Title: Connell v. Houser

State: massachusetts

Issuer: Massachusetts Supreme Court

Document:

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SJC-11698 
 
MARY-KATHLEEN O'CONNELL & another,1 trustees,2  vs.   
GEORGE C. HOUSER, JR., & others.3 
 
 
October 28, 2014. 
 
 
Trust, Reformation.  Taxation, Generation skipping transfer tax. 
 
 
 
The trustees filed a complaint in the county court seeking 
reformation of the trust established under Article Fourth of the 
Mary R. Houser Trust -- 1991 to correct a drafting error that 
they contend frustrates the intent of the settlor and her 
husband to provide for their descendants in an efficient and 
tax-advantageous manner.  Apart from the Commissioner of 
Internal Revenue, who has not appeared, the parties with 
competency to do so have stipulated for themselves and their 
minor, unborn, and unascertained issue to the facts underlying 
the complaint and assented to the relief requested.  A single 
justice of this court reserved and reported the case to the full 
court.4 
                                                          
 
1 Dennis J. Phillips. 
 
2 Of the trust established under Article Fourth of the Mary 
R. Houser Trust -- 1991. 
 
3 Charlene D. Houser, Addison Houser, Austin Houser, George 
C. Houser, III, Victoria Houser, Julia Houser, and the 
Commissioner of Internal Revenue.  The complaint also names 
"others," referring to "unborn and unascertained issue of Mary 
R. Houser." 
 
4 The parties have moved to dispense with appointment of a 
guardian ad litem for any minor, unborn, and unascertained 
descendants of Mary R. Houser.  "[I]t is preferable that this 
2 
 
 
 
 
Background.  As part of their estate plans, George C. 
Houser (George Sr.) and Mary R. Houser (Mary) established trusts 
to provide income for their sons, George C. Houser, Jr. (George 
Jr.), and Horace M. Houser (Horace), while preserving principal 
for future generations.  The George C. Houser Trust -- 1980 
(George Houser Trust) became irrevocable on George Sr.'s death 
in 1983.  It established two trusts for Mary's benefit during 
her lifetime, and gave her a power of appointment over one of 
the trusts (the marital trust).  On Mary's death in 1993, the 
principal remaining in the George Houser Trust was divided into 
two "share trusts," one for each of the Housers' sons.  Each son 
was given a power to "appoint by his will" any property 
remaining in his respective share trust on his death "to such 
one or more of the Donor's issue" or to trusts for their 
benefit.  The parties represent that the property contained in 
the share trusts is not subject to the Federal generation 
skipping transfer (GST) tax.5  The George Houser Trust provided 
that each share trust: 
 
"shall terminate whenever after the death of said child of 
the Donor [George Sr.] no issue of said child is living, or 
upon the expiration of twenty-one (21) years after the 
death of the last survivor of the Donor, the Donor's wife 
MARY and all of the Donor's issue by blood living at the 
Donor's death, whichever shall first occur." (Emphasis 
added).   
 
 
After George Sr.'s death and enactment of the GST tax, Mary 
established the Mary R. Houser Trust -- 1991 (Mary Houser 
Trust).  She exercised her power of appointment over the marital 
trust property by appointing it to the trustees of the Mary 
Houser Trust.  She directed that, on her death, an amount equal 
to her GST exemption be held in a family trust established under 
                                                                                                                                                                                           
court be furnished with and have the benefit of an independent 
guardian's opinion concerning the possible consequences of the 
reformation for those beneficiaries." Fiduciary Trust Co. v. 
Gow, 440 Mass. 1037, 1038 n.7 (2004).  In the circumstances of 
this case, we allow the motion. 
 
5 The parties state that the assets contained in the George 
Houser Trust (and the share trusts created under it) and the 
distributions from it are exempt from the Federal generation 
skipping transfer (GST) tax because the trust became irrevocable 
prior to September 25, 1985, and it is therefore 
"grandfathered."  See generally Morse v. Kraft, 466 Mass. 92, 94 
n.7 (2013). 
3 
 
 
 
Article Fourth of her trust.  The parties state that 
distributions from the family trust to Mary's grandchildren and 
more remote descendants are fully exempt from the GST tax. 
According to its terms, the family trust will terminate: 
 
"(i) whenever after the death of the Donor [Mary] no issue 
of the Donor is living or (ii) upon expiration of twenty-
one (21) years after the death of all of the Donor's issue 
living on the date of the Donor's death, whichever event 
shall first occur."  (Emphasis added). 
 
When George Sr. died in 1983, and Mary died in 1993, their 
"issue by blood" were the same:  George Jr. and Horace, and 
George Jr.'s children, Charlene Houser and George C. Houser, 
III. 
 
