February 26, 2014
Authored by: Luke Lantta
Originally posted on bryancavefiduciarylitigation.com
In In re Alice J. Welch Revocable Living Trust (Vandenbrook v. Welch), a Wisconsin appellate court was required to interpret a provision in a trust instrument on how trust assets would be valued for purposes of distribution. The trust instrument provided different distribution schemes, depending on whether a certain value exceeded $5 million. So, the first question for the court was whether the value of these assets exceeded $5 million. Let’s take a look at the differing interpretations and why trust language can’t be read in isolation.
One party, Jon Welch, claimed that the $5 million cut-off point for distributing the estate was the “adjusted gross estate as finally determined for federal tax purposes.” He claimed that the trial court erred in deciding that the value was less than $5 million because it removed certain assets and loans from the total estate value. He further argued that, under federal tax law, those items were included in the estate’s value, which would make the estate exceed $5 million.
The trustee, on the other hand, claimed that Welch’s reading of the trust instrument was incomplete. The trustee claimed that the $5 million cut-off was not set directly at the final adjusted gross value of the estate as determined for tax purposes. Instead, the trust instrument contained provisions first disposing of the decedent’s tangible assets, and then also forgiving loans that the decedent made to some beneficiaries. Then, for purposes of distributing the remainder of the estate, the distribution scheme refers to the first $5 million of value above and beyond the value of the tangible property and loans. In other words, the calculation to be made was adjusted gross value, minus the tangible property and forgiven loans. Thus, while the gross value of the estate might exceed $5 million, the value for distribution purposes would be under $5 million.
The appellate court agreed with the trustee. To reach Welch’s conclusion that the distribution method is determined solely by using the adjusted gross estate for tax purposes, one would have to pull the words quoted by Welch out of context, without taking into account the remainder of the provision, including words within the same sentence.
In reaching its decision, the appellate court specifically noted that Welch did not argue that the trustee’s (and district court’s) reading of the trust instrument was unreasonable, or that the trust instrument was ambiguous because Welch’s reading was also reasonable. It’s unclear whether those arguments, if made, would have made a difference.