Opinion ID: 1908963
Heading Depth: 1
Heading Rank: 2

Heading: The Modification of the Provisions of the Trust

Text: After the case was at issue, and at or prior to the hearing, Maryland National filed what was later marked for identification as Plaintiff's Exhibit No. 1, titled The Harry Edward Clinton Charitable Remainder Unitrust under decree by Circuit Court No. 2 of Baltimore City, Maryland, which appears as an appendix to this opinion. It set out in considerable detail the manner in which Maryland National apparently proposed that the will be modified, a modification which was seemingly acceptable to the parties, but not formally consented to by them, except for the provision of Article II relating to distribution of income. Article I made Miss Schleupner's interest a true life estate, [7] and Article II adopted the distribution of income urged by the life tenants and opposed by the Hospitals. We need not pass on the question whether the proposed modification could have been accomplished solely by agreement of the parties under Chapter 312 of the Laws of 1972 and Chapter 366 of the Laws of 1971, which were enacted by the General Assembly to facilitate the conformance of charitable remainder trusts to certain requirements of the Tax Reform Act of 1969, and are now codified as Code (1957, 1973 Repl. Vol.) Art. 16, §§ 199D-1 and 199F. [8] In the first place, no agreement was reached; and more importantly, it seems to be conceded that the time for reformation by agreement of the parties expired under Treasury Regulations on 31 December 1972, and that an acceptable modification can now only be effected by judicial decree, Treas. Reg. § 1.664-1(f)(3)(ii) (1972). Exhibiting commendable restraint, the chancellor filed an opinion in which he declined to rule on the proposed modification of the terms of the will until (i) the question as to the proper construction of the provisions dispositive of income was finally resolved; (ii) the consent of the several parties in interest had been obtained, [9] and (iii) the modifications proposed had been limited to the bare minima required by the Tax Reform Act of 1969. To this end, he retained jurisdiction over the trust estate until a final decree was signed. We think the chancellor had it just about right when he said: It is clear beyond question that subject to rare exception a court of equity has no power to rewrite or amend a decedent's will. McCurdy v. Safe Deposit & Trust Company, 190 Md. 67, 76 [, 57 A.2d 302, 307 (1948)], and Ridgely v. Pfingstag, 188 Md. 209, 228 [, 50 A.2d 578, 587 (1946)]. Where the overriding general intent of the testator is clear, a court may change, transpose or add to the words of the will in order to effect the general intent. McElroy v. Mercantile-Safe Deposit & Trust Company, 229 Md. 276 [, 182 A.2d 775 (1962)]; Payne v. Payne, 136 Md. 551 [, 111 A. 81 (1920)]; Mercantile-Safe Deposit & Trust Company v. Winters, Trustee, 246 Md. 106 [, 228 A.2d 289 (1967)]. However, there is a vast difference between the transposition, addition or changing of a word or two in order to carry out the overriding general intent of the testator and incorporating in his will an 8-page document such as is proposed in the instant case. One (and perhaps the only one) rare exception to the general rule against amending or rewriting the will of a testator is with respect to charitable trusts under the doctrines of cy pres and deviation. IV Scott on Trusts, §§ 381, 399-399.4 [3d ed. 1967]. The contention is made here that the Court should invoke the doctrine of cy pres or deviation to prevent the loss of the tax deduction and the consequent diminution in the size of the gift to charity. In a proper case it would seem that an equity court would have the power under either the cy pres or deviation doctrine to modify the trust instrument to the extent necessary to insure a charitable deduction for estate or income tax purposes on the theory that diversion of assets from charitable purposes contrary to the clearly expressed intent of the donor would thus be avoided. Art. 16, § 196, Code [(1957, 1973 Repl. Vol.)]; Miller v. Mercantile-Safe Deposit & Trust Company, 224 Md. 380 [, 168 A.2d 184 (1961)]; Gordon v. City of Baltimore, 258 Md. 682 [, 267 A.2d 98 (1970)]; Wesley Home, Inc. v. Mercantile-Safe Deposit & Trust Company, 265 Md. 185 [, 289 A.2d 337 (1972)]; In the Matter of Estate of Barkey, [65 Misc.2d 738,] 318 N.Y.S.2d 843 (Surrogate's Court, New York County 1971); In re Estate of Klosk, [65 Misc.2d 1005,] 319 N.Y.S.2d 685 (Surrogate's Court, New York County 1971); In re Roche's Will, [69 Misc.2d 481,] 330 N.Y.S.2d 441 (Surrogate's Court, Queens County 1972); Bok Trust, [27 Am. Fed. Tax R.2d 71-1331] (Orphans' Court Div., Court of Common Pleas of Montgomery County, Pa. 1971); Maryland National Bank v. Kidd, Circuit Court of Baltimore City, Docket 111A, Folio 659, Case No. A-52246. A direction or statement of intention in the instrument that the charitable gift