In Re Robert G. Kay Irrevocable Supplemental Needs Trust ( 2019 )

In re Robert G. Kay Irrevocable Supplemental Needs Trust, No. 808-9-18 Cncv (Toor, J., June 6, 2019).
In re Benjamin R. Kay Irrevocable Supplemental Needs Trust, No. 809-9-18 Cncv (Toor, J., June 6, 2019).
[The text of this Vermont trial court opinion is unofficial. It has been reformatted from the original. The accuracy of the text and the
accompanying data included in the Vermont trial court opinion database is not guaranteed.]
VERMONT SUPERIOR COURT
CHITTENDEN UNIT
CIVIL DIVISION
│
│
│
IN RE: ROBERT G. KAY IRREVOCABLE │
SUPPLEMENTAL NEEDS TRUST │
u/a 4/7/95 │ Docket Nos. 808-9-18 Cncv
│
BENJAMIN R. KAY IRREVOCABLE│ and 809-9-18 Cncv
SUPPLEMENTAL NEEDS TRUST │
u/a 11/9/95 │
│
RULING ON DEPARTMENT’S MOTIONS FOR SUMMARY JUDGMENT
This is an appeal from the Probate Division’s denial of a petition to modify two
trusts. The two supplemental needs trusts at issue were created in 1995 by Pamela Kay
for the benefit of her two adopted sons, Robert G. Kay and Benjamin R. Kay. The trusts
were initially funded with assets owned by Robert and Benjamin, so that those assets were
not counted as “resources” for purposes of determining Medicaid eligibility.
Pamela died in 2006, and over $271,000 from her retirement account was
deposited into the trusts shortly thereafter, pursuant to her beneficiary designation form.
The trust instruments subject all funds remaining at a beneficiary’s death to a Medicaid
payback clause, even though Medicaid law requires reimbursement only for first-party
assets (i.e., assets owned by the beneficiaries) and not for third-party assets (i.e., the
retirement funds contributed by Pamela). After Robert died in 2012, the State of Vermont
demanded over $134,000 from the remaining funds in Robert’s trust as reimbursement
for medical expenses.
Pamela’s brother and the current trustee, Petitioner David C. Kay, now seeks to
modify both trusts to prevent exposure of third-party trust assets to Vermont Medicaid,
and to allow remaining funds in Robert’s trust to go instead to Benjamin’s trust. The State
of Vermont Department of Health Access, an interested party, moves to dismiss or,
alternatively, for summary judgment. William E. Drislane and Cynthia L. Broadfoot, Esqs.
represent Petitioner. Jared C. Bianchi, Esq. represents the Department of Health Access.
I. Facts1
The following facts are undisputed unless noted otherwise. Pamela J. Kay was the
mother of two sons by adoption, Benjamin R. Kay and Robert G. Kay. Pamela, as settlor
and initial trustee, established two irrevocable first-party supplemental needs trusts for
her sons: one for Robert on April 7, 1995 (the “Robert Trust”), and a second for Benjamin
on November 9, 1995 (the “Benjamin Trust”). The purpose of the trusts was to provide for
the special needs of her sons, who were both Vermont Medicaid beneficiaries. Pamela’s
attorney, Aaron J. Goldberg, designed the trusts “pursuant to federal and Vermont law as
an estate plan for Pamela to protect the benefits of her sons by transferring their personal
first-party assets to their respective trusts.” First Goldberg Aff. ¶ 35 (Dep’t’s Ex. 1).2
The stated intent of the trusts “is to supplement any [governmental assistance]
benefits received . . . and not to supplant any such benefits.” Trust Agreement at 1. The
1 Because the statements of facts and the record evidence are largely identical in the two cases, all references
are to the exhibits in Robert’s case, unless otherwise noted.
2 Petitioner contends that those are “incomplete” statements of the purpose and design of the trusts. Pet’r’s
Resp. to Dep’t’s Statement of Undisputed Material Facts ¶¶ 2–3. Petitioner asserts that Pamela’s “donative
intent was to convey at the time of her death her entire gross estate to the benefit of her sons and their
families without compromising their public benefits and did not intend her own assets to be inherited by
the State of Vermont as a donative beneficiary.” Pet’r’s Statement of Disputed Facts ¶ 1. Petitioner further
asserts that the trusts were “not designed, drafted[,] or intended to be used as a vehicle for Pamela’s own
personal estate plan.” Id. ¶ 2 (citing Second Goldberg Aff. ¶¶ 2–7).
2
trust estate includes property transferred to the trust by the Settlor or other third parties.
