First National Bank v. Department of Health & Mental Hygiene

Digges, J., delivered the opinion of the Court. The event that precipitated this case occurred in mid-1975 when the petitioners, the trustees of a trust created by the will of Annesley Bond Baugh, were notified by respondent Maryland Department of Health and Mental Hygiene that as of July 1, 1975, the charge to the trust for the care of the testatrix’s daughter at Spring Grove State Hospital was being increased. The daughter, also named Annesley Bond Baugh, is now approximately sixty-eight years old and has resided at this mental hospital since 1944. The facts, none of which are here in dispute, show that from 1968, when the mother died, until July 1975 all costs for her daughter’s care were paid out of the trust fund created by Mrs. Baugh’s will.

The will, executed in 1957 and amended to a minor degree by codicils in 1961 and 1963, provides in pertinent part: FIFTH: I give, devise and bequeath all of the rest and residue of my estate, including all property over ⁷²³ which I have a power of testamentary disposition under any will of my husband, Frederick H. Baugh, unto my son, Frederick H. Baugh, Jr., and First National Bank of Baltimore, the survivor of them and their successors, as Trustees, IN TRUST AND CONFIDENCE, NEVERTHELESS, for the following uses and purposes: A. My Trustees shall collect the rents, revenues, income and profits from my trust estate and after paying or providing for the payment of all taxes, dues, charges and expenses, shall dispose of the income and principal as follows: 1. My Trustees, accounting from the date of my death, shall pay from time to time the net income and so much of the principal as they, in their absolute and uncontrolled discretion, may determine, to my daughter, Annesley Bond Baugh, or, in their absolute and uncontrolled discretion, may apply the same for her maintenance, comfort and support. 2. Upon the death of my daughter my Trustees shall pay her funeral expenses unless her individual estate is sufficient to pay such expenses and shall transfer and deliver the balance of my trust estate then in their hands unto my son, Frederick H. Baugh, Jr., if he be then living. If my son should not be then living, my surviving Trustee shall retain the trust estate and pay the net income therefrom for the maintenance, education, comfort and support of his children living from time to time.

When the youngest child of my son reaches the age of twenty-one (21) years, this trust shall terminate and cease and the surviving Trustee shall transfer and deliver the principal of the trust estate and all accumulated income thereon to the then living children and descendants of my son, per stirpes. From 1968 until 1973, the income generated by the trust corpus proved to be sufficient to pay all costs of the daughter’s care at the hospital and the trustees applied it to ⁷²⁴ that cause. The income, however, became insufficient in 1973 to discharge this obligation and from then until 1975 the trustees exercised the discretion granted them by the will and invaded the principal in order to pay the difference between the trust income and the hospital charges. Upon receipt in mid-July 1975 of a notice from the hospital of an additional increase in costs, the trustees decided that further invasion of the principal would not advance the testatrix’s purposes in creating the trust and, as a consequence, notified the respondent that future payments would be limited to the trust income. 1 The Department of Health and Mental Hygiene, in contesting the trustees’ construction of their responsibilities to Miss Baugh under the will, maintained the position that both the trust income and the principal, if need be, could be used in an appropriate amount to help defray the total cost of the daughter’s care.

As a result of this conflict, a series of administrative appeals followed. When each resulted in a ruling adverse to the trustees, they sought judicial review by appealing to the Baltimore City Court. See Md. Code (1957, 1978 Repl. Vol., 1978 Supp.), Art. 41, § 206B; id.

(1957, 1978 Repl. Vol.), Art. 41, § 255 (a). That court held that after all the income of Mrs. Baugh’s trust had been utilized on her daughter’s behalf, the corpus was, as an asset of the patient, then legally chargeable for the unpaid portion of the cost of the daughter’s care assessed under Md. Code (1957, 1972 Repl. Vol., 1975 Cum.

Supp.), Art. 59, § 40 (currently codified at Md. Code (1957, 1971 Repl. Vol., 1978 Cum. Supp.), Art. 43, § 601). From this order a timely appeal was taken by the trustees to the Court of Special Appeals and we granted certiorari prior to that court’s consideration of the matter.

Having concluded that the trustees acted within the authority granted them by the provisions of the trust in refusing to further deplete its principal, we will reverse. The paramount issue now before us is whether the trust principal may be charged with the costs of the care of ⁷²⁵ Annesley Bond Baugh. The answer to this question, in turn, depends on which of two commonly recognized types of trusts the testatrix intended to create, that is, whether by the fifth item of her will she intended to establish a support trust or a discretionary trust. A support trust, it is generally recognized, is one that provides that “the trustee shall pay or apply only so much of the income and principal or either as is necessary for the education or support of the beneficiary,” thereby barring the beneficiary from transferring his interest and precluding his creditors from reaching it.

