September 12, 2011
Authored by: Luke Lantta
A lot of family trust disputes get resolved either through pre-litigation settlement agreements or pre-trial settlement. Unfortunately, poor drafting of a settlement agreement often defeats the purpose of the original settlement by leading to litigation concerning the settlement agreement itself. In Purcella v. Purcella, the Wyoming Supreme Court reminds us that if you are going to enter an agreement altering the terms of an original trust, you need to be explicit that you are actually altering the terms of the original trust.Burt A. Purcella established a trust into which he transferred his assets, including his one-half interest in a self-storage business. Burt was the original trustee and he named his wife, Cynthia, and his children from a prior marriage as successor trustees. Upon Burt’s death, the trust assets were to be divided between a Family Trust and a Marital Trust. Cynthia was the income beneficiary of the Marital Trust and the Children were the beneficiaries of the Family Trust and the remainder beneficiaries of the Marital Trust.
Burt’s original trust repeatedly used the term “net income,” including its use in the provision that Cynthia was to receive the “net income” from the Marital Trust in installments during her lifetime and the children were to receive the “net income” from the Family Trust during their lifetimes.
As happens in second marriages, a dispute arose between Cynthia and her step-children. While the Wyoming Supreme Court doesn’t tell us what those “differences” were, they included a dispute over how income from the self-storage business should be handled. Cynthia and the children entered into a settlement agreement seeking to resolve those differences. Unlike the original trust, the settlement agreement apparently made no mention of “net income,” but instead referred to “all income” received from the self-storage business. Cynthia, therefore, contended that the settlement agreement entitled her to “all income” from the Marital Trust instead of just the “net income” from the Marital Trust.
The Wyoming Supreme Court held that Cynthia was bound by the settlor’s intent as expressed in the original trust and not the purportedly inconsistent language in the settlement agreement. Therefore, Cynthia was entitled only to the net income from the Marital Trust. The settlement agreement had to be construed in the context of the original trust. Thus, the settlement agreement clarified, but did not change, how the Marital Trust operated. The Court’s reasoning boiled down to the following: “Absent clear language in the [settlement agreement] expressing the intent to change the disbursements from the Marital Trust to allow Wife to receive all income, without accounting for any administrative expenses, we conclude she is entitled to net income.”
Maybe Cynthia and the children actually did intend to alter the operation of the Marital Trust through the settlement agreement. If they did, however, nothing in the settlement agreement itself made explicit that was their plan. Therefore, if you are entering a settlement agreement that actually changes the operation of a trust, it is good practice to make that clear on the face of the settlement agreement rather than assume that it is understood.