Opinion ID: 1986023
Heading Depth: 1
Heading Rank: 3

Heading: Was There a Family Agreement and, if So, What Were Its Terms?

Text: The trial court found there was an oral agreement by the four siblings to disregard the codicil and relieve Dwight of his obligation to repay his brothers for the federal estate tax payments Dennis and Douglas had made on Dwight's behalf. The court also found that pursuant to this oral agreement, the beneficiaries agreed not to seek payment of a $24,000 note owed to Henrietta by Douglas. On appeal, Dennis claims there was not a meeting of the minds with respect to such an agreement, but if there was it included an understanding that the beneficiaries would abandon any claim that Henrietta had not gifted the disputed machinery to Dennis. Our review of the trial court's ruling is de novo. See In re Estate of Spurgeon, 572 N.W.2d 595, 597 (Iowa 1998) (holding that claims tried in equity are reviewed de novo). In a de novo review, we make our own fact findings, but we give weight to the trial court's findings with respect to the credibility of witnesses. See In re Estate of Kiel, 357 N.W.2d 628, 630 (Iowa 1984). Dennis and Douglas testified at trial that the subject of Douglas's note and Dwight's obligation for deferred estate taxes in their father's estate was discussed at the family meeting in the lawyer's office, but there was no agreement that these debts would be forgiven. They also testified that Douglas had paid the note prior to Henrietta's death. In contrast, Dwight testified that an agreement to forego collection of Dwight's and Douglas's debts was reached at that meeting. Dwight recalled that Sackett brought up the fact that Douglas had a note with Henrietta for $24,000. Dwight testified that Sackett suggested that everyone agree to forgive Dwight's unpaid tax obligations and Douglas's note. It was Dwight's understanding when he left that meeting that everyone had agreed to this suggestion and that these matters would just be forgot. Before we consider whether a family agreement was reached at the meeting in the attorney's office, we address Dennis's claim that Douglas had paid the promissory note prior to Henrietta's death. Although Douglas testified that he had repaid the $24,000 prior to his mother's death, no documentation of any such payment was produced and none was found in Henrietta's accounts. Dennis did introduce documents showing that a piece of property owned by Douglas had been deeded to his mother and then subsequently deeded back to Douglas. Dennis claimed that this property was security for Douglas's debt to Henrietta and the fact that Henrietta deeded it back to Douglas showed that the note had been paid. Douglas's testimony, however, did not support this scenario. Douglas acknowledged that at the time of the original deed from him to his mother, he was involved in bankruptcy proceedings and he really didn't want [the land] in [his] name at that time. In fact, Douglas admitted that on the same day he transferred the property to his mother, she sold it on contract to Douglas's children. He also admitted that after he got [his] affairs together, his children assigned the contract to him and then his mother deeded the property back to him. In addition, Dennis testified that the promissory note was found in his mother's safety deposit box after she died and was listed on an inventory of the contents of the safety deposit box. No one testified that the note was cancelled or marked paid. By the time of trial, the note had disappeared and Dennis testified he did not know what had happened to it. We draw two inferences from this evidence. First, the fact that the promissory note was in Henrietta's possession at the time of her death raises a rebuttable presumption that the note was not paid. See Burch Mfg. Co. v. McKee, 231 Iowa 730, 732, 2 N.W.2d 98, 99 (1942). Second, Dennis's failure to produce the note at trial despite his possession of it as executor of Henrietta's estate also raises an adverse inference. See Phillips v. Covenant Clinic, 625 N.W.2d 714, 718 (Iowa 2001). As we said in Phillips, [i]t is a well-established legal principle that ... the failure to produce documents or physical evidence relevant to the proof of an issue in a legal proceeding supports an inference that the evidence would have been unfavorable to the party responsible for its ... nonproduction. Id. We find, as did the trial court, that Douglas had not repaid the $24,000 loan from his mother. We now turn to the primary issuewas there an agreement by the siblings to forgive Douglas's debt to his mother and Dwight's debt to his brothers? In addition to Dwight's testimony that such an agreement was made, Dennis's conduct as executor prior to his filing of the final report supports the existence of a family agreement. When the required forms were filed with the Iowa Department of Revenue and Finance with respect to Iowa inheritance and estate taxes, the executor showed the respective shares of the four siblings in amounts that did not reflect Henrietta's directions in the codicil to her will to deduct unpaid deferred estate taxes from the share of any beneficiary who had not paid his portion of those taxes. In fact, the computation of shares and tax for Douglas and Dwight were identical, showing that each was entitled to a net share of approximately $60,000. Dennis could not explain at trial why the computation of shares in the inheritance tax forms varied from the proposed distribution filed with the final report. We agree with the district court that the most credible testimony supports the existence of a family agreement to forgive Douglas's unpaid obligation under the promissory note and Dwight's obligation for past, deferred estate taxes. [3] We turn, then, to Dennis's claim that if such an agreement existed, it included an understanding that no one would challenge his ownership of the farm equipment he alleges his mother gave him. Douglas and Dennis both testified that their mother had given this equipment to Dennis early in 1995. Although these transfers were within three years of Henrietta's death and therefore includable in her estate for tax purposes, see Iowa Code § 450.3(2); I.R.C. § 2503 (1994), they were not listed in the estate's Iowa inheritance and estate tax return, as required under Iowa law. See Iowa Code § 450.53. Similarly, Douglas's debt to the estate, which was an asset of the estate notwithstanding any agreement that Douglas did not have to pay the note, was not listed as an estate asset. These actions by the executor are consistent with a family agreement that the various transactions concerning each brother would simply be forgot[ten]. In addition, common sense and the less-than-warm relationship among the brothers suggest that any family agreement would include some benefit to each brother. If Dennis's gifted equipment is included in the family agreement, all brothers benefited in a roughly equivalent amount. Dwight's obligation of almost $22,000 was forgiven, Douglas's debt of $24,000 was forgiven, and Dennis received equipment without objection valued at $25,500. Based upon our de novo review of the record, we find that the family agreement included an understanding that Dennis could have the disputed equipment free of any challenge by his siblings. We reverse the district court's contrary finding. In summary, we find that a family agreement was made that Douglas's unpaid note to his mother and Dwight's debt to his brothers would be forgiven, and that the beneficiaries would not contest Dennis's ownership of the farm machinery. Accordingly, the brothers' distributive shares of the estate should not have been adjusted for the debt Dwight owed to Douglas and Dennis. Although the executor acted properly in not requiring Douglas to pay the $24,000 note, this note was an asset of the estate and it should have been included in the estate for purposes of computing any taxes owed. Likewise, notwithstanding the family agreement to forget the gifts to Dennis, these items should also have been revealed in the tax returns as transfers made within three years of the decedent's death. Contrary to the executor's argument in his brief, inclusion of these items in the estate for tax purposes does not violate the family agreement. The family agreement only affects the rights and obligations of the beneficiaries as to the estate and each other; the agreement cannot alter the legal requirements with respect to the taxation of estate assets. Our finding that a family agreement existed renders any question about the enforceability of the codicil moot. Pursuant to the family agreement, Dwight's obligation for deferred estate taxes was forgiven. Therefore, as we have stated, there was no need to adjust Dwight's distribution as required by the codicil. Consequently, we do not decide whether the codicil was enforceable. For the same reason, we need not determine whether Dwight's share of the deferred taxes should have been computed on a proportionate basis rather than a pro rata basis. Finally, our finding that the family agreement included the abandonment of any challenge to Dennis's ownership of the disputed equipment makes it unnecessary for the court to decide whether Henrietta had, in fact, given this property to Dennis prior to her death.