Restatement (Second) of Trusts § 154 (1957); accord, G.G. Bogert & G.T. Bogert, The Law of Trusts and Trustees § 229, at 726 (2d ed. 1965); 2 A. Scott, The Law of Trusts § 154, at 1176 (3d ed. 1967). If this trust were entirely for the support of Miss Baugh, however, she could, by showing the trustees have abused their discretion, compel them to make any payment reasonably necessary for that purpose, Offutt v. Offutt, 204 Md. 101, 110 , 102 A. 2d 554, 559 (1954) (quoting Restatement of Trusts § 128, Comment e (1935)); likewise, this Court has recognized that when a supplier of necessaries — the State in this case — has a claim against the beneficiary of a support trust, the interest of the beneficiary in the trust can be reached to compel payment for the required items or services. Safe Deposit & Tr. Co. v. Robertson, 192 Md. 653, 660 , 65 A. 2d 292, 295 (1949) (quoting Restatement of Trusts § 157 (1935)); see Pole v. Pietsch, 61 Md. 570, 573-74 (1884). 2 In contrast, if, by direction of the settlor, all or any part of the trust assets can be totally withheld from the beneficiary by the trustees then, to the extent it can be so retained, a discretionary trust would be created.

The Restatement of Trusts, Second, sets forth the definition and incidents of a discretionary trust as follows: [I]f by the terms of a trust it is provided that the trustee shall pay to or apply for a beneficiary only ⁷²⁶ so much of the income and principal or either as the trustee in his uncontrolled discretion shall see fit to pay or apply, a transferee or creditor of the beneficiary cannot compel the trustee to pay any part of the income or principal. [Restatement (Second) of Trusts § 155(1) (1957).] Accord, G.G. Bogert & G.T. Bogert, supra, § 228, at 717, 720-21; 2 A. Scott, supra, § 155, at 1180. Thus, payment cannot be compelled out of a discretionary trust unless it is shown that the trustees have acted arbitrarily, dishonestly, or from an improper motive in denying the beneficiary the funds sought. Restatement (Second) of Trusts § 128, Comment d (1957); see Offutt v. Offutt, supra, 204 Md. at 110 , 102 A. 2d at 558 . Bearing in mind these trust classifications, we proceed to the task of ascertaining, from the four corners of the will, which form of trust the testatrix-settlor intended to create.

See, e.g., Johnson v. Hall, 283 Md. 644, 649 , 392 A. 2d 1103, 1106 (1978) (citing authorities); Shriners Hospitals v. Md. Nat’l Bank, 270 Md. 564, 570-71 , 312 A. 2d 546, 550 (1973) (same). After reviewing the will and its codicils to determine Mrs. Baugh’s intent, we think the critical passage indicating her desires and directions is found in paragraph one of the fifth clause which, because of its importance, we here set out again: 1. My Trustees, accounting from the date of my death, shall pay from time to time the net income and so much of the principal as they, in their absolute and uncontrolled discretion, may determine, to my daughter, Annesley Bond Baugh, or, in their absolute and uncontrolled discretion, may apply the same for her maintenance, comfort and support. The respondent contends that the testatrix, by the use of these words, exhibited an intention to devote the principal of the trust fund to the maintenance, comfort, and support of her daughter, while the petitioners have consistently declared that the principal, as distinguished from the income, was not unreservedly devoted to the. support of Annesley Bond Baugh ⁷²⁷ but is to be dispensed only as the trustees, in their absolute discretion, see fit. 3 In examining the language of this paragraph as it deals with the trust corpus, we observe that it speaks of the distribution of the principal in two different contexts.

It first declares: “My trustees ... shall pay ... so much of the principal as they, in their absolute and uncontrolled discretion, may determine, to my daughter Annesley Bond Baugh. . . .” Although this provision allows the trustees to pay any part of the principal to Miss Baugh for any reason, it also forecloses her right to compel such payments because any distribution rests solely within the trustees’ discretion, if that discretion is honestly exercised. Thus, when considered alone, this language indicates the testatrix desired that the distribution of the principal be handled by the trustees under the rules and incidents applying to discretionary trusts. The application of this seemingly clearcut provision is somewhat muddled, however, by the testatrix’s additional direction that her trustees “in their absolute and uncontrolled discretion, may apply the same for [my daughter’s] maintenance, comfort and support.” Respondent argues that by mixing language that traditionally connotes a discretionary trust with that often used to establish a support trust, the testatrix in this instance was qualifying her earlier grant of absolute discretion to her trustees and mandating that they act consistent with the more limited discretion connected with a trust for support when dealing with matters involving her daughter’s maintenance. Usually, if the purpose of the trust is to provide support, words to that effect are included in the clause directing the trustees to pay.

