A Tennessee case involving a father who, by all indications, intended that each of his three children share equally in his assets, illustrates the importance of paying careful attention to the specific language in a trust agreement. Here are the facts:
• The father (“Father”) executed a living trust (“Trust”) in 1996.
• The Trust provided that the Father’s daughter, Judith, would have her share of the distributed Trust assets reduced by $247,800 on account of advances Father had made Judith over the years
• The Trust provided that the Father’s daughter, Judith, would receive no share of the Trust if her share was worth less than $247,800
• The undisputed testimony from all three children was that the Father desired all three of his children to share equally in his property after his death
• A few weeks after he signed the Trust agreement, the Father created a family limited partnership called Copper Creek Farm
• Prior to his death, Father transferred all of his interest in Copper Creek Farm to his daughter Judith
• The reason that the Father reduced daughter Judith’s share of the trust assets by $247,800 was because that was the appraised value of Copper Creek Farm
• The reference in the Trust agreement to the advances made to daughter Judith were to annual disbursements of the family limited partnership units in Copper Creek Farm
• In 2003, the Father established an annuity account which was worth $172,730.79 at his death in 2007
• The Father had named his two children, other than daughter Judith, as the beneficiaries of the annuity
• The Father named the other two children, besides daughter Judith, as beneficiaries of the annuity because he wanted to give them something to offset the value received by daughter Judith because of the appreciation of Copper Creek Farm, the family limited partnership, in which the other two children besides Judith had no interest
• As a result of being named as beneficiaries of the annuity, after the death of Father, the two children, other than Judith, received $83,365 each which was distributed outside of the Trust
• Neither the annuity, nor Copper Creek Farm, were held by the living trust established by Father at the time of his death
The trial court, the Chancery Court for Sullivan County, Tennessee, found that it was the intent of the Father that his three children share equally in his assets at the time of his death. Yet, a strict reading of the Trust would result in daughter Judith receiving nothing from the Trust, while her two siblings would receive $311,428 from the Trust in addition to the $83,365 each received from the annuity.
In order to carry out the intent of the Father, the Chancery Court judge held that the prior distributions of $83,365 which were made to the two children, other than daughter Judith, should be added back into the Trust. The Tennessee Court of Appeals reversed that ruling. As a result of the ruling of the court of appeals, the two children, other than daughter Judith, received significantly more of the assets of the Father than did daughter Judith.
Although the result in this case was not what the Father would have wanted, it was the only result possible if the living trust was interpreted according to its plain and unambiguous language. Trust agreements, under Tennessee law, are to be interpreted in the same manner that contracts and deeds are interpreted. If the intent of the settlor (the person who created the trust) is clear and unambiguous from reading the trust instrument, then outside evidence of the settlor’s intent (called parol evidence) is not admissible.
There are several lessons to be learned from this case. First, if you draft a clear and unambiguous contract, deed, trust or other agreement, you must expect that a court will carry out your written intent even if fifty credible witnesses testify that, after you signed the document, your intent changed. Second, if you draft a clear and unambiguous trust, but thereafter make distributions and transactions outside of the trust that will affect the equality with which your assets are distributed, you may well need to reconsider those transactions or distributions or revise or amend your living trust. Third, never expect the beneficiaries of your trust not to overreach if you allow them the opportunity. Lastly, in trust agreement litigation, if your opponent can’t afford to pay for an appeal to the Tennessee Court of Appeals, the judgment of the trial court, even if it is contrary to the clear wording of the trust agreement, might just do the trick.