in-the-matter-of-the-estate-of-elizabeth-gaeta-and-also-concerning-the ( 2014 )

IN THE COURT OF APPEALS OF IOWA
No. 13-1719
Filed November 13, 2014
IN THE MATTER OF THE ESTATE
OF ELIZABETH GAETA, Deceased.
And also Concerning
THE CHARLES GAETA REVOCABLE TRUST
and THE ELIZABETH GAETA REVOCABLE TRUST
CHARLES GAETA,
Objector-Appellant,
and
PHILIPPA CLESTER and MICHAEL GAETA,
Trustees/Executors-Cross-Appellants,
vs.
JOSEPH B. GAETA and ELIZABETH A. HACKETT,
Objectors-Appellees.
________________________________________________________________
Appeal from the Iowa District Court for Muscatine County, Paul L. Macek,
Judge.
A son appeals and the trustees cross-appeal the district court’s ruling on
the final report and denial of the trustees’ application for discharge. REVERSED
AND REMANDED ON APPEAL; REVERSED IN PART AND AFFIRMED IN
PART ON CROSS-APPEAL.
Roger A. Huddle of Weaver & Huddle, Wapello, for appellants.
Patrick L. Woodward of McDonald, Woodward & Carlson, P.C.,
Davenport, for appellee Joseph B. Gaeta.
2
Rosalinda A. Eichelberger of Eichelberger Law Office, P.C., Muscatine, for
appellee Elizabeth Hackett.
John E. Wunder of Wunder Law Office, Muscatine, and Robert M. Hogg of
Elderkin & Pirnie, P.L.C., for trustees/executors-cross-appellants.
Heard by Mullins, P.J., and Bower and McDonald, JJ.
3
BOWER, J.
This appeal arises from the district court’s ruling on the final report of
trustees Charles Gaeta and Philippa Clester (the trustees) and the court’s denial
of the trustees’ application for discharge. On direct appeal, Charles Gaeta claims
the court erred in directing his share of the trust be reduced by the portion of the
life insurance proceeds he received. The trustees seek guidance on the
treatment of the insurance proceeds. On cross-appeal, the trustees raise three
issues. First, the trustees claim the court erred in requiring a more detailed
explanation of an arrangement the family created to provide care for their mother.
Second, the trustees ask us to reverse the court and award the trustees a fee
amounting to two percent of the trust estate. Third, the trustees object to the
court’s requirement the trust accounting must be presented using generally
acceptable accounting principles (GAAP).
We find the language of the trust is ambiguous and extrinsic evidence
shows Charles should retain the proceeds from the life insurance policy, minus
the life insurance payments made by his parents. We find the record provides a
sufficient explanation for the arrangement the family created to provide care for
their mother, though the trustees should have placed the arrangement in writing.
We find the court’s decision awarding the trustees $20,000 in fees was not an
abuse of discretion. Finally, we find the issue concerning the accounting method
to be moot.
4
I. BACKGROUND FACTS AND PROCEEDINGS
Elizabeth Gaeta (Betty) and her husband Charles Gaeta (Charlie)1 had
eight children and owned multiple assets including farmland and stock in a farm
corporation. The eight children are: Joseph B. Gaeta (Joe), Charles J. Gaeta
(Charles), Elizabeth A. Hackett (Elizabeth), Louis C. Gaeta (Louis), Vincent
Gaeta (Vincent), Michael Gaeta (Michael), Maria Collins (Maria), and Philippa
Clester (Philippa).
Estate planning began in 1992 when Betty and Charlie executed mutual
wills. Codicils in June 2001 and January 2002 modified the wills. In July 2002,
Betty and Charlie hired an attorney to prepare reciprocal revocable trusts for
them both. These trusts were titled: the Revocable Trust Agreement of Charles
Gaeta Sr. and the Revocable Trust Agreement of Elizabeth Gaeta. A month later
on August 26, Charlie unexpectedly passed away. At the time of his death, not
all of his assets had been transferred into the trust, and therefore his estate was
probated. Charlie’s will named Charles and Philippa as executors and they
served in that capacity. The estate was closed on January 23, 2004. Due to
Betty’s health problems from a stroke suffered in 2000 and Charlie’s untimely
death, Philippa and Michael began acting as trustees for Betty’s trust. Betty was
the primary beneficiary of the Charles Gaeta Revocable Trust and the Elizabeth
Gaeta Revocable Trust. Betty passed away on January 4, 2011.