For example, “the trustees shall pay to the ⁷²⁸ beneficiary of this trust so much of the income or principal as they deem necessary for his maintenance, comfort, and support,” is a fairly typical clause that clearly shows the testator’s intent to create a support trust. Indeed, the testatrix in this instance included within part A of the fifth item a paragraph designated as “2”, quoted earlier, that provides that after her daughter’s death, if her son were also dead, “my surviving Trustee shall retain the trust estate and pay the net income therefrom for the maintenance, education, comfort and support of his children living from time to time.” This is clearly a support clause for her grandchildren and, had the testatrix so desired, she could have provided for Miss Baugh’s support with similar language. She did not do so, however, but instead qualified the language of support by adding words describing the discretion her trustees were to exercise as being “absolute and uncontrolled,” an addition negating any suggestion that the testatrix wished to limit her trustees’ power to deal with the principal in matters concerning her daughter’s support and maintenance to the somewhat more restricted authority that is associated with a support trust. See Town of Randolph v. Roberts, 346 Mass. 578 , 195 N.E.2d 72, 73-74 (1964); McNeal v. Bonnel, 412 S.W.2d 167, 170-71 (Mo. 1969); In re Sullivan’s Will, 144 Neb. 36 , 12 N.W.2d 148, 150-51 (1943); Estate of Escher, 94 Misc. 2d 952 , 407 N.Y.S.2d 106, 109-11 (Sur.

Ct. 1978); cf. City of Bridgeport v. Reilly, 133 Conn. 31 , 47 A. 2d 865, 867-68 (1946). But see In re Lackmann’s Estate, 156 Cal. App. 2d 674 , 320 P. 2d 186, 189 (1958); In re Estate of Browning, 7. 6 Misc. 2d 1041 , 352 N.Y.S.2d 769, 770-71 (Sur. Ct. 1974); Bureau of Support in Dept. of Ment.

H. & C. v. Kreitzer, 16 Ohio St. 2d 147 , 243 N.E.2d 83, 85-86 (1968). Our conclusion, therefore, is that the trust, as it related to the principal, was not unqualifiedly for the support of Miss Baugh, but rather could be used for such a purpose at the sole discretion of the trustees. In so stating, we are aware that this interpretation of paragraph one’s language appears to deprive the second half of that paragraph of any independent meaning, because it does not seem to change or add to the trustees’ power, ⁷²⁹ thereby contravening the constructional rule that “[a]ll of the language in [a trust instrument] should be given effect where possible.” Vickery v. Maryland Trust Co., 188 Md. 178, 188 , 52 A. 2d 100, 105 (1947). Upon closer scrutiny, however, we think this is not the case.

With regard to discretionary trusts, the Restatement, Second, points out: Unless a valid restraint on alienation has been imposed ..., if the trustee pays to or applies for the beneficiary any part of the income or principal with knowledge of the transfer or after he has been served with process in a proceeding by a creditor to reach it, he is liable to such transferee or creditor. [Restatement (Second) of Trusts § 155 (2) (1957).] In this case, the testatrix imposed a restraint on alienation, of the kind denoted above, in the fifth item of her will by stating that “[e]xcept as otherwise provided in this will, my Trustees shall pay all amounts of income and principal payable hereunder to any person into the hands of such person and not unto any other person or corporation whatsoever,... nor can any of said payments be anticipated.” The effect of this spendthrift provision upon any discretionary payment of the principal, whether for support or some other purpose, would be to require that it be given directly to Miss Baugh and not to her creditors or assigns. By adding the latter provision of the first paragraph, however, we think testatrix was expressing her intention that the trustees could make discretionary payments for support from the principal directly to a creditor despite the spendthrift provision. Thus, our conclusion is that Mrs. Baugh, taking into account her daughter’s mental condition, sought to insure her well-being by giving her the income from the trust and, in addition, sought to clothe her trustees with maximum flexibility to deal with the trust corpus so that they, in their absolute discretion, might make payments directly into the hands of her (laughter or directly to creditors providing her daughter with necessary items or services. 4 ⁷³⁰ Our determination that the testatrix created a discretionary trust, of course, precludes any argument that the trustees can be compelled to pay the principal of the trust for Miss Baugh’s care at Spring Grove unless it can be shown that they acted “dishonestly or arbitrarily or from an improper motive.” Restatement (Second) of Trusts § 128, Comment d (1957); see Town of Randolph v. Roberts, supra, 195 N.E.2d at 73 (“arbitrarily, capriciously, or in bad faith”). No such showing was made or even attempted to be made here.

In a memorandum filed in the course of the trustees’ appeal to the Baltimore City Court they declared: In declining to consume the corpus of the trust to meet the escalating costs for Miss Baugh’s care at Spring Grove, the Trustees have