Id. at 2. The trusts terminate upon depletion of their assets or the death of the beneficiary,
whichever occurs earlier. Id. at 8. If terminating upon the beneficiary’s death, “the Trustee
shall distribute any remaining principal and income unto the State of Vermont, up to an
amount equal to the total Medicaid payments paid on behalf of [the beneficiary] under a
State Plan.” Id.
On November 13, 1995, Pamela opened a personal IRA account in the approximate
amount of $25,000 and executed a beneficiary designation form naming the two trusts as
beneficiaries. First Goldberg Aff. ¶ 38 (Dep’t’s Ex. 1). At some point between 2003 and
2006, Pamela deposited approximately $200,000 in additional IRA funds. Id. ¶ 42.
On December 11, 2006, Pamela executed a will, drafted by Aaron Goldberg, giving
the bulk of her estate to Goldberg, as trustee, “to hold such assets[] IN TRUST” for the
benefit of her sons. Last Will and Testament of Pamela Jane Kay at 2 (Dep’t’s Ex. 5). The
will also gives Goldberg “absolute authority to make distributions of principal or income”
for the benefit of either of her sons. Id. at 2. Pamela died on December 20, 2006. At that
time, the IRA was valued at $271,295.00. Upon Pamela’s death, Goldberg became the
successor trustee of the Robert Trust and the Benjamin Trust, the executor of Pamela’s
estate, and the trustee of Pamela’s testamentary trust. On April 4, 2007, Goldberg funded
the Robert Trust and the Benjamin Trust with the IRA funds, pursuant to Pamela’s
beneficiary designation form. First Goldberg Aff. ¶ 49 (Dep’t’s Ex. 1).
Robert G. Kay received Medicaid benefits and the benefits of his supplemental
needs trust from January 1, 1987 until he died on February 28, 2012. Whalen Aff. ¶¶ 2, 5,
3
6 (Dep’t’s Ex. 7); First Goldberg Aff. ¶ 5 (Dep’t’s Ex. 1).3 Pursuant to the terms of the
Robert Trust, it terminated upon Robert’s death. Trust Agreement at 8 (Dep’t’s Ex. 3).
The State of Vermont expended $134,268.66 for Robert’s medical care. Whalen Aff. ¶ 5
(Dep’t’s Ex. 7). The Department now asserts that this amount must be paid back to
Vermont Medicaid under the terms of the Robert Trust. Robert’s brother, Benjamin, is
alive and receiving Medicaid benefits. To date, the State has expended $172,119.68 for
Benjamin’s medical care. Whalen Aff. ¶¶ 4–5 (Dep’t’s Ex. 7).4
On November 28, 2017, Goldberg petitioned the probate court to modify the
Robert and Benjamin Trusts. Probate case docket sheet at 1 (Dep’t’s Ex. 8). The petition
sought to add language to the trust agreements stating that third-party assets are not
subject to the Medicaid payback provision.5 Pet. for Modification at 8–9 (Dep’t’s Ex. 6).
On December 11, 2017, David C. Kay became the second successor trustee and,
accordingly, the substitute petitioner. Dep’t’s Ex. 8.
On June 28, 2018, the probate court appointed Attorney Richard Kozlowski as a
special fiduciary for the limited purpose of ensuring that any potential claim of breach of
fiduciary duty against Goldberg was fully and independently explored. Dep’t’s Ex. 10. On
July 20, Kozlowski filed a report detailing his investigation and conclusion. Dep’t’s Ex. 11.
The probate court denied the petition to modify, holding that “as a matter of law, a
testator’s intent (written or otherwise) cannot override a prior beneficiary designation
3 Petitioner claims to dispute the “timing of benefits received from 1995 trust,” Pet’r’s Resp. to Dep’t’s
Statement of Undisputed Material Facts ¶ 22, but offers no citation to any record evidence in support of his
assertion.
4 This citation refers to the Whalen affidavit in Benjamin’s case.
5 It appears that such language is consistent with Medicaid law. The Department does not argue otherwise.
4
made in accordance with the governing terms of the account, or policy, at issue (here, the
IRA owned by the late Pamela Kay).” Dep’t’s Ex. 12. This appeal followed.
II. Discussion
Petitioner seeks to modify the Robert and Benjamin Trusts pursuant to the
Vermont Trust Code, specifically 14A V.S.A. §§ 411(b), 412, and 415. In a probate appeal
under V.R.C.P. 72, “the proceeding in the superior court is a hybrid of an appeal from the
probate court . . . and a de novo proceeding that is conducted as if the probate court
proceeding never occurred.” In re Estates of Allen, 2011 VT 95, ¶ 8, 190 Vt. 301 (citing
Whitton v. Scott, 120 Vt. 452, 458 (1958)). The statement of questions required by Rule
72(c), while mandatory, has a “limited function” as it only “serves to focus, but cannot
limit, the issues for the court.” Id. (citing In re Estate of Doran, 2010 VT 13, ¶ 14, 187 Vt.