Joe filed an ex parte petition for probate on March 22, 2011, and
appointed himself executor of Betty’s estate, notwithstanding the fact Betty’s trust
1
To avoid confusion, we will refer to Charles Gaeta, the father, by his nickname
“Charlie.” We will refer to Charles Gaeta, the son, by his name “Charles.”
5
and will named Michael and Philippa as executors and trustees. On March 28,
Joe filed an application for appointment of trustees asking the court to appoint a
financial institution as the trustee of both the Charles Gaeta Revocable Trust and
the Elizabeth Gaeta Revocable Trust due to what he perceived as
mismanagement by his siblings. Michael and Philippa responded by filing a
motion to replace Joe as the executors. A hearing was held on May 31, and an
order was filed on July 20. The court found no reason to remove Michael and
Philippa as trustees. The court also ordered Michael and Philippa to replace Joe
as executors. Finally, the court ordered Joe to personally pay $1000 in
attorney’s fees due to the “baseless allegations” in his complaint.
On November 16, 2012, Michael and Philippa filed a final report and
application for discharge of both the Charles Gaeta Revocable Trust and the
Elizabeth Gaeta Revocable Trust. They also sought to close Betty’s probate
estate as she did not have any remaining assets or liabilities. Joe, Elizabeth, and
Charles filed separate objections to the final report and accounting. 2
A hearing on the final report and application for discharge was held on
May 8, 2013, and the court entered a ruling on July 15. The court declined to
approve the final report due to the report’s failure to “include specific and precise
valuations.” Because of this, the court found the report was only an “interim
2
The objections relevant to this appeal are the following: Joe objected to the gifts made
by the trustees to themselves and others, to the accounting provided by the trustees,
and to the life insurance policy proceeds received by Charles. Elizabeth objected to the
insufficiency of the accounting, to the life insurance policy proceeds received by Charles,
and to the requested trustee fees. Charles noted he believed his parents wanted him to
retain the life insurance proceeds, but he would follow the methodology of the trustees in
the interest of resolving the matter; Charles objected to the estimate of certain fees in
the final report and suggested the final report be considered as a proposed distribution.
6
report” and denied the application for discharge. The court also ruled on the
objections of Joe, Elizabeth, and Charles.
On August 7, 2013, Michael and Philippa filed a motion to modify the
court’s findings and conclusions and enlarge or amend the ruling. The court
entered an order on September 24, denying the trustees’ request, except the
court allowed the trustees to only provide GAAP to the beneficiaries from the
date of Betty’s death, rather than from the creation of the trusts. From this order,
Charles appeals, and the trustees cross-appeal.
II. STANDARD OF REVIEW
Our review in appeals from rulings by the probate court on the denial of an
executor’s application to discharge and final report is de novo. In re Estate of
Bruene, 350 N.W.2d 209, 211 (Iowa Ct. App. 1984). We are not bound by the
findings of the trial court, but give them weight, especially when the credibility of
a witness is involved. Id. We also confine our review to those propositions
raised in support of reversal. In re Estate of Martin, 155 N.W.2d 401, 403 (Iowa
1968). Probate proceedings concerning costs of estate administration are
equitable in nature. In re Estate of Wulf, 526 N.W.2d 154, 155–56 (Iowa 1994).
We accord the district court considerable discretion in taxing executor and
attorney fees to the estate. Iowa Code § 633.3(8) (2013) (defining costs of
administration to include both attorney and executor fees); In re Estate of
Petersen, 570 N.W.2d 463, 465 (Iowa Ct. App. 1997).
7
III. ANALYSIS
A. Life Insurance Proceeds
In 1990 and before the execution of their mutual wills, Charlie and Betty
purchased a life insurance policy on Betty’s life, which listed Charles as the
owner and beneficiary. The couple made payments on the policy through June
2002, at the rate of $6314 per year, for a total of $81,945.65 in payments. In
2004, Charles began making payments on the policy. At the time of Betty’s
death, his payments totaled $38,967.86, and he received the payout from the
insurance policy worth $259,916. Language in Betty’s trust, which mirrors the
language in Charlie’s trust, included a provision regarding the disposition of the
life insurance policy on Betty’s life:
Charles J. Gaeta Jr. is the owner of a life insurance policy at
Farm Bureau on the life of Elizabeth Gaeta. If he has not switched
the policy to name all of my children equally as beneficiaries, then
his share of my estate shall be reduced by seven-eighths (7/8) of
the value of the paid out policy or, in the alternative, if seven-
eighths (7/8) of the paid out value of that policy is in excess of his
share of my estate, said amount shall be in lieu of and shall be
considered his share.
