Margaret C. Ughetta, Petitioner
Mary Harding Cist, individually, as Executrix of the Estate of John David Cist, and as Trustee of the Supplemental Trust Agreement of John David Cist, Respondent
Submitted: January 7, 2015
David F. Ferry, Jr, Esquire
Edward M. McNally, Esquire
Kim E. Ayvazian Master in Chancery
One of four beneficiaries of a now-irrevocable trust contends that the successor trustee should be removed for alleged breaches of fiduciary duty. The successor trustee denies these claims and, in turn, seeks to forfeit 50 percent of this beneficiary's trust share under the no-contest provision of the trust agreement.
The four beneficiaries, one of whom is the successor trustee, are the surviving children of a married couple, each of whom settled a trust for the benefit of themselves and their children. The beneficiaries' mother predeceased their father, and upon the father's death two years later, his successor trustee was directed by the provisions of the father's trust agreement to equalize the couple's lifetime and post-mortem gifts to their four children. Petitioner has questioned the successor trustee's administration of the father's trust. In 2011, after the beneficiaries all participated in a distribution the trust's tangible personal property (hereinafter "TPP"), petitioner refused to sign a receipt and release agreement. As a result, her TPP remains in storage controlled by the father's trust while her three siblings have taken possession of their TPP. Likewise, petitioner is dissatisfied with the process undertaken to equalize the beneficiaries' shares of their parents' lifetime and post-mortem gifts. Petitioner now contends that the equalization process was inconsistent with the terms of the father's trust agreement.
For the reasons that follow, I conclude that the successor trustee properly exercised her discretion in distributing the TPP and in following the equalization process established originally by the trustor during his lifetime. However, I also conclude that the beneficiary has not challenged the disposition or validity of the trust, but instead sought only to ensure its proper administration. As a result, she has not triggered the no-contest provision of the trust agreement. In order not to prolong this litigation, I am waiving a draft report and issuing this as my final report.
I. FACTUAL BACKGROUND
The trustor, John David Cist (hereinafter "Mr. Cist") and his wife Mary S. Cist (hereinafter "Mrs. Cist") were the parents of four children: Dorothea Cist, Margaret C. Ughetta, David Cist, and Mary Harding Cist. During their lifetimes, Mr. and Mrs. Cist were financially comfortable as a result of their own investments and family inheritances. They accumulated possessions, including family heirlooms, and were reluctant to dispose of anything. At the same time, however, Mr. and Mrs. Cist were generous parents. They provided each of their children with a private college education and a credit card on the parents' account, and also paid some of the private school tuition of their grandchildren, among other gifts. Dorothea and Mary Harding apparently never married and have no children.Margaret and her husband have four children who were in high school and college when Margaret filed her petition for an accounting and to remove Mary Harding as successor trustee. David and his wife have two younger children.
On May 21, 1991, Mr. and Mrs. Cist executed wills and entered into trust agreements in their respective capacities as trustor of his and her own trust and as co-trustees of both trusts. The provisions of Mr. Cist's trust agreement included the division of the trust fund upon his death, if his wife survived him, into a Unified Credit Generation Skipping Transfer ("GST") Trust, a Marital GST Trust, a Marital Trust and, possibly, a Resulting Trust. On June 30, 1993, Mr. Cist executed a Supplemental Trust Agreement, in which he modified two sections that are not relevant here. Mrs. Cist's trust agreement and supplemental trust agreement contained reciprocal provisions for the benefit of her husband, and identical provisions for her children.
A. Fairness Concerns
In 2006, David became aware that Margaret was receiving from her parents more gifts of family heirlooms than her siblings. In a letter to his parents, David expressed his concern that jewelry, silverware, china, paintings, and furnishings "were leaking away" "by gift or eminent domain, " giving rise to the appearance of favoritism. In his letter, David stated that he was not concerned about monetary matters because he predicted that his parents' assets after taxes could be equalized without much difficulty despite the large sums of money or assets that already had been given to their four children. However, David implored his parents to be fair to the rest of their children when it came to the distribution of "historically important family artifacts."
David's letter may have prompted Mr. and Mrs. Cist to reconsider their estate plans because on December 20, 2006, Mr. Cist executed another Supplemental Trust Agreement, in which he modified his previous trust agreement by restating it completely. Mr. Cist's 2006 Supplemental Trust Agreement provided for the distribution of the trust fund, upon Mr. Cist's death, into: (1) a Generation-Skipping Transfer Tax Exemption Trust (hereinafter "GST"); (2) a Marital Trust in the event that Mrs. Cist survived her husband; and (3) a Residuary Trust. The provisions of the Marital Trust were complex and allowed Mrs. Cist to occupy the family residence in Wilmington, Delaware, for the rest of her life and, upon Mrs. Cist's death, provided for the transfer of this residence to Mary Harding, outright and free from trust. The remaining Marital Trust was to be divided in equal shares for his children, with the following provisos: (1) the amount of $250, 000 was to be treated as an advancement to Dorothea to reduce the value of the share set aside for her and to increase correspondingly the shares set aside for the other children of Mr. Cist; (2) the amount of $1, 250, 000 was to be treated as an advancement to David as above; and (3) if Mary Harding received the Wilmington residence, then the amount of $900, 000 was to be treated as an advancement to Mary Harding as above. On December 20, 2006, Mrs. Cist executed a reciprocal 2006 Supplemental Trust Agreement, giving her husband the right to occupy the Wilmington residence for the rest of his life, and upon his death, for that residence to be transferred to Mary Harding outright and free of trust, with the same provisions regarding monetary reductions for advancements made to Dorothea, David, and Mary Harding. Only Margaret's shares of Mr. and Mrs. Cist's trusts were not subject to any reduction.