349).
A. Statute of Limitations
The Department first contends that the trust modification petition is time-barred
because the latest possible accrual date was in 2007, when Pamela Kay’s IRA funds were
deposited into her sons’ trusts, well outside the six-year statute of limitations applicable
to general civil actions under 12 V.S.A. § 511. Petitioner argues that no statute of
limitations applies to the modification of a trust and that even assuming the six-year
limitations period applies, accrual did not occur until 2012, when Robert Kay died leaving
third-party IRA assets in his trusts.6
6 Kowlowszki’s report asserts that the six-year statute of limitations for a legal malpractice claim against
Goldberg accrued “when it was revealed that the State has a claim against Robert’s [supplemental needs
trust],” which was “initially made on May 25, 2017.” Kozlowski Report at 4–5 (Dep’t’s Ex. 11).
5
Whether a trust modification petition is subject to a statute of limitations is
apparently a matter of first impression in Vermont. The Vermont Trust Code provides
specific limitations periods for breach of trust actions brought against a trustee, see 14A
V.S.A. § 1005(a) and (c), and for actions contesting the validity of a revocable trust, see
14A V.S.A. § 604, but not for trust modification. See 14A V.S.A. §§ 410–416. The
Department cites two cases, both of which are distinguishable. See Estate of Alden v. Dee,
2011 VT 64, ¶ 20, 190 Vt. 401 (holding that breach of fiduciary duty claim against trustee
was time-barred under 12 V.S.A. § 511); In re Admin. of C.H. Young Revocable Living Tr.,
751 N.W.2d 715, 717 (S.D. 2008) (affirming lower court’s ruling that doctrine of laches
precluded modification of trust instrument, but not addressing statute of limitations
issue).
“In . . . actions in equity to have instruments reformed, . . . it is generally agreed
that the appropriate statute [of limitations] may be interposed as a defense . . . .” 66 Am.
Jur. 2d Reformation of Instruments § 88. However, “there is no agreement beyond that
as to what particular statute is appropriate inasmuch as this question depends upon the
particular statutes in the various jurisdictions” and their respective interpretation. Id.
Some states apply the statute of limitations “governing relief on the grounds of fraud or
mistake,” while others apply statutes that “establish a limitation period for actions or
relief not otherwise provided for in the statutes of limitations.” Id. Accordingly, “no
general rule covering all jurisdictions can be stated” as to which statute of limitations
might apply. Annotation, What Statute of Limitations Governs Action to Reform
Instrument, 36 A.L.R.2d 687 (originally published in 1954).
With respect to trusts, courts have generally held that reformation based on
mistake is subject to a statute of limitations. See, e.g., Getty v. Getty, 232 Cal. Rptr. 603,
6
607–08 (Cal. Ct. App. 1986) (applying 3-year limitations period for “action[s] for relief
on the ground of fraud or mistake”); Collins v. Richardson, 212 P.2d 302, 306 (Kan. 1949)
(applying five-year limitations period for “action[s] for relief not hereinbefore provided
for”); Mason v. Univ. of the South, 212 S.W.2d 854, 856 (Tex. Civ. App. 1948) (applying
four-year limitations period from since-repealed statute); but see Ditta v. Conte, 298
S.W.3d 187, 192 (Tex. 2009) (holding that trustee removal action not subject to any
statute of limitations, and analogizing to other “status” cases such as divorce actions and
real property cloud on title cases). Notably, Petitioner cites this court to no authority
holding that trust reformation actions are not subject to a statute of limitations.
Vermont does not have a statute of limitations specific to trust reformation
petitions, or actions based on mistake. However, there is a residual statute of limitations
applicable to civil actions generally: “A civil action, . . . except as otherwise provided, shall
be commenced within six years after the cause of action accrues and not thereafter.” 12
V.S.A. § 511. In observing that this statute applies to quasi-contract theories such as unjust
enrichment and restitution “equally as well as it applies to other civil actions,” the
Supreme Court noted that “[s]tatutes of limitations apply to virtually every legal action.”
Stankiewicz v. Estate of LaRose, 151 Vt. 453, 456 (1989). This court sees no reason why
this statute should not apply to trust reformation actions that are based on a specific
event, such as a mistake in the drafting of the instrument, or unanticipated circumstances.