In their final report, the trustees proposed Charles repay seven-eighths of
the premiums paid by Charlie and Betty by withholding $71,233.75 from
Charles’s share of the proposed distribution of the trust assets.
The court found the language of the trust “unambiguous,” and since
Charles did not list the other beneficiaries’ names on the life insurance policy
insuring Betty’s life, his share of her estate had to be offset by seven-eighths of
the death benefit paid to him. Further, the court disagreed with the trustees and
8
did not allow an offset of the premiums Charles paid, reasoning the trust did not
“provide for any offset or adjustment for insurance premiums” paid by Charles.
On appeal, Charles claims the court erred in directing his share of the trust
be reduced by the portion of the life insurance policy proceeds he received. In
support of his claim, Charles notes a literal reading of the trust language would
require no reduction in his share of the trust estate. He claims the use of the
word “estate” refers solely to Betty’s probate estate, rather than her trust estate.
Betty’s probate estate has no significant assets. He asserts the words “Trust
Estate,” as used elsewhere3 in the trust document refer to the assets of the trust.
If Betty had intended to offset his share of the trust assets, Betty would have
used the words “Trust Estate” rather than “estate.” As Betty’s probate estate
contains nothing, Charles’s share should not be offset. Additionally, Charles
points to the clear intent of Charlie and Betty, which shows they wanted Charles
to receive the life insurance proceeds to assist him in purchasing the farm. He
claims the testimony from the trial demonstrates his parents’ intent. He also
notes those statements were corroborated by the insurance agent who sold the
policy to Charlie and Betty. Finally, Charles asserts that it would make no sense
to deduct his share, given the provisions in the trust regarding his option to the
purchase the farm, and the fact he paid almost $39,000 on the insurance policy
only to receive a one-eighth share of $32,500.
The trustees make a substantially similar argument, but urge this court to
find Charles is entitled to the insurance proceeds, offset by the premiums paid by
3
Charles points to sections 2.01, 2.02, 3.01, 4.02, 4.03, and 6.04, which he claims
demonstrate the words “Trust Estate” are only intended to refer to the trust assets.
9
his parents. The trustees support Charles’s conclusion the language of the trust
document is ambiguous, due to the “Trust Estate” versus “estate” discrepancy.
The ambiguity creates a need to look to other sources to find the intent of the
testators. Based on the clear intent of Charlie and Betty, as discerned from the
extrinsic evidence admitted at trial, the trustees believe Charlie should receive
the full proceeds of the life insurance policy.
Joe and Elizabeth claim the court’s ruling on the insurance proceeds
should be upheld. They claim the language of the trust is unambiguous and
clearly shows the intent of Charlie and Betty. Joe and Elizabeth point to a few
factors, supported by “well-settled principles of interpretation,” they claim show
the trust is unambiguous. First, they note the operative provision, 4.06, is
contained in article four, which is titled “Division of Trust Estate.” On its face, the
provisions of article four deal with trust assets. Second, looking at the trust as a
whole, the words “Trust Estate,” “trust estate,” and “estate” are used to refer to
assets in the trust. Third, they claim the first provision of article four, “the
Trustees shall divide the balance of the trust estate as provided in this Article,” to
mean the language in 4.06 can only refer to the trust estate rather than the
probate estate. Finally,4 Joe and Elizabeth note extrinsic evidence should not be
considered because the trust is clear on its face. They claim, even if extrinsic
4
Joe and Elizabeth also reference a loan that Charles purportedly took out on the life
insurance policy. They claim the only payments Charles made were to pay back the
loan, rather than to make payments on the life insurance policy. Joe and Elizabeth cite
no evidence to support the fact Charles took out this loan. No evidence submitted at trial
or contained in the record supports this assertion.
10
evidence is used, that evidence does not support allowing Charles to receive the
proceeds from the insurance policy.
