walz, is his surviving spouse, then and in that event, the trustee shall pay and deliver to her in regular installments for as long as she remains his unremarried widow, one-third of the income from the trust, and she shall be permitted to live in the home owned by him at his death for the remainder of her life, without charge. The balance of the income may be accumulated by the trustee or in its discretion may be distributed among the descendants of the Grantor, per stirpes. Upon the death of Lorraine I Walz, the remainder of the trust property shall be divided and distributed among the children of the Grantor, namely Donald Walz and Jacqueling Keown, equally, share and share alike or to the Grantor's descendants per stirpes, as their absolute property forever."

Donald and Jacqueline (appellants) argue that these provisions are a trust and not a testamentary disposition. They argue the probate code should not control the construction of inter vivos trust provisions. The essence of their argument is that the construction of this trust provision is controlled by the circumstances existing at the time the trust was executed. Michael (appellee), on the other hand, argues that Trust B is a "testamentary disposition of property" and, therefore, the trust should be construed as such. Michael forwards numerous probate statutes and cases controlling the construction of testamentary dispositions. In essence, Michael argues that the trust provision should be read as a "will" and controlled by the probate statutes. Although Michael's arguments are persuasive, we find the position taken by Donald and Jacqueline to be the correct application of the law.

Michael argues the disposition of property under Trust B is testamentary because it does not become effective until the death of the settlor, John Walz. He then pursues this argument through the Indiana Probate Code, Ind.Code §§ 29-1-1-1 et seq. (1976 & Supp.1980), and arrives at the following conclusion. Michael, an adopted child of the settlor, should be treated equal to the natural children of the settlor under the provisions of the trust. This conclusion fails for two reasons.

First, we are well aware the overall design of the Probate Code regarding the distribution of property is to treat an adopted child as a natural child of the adopting parents. ² Michael, however, misperceives the issue. The issue is not whether an adopted child is to be treated equal to the natural children of the settlor of a trust. The issue is whether Michael who was adopted by John after the execution of his trust, comes within the provisions of the trust.

Secondly, Michael's argument must fail in that the provisions of an inter vivos trust are not controlled by the Probate Code. There are several compelling reasons for this conclusion. The Legislature has clearly pronounced its favor with inter vivos trusts as a means of disposing of property; and, has specifically exempted such instruments from the exactitudes of testamentary executions:

"An instrument creating an inter vivos trust in order to be valid need not be executed as a testamentary instrument pursuant to section 503, even though such trust instrument reserves to the maker or settlor the power to revoke, or the power to alter or amend, or the power to control investments, or the power to consume the principal, or because it reserves to the maker or settlor any one or more of said powers."

IC 29-1-5-9. The Legislature has approved non-testamentary instruments which allow the settlor to retain many of the benefits of the property and to dispose of it during life.

The inter vivos trust is a unique legal entity. Through its use, the settlor may transfer property to a trustee reserving for the life of the settlor the beneficial use of the property with the remainder to designated beneficiaries. Although the settlor enjoys the beneficial use of the trust property until his death that trust property is not subject to the administration of his estate. Leazenby v. Clinton County Bank & Trust Co. (1976), 171 Ind.App. 243, 355 N.E.2d 861. That is, the trust property is not in the decedent-settlor's estate. The Probate Code, which controls the distribution of decedent's property, does not control the inter vivos distributions of property.

In Smyth v. Cleveland Trust Co. (1961), 172 Ohio St. 489, 179 N.E.2d 60, the surviving wife challenged the validity of her husband's creation of an inter vivos trust. The Ohio Supreme Court explained the distinction between the inter vivos distribution and the testamentary distribution:

"Where, as here, a settlor transfers, assigns and sets over to a trustee title to property owned by him in proceeding to create a trust inter vivos, the interest therein passes immediately to the trustee, and the trust is consummated even though the trust instrument reserves to the settlor the income for life, an absolute power to revoke the trust in whole or in part and the right to control investments and further to modify the trust in any respect. Where the remainder over at his death is to be held for the benefit of his wife for life and later to be distributed to his heirs ..., there is created, at the instant of creation of the trust, a vested equitable interest in the remaindermen subject to defeasance in whole or in part by the exercise of the power to revoke or modify....

"It is asserted that the trust was not executed in conformity to the laws applicable to wills, that it is colorable and illusory, and, because of the reserved powers, that the trust constitutes nothing more than an agency.

"If a settlor by his declaration shows that he does not intend that the trust shall be created and exist until his death, even though the trust property and the beneficiaries are ascertained prior to his death, the disposition is testamentry. 'On the other hand, if by his declaration the settlor creates a trust during his lifetime, the mere fact that the enjoyment of the interest of the beneficiary is postponed until the death of the settlor, and the fact that the settlor reserves power to revoke or modify the trust, does not make it testamentary.' "

172 Ohio St. at 501-02, 179 N.E.2d at 68-69 (citations omitted).

This well defined distinction strongly argues against the application of the Probate Code to inter vivos distributions even though such distributions may have certain testamentary characteristics. Stronger still is the argument that an individual transfering property during his life should not be bound by the Probate Code which regulates the transfer of property after life. As in the case of Smyth v. Cleveland Trust Co., supra, Indiana recognizes that even though the grantor has the power to modify or revoke his inter vivos trust, the interest of the remaindermen vests at the time the trust is executed. Loeb v. Loeb (1973), 261 Ind. 193, 301 N.E.2d 349; Colbo v. Buyer (1956), 235 Ind. 518, 134 N.E.2d 45. When the inter vivos settlor creates his trust and transfers property thereto, he creates a present interest in the beneficiaries. The beneficial use of the property may well be delayed until some future date, but the interest vests immediately. ³ There is no comparable present vesting of testamentary dispositions. This strongly reinforces the conclusion that the inter vivos trust is a "during life" transfer which should not be controlled by the "after life" Probate Code.

We do not conclude that the Probate Code is totally inapplicable to inter vivos trusts. For example, we find the Probate Code to strongly represent the public policy of this state that an adopted child is to be treated as though the natural...