qualify for the deduction would weigh in favor of the existence of such a power in a given case. However, the power to alter would extend only to the minimum modification necessary to obtain the deduction and could only exist when its exercise would not disturb any other gift, estate or interest provided for in the trust instrument which the donor had not clearly subordinated to the maximization of the charitable gift. In none of the cases cited and relied on by counsel, or in any found by the Court, was as extensive a rewriting of the trust instrument permitted as is requested here. Apparently, the changes needed in this case to conform the will to the requirements of the Tax Reform Act of 1969 are: (1) limit the income to 5% of net market value of the trust assets valued annually, (2) eliminate marriage as an event which would terminate Miss Schleupner's income estate; (3) add express administrative provisions preventing self-dealing by the trustee and prohibiting the trustee from making taxable expenditures, having excess business holdings and investing in a manner jeopardizing the trust's exempt purposes; and (4) provide for distribution of remainder to some other tax qualified charity in the event Shriners is not tax qualified on termination of the trust. The Klosk, Barkey, Roche and Bok cases relied upon by the plaintiff and cited above dealt with charitable trusts in which there were no other beneficiaries. The Barkey and Klosk cases merely permitted the addition of administrative provisions. In Roche and Bok the income of the trust was payable to a charity or charities and the courts permitted only (1) addition of the required administrative provisions and (2) a provision with respect to minimum income distribution. Estate of Bird [N.Y.L.J. May 10, 1972] (New York County Surrogate's Court), and Estate of Pearlbrook, [30 Am. Fed. Tax R.2d 72-5904] (New York County Surrogate's Court [1972]) while involving split interest trusts merely provided for inclusion of administrative provisions not inconsistent with any `mandatory direction' or the `substance of the testamentary provisions or the rights of the beneficiaries' in the wills. In none of these six cases was the estate or interest of another individual modified by the court nor did it appear from the opinion in any of the cases that any of the modifications or deviations substantially altered an express provision of the trust instrument. It is true that in Maryland National Bank v. Kidd, [supra,] a nisi prius decision in this court, the estate of a life beneficiary was modified, but such was by express agreement of all affected parties and the court was not called upon to hold that the abandonment of the interest of the income beneficiary resulted in a gift from the grantor rather than the income beneficiary. The proposed amendment in this case would: 1. Modify the income estate of Mary L. Schleupner by eliminating the provision for termination upon her marriage. [Appendix, Article II] 2. Limit the income to 5% of the net fair market value of the assets of the trust estate valued annually. [Article III] 3. Require distribution of the remainder interest to another charity which meets the requirements of Section 170(c) of the Internal Revenue Code to be selected by the trustee in the event that when the remainder falls in Shriners is not an organization which meets such requirements. [Article IV] 4. Add detailed provisions with respect to determination of income and for its distribution. [Article V] 5. Add a provision permitting the trustee to apply an income beneficiary's distributable share in its discretion for the comfort and support of the beneficiary in the event of legal disability. [Article VI] 6. Add a substantial number of express powers for the trustee, many of which are unrelated to the requirements of the Tax Reform Act. [Article VII, and see particularly (b), (g), and (h)] 7. Modify provisions with respect to payment of trustee's compensation. [Article VIII] 8. Add a provision requiring annual accounting to each beneficiary. [Article IX] 9. Modify the provision with respect to the selection of a memorial by empowering the trustee to select it in conjunction with the two Potentates identified in the will rather than leaving it to the `sole discretion' of the Potentates. [Article X] While the proposed amendment might well be one upon which all parties in interest could agree under [Code (1957, 1973 Repl. Vol.)] Art. 16, § 199D-1, it is not one which the Court has the power to adopt under the doctrine of either deviation or cy pres. The very most that would be within the Court's power would be to rule that the trust be amended to include (from the items listed above) only items 2, 4 and those powers under item 6 which are required by the Tax Reform Act of 1969. Although the evidence is scant, it seems reasonably clear that the trustee's conclusion expressed in its brief that the income during the existence of the trust will never exceed that