 
Discussion.  Horace died on December 9, 2009, without 
having had any children.  He exercised his power of appointment 
over his GST-exempt share trust by directing that the property 
be added to the GST-exempt family trust.  The trustees contend 
that the GST-exempt status of the property held in Horace's 
grandfathered share trust is lost if a power of appointment over 
the property is exercised: 
 
"in a manner that may postpone or suspend the vesting, 
absolute ownership or power of alienation of an interest in 
property for a period, measured from the date of the 
creation of the trust, extending beyond any life in being 
at the date of creation of the trust plus a period of 21 
years." 
 
26 C.F.R. § 26.2601-1(b)(1)(v)(i)(B)(2).  Because the duration 
of the family trust as drafted is not measured solely by the 
lives of Mary's "blood issue" -- it potentially includes the 
lives of adopted persons -- the parties state that termination 
of the family trust may extend beyond the termination of the 
George Houser Trust.  They contend, therefore, that unless the 
family trust is reformed by adding the words "by blood" to its 
termination provision (as with the George Houser Trust), the 
GST-exempt property appointed to the family trust by Horace not 
only will lose its tax exempt status, but it will also make 
administration of the trust cumbersome. 
 
 
Where, as the result of a drafting mistake, a trust 
instrument fails to accomplish the settlor's intent, or leads to 
results inconsistent with that intent, reformation is 
appropriate.  See Rockland Trust Co. v. Attorney Gen., 463 Mass. 
4 
 
 
 
1004, 1005 (2012), citing Walker v. Walker, 433 Mass. 581, 587 
(2001); Bindman v. Parker, 459 Mass. 1004, 1004 (2011).6  We 
require clear and decisive proof that the instrument as drafted 
"fails to embody the settlor's intent," and produces "tax 
results . . . clearly inconsistent with the settlor's tax 
objectives."  Walker v. Walker, supra (citations omitted).  
Here, the trustees have adduced the requisite proof.  From the 
trust instrument itself, Mary's and George Sr.'s over-all estate 
plans, the affidavit of Mary's attorney, and the proof of other 
circumstances known to Mary at the time she created her trust, 
it is clear that she intended the family trust to complement her 
husband's estate plan and to operate as a vehicle to preserve 
Houser family property for the benefit of the Housers' 
descendants with the least GST tax burden possible.  Among other 
things, after the enactment of the GST tax, Mary exercised her 
power to appoint her taxable marital trust property to a 
separate trust, executed the family trust, and then funded it 
with her maximum GST exemption amount, with the understanding 
that a single trust (containing GST-exempt property) would be 
the most efficient and tax-advantageous way to provide for 
future generations. 
 
 
In these circumstances, we are satisfied that omission of 
the words "by blood" was not intentional and that it was, 
instead, the result of a mistake in drafting.  The affidavit of 
Mary's attorney and the agreed facts further support this 
conclusion.  Omitting the words "by blood" in the family trust's 
termination provision had the unintentional effect of decoupling 
the settlor's plan from that of her husband, and inadvertently 
frustrates her estate planning objectives.  Without reformation 
to include the omitted language, Horace's exercise of his power 
of appointment to add property from his father's trust to the 
family trust will defeat her purpose. 
 
 
Finally, we announce a change in procedure for future cases 
such as this.  On October 1, 2014, the court voted to adopt the 
"Amended Report of the Supreme Judicial Court's Ad Hoc Committee 
on Bosch Litigation" and to accept the committee's 
recommendations contained in the report.  Consequently, in the 
future, cases like this -- which involve no novel or unsettled 
issue of Massachusetts law, require only the application of 
                                                          
 
6 Cases like this raise issues of State law, which the 
parties ask us to resolve because of their Federal tax 
implications.  See Walker v. Walker, 433 Mass. 581, 582 (2001); 
Kirchick v. Guerry, 429 Mass. 215, 217 (1999) (in reformation 
cases, court decides State law issues, not Federal law issues). 
5 
 
 
 
settled Massachusetts legal principles to a particular set of 
facts, and have no particular significance beyond the specific 
parties and the specific facts involved -- should ordinarily be 
heard and decided in the Probate and Family Court.  The report 
is available online on the court's web site and in the offices 
of the clerks of the county court and the full court. 
 
 
Conclusion.  A judgment shall enter reforming the family 
trust (subsection 2 [ii] of Article Fourth of the Mary R. Houser 
Trust -- 1991), by inserting the term "by blood" after the  
phrase "all of the Donor's issue." 
 
 
 
 
 
 
 
 
So ordered. 
 
 
The case was submitted on briefs. 
 
Mary-Kathleen O'Connell, Jennifer Locke, & Janet 
Rickershauser for the plaintiffs.