Under the discovery rule, “the limitations period begins to run ‘when the plaintiff
has or should have discovered both the injury and the fact that it may have been caused
by the defendant’s negligence or other breach of duty.’” Rodrigue v. VALCO Enterprises,
Inc., 169 Vt. 539, 541 (1999) (emphasis in original) (quoting Lillicrap v. Martin, 156 Vt.
165, 175 (1989)). More specifically, a cause of action accrues:
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upon the discovery of facts constituting the basis of the cause
of action or the existence of facts sufficient to put a person of
ordinary intelligence and prudence on inquiry which, if
pursued, would lead to the discovery. Thus, the statute of
limitation begins to run when the plaintiff has notice of
information that would put a reasonable person on inquiry,
and the plaintiff is ultimately chargeable with notice of all the
facts that could have been obtained by the exercise of
reasonable diligence in prosecuting the inquiry.
Estate of Alden v. Dee, 2011 VT 64, ¶ 20, 190 Vt. 401 (citing Kaplan v. Morgan Stanley &
Co., 2009 VT 78, ¶ 7, 186 Vt. 605 (mem.)); see also Galfetti v. Berg, Carmolli & Kent Real
Estate Corp., 171 Vt. 523, 524–25 (2000); Agency of Nat. Res. v. Towns, 168 Vt. 449, 452
(1998).
The Department contends that the action accrued as early as 1995, when the trust
was drafted, and at the latest in 2007, when the IRA funds were transferred to the trusts.
It contends that Pamela Kay and Goldberg “were charged with being aware and
understanding the terms of the trusts” in 1995, and that Goldberg, “as former successor
trustee” who “drafted the terms of the trusts and deposited the IRA funds into the trusts
. . . clearly was aware of the facts constituting the basis of this cause of action” by 2007.
Motion for Summ. J. at 5–6. However, as Petitioner correctly asserts, the trust
beneficiaries are the real parties in interest here. While the general rule is that an action
must be prosecuted in the name of the real party in interest, a “trustee of an express trust
. . . may sue in that person’s own name without joining the party for whose benefit the
action is brought . . . .” V.R.C.P. 17(a).
The Department cites no authority for the idea that a beneficiary is charged with
knowledge of a trustee’s mistake for statute of limitations purposes. Caselaw concerning
breach of trust actions suggests the contrary. See, e.g., Demoulas v. Demoulas Super
Markets, Inc., 677 N.E.2d 159, 173–74 (Mass. 1997) (“a cause of action does not accrue
8
until the trustee repudiates the trust and the beneficiary has actual knowledge of that
repudiation”) (emphasis in original); Cundall v. U.S. Bank, 909 N.E.2d 1244, 1251 (Ohio
2009) (limitations period began to run when trust “beneficiaries knew, or in the exercise
of reasonable diligence should have known, of the possibility” of alleged fraud); Kaneda
v. Kaneda, 45 Cal. Rptr. 437 (Cal. Ct. App. 1965) (resulting trust beneficiaries who had no
knowledge of trustee’s alleged repudiation of resulting trust more than four years before
one of trustee’s grantees instituted action to partition the land and who claimed interest
in the land during the four-year period were not barred by four-
year statute of limitations from asserting resulting trust as defense); Knox v. Knox, 25
N.W.2d 225, 232 (Minn. 1946) (“Knowledge will be imputed to the plaintiff [beneficiary]
when, by the exercise of reasonable care, he should have known of the circumstances
revealing defendant’s adverse and inequitable role.”) (citing 3 Bogert, Trusts and
Trustees, Part 1 (1946 Ed.) § 472, p. 12).
Under the Department’s logic, the statute of limitations in a trust reformation case
would start to run from the moment the mistake was made, regardless of when it
reasonably should have been discovered. That result is untenable, and contradicts
Vermont’s well-established discovery rule. See Rodrigue, 169 Vt. at 541. There is sufficient
evidence to establish the existence of a disputed material fact as to when the alleged
mistake reasonably should have been discovered. See Kozlowski Report at 4–5 (Dep’t’s
Ex. 11); Drislane Aff. ¶¶ 2, 4 (Pet’r’s Ex. 16) (asserting that there was “considerable
difficulty” in developing the facts from 1995 through 2006, and that “[c]ritical records
and evidence regarding the establishment and initial funding of the 1995 trusts were
discovered in 2015 and 2016”). The Department is not entitled to summary judgment on
statute of limitations grounds.