Our task in this case is to construe the terms of the trust. To aid us in this
task we look to the well-settled principles governing trust interpretation. The
polestar of our analysis is the rule that the testator’s intent must prevail.
Hollenbeck v. Gray, 185 N.W.2d 767, 769 (Iowa 1971). “[T]his intent, however,
must be derived from (a) all of the language contained within the four corners of
the [trust], (b) the scheme of distribution, (c) the surrounding circumstances at
the time of the [trust]’s execution and (d) the existing facts.” In re Rogers, 473
N.W.2d 36, 39 (Iowa 1991). Courts should resort to technical rules of
construction only if ambiguous language in the trust creates uncertainty about the
maker’s intent. Hollenbeck, 185 N.W.2d at 769. In determining intent, the
question is not what the testator meant to say, but rather what is the meaning of
what the testator did say. Rogers, 473 N.W.2d at 39.
The threshold question is whether the court was correct in determining the
plain language of the trust was clear. The interpretations of the language of the
trust posed by Charles, and by Joe and Elizabeth demonstrate the trust is
susceptible to opposing, yet reasonable interpretations. Therefore, we look to
extrinsic evidence to determine Betty’s intent. Betty and Charlie expressed their
intent to Michael,5 Philippa,6 and their insurance agent, Paul Carroll,7 who
5
Michael testified:
Okay. We took—we took the trust and we looked through it and were
concerned about the issue of the life insurance. We tried to take all of our
knowledge, all of our conversations with our parents and the insurance
man and put it all together to decipher exactly what our folks wanted.
11
created the policy. Based on the testimony presented at trial, Charlie and Betty
intended the insurance policy to provide enough cash for Charles to purchase the
farm, if he so desired. The insurance proceeds were also meant to provide
Charles with money so he could afford to retire. Charles worked on the farm his
entire life and, therefore, did not have a retirement plan to fall back on should the
farm sell after Charlie’s and Betty’s deaths. While the express terms of the trust
could have been written in a clearer fashion, the extrinsic evidence resolves the
ambiguity and shows Betty clearly intended Charles to receive the proceeds of
the life insurance policy, offset by the amount paid into the policy by Charlie and
And our position is that the life insurance was taken out for Charles and
he was to be the owner and the beneficiary. Now, it would make no
sense to be an owner and beneficiary and be part of a life insurance
policy that when the insured person is deceased you turn around and
hand it all back. So there definitely was an agreement that Charles would
get the payout. In my conversation with dad, dad told me that Charles
was to get the payout, and he was to pay back the premiums.
6
Philippa testified:
The life insurance policy was to go to Charles so that if he wanted to buy
the farm, he could buy the farm. If he wanted to use that for his
retirement, because he spent his life on the farm, farming the farm, that’s
what he could do. The money was to be for Charles. Charles paid the
premiums; we did not pay the premiums. If Charles would pay back what
dad paid, just like Vince is going to pay back, then we didn’t put any of
our money in it, it would be Charles’ money. . . . My mom wanted
everything the way she had it. The life insurance policy was to go to
Charles, the assets to be divided among eight of us.
7
Paul testified:
As a career agent with Farm Bureau Life, we worked with a lot of Farm
Bureau member families. Particularly a policy like this was considered by
the parents for business transition. The dynamic is you have one or more
siblings as part of the family farm operation, one or more siblings off the
farm, and what happens is when both parents are gone, the off-farm heirs
want their part of the estate that precipitates a farm sale. Oftentimes the
on-farm heir is not in a position to make substantial cash payment
because this happens when they're in their 50s and 60s. So to provide
that person with liquidity and a down payment, we write a life insurance
policy on the life of one of the two parents, in this case it was Betty, and
that intention was to give Charles enough cash to be in a position to go to
the bank and borrow the rest and buy out his siblings if he chose to.
12
Betty. We reverse and remand for the entry of an order consistent with this
opinion.
B. Gifts Received for Betty’s Care
After Betty suffered a stroke in 2000, she was unable to care for herself.
