Johnson v. Johnson

MATRICCIANI, J. This case arises from a dispute between a trust beneficiary and its trustee. Appellant, Catherine A. Moreland Johnson (Catherine), is trustee and stepmother to appellee and trust beneficiary, James Michael Johnson (James). Unsuccessful in his efforts to obtain an accounting of the trust from Catherine, James filed a Petition for Court Assumption of Jurisdiction of Trust Estate and Related Relief in the Circuit Court for Calvert County. Catherine opposed the petition, asserting that James lacked a cognizable interest in the trust.

After a hearing on the matter, the circuit court ordered Catherine to provide an accounting of the trust at issue, the Johnson Family Trust (the “Trust”), to James by April 25, 2008. In response, Catherine noted this timely appeal. QUESTIONS PRESENTED Appellant presented one question for our review, which we have reworded and divided into two questions. ⁶⁴⁶ I. Did the trial court err in finding that James had an interest in the Johnson Family Trust and that as a result of that interest he was entitled to an accounting?

II

Did the trial court err in finding that the language in the Trust purporting to eliminate the Trustee’s duty to provide an accounting was ineffective and that James was still entitled to an accounting of the trust? Finding no error, we shall affirm the trial court’s judgment. FACTS AND PROCEEDINGS Catherine and the late Edward R. Johnson (the “Johnsons”) were married on January 9, 1988. On August 25, 2004, the Johnsons established an inter vivos trust known as the Johnson Family Trust.

The Trust made the Johnsons Trustors and the first Co-Trustees. Edward died on February 14, 2006. Following Edward’s death, his son, James, twice requested an accounting of the Trust. When the requests went unanswered, he filed a Petition for Court Assumption of Jurisdiction of a Trust and Related Relief on October 11, 2007.

He asked the court to order his stepmother, Catherine, to file a complete and accurate accounting of her tenure as Trustee. Catherine replied on January 14, 2008, asking the court to deny the requested accounting. The circuit court held a hearing on the matter on January 31, 2008, and it filed an opinion and order on February 12, 2008. The court ordered Catherine to provide an accounting of the Trust to James by April 25, 2008.

Catherine noted this timely appeal on March 5, 2008. Relevant excerpts of the Trust and additional facts will be provided throughout the discussion. DISCUSSION I. Standard of Review For cases tried without a jury, this Court must review the case on both the law and the evidence. Maryland ⁶⁴⁷ Rule 8 — 131(c).

We will not set aside the judgment of the circuit court on the evidence unless clearly erroneous, and we give due regard to the trial court’s opportunity to judge the credibility of the witnesses. Elderkin v. Carroll, 403 Md. 343, 353 , 941 A.2d 1127 (2008). “When the ruling of a trial court requires the interpretation and application of Maryland case law, we give no deference to its conclusions of law.” Id. We review the court’s conclusions of law de novo. Sifrit v. State, 383 Md. 77, 93 , 857 A.2d 65 (2004).

II

The Trust The Johnson Family Trust was created on August 25, 2004, by Edward R. Johnson and Catherine A. Moreland Johnson, his wife. They were named as “Trustors” and “Co-Trustees” and they established the Trust, according to its express language, with the intent that, while they were both living, they would each equitably own an undivided one-half interest in all property subject to the Trust. This was to be accomplished by the use of the federal gift tax exemption for transfers between husband and wife. Trust property, which was listed in an attached “Schedule A,” constituted the “Trust Estate” 1 and, due to its gifting provisions, the beneficial interest of the first Trustor to die was to be exactly equal to that of the surviving Trustor.

Trust, Article I. On February 14, 2006, Edward was the first to die. Pursuant to the Trust instrument, the Trust Estate was then to be divided into two shares. Trust A was to be created to take advantage of the federal estate tax exclusion and other tax provisions. The remaining portion of the decedent’s interest was to be distributed to an irrevocable Trust B. 2 Trust, Article IV. ⁶⁴⁸ The surviving Trustor (Catherine) is entitled to the income and potentially all of the principal of Trust A during her lifetime, if needed for her health, maintenance, reasonable comfort and support.