9
B. Laches
As an alternative to its statute of limitations argument, the Department also
contends that trust modification is barred by the doctrine of laches. Laches is “an
equitable defense that bars relief when a party fails ‘to assert a right for an unreasonable
and unexplained lapse of time.’” In re McCarty, 2013 VT 47, ¶ 15, 194 Vt. 109 (quoting
Comings & Livingston v. Powell, 97 Vt. 286, 293 (1923)). A lapse of time is not sufficient.
“Laches involves prejudice, actual or implied, resulting from the delay. It does not arise
from delay alone, but from delay that works disadvantage to another.” Id. (quoting
Comings, 97 Vt. at 294). The Department argues that the alleged mistakes occurred many
years ago, and that it is prejudiced by the unavailability of testimony from Pamela and
Robert, Attorney Goldberg’s retirement, and the possibility that reformation of the trust
might render the beneficiaries retroactively ineligible for Medicaid.
The court is not persuaded that laches bars the proposed trust modification. While
the trust was drafted in 1995 and the IRA fund transfer occurred in 2007, the court cannot
say that the lapse of time was unreasonable or unexplained. There is evidence that the
alleged mistakes in the trust instrument and the IRA fund transfer did not come to light
until much more recently. See Drislane Aff. ¶¶ 2, 4 (Pet’r’s Ex. 16). Moreover, the
Department cannot demonstrate prejudice from the delay. Were Pamela and Robert still
alive, it is likely that any testimony from them would benefit Petitioner and not the
Department, and it is unclear how Attorney Goldberg’s retirement is prejudicial. The
possibility that reformation could lead to retroactive Medicaid ineligibility would only
benefit the Department, as it then might be entitled to some degree of repayment. On
these facts, laches does not provide a basis for summary judgment.
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C. Modification by Consent (14A V.S.A. § 411(b))
Petitioner argues that the trust can be modified based on the consent of Benjamin
Kay, whom Petitioner contends is the “sole living beneficiary” of the two trusts. Pet’r’s
Resp. at 14. “A noncharitable irrevocable trust may be modified upon consent of all of the
beneficiaries if the [court] concludes that modification is not inconsistent with a material
purpose of the trust.” 14A V.S.A. § 411(b).
Despite the Medicaid payback provision, see Trust Agreement at 8 (Pet’r’s Ex. 3),
Petitioner contends that the State is not a beneficiary, but a creditor. Petitioner cites no
authority to support this contention, aside from the vague assertion that “based on statute
and equity, including the law of restitution and unjust enrichment, the court may declare
the State’s status as creditor only of [the trusts, and] that the State is not a beneficiary of
Pamela’s third-party asset.” Pet’r’s Resp. at 15.
This argument is directly contrary to the statutory language, which defines
“[b]eneficiary” as “a person that [] has a present or future beneficial interest in a trust,
vested or contingent.” 14a V.S.A. § 103(a)(A) (emphasis added). The trust code further
clarifies that “person” includes a “government” or a “governmental subdivision, agency,
or instrumentality . . . .” Id. § 103(10). The State is clearly a contingent beneficiary and
does not consent to modification. Therefore, Petitioner cannot modify the trusts under
section 411(b).7
7 The trust code provides an alternative means of modification by consent even if not all of the beneficiaries
consent. See 14A V.S.A. § 411(e) (“if the . . . court is satisfied that: (1) if all of the beneficiaries had consented,
the trust could have been modified or terminated under this section; and (2) the interests of a beneficiary
who does not consent will be adequately protected”). The Department argues that subsection (e) is
inapplicable. However, because Petitioner does not argue for modification under subsection (e), the court
need not address it.
11
Petitioner also points to another probate case in which the Department contented
to the modification of a trust, Pet’r’s Ex. 19, and contends that “in fairness the Department
should do the same” for the current petition to modify. Pet’r’s Opp’n at 11–12. Petitioner
cites no legal basis for this argument.
D. Reformation to Correct Mistakes (14A V.S.A. § 415)
The trusts unambiguously provide that, upon termination, “any remaining
principal and income” shall be paid to the State of Vermont for Medicaid reimbursement
purposes. Trust at 8. Petitioner asserts that the trusts are flawed in that “the drafter by
mistake or error invited ‘the settlor and other third parties’ to contribute to the trust[s],
but omitted terms to expressly exempt third-party assets from the . . . pay-back provision
and limit the provision exclusively to first-party assets.” Pet’r’s Statement of Disputed
Facts ¶ 6 (citing Trust at 2; Second Goldberg Aff. ¶¶ 9–14). Petitioner seeks to reform the
trusts to correct that claimed mistake.