The children and Charlie held a meeting to decide whether Betty should continue
living at the family farm or in a nursing home. In the short term, they eventually
decided to use “hired help” and fill in when the help was unavailable. Ultimately,
upon the advice of their accountant, the entire family agreed upon a system
where the members of the family would be compensated at $10 per hour in gift
funds when providing care for their mother. The family determined the
arrangement would allow their mother to stay in her home, save money, and
allow family members to spend time with her. Every sibling was aware of the
arrangement and seemed to be on board. Joe declined to assist in the gifts-for-
care arrangement because he was already caring for his mother-in-law and had
ongoing back problems.
In his objection to the final report, Joe challenged the gifts-for-care
arrangement and characterized the gifting as “self-dealing” and a “breach of
fiduciary duty” by the trustees. Joe specifically took issue with the fact the
trustees made disbursements in unequal amounts to the beneficiaries, to
themselves, and to individuals not named in the trust. He questioned if the
trustees should have filed the proper tax documents to reflect the compensation
for services rendered. After considering Joe’s objection, the court determined
the trustees had failed to provide enough information about the arrangement and
13
ordered the trustees to provide information on the payments and an explanation
why Joe was not treated equally.
On cross-appeal, the trustees claim the district court erred by finding the
gifts given to seven of the eight siblings required additional explanation. They
believe the record shows the payments were gifts measured by the amount of
time the children cared for their mother. The gifting arrangement allowed the
children to spend time with their mother, while saving money on professional
home care. Joe failed to participate in the gifts-for-care arrangement and
therefore he did not receive any gifts.
Joe claims the court was correct in its ruling. He further claims the gifts-
for-care arrangement resembles an employment scenario where the trustees
should have filed tax forms for the work performed.
The “gifting arrangement” created to care for Betty is unique in Iowa law.
However, this gifting arrangement is not unheard of and is recognized as a way
to make it possible for family members to take time off of work to care for their
elderly parents, and to avoid the tax consequences of hiring a caregiver. See
Richard L. Kaplan, Federal Tax Policy and Family-Provided Care for Older
Adults, 25 Va. Tax Rev. 509, 528 (2005). Reviewing the record, we believe the
arrangement was meant to allow the family to conveniently provide care for their
mother. Joe conceded he was aware of the gifts-for-care arrangement, did not
object, and was given the opportunity to participate. The gifts never exceeded
the annual exclusion for tax purposes. We believe it is unnecessary for the
trustees to provide further information on the caregiving arrangement. We also
14
note if the trustees had wished to avoid the confusion created by the gift-for-care
arrangement, they should have reduced the arrangement to a writing signed by
the participants. Accordingly, we reverse the district court on this cross-appeal
claim of the trustees.
C. Executor Fees
The trustees claim the district court did not rely on substantial evidence
and abused its discretion by calculating executor fees at $20 per hour, instead of
awarding fees at the statutory maximum of two percent of the entire estate. The
trustees claim the court’s ruling fails for two reasons. First, since this case
involved both the administration of an estate and a trust, the court should have
construed Iowa Code section 633.1978 (Compensation [of executor]) and Iowa
Code section 633A.41909 (Compensation of trustee) together. Second, the court
did not take into account all the hours the trustees spent working on the estate
not included in “their three month sampling or representation provided to the
court.” Conversely, Joe and Elizabeth ask us to uphold the court’s ruling due to
the fact the trustees spent most of their time dealing with the lower-value trust
assets and spent little time on the high-value trust assets.
8
Iowa Code section 633.197 states:
1. Personal representatives shall be allowed such reasonable fees as
may be determined by the court for services rendered, but not in excess
of the following commissions upon the gross assets of the estate listed in
the probate inventory, which shall be received as full compensation for all
ordinary services:
....
c. For all sums over five thousand dollars, two percent.
9
Iowa Code section 633A.4109 states:
1. If the terms of the trust do not specify the trustee’s compensation, a
trustee or cotrustee is entitled to compensation that is reasonable under
the circumstances.
15
Iowa Code section 633A.4109 governs compensation for trustees,
although “considerable discretion is left to [the] trial court in the allowance or
nonallowance” of such fees. Bass v. Bass, 196 N.W.2d 433, 435 (Iowa 1972);
see also In re Woltersdorf, 124 N.W.2d 510, 511 (Iowa 1963) (“The matter of
fees for executors and trustees rests within the sound discretion of the trial
court.”); Restatement (Third) of Trusts § 38 cmt. c(1), at 150 (2003) (stating trial
courts have discretion in determining a trustee’s reasonable compensation).
