Shriners Hospitals for Crippled Children v. Maryland National Bank

Singley, J., delivered the opinion of the Court. This case, on appeal from the Circuit Court No. 2 of Baltimore City (Ross, J.), is concerned with two problems: First, the proper construction of that portion of a testator’s will which directed that the income of a residuary trust created by the will be paid to three beneficiaries; and second, the extent to which a court of equity, either in the exercise of its traditional jurisdiction, or in pursuance of a statute, may reform the language of a decedent’s will to insure that a remainder interest created by that will can qualify as a charitable deduction for federal estate tax purposes. The problems surfaced when Harry Edward Clinton, a successful investor, died domiciled in Baltimore on 6 February 1970, leaving an estate of approximately $1,500,000.00, disposed of by a holographic will dated 30 December 1969, which he had apparently drawn himself. The provision with which we are principally concerned is that contained in Item Eight of the will: “Item Eight: I hereby give, devise, and bequeath the residue of my estate unto the Maryland ⁵⁶⁷ National Bank, its successor or successors, Trustee for the uses and purposes set forth: “My Trustee shall collect the income arising from the principal of the Trust Estate arising from this item Eight (8) and after paying all expenses incident to the trust estate, including the usual commissions to the Trustee, shall distribute the income and principal as follows: “My Trustee shall pay the entire net income from this Trust estate in equal shares unto such of Mrs. Gladys K. Moore, Mrs. Helen Crossley, Miss Mary L. Schleupner as shall be qualified to receive the same from time to time.

By ‘qualified to receive the same’ I mean until their respective deaths as to Mrs. Moore and Mrs. Crossley and to her death or marriage as to Miss Schleupner. This Trust shall terminate when the last person qualified to receive the net income dies or marries, as the case may be, at which time my Trustee shall pay over and deliver the accumulated income and principal as then constituted unto The Shriner’s Crippled Children Hospitals to be used by the said hospital to endow a memorial to be known as the Harry Clinton Memorial, the selection and form of the memorial to be in the sole discretion of the then Imperial [Potentate] of the Ancient Arabic Order, Nobles of the Mystic Shrine, [whose] headquarters are in Chicago and the then Potentate of Osiris Temple, Wheeling, West Virginia, of which Temple I have been a member in good standing for over fifty seven (57) years — this selection shall [embody)?)] all the remainder interest of my estate and should qualify as a deduction under Section 2055(a)(2) of 1951 Internal Revenue Code or the corresponding Charity section of the Internal Revenue Code in effect at my death. ” (Emphasis supplied.) While Mr. Clinton exhibited not inconsiderable skill as a draftsman, and clearly demonstrated that he had both the ⁵⁶⁸ charitable intent and tax consciousness frequently-associated with people of means, he was apparently unaware that the Tax Reform Act of 1969 1 was enacted on the very day that he signed his will, and could not know that the Internal Revenue Code of 1954, § 664 and § 2055(e)(2) [hereinafter I.R.C.], would deny a result — which he had very much in mind — the deduction, for federal estate tax purposes, of the value of the charitable remainder unless the trust which he created could qualify as a charitable remainder annuity trust or a charitable remainder unitrust as described by I.R.C. § 664 and the regulations to be issued thereunder. 2 Unhappily, Mr. Clinton’s trust was neither, and a federal estate tax saving of some $90,000.00 would be lost unless something could be done. 3 As a consequence, Maryland National Bank (Maryland National) as personal representative of Mr. Clinton, and as trustee under his will, filed a petition in equity in the Circuit Court No. 2 of Baltimore City seeking a construction of the will and such modification of it as might be necessary to bring its provisions into conformity with the Internal Revenue Code. Joined as respondents were the three income beneficiaries, Gladys K. Moore (born in 1899), Helen Crossley (born in 1896), sisters of Mr. Clinton, and Mary L. Schleupner (born in 1925), together with the holder of the vested remainder, Shriners Hospitals for Crippled Children (the Hospitals). Answers were filed by the several parties, admitting the allegations of the petition and concurring in the granting of the relief prayed. 4 ' ⁵⁶⁹ When the case came on for hearing, however, the individuals who were the income beneficiaries, on the one hand, and the Hospitals, as the holder of the vested remainder, on the other, differed in their views as to the proper construction of the will.

The individual beneficiaries contended that they, and the survivors of them (subject to the provision in respect to the marriage of Miss Schleupner, which under the wdH’s concept of “qualified to receive the same” will hereafter be treated as equivalent to her death), would take the entire net income, in equal shares, so long as more than one survived, and that the last survivor would take the whole. The Hospitals took a different view, relying primarily on the provision of the will which directed, on the termination of the trust, that the trustee should “pay over and deliver the accumulated income and principal, as then constituted” (emphasis supplied) to the Hospitals, and on Maryland Code (1957, 1972 Repl. Vol.) Art. 50, ij 9, 5 which dealt with the express provision required to create a joint tenancy. The Hospitals contended that under a proper construction of the will, upon the death or marriage of Miss Schleupner and upon the death of each of the other life tenants, the share of income to which such person was theretofore respectively entitled should be accumulated and ultimately distributed to the Hospitals when the trust terminated, or should be distributed to them currently if tax considerations required.