“[C]ourts will not reform a trust simply because [it] would be desirable for the
settlor or the beneficiaries.” Bogert’s Trusts And Trustees § 991 (June 2018 update).
However, the court “may reform the terms of a trust, even if unambiguous, to conform
the terms to the settlor’s intention if it is proved by clear and convincing evidence that
both the settlor’s intent and the terms of the trust were affected by a mistake of fact or
law, whether in expression or inducement.” 14A V.S.A. § 415. Reformation of an
instrument “to correct a mistake of law or fact is a long-established remedy.” Id., Official
Comment. Because it “may involve the addition of language not originally in the
instrument . . . if necessary to conform the instrument to the settlor’s intent . . . , reliance
on extrinsic evidence is essential.” Id.
12
The court may consider evidence relevant to the settlor’s intent “even though it
contradicts an apparent plain meaning of the text.” Id. The “higher standard” of clear and
convincing evidence is required “[t]o guard against the possibility of unreliable or
contrived evidence” or “fraudulent testimony[.]” Id. Thus, to reform the trusts pursuant
to section 415, Petitioner must prove by clear and convincing evidence both that the terms
of the trust were affected by a mistake, and that the settlor’s intention was for the
Medicaid payback clause not to unnecessarily apply to third-party assets.
Regarding the issue of mistake, Attorney Goldberg asserts that he made an error
in drafting the instruments, and this error clearly affected the Medicaid payback provision
in the trusts. See Second Goldberg Aff. ¶¶ 9–14 (Pet’r’s Ex. 2). The problem with this
assertion is that at the time the trusts were drafted, despite Attorney Goldberg’s
“recommended treatise language” inviting contributions from third parties, see 2nd
Goldberg Aff. ¶ 9; Trust at 2, there was no specific plan to add third-party funds.
According to Goldberg, he and Pamela never discussed her personal assets when setting
up the trusts. See First Goldberg Aff. ¶ 36. Any mistake, if there was one, came separately
when Pamela executed the IRA beneficiary designations. That is not a mistake in the
creation of the trusts.
Even if the court were to accept the idea that the error was not Pamela’s separate
designation but Attorney Goldberg’s drafting, that does not resolve the issue of intent. To
demonstrate Pamela’s intent, Petitioner points to several pieces of evidence. First, the
trust provides that the trust property is to be “distributed to the beneficiaries named
herein upon Robert’s death,” including Robert’s surviving spouse, if any, children, if any,
13
and the Benjamin Trust, in that order. Trust at 1, 8 (Pet’r’s Ex. 3).8 Second, Pamela’s Will
grants the remainder of her estate to a testamentary trust for her two sons. Last Will and
Testament of Pamela Jane Kay at 2 (Pet’r’s Ex. 4). Third, Pamela’s 2005 Merchant’s Bank
beneficiary designation form named Benjamin and his then-wife Amanda as
beneficiaries. Pet’r’s Ex. 5. Fourth, Pamela’s 1995 IRA beneficiary designation form with
A.G. Edwards & Sons, Inc. named the two trusts as beneficiaries. Pet’r’s Ex. 6. Fifth,
Goldberg’s counsel to Pamela in 1995 concerned only the assets of her sons, and not
Pamela’s own personal assets. First Goldberg Aff. ¶ 36 (Pet’r’s Ex. 1); Pamela’s notes from
mid-1995 (Ex. 7).9 Finally, Goldberg also asserts that “[u]pon information and belief[,]
Pamela did not intend her personal IRA assets to be exposed to the payback terms of the
Robert Trust and the Ben Trust, if the federal and state payback rule was not applicable
to her third-party IRA asset.” First Goldberg Aff. ¶ 41 (Pet’r’s Ex. 1).10 Petitioner contends
that this all shows Pamela’s estate planning intent to leave her property to her sons and
their families, instead of unnecessarily benefiting the State.
Petitioner’s argument fails because of the heightened evidentiary standard here.
To reform the trusts, the evidence of intent must be clear and convincing. 14A V.S.A. § 415.
8 The Benjamin Trust similarly provides that any remaining trust property is to be distributed to Benjamin’s
surviving spouse, if any, children, if any, and the Robert Trust, in that order. Benjamin Trust at 1, 8 (Pet’r’s
Ex. 3 in Benjamin Trust filings).
9 The Department objects that Pamela’s notes are inadmissible hearsay. However, the notes might be
admissible under the state of mind exception, see V.R.E. 803(3), or potentially as a recorded recollection.
See V.R.E. 803(5). In any event, Goldberg’s affidavit also provides independent evidence of his counsel to
Pamela in 1995, assuming his assertion is based on personal knowledge and not wholly on the notes.
