[Carlson v. Sweeney, Dabagia, Donoghue, Thorne, Janes & Pagos, 868 N.E.2d 4 (Ind. Ct. App. 2007)]
The court held that a power to invade for the beneficiaries’ “medical care, comfortable maintenance and welfare†is not limited by an ascertainable standard; that the use of the word “welfare†was mistake of law that does not warrant reformation; and that the malpractice suit could proceed although the adverse tax effects of the language would not occur until the beneficiaries’ deaths.
In 1988, Norman and Hilda retained an attorney to prepare their Wills. They informed their lawyer that, among other things, they wanted to ensure that the property passing to their children would not be subject to federal estate or state inheritance tax upon their deaths. Their attorney agreed to prepare the Wills in this way and drafted wills and trusts that contained the following provisions regarding the Trustees distributive discretion:
ITEM III. All the residue of my estate and property, wherever situated, including lapsed legacies and devises, but expressly excluding any property over which I may now or hereafter have a power of appointment, I give to FIRST CITIZENS BANK, N.A., as Trustee, to be held and disposed of as follows:
SECTION 1: If my husband survives me, then commencing with my death the Trustee shall pay the income from the trust estate in convenient installments, at least quarterly, to him during his lifetime.
The trustee may also pay to my husband such sums from principal as the Trustee deems necessary or advisable from time to time for his medical care, comfortable maintenance and welfare, considering his income from all sources known to the Trustee.SECTION 2: Upon the death of my husband, the Trust shall continue and the Norman Sr.’s Will is identical except that his Will leaves his property first to Hilda.
Trustee may pay the income from the Trust Estate in convenient installments, at least quarterly, to my son, NORMAN R. CARLSON, JR., and to his wife, MARGARET ANN CARLSON, and the survivor of them. The Trustee may also pay to my said son, NORMAN R. CARLSON, JR., and/or his said wife, MARGARET ANN CARLSON, such sums from principal as the Trustee deems necessary or advisable from time to time for either of their medical care, comfortable maintenance and welfare, considering the income of either from all sources known to the Trustee.
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(a) While any grandchild of mine is under the age of twenty-one (21) years, the Trustee shall use for his benefit so much of the income of his share of this trust as the Trustee determines to be required, in addition to his other income from all sources known to the Trustee, for his reasonable support, comfort, welfare, maintenance (including medical, surgical hospital or other institutional care) and education including post high school education adding any excess income to principal at the discretion of the Trustee. After the grandchild reaches the age of twenty-one (21) years, the Trustee shall pay all the current net income of his share of this trust to him in convenient installments at least as often as quarter-annually. The Trustee may in its discretion pay to or use for the benefit of such grandchild so much of the principal of his share of this trust as the Trustee determines to be required, in addition to his respective incomes from all other sources known to the Trustee, for his reasonable support, comfort, welfare, maintenance (including medical, surgical hospital or other institutional care) and education including post high school education, or for any other purpose the Trustee believes to be in the best interests of either of [sic] grandchild.
Well, Norman Sr. died on June 24, 1992, and Hilda died shortly thereafter on August 3, 1992. Hilda’s Will was admitted to probate and Norman Jr. retained counsel in Houston, Texas, to assist with the management of the Trust. In January 1994 (I don’t know why it took so long), his Texas counsel informed Norman Jr. that the language of the Will did not conform to the Treasury Regulations, and as a result, any property remaining in the Trust at the time of Norman Jr. or Margaret’s death would be subject to federal estate tax. Specifically, the Texas counsel felt that the Trust created a general power of appointment, because 26 C.F.R. § 20.2041-1 indicates, “[a] power to use the property for comfort, welfare, or happiness of the holder of the power is not limited by the requisite standard.†(And as we all know general powers of appointment are taxable upon the death of the power’s holder. 26 U.S.C. § 2041(a)(2).)
Counsel was then successful in reforming the trust to read as follows:
The Trustee may also pay to my said son, NORMAN R. CARLSON, JR. and/or his said wife, MARGARET ANN CARLSON, such sums from principal as the Trustee deems necessary from time to time for either of their health and maintenance, considering the income of either from all sources known to the Trustee.
However, counsel who drafted the trust got sued anyways and lost.
On cross-appeal, the Lawyers raise the following issues:
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1) whether the “substantial adverse interest exception†protects the Carlsons from adverse tax consequences;
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2) whether the Carlsons have brought this suit too early, as the IRS has not yet assigned a tax penalty; and
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3) whether the trial court improperly considered the opinion of an attorney hired by the Carlsons.
The court ruled that the adverse interest exception does not protect the Carlsons, the Carlsons are not precluded from bringing their suit at this time, and that the Lawyers waived their argument relating to the opinion of the expert witness by not raising it before the trial court. The court further conclude that the trial court properly found that the original Wills would result in adverse tax consequences, and affirm the trial court’s denial of the Lawyers’ motion for summary judgment on that issue. However, the court also concluded that the reformations did not effectively avoid potential adverse tax consequences..