She has a power of appointment to dispose of the undistributed income and principal of Trust A by her Last Will and Testament. If the power is not exercised, upon her death, the Trust A corpus is to be added to Trust B and distributed according to its terms. Catherine has the same lifetime entitlement to the income and to principal of Trust B if needed for her health, maintenance, or support. She has a limited power of appointment over the Trust B estate which authorizes her to leave it to one or more of any children 3 and/or other descendants of both Trustors in such shares as she may deem appropriate.

Trust, Article IV. If Catherine does not exercise this limited power, distribution of the Trust B corpus is governed by the Trust’s Article VI, which expressly names Edward’s son, James, as a beneficiary, if he survives Catherine.

III

James’s Interest in the Trust We begin the inquiry concerning James’s entitlement to an accounting by identifying his interest in the Trust. A leading treatise on the subject categorizes a beneficiary’s interests as follows: The settlor has great freedom in the selection of the beneficiaries and their interests. The interests he creates in them must always be equitable, but otherwise they need possess no particular characteristics. Such a beneficial interest may be a present interest, entitling its holder to immediate enjoyment of income of the trust property.

Or it ⁶⁴⁹ may be a future interest, giving the beneficiary rights to receive trust assets or benefits at a later time. The interest of the beneficiary may be absolute and vested, so that the happening of no future event will destroy or diminish it, or it may be subject to a condition precedent or contingent, as where the beneficiary’s survivorship of a named date is a condition to his enjoyment of benefits from the trust. Likewise the beneficiary’s interest may be made determinable or with a condition subsequent attached, so that on the happening of a future event the interest will diminish or cease entirely. George T. Bogert, The Law of Trusts and Trustees § 181 at 244-46 (Rev.2d ed.1979) (internal footnotes omitted).

Under the terms of the Trust, only Catherine held a present interest, entitling her to the Trust income at least quarter-annually. Trust, Article IV. Thus, James’s interest, which depends upon his surviving his stepmother, is at best a future interest, contingent upon his survivorship. It is a property interest properly deemed a “remainder interest.” As such, it has been defined as “any future interest limited in favor of a transferee in such manner that it can become a present interest upon the expiration of all prior interests simultaneously created, and cannot divest any interest except an interest left in the transferor.” Standard Fire Ins.

Co. v. Berrett, 395 Md. 439, 452 , 910 A.2d 1072 (2006) (citing Restatement (Second) of Property § 156, at 535 (1936)). Moreover, the law has an express preference for treating a remainder as “vested” rather than “contingent,” so that a vested remainder is a present fixed right to future enjoyment, even if it is subject to a condition subsequent which would result in its becoming divested. Maryland Law Encyclopedia, Estates, § 24 at 26-27 (1999). Because James’s remainder interest in the Trust estate here can be defeated if he fails to survive Catherine, or if her right to invade the Trust principal for her health, maintenance or support exhausts the corpus of the Trust, his is a vested defeasible remainder interest in the Trust.

Indeed, his interests in ⁶⁵⁰ Trust A and Trust B differ as well, because Catherine may exercise her power of appointment to exclude James from any of the proceeds of Trust A, making his interest in the revocable Trust A merely contingent, while his interest in the irrevocable Trust B is vested, but subject to divestment. The specific pertinent Trust provisions are set forth below: Upon the death of the first TRUSTOR to die, the TRUSTEE shall distribute to Trust A (referred to below) the deceased TRUSTOR’S interest in his or her personal and household effects and tangible personal property of every kind----The TRUSTEE shall divide the remaining principal and any undistributed net income of such deceased TRUSTOR’S one-half interest in the Trust Estate other than the above-described effects and personal property ... into two shares.... Trust, Article IV(B). The Trust provided that the shares were to be distributed into Trust A and Trust B, based on the Federal Estate Tax Unified Credit and the estate tax credit or exemption.