10 Petitioner also points to email correspondence between Goldberg and Pamela’s investment broker, David
Shaw, just a few days before Pamela’s death in December 2006. See Second Goldberg Aff. ¶ 23 and attached
email correspondence labeled as Ex. S-3 (Pet’r’s Ex. 2). The email discusses the subjects of Pamela’s estate
plan and provisions for her granddaughter. However, there is no affidavit from David Shaw, and therefore
his statements in the email exchange are inadmissible hearsay. To the extent Petitioner relies on the 2007
email exchange between David Shaw and David Kay, that also appears to be inadmissible hearsay. Pet’r’s
Ex. 11. To the same effect is the document written by David Kay titled “Background relating to Pamela J.
Kay with regard to her trusts,” which is not presented in the form of an affidavit. Pet’r’s Ex. 14.
14
While direct statements from the settlor are not required, see In re Estate of Tuthill, 754
A.2d 272, 275–76 and n.3 (D.C. 2000), the cases finding clear and convincing evidence
involve more than is proffered here. See, e.g., Griffin v. Griffin, 832 P.2d 810, 814
(Okl.1992) (upholding trial court’s decision to grant reformation based on (1) undisputed
testimony of tax attorney, (2) letter of attorney whom grantor consulted, and (3)
admissions of executor of estate); Ike v. Doolittle, 70 Cal. Rptr. 2d 887, 897 (Cal. Ct. App.
1998) (finding clear and convincing evidence of settlor’s intent through (1) testimony of
drafter, (2) expert testimony on tax savings, (3) five supporting witnesses, and (4) the
trust); Popp v. Rex, 916 So. 2d 954, 957–58 (Fla. Dist. Ct. App. 2005) (clear and
convincing evidence established that settlor intended that share of deceased son without
issue go to other son despite omission of trust provision for that contingency; evidence
included: (1) testimony of drafting attorney; (2) testimony of financial advisor; and (3)
separate revocable trust); In re Lock Revocable Living Trust, 123 P.3d 1241, 1249–51
(Haw. 2005) (affidavits by drafting attorney and settlor’s sister-in-law made it clear that
settlor intended distribution of trust assets only among surviving siblings, not deceased
siblings’ descendants).
The cases cited by Petitioner also do not support his case for reformation. While
the North Dakota Supreme Court held in In re Matthew Larson Trust Agreement Dated
May 1, 1996, 831 N.W.2d 388, 398 (N.D. 2013) that the settlors were entitled to
reformation based on a mistake of law as to whether beneficiaries’ siblings who were not
settlors’ lineal descendants would benefit from the trust, the evidence of the settlors’
intent was clear. The settlors themselves testified as to their intent, and “[n]o evidence
disput[ed] their testimony.” Id. Similarly, the detailed offer of proof in Erickson v.
Erickson, 716 A.2d 92, 95 n.8 (Conn. 1998) was sufficient to prove clearly and
15
convincingly that there was a scrivener’s error that resulted in the failure to include a
contingency of marriage clause in a will. Id. at 101 (reversing for a new trial and holding
that trial court should have admitted extrinsic evidence regarding testator’s intent,
including conversations between testator and drafting attorney). The evidence in Larson
and Erickson is substantially more convincing than the evidence provided here.
The court finds State St. Bank & Tr. Co. v. Alden, 830 N.E.2d 205 (Mass. 2005)
particularly instructive. The evidence there—the drafting attorney’s affidavit stating that
the settlor’s intent was to minimize estate taxes—was insufficient to override the settlor’s
deliberate and specific choice-of-law provision. Id. at 207. Similarly, here, Attorney
Goldberg’s affidavit is simply not enough to contradict the unambiguous Medicaid
payback provision of the trusts under the clear and convincing evidentiary standard.
Importantly, Goldberg’s affidavit is not based on any clear statement by Pamela about her
intent, but on “information and belief,” including the other provisions of the trusts,
Pamela’s will, and her beneficiary designations.
