The Oregon Court of Appeals ruled on a trust administration case yesterday. In Head v. Head, No. A149899 (Or. Ct. App. Mar. 5, 2014), the plaintiff/beneficiary brought an action against the successor trustee claiming that the previous trustee (his father) had failed to carry out the terms of the trust after the Trustor’s (plaintiff’s mother’s) death.
While living, Mr. Head and Mrs. Head had created “his and hers” revocable living trusts. Under both trusts, on the death of the first spouse, a credit shelter trust was to be created with the assets from the deceased spouse’s trust estate up to an amount equal to the credit shelter exemption available at the time of the first spouse’s death. To the extent the first spouse’s estate exceeded the credit shelter exemption, the excess amount would ultimately be distributed outright to the surviving spouse. The credit shelter trust was to be irrevocable on the death of the first spouse. During its administration, the assets in the credit shelter trust were to be used for the lifetime benefit of the surviving spouse subject to certain restrictions, and then on the death of the surviving spouse, the remaining principal was to be distributed to the Heads’ three children: the plaintiff, George, and Roderick.
When the first spouse (Mrs. Head) died, her estate was less than the $1.5 million federal credit shelter exemption in place at the time. Per the terms of the trust, her entire estate was to be allocated to the credit shelter trust and administered as provided in her trust. Mr. Head, acting as Trustee, however, treated the assets as his own, even going so far as to transfer assets from Mrs. Head’s Trust into his own revocable living trust. Mr. Head then modified the terms of his trust (which was revocable), disinheriting one of his sons, the plaintiff.
The plaintiff argued that if the credit shelter trust established under his mother’s trust had been properly funded and administered, he would have been entitled to a distribution of an equal share of the credit shelter trust when his father died. The trial court found that the trustee had not followed the terms of the trust, but went on to find that the trust agreement did not reflect Mrs. Head’s intent. Therefore, the court, sua sponte, modified the terms of the trust under ORS 130.205(1) (modification because of unanticipated circumstances) and ORS 130.225 (modification to achieve settlor’s tax objectives) to meet what the court found to be Mrs. Head’s probable intent. The Court of Appeals reversed the modification because the court was without authority to do so where neither party reasonably contemplated such relief and the relief represented a substantial departure from the pleadings and legal theories upon which the parties had relied.
The case has been reversed and remanded to the trial court. While the Court of Appeals has made clear that a trial court cannot rely on ORS 130.205(1) or ORS 130.225 to modify an otherwise irrevocable trust where the parties have not requested such relief, this case is an equally important reminder to estate planning practitioners that clients need to understand the implications of the term “irrevocable” in a mandatory tax plan and the importance of trust funding on the death of the first spouse.