Once the shares were distributed into Trusts A and B, the Trust set forth how the Trustee was to hold, manage, and distribute the Trust. The Trustee was to distribute Trust A as follows: During the lifetime of the surviving TRUSTOR, the TRUSTEE shall pay to the surviving TRUSTOR, not less frequently than quarter-annually, all the net income (if any) of the Trust Estate together with any amounts of principal that the surviving TRUSTOR might request or that may be necessary to maintain the surviving TRUSTOR and provide for the surviving TRUSTOR’S health, maintenance, reasonable comfort and support. Trust, Article IV(C)(1). Upon the death of the surviving trustor, the trustee was to: [Distribute the principal and undistributed net income of Trust A to or in trust for such persons or entities, or the estate of the surviving TRUSTOR, in such amounts or proportions as the surviving TRUSTOR shall designate by ⁶⁵¹ specific reference to this power in the surviving TRUSTOR’S Last Will and Testament.

Trust, Article IV(C)(2)(a). The Trust then provided that if the surviving trustor did not effectively or fully exercise the right to designate beneficiaries in his or her last will and testament, the undistributed amount shall be added to and disposed of as part of Trust B under the terms that apply to it. The Trustee was to hold, manage and distribute Trust B as follows: During the lifetime of the surviving TRUSTOR, the TRUSTEE shall pay to the surviving TRUSTOR, not less frequently than quarter-annually, all of the net income of Trust B. In addition, the TRUSTEE may pay to or for the benefit of the surviving TRUSTOR, for his or her health, maintenance, or support, any part or all of the principal of Trust B, without considering other resources available to the surviving TRUSTOR. Trust, Article IV(D)(1).

Upon the death of the surviving TRUSTOR, the TRUSTEE shall distribute the principal and any undistributed income of Trust B (including any assets received from Trust A or other sources) as the surviving TRUSTOR may appoint by specific reference to this limited power in his or her Last Will and Testament. The surviving TRUSTOR may appoint to or among any one or more of any children and/or other descendants of both TRUSTORS in such shares as he or she may deem appropriate, and he or she may appoint outright, to a custodian, or to a TRUSTEE to be held in further lawful trust. Trust, Article IV(D)(2). In the event and to the extent the surviving TRUSTOR shall fail to exercise the foregoing limited power of appointment, the remaining principal and undistributed income of Trust B shall be held, managed and distributed as provided in Article VI below.

Trust, Article IV(D)(3). Article VI sets forth the provisions for distribution of the Trust after the death of the surviving Trustor. The relevant ⁶⁵² provision in this section states: “The TRUSTEE shall distribute free of Trust the remaining one-half Qh) of the Trust Estate to James Michael Johnson, if he is then living.” Trust, Article IV(B)(3). Contrary to appellant’s contention, and as we stated swpra, appellee possesses a contingent interest in Trust A, as well as a vested remainder interest subject to divestment in Trust B. Thus, James possesses a legally cognizable interest in the Trust.

IV

The Right to an Accounting Having determined that James possesses a future interest in the Trust, we must consider the trial court’s decision that his interest gives rise to a right to an accounting. According to the Restatement of Trusts 4 a trust is defined as a “fiduciary relationship with respect to property, arising from a manifestation of intention to create that relationship and subjecting the person who holds title to the property to duties to deal with it for the benefit of charity or for one or more persons[.]” 1 Restatement (Third) of Trusts § 2 at 17 (2003) (“Restatement”). Thus, a fiduciary relationship exists between the trustee and the beneficiary. Beneficiaries are the people, “upon whom the settlor manifested an intention to confer beneficial interests (vested or contingent) under the trust[.]” 2 Restatement, § 48 cmt. a at 236.