distributable under the proposed formula is a sound one. Furthermore, although the reference to the charitable deduction in the will can more readily be interpreted as an expression of probability or expectancy than a declaration of intent (clearly it cannot serve to incorporate by reference under [Code (1957, 1969 Repl. Vol.)] Art. 93, § 4-107), reading the will as a whole one can support the holding that the testator would prefer the limitation on income to the loss of the charitable deduction. Although Internal Revenue has ruled that item 1 is necessary to obtain the charitable deduction, the modification of Miss Schleupner's income estate is so great as to put it beyond the power of the Court, at least without the express consent of all affected parties. It seems ironic that Internal Revenue is insisting on a modification which can only serve to reduce the charitable gift and can in no way increase it. Since Miss Schleupner is substantially younger than the other two income beneficiaries, the chances are she will outlive them by a number of years. If she should marry, the elimination of this event as a disqualifying one would increase her estate and at the same time diminish that of Shriners. Apparently, Internal Revenue's problem is one of difficulty of valuation. Its end could be achieved by requiring valuation of Miss Schleupner's interest as if it were an unrestricted life estate without requiring an actual change in the will. This would assure the minimum deduction and the maximum gift to charity which seems to be more consistent with the underlying policy of the pertinent provisions of the Internal Revenue Code. While item 3 is required by Internal Revenue Regulations, it constitutes a change in substance which could only be achieved under [Code (1957, 1973 Repl. Vol.)] Article 16, § 199D-1. There would appear to be no justification for the remaining suggested modifications. Items 5, 7, 8 and 9 and many of the powers in item 6 appear to bear no relation to the estate tax law or regulations and therefore are unnecessary to prevent diversion of property from charitable purposes. While many of these items might constitute no more than codification of existing rules of law regarding administration of trusts, or innocuous supplements thereto, some materially vary express provisions of the will for no demonstrated tax purpose. Almost two months thereafter, there having been no express agreement of the parties, a final decree was entered: This case came on for hearing in open Court on September 26, 1972. The Court has considered the Petition for Construction of Will and for Amendment, together with the exhibits thereto, the answers filed by the parties respondent, the amendment to the Petition which was made at the hearing, the evidence produced at the hearing of the case, and the memoranda of law submitted by counsel. For the reasons stated in a Memorandum Opinion filed on January 11, 1973, the Court has resolved the issues raised in the case as follows: (1) That `The Harry Edward Clinton Charitable Remainder Unitrust under Decree of Circuit Court No. 2 of Baltimore City, Maryland,' marked at trial as Plaintiff's Exhibit No. 1 for Identification, alters the terms of the Will of Harry Edward Clinton to such an extent as to make its adoption beyond the power of this Court, and (2) That the clear meaning of the Will of Harry Edward Clinton is that the surviving qualified income beneficiaries would share the entire net income of the trust created under the said Will until the termination of the trust, and (3) That in view of the foregoing, Prayer e as contained in `Amendment to Petition for Construction of Will and for Amendment of Maryland National Bank, Petitioner' is moot. The Court having so resolved the issues, it is this 2 day of March, 1973 by the Circuit Court No. 2 of Baltimore City 1. ORDERED that Maryland National Bank, Trustee of the trust created under the Will of Harry Edward Clinton, pay the entire net income from the trust in equal shares unto such of the following as are `qualified to receive the same' as that term is defined as to each of them in the Will  Mrs. Gladys K. Moore, Mrs. Helen Crossley and Miss Mary L. Schleupner  and that said Trustee make no income payments to the remainderman, Shriners Hospitals for Crippled Children, and that only income accumulated between the last distribution to the final income beneficiary and the time she is no longer `qualified' is to be added to the corpus of the trust for distribution to Shriners Hospitals for Crippled Children. 