The Proper Construction of the Income Provision In disposing of the conflicting contentions regarding the devolution of income, Judge Ross said: “The language of the will so plainly states the intention of the testator that it is not open to ⁵⁷⁰ construction. It is clear he intended that the surviving qualified income beneficiaries would share ‘the entire net income’ until the termination of the trust upon the death or marriage of the last qualified income beneficiary. ‘[Play the entire net income * * * unto such * * * as shall be qualified * * * from time to time’ can have no other meaning. All that [Code (1957, 1972 Repl. Vol.)l Art. 50, § 9 requires is a clear statement of intention and such is present here.

Marshall v. Security Storage Co., 155 Md. 649 [, 652-53, 142 A. 186, 187 ] (1928). The subsequent use of the term ‘accumulated income’ in connection with distribution upon termination gives rise to no ambiguity. It undoubtedly refers to income accumulated between the last distribution to the final income beneficiary and her death or marriage, thus avoiding the distribution of such income to her estate.” Without intending to question the chancellor’s conclusion, we could speculate that Mr. Clinton may well have confused the concept of “accumulated” income with “accrued” income — an imprecision utilized by many draftsmen more sophisticated than he. In general, where a will is drawn by a layman, “the language used may be given the meaning it would commonly have to a person in his situation,”.

Buchwald v. Buchwald, 175 Md. 103, 111 , 199 A. 795, 798 (1938). Whatever his reason for using “accumulated” as an adjective, it is patent that this does not negate his clear intention as expressed by the will: that the income beneficiaries, ánd the survivors and survivor of them, were to take the “entire net income” until “the last person qualified to receive the net income dies or marries.” (Emphasis supplied.) It seems to us that the devolution of the trust income is clearly controlled by the intention of the testator; as expressed in the will, Davis v. Mercantile-Safe Deposit & Trust Co., 235 Md. 266, 269 , 201 A. 2d 373, 374 (1964); Gent v. Kelbaugh, 179 Md. 343, 350-51 , 18 A. 2d 595, 598 (1941); ⁵⁷¹ Buchwald v. Buchwald, supra, 175 Md. at 111 , 199 A. at 798 ; Chew v. Chew, 1 Md. 163, 168 (1851). We agree with the chancellor, that as expressed in the will, it was Mr. Clinton’s intention that such of the income beneficiaries, as were “qualified” from time to time, were to receive the entire net income. Furthermore, the rule of our cases is clear: income is not to be accumulated absent an express provision or necessary implication, Green v. Green, 182 Md. 571, 575 , 35 A. 2d 238, 240 (1944); Burt v. Gill, 89 Md. 145, 151-52 , 12 A. 968 , 970, 43 A. 177 (1899); see also Restatement of Property § 440 (1944).

Elsewhere, in cases where intention was not clearly spelled out, an equal division among income beneficiaries has been justified as a class gift, In re Hicks' Estate, 345 Mich. 448 , 75 N.W.2d 819 (1956); Old Colony Trust Co. v. Treadwell, 312 Mass. 214 , 43 N.E.2d 777 (1942); as a joint tenancy with right of survivorship, Bodeman v. Cary, 152 Neb. 506 , 41 N.W.2d 797 (1950); In re Monroe, 42 R. I. 412, 108 A. 497 (1920); 6 or by an implication of cross remainders, Kiesling v. White, 411 Ill. 493 , 104 N.E.2d 291 (1952). Examples of the latter in Maryland are Tilghman v. Frazer, 191 Md. 132 , 59 A. 2d 781 , 191 Md. 153 , 62 A. 2d 596 (1948), and Heald v. Heald, 56 Md. 300 (1881); cf. Gent v. Kelbaugh, supra. See also Restatement (Second) of Trusts § 143, comment b (1959); 2 Scott, Law of Trusts § 143 (3d ed. 1967). See generally Annot., 71 A.L.R.2d 1332 (1960), and Annot., 140 A.L.R. 841 (1942), where cases involving the devolution of income from testamentary trusts upon the deaths of life beneficiaries are collected, and numerous constructions are discussed. ⁵⁷² The Modification of the Provision? of the Trust 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 ⁵⁷³ 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 -l(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. ⁵⁷⁴ 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, ijij 381, 399-399.4 [3d ed. 19671.

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)1; 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, ⁵⁷⁵ 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 Kiosk cases merely ⁵⁷⁶ 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 ⁵⁷⁷ 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 ⁵⁷⁸ 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.ll Art. 93, ij 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.ll Article 16, § 199D-1. There would ⁵⁷⁹ 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 ⁵⁸⁰ 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