Mrs. Cist passed away on February 10, 2008. In August 2008, while Mrs. Cist's estate and trust were being administered, Mr. Cist sought the assistance of a different law firm to help him address the issue of prior gifts that had been made to his children, and achieve his goal of treating his children equally and fairly.Mary Harding made the initial phone call,  and Dorothea accompanied her father to the office of Joanna Reiver, Esquire. During the course of this representation, Mr. Cist authorized Reiver and her associate, P. Kristen Bennett, Esquire, to speak with Mary Harding, Dorothea, or David at different times, but never with Margaret. In January 2009, after reviewing: (1) the most recent numbers for cumulative transfers/gifts made prior to Mrs. Cist's death, which had been prepared by Mr. Cist, Mary Harding and David; (2) Mr. Cist's December 2008 transfers for tuition and equalizing gifts totaling more than $900, 000; and (3) draft Form 706 for Mrs. Cist's trust, Reiver recommended that Mr. Cist make equalizing distributions to his children "via lifetimes gifts to trusts" that Mr. Cist would establish for each of his children. At this time, some of Mr. Cist's children and his attorneys were concerned that Mr. Cist's continued gift-giving and transfers were depleting his estate and would make equalization impossible unless Mr. Cist made a complete distribution of his estate during his lifetime. In July 2009, Mr. Cist authorized Reiver to prepare an irrevocable GST trust for each of his children. However, the issue of funding these trusts was very complex, given the character of some of the assets and in light of expected changes in the federal transfer tax regime. Because of the uncertainty of the tax law and the exact amount of assets needed for each trust, Reiver recommended that Mr. Cist wait until September 2010 to proceed with the funding. Although the four documents were signed by Mr. Cist,  the irrevocable GST trusts were never funded because Mr. Cist unexpectedly died on June 24, 2010, at the age of 90 years.
B. Amendments to Mr. Cist's Trust
On July 19, 2009, Mr. Cist executed a First Amendment to 2006 Supplemental Trust Agreement of John David Cist,  which was intended by Reiver as a "stopgap" measure pending an entire trust restatement. The background for this instrument was stated in Paragraph D of the First Amendment:
D. This amendment is intended to express my goal that, insofar as possible, the combined estates of my late wife, Mary S. Cist, and me shall be divided into equal shares – one share for each child of ours living at the time of my death, and one share for each child of ours deceased at such time but with issue then surviving. For the purposes of this division:
1. The trustee shall add to the value of my wife's and my combined estates the cumulative value of transfers to our children (including transfers to, or for the benefit of, issue of a child as transfers to that child, and including payments made on behalf of a child or issue even if such payments were not deemed transfers under IRC Section 2503(e) for gift tax purposes) made by my wife and/or made by me during our lifetimes, as well as made upon death pursuant to my wife's will and/or trust and/or pursuant to my will and/or trust, as well as by beneficiary designation. These gifts shall be included at their date-of-gift (i.e., transfer) values.
2. After calculating the aggregate amount to which each child (or issue of a child) has received and is entitled to receive from all sources as provided above, the trustee shall modify (i.e., reduce or increase) the shares for my children (or issue of a child) under this Agreement as necessary so that the aggregate amount received by such child (or issue of a child) from all such sources is equal to the aggregate amounts received by each other child (or issue of a child) of mine from all such sources.
3. Such equal shares shall be further modified (i.e., reduced or increased) if required pursuant to the No-Contest Provision included below.
4. Although I intend to amend this Agreement by complete restatement to provide detailed instructions for such equalizing distributions, I execute this interim amendment to my Agreement to express my intent, and I direct that my trustee take all necessary steps upon my death to distribute my estate and trust to achieve my intent as nearly as possible.
Mr. Cist then modified his 2006 Supplemental Trust Agreement, first by modifying Section II, Paragraph B by deleting it in its entirety and substituting a new Paragraph B-3, as follows in pertinent part:
3. Residuary Trust.
Trustee shall hold and administer all of the remainder of the trust fund that is not disposed of by the previous provisions of this Agreement (hereinafter referred to as the "Residuary Trust") in accordance with the provisions of this Paragraph 3 of this Subsection B.
(a) The trustee shall distribute the trust's entire interest in [the Wilmington residence] to Trustor's daughter, Mary Harding Cist …. Such distribution shall be added to such child's trust share as provided in subparagraph (b) and described in subparagraph (c) below, as an addition to such child's trust share.
(b) After the distribution provided in the preceding subparagraph, the trustee shall then divided the then-remaining amount of principal into shares for the benefit of each child of mine who survives me, …, to effectuate my intent as described in Paragraph D of this ...