2. FURTHER ORDERED that Maryland National Bank, Trustee of the trust created under the Will of Harry Edward Clinton administer said trust pursuant to the terms of said trust and applicable law. 3. FURTHER ORDERED that this Court retain no jurisdiction over the administration of the trust created under the Will of Harry Edward Clinton. In their appeal, the Hospitals have challenged not only the construction of the provision relating to the distribution of income, but also the determination that a court of equity is without power to modify the trust instrument without the consent of the several parties in interest. As regards the power of a court of equity to modify a trust instrument beyond the point of preventing a complete frustration of the creator's purpose, we agree with the chancellor that if an instrument is to be conformed to the requirements of the Tax Reform Act of 1969, it must be done in the light of the clear expression of legislative intent contained in Code (1957, 1973 Repl. Vol.) Art. 16, § 199D-1. Changes may be made by the parties, for purposes of complying with I.R.C. § 664, so long as the court is satisfied that such alterations are not contrary to the terms of the governing instrument, Code (1957, 1973 Repl. Vol.) Art. 16, § 199F. Reading the two sections together, it would seem that two approaches are available: either amendment by consent of the parties, subject to court review, or amendment by decree of a court of competent jurisdiction with the consent of those parties whose substantive rights may be affected. The prevailing rule is that the doctrine of reformation of instruments is not applicable to wills, [10] see Annot., 90 A.L.R.2d 924, 933-34 (1963), and cases there cited, although concededly a somewhat similar but much more restrictive result may sometimes be accomplished in an action for construction, see McElroy v. Mercantile-Safe Deposit & Trust Co., supra, 229 Md. at 283-84, 182 A.2d at 778-79; Slingluff v. Johns, 87 Md. 273, 280-81, 39 A. 872, 875 (1898). Cases dealing with the power of a court of equity to reform other instruments, e.g., Housing Equity Corp. v. Joyce, 265 Md. 570, 290 A.2d 769 (1972); Anne Arundel County v. Cushman, 255 Md. 153, 257 A.2d 150 (1969), are therefore clearly inapposite. While it is true that trustees cannot alter the interests of the beneficiaries without their consent, Walbach v. Walbach, 165 Md. 8, 166 A. 422 (1933), a trust instrument may be reformed by the court to correct a mistake, Liberty Trust Co. v. Weber, 200 Md. 491, 507, 90 A.2d 194, 200, 200 Md. 523, 91 A.2d 393 (1952); Kiser v. Lucas, 170 Md. 486, 496-97, 185 A. 441, 445-46 (1936), in the exercise of an equity court's inherent power. However, the doctrine of reformation is ordinarily applicable only in cases, such as Liberty Trust and Kiser, involving inter vivos trust instruments. [11] Here we are confronted with a testamentary trust and, except for the statutes, Code (1957, 1973 Repl. Vol.) Art. 16, § 199D-1 and § 199F, the general prohibition against the reformation of a will would prevail. Further, it seems to us that this is not a situation where modification can be obtained under the doctrine of cy pres, because there is no element of illegality, or impossibility or impracticability of enforcement present here, as contemplated by Code (1957, 1973 Repl. Vol.) Art. 16, § 196; Gordon v. City of Baltimore, supra, 258 Md. at 702, 267 A.2d at 108-09; Miller v. Mercantile-Safe Deposit & Trust Co., supra, 224 Md. at 387, 168 A.2d at 188; see generally Casenote, The Cy Pres Doctrine Explored, 22 Md. L. Rev. 340, 345-48 (1962); see also Restatement (Second) of Trusts § 399, comment a (1959); 4 Scott, Law of Trusts § 399, at 3085 (3d ed. 1967); Bogert, Law of Trusts & Trustees § 431, at 390-91 (2d ed. 1964), for a general discussion of common law cy pres principles in the absence of statute. Strictly speaking, neither is this a case where the doctrine of deviation can be invoked, because deviation usually has to do with the powers and duties of the trustees of charitable trusts with respect to the administration of the trust, Restatement (Second) of Trusts § 381, comment a (1959) (emphasis supplied); Bogert, supra, § 394, at 236. Although deviation is a principle analogous to cy pres, [12] and is not as extensive, Restatement (Second) of Trusts § 399, comment a (1959), it is a power which may be exercised with particular liberality in the case of charitable trusts, Gordon v. City of Baltimore, supra, 258 Md. at 706, 267 A.2d at 111; 4 Scott, supra, § 381, at 2987. Even without the statutes, it is conceivable that some degree of modification might have been accomplished, so long as it did not materially alter the substantive rights of the parties, for example, to prevent the frustration of Mr. Clinton's clearly expressed desire that the provision made for the Hospitals should qualify as a charitable deduction for federal estate tax purposes. Here, the root of the difficulty was the absence of the express consents of the affected parties. See Davison v. Duke University, 282 N.C. 676, 194 S.E.2d 761 (1973), where modification of the administrative provisions of the trust instrument which created the Duke Endowment to conform to the provisions of the Tax Reform Act of 1969 was permitted, possibly under the doctrine of deviation, only to an extent not at variance with the expressed intention of the settlor.