Where, as in this case, “the terms of the trust do not specify the trustee’s
compensation, a trustee or cotrustee is entitled to compensation that is
reasonable under the circumstances.” Iowa Code § 633A.4109(1); Restatement
(Third) of Trusts § 38 cmt. c (1), at 150 (stating factors that may be considered
include local custom, trustee’s skill and experience, time devoted to trust duties,
amount and character of trust property, degree of difficulty, responsibility, and
risk assumed in administering the trust, including making discretionary
distributions, nature and costs of services rendered by others, and quality of the
trustee’s performance).
The trustees presented an affidavit in support of their request for trustees’
fees, which equaled a total of 992.5 hours. On appeal the trustees request a
payment of $63,298.76, or two percent of the entire estate.
While our review of this estate case is de novo, we afford the court
“considerable discretion” in the allocation of trustee fees. Woltersdorf, 124
N.W.2d at 511; Petersen, 570 N.W.2d at 465. The trustees both testified
concerning the payment of trustee fees. Michael testified the hours he and
16
Philippa submitted to the court evidencing the time spent on the trust business
were less than the amount they actually worked. He claimed Joe complicated
their administration of the trust by filing various lawsuits and generally impeding
their ability to deal with issues at Betty’s house. Michael further noted he took
time off from work to deal with trust business. He approximates his lost wages
total $23,000. Michael admitted he had no specialized skills or education that
would act to qualify him as a trustee. He also admitted over half of the trust
consisted of stock from Louis Gaeta Inc. and required little time to administer.
Philippa also testified about her role as trustee. She claimed she
deserved the requested fees due to the amount of time she had spent in court
and the hassle she had been put through in the administration of the trust. She
noted a bank would have charged more than the fees she requested and her
parents did not desire to have their affairs managed by a bank.
The district court properly calculated the trustee fees at twenty dollars per
hour, which we believe is a fair and reasonable amount based on the
circumstances. The most persuasive factors weighing against upsetting the
court’s ruling include: The trustees relative lack of skill and expertise, the time
devoted to potentially insignificant trust matters, the nature and cost of the
services rendered by the trustees’ attorney, and the quality of the trustees
performance. We wonder if considerable cost and time (and litigation) could
have been saved if a bank trustee had been used, rather than family members.
Accordingly, we affirm the district court on this cross-appeal claim of the trustees.
17
D. GAAP Accounting
The court ordered “[t]he trustees to provide the beneficiaries with annual
accountings according to generally accepted accounting principles for each year
subsequent to each settlors’ death.” On January 3, 2014, the trustees filed a
notice with the Muscatine County Court stating they had provided the heirs and
attorneys of record with GAAP accountings for the Elizabeth Gaeta Revocable
Trust and the Charles Gaeta Revocable Trust. In his brief, Joe concedes the
accountings were sufficient and no longer objects to the trustees’ accounting.
“One familiar principle of judicial restraint is that courts do not decide
cases when the underlying controversy is moot.” Rhiner v. State, 703 N.W.2d
174, 176 (Iowa 2005); see also, e.g., Lalla v. Gilroy, 369 N.W.2d 431, 434 (Iowa
1985) (“A live dispute must ordinarily exist before a court will engage in an
interpretation of the law.”). “[O]ur test of mootness is whether an opinion would
be of force or effect in the underlying controversy.” Wengert v. Branstad, 474
N.W.2d 576, 578 (Iowa 1991). Here, the trustees have provided an accounting
meeting the requirements set by the court, and the objector has rescinded his
objection. A ruling on this issue would only result in an academic exercise and is
therefore moot.
IV. CONCLUSION
Upon our de novo review, we reverse the district court and find the
language of the trust is ambiguous and extrinsic evidence shows Charles should
retain the proceeds from the life insurance policy, minus the life insurance
premiums paid by Betty and Charlie. We also reverse the court and find the
18
record provides a sufficient explanation for the arrangement the family created to
provide care for their mother, though the trustees should have placed the
arrangement in writing. We affirm the court on its decision to award the trustees
$20,000 in trustee fees. Finally, we find the issue concerning the GAAP
accounting method to be moot.
REVERSED AND REMANDED ON APPEAL; REVERSED IN PART AND
AFFIRMED IN PART ON CROSS-APPEAL.