It is clear that the primary purpose of each trust was to care for each son during
his life and allow each to retain his Medicaid eligibility. Robert’s trust had served its
purpose when Robert died in 2012. What happens to remaining trust funds at each
beneficiary’s death is merely incidental to that primary purpose. See duPont v. Southern
Nat’l Bank of Houston, Tex., 771 F.2d 874, 883–84 (5th Cir. 1985) (finding that primary
purpose of trust was to shield property from then-wife and provide for son, and that tax
consequences were “incidental to its creation”). Moreover, to say what Pamela’s intent
was with respect to remaining trust funds under the clear and convincing standard would
require too much speculation. See Application of Last Will & Testament of Manville, 447
N.Y.S.2d 195, 199 (N.Y. Sur. Ct. 1982) (“Mere speculation or the assumption that every
16
person wishes to avoid the payment of burdensome taxes, cannot determine testator’s
intent.”).11 The express language of the trusts states that funds in the trusts at the time of
Benjamin or Robert’s death would go to repay the State. Pamela executed the IRA
beneficiary designation despite that language. To argue that she did not intend such a
result when the language is clear on its face defies logic.12
The clear-and-convincing-evidence standard “requires an assertion to be
established by a high degree of probability, though not to an absolute or moral certainty
or beyond a reasonable doubt.” Restatement (Third) of Property (Wills & Don. Trans.)
§ 12.1, cmt. (e). This higher degree of proof allocates risk by “impos[ing] a greater risk of
an erroneous factual determination on the party seeking reformation than on the party
opposing reformation.” Id. Even viewing the evidence in the light most favorable to the
non-moving party, it does not establish by a “high degree of probability” that Pamela’s
intent was to avoid paying remaining third-party assets to the State. On this evidence, no
fact-finder could reasonably conclude that reformation is warranted.
11 The court recognizes that there is a line of New York cases, some cited by Petitioner, presuming that
testators wish to reduce taxes and have the state pay the costs of medical care. See, e.g., In re Shah, 733
N.E.2d 1093, 1099 (N.Y. 2000) (“[t]here can be no quarreling with the Supreme Court’s determination that
any person in [a permanent coma] would prefer that the costs of his care be paid by the State, as opposed
to his family”); In re Will of Kamp ex rel. Kamp, 790 N.Y.S.2d 852, 856 (N.Y. Sur. Ct. 2005) (“the courts
will presume a testator wishes to reduce taxes to the greatest extent possible and will reform the will to
accomplish that result”); Estate of Escher, 407 N.Y.S.2d 106, 111 (N.Y. Sur. Ct. 1978), aff’d, 426 N.Y.S.2d
1008 (N.Y. App. Div. 1980), aff’d, 52 N.Y.2d 1006, 420 N.E.2d 91 (N.Y. 1981) (“It is divorced from the
realities of life to presume that if testator were aware of the facts as they now exist, he would desire to pay
the immense cost for his daughter's care in preference to having society share this burden.”). If this were
the law—a presumption—then no one would ever lose to the government in this type of case, no matter how
they drafted their will or trust. Such an absurd result cannot possibly be the law.
12 While the closeness in time between the trust creation and the IRA beneficiary designation might lead to
an inference that the trust language influenced Pamela to designate the trusts as beneficiaries of the IRA
account, one would also have to presume that she was aware of the clear language subjecting all trust funds
to the Medicaid payback provision.
17
E. Modification based on Unanticipated Circumstances (14A V.S.A. § 412)
Under section 412, the court “may modify” the “administrative or dispositive
terms” of a trust “if, because of circumstances not anticipated by the settlor, modification
. . . will further the purposes of the trust. To the extent practicable, the modification must
be made in accordance with the settlor’s probable intention.” 14A V.S.A. § 412(a). The
purpose of “equitable deviation” is “not to disregard the settlor’s intent but to modify
inopportune details to effectuate better the settlor’s broader purposes.” Id., Official
Comment. “While it is necessary that there be circumstances not anticipated by the
settlor,” this section does not require changed circumstances. Id. Thus, “the
circumstances may have been in existence when the trust was created.” Id. This section
accordingly complements section 415 (reformation based on mistake at trust creation).
Id. It is also “not necessary . . . that the situation be so serious as to constitute an
‘emergency’ or to jeopardize the accomplishment of the trust purposes.” Restatement
(Third) of Trusts § 66 (2003) cmt. (a). Section 412 does not require a showing of clear and
convincing evidence.
Petitioner argues that modification is warranted here because Pamela funded the
first-party Medicaid trusts “with her own IRA money pursuant to the advice and
presentations of her attorney and broker, unaware that the advice and presentations were
in error,” and because modification “to remove the inadvertent exposure to [the State]
would be in accord with the settlor’s probable intention to provide for her disabled sons
and their families.” Pet’r’s Response at 16. According to Petitioner, the circumstance of
which she was unaware is “the fact that the plan, presentation[,] and document were
18
flawed.” Id. at 16–17; see also Pet. ¶ 29 (Pet’r’s Ex. 13) (“[Pamela] did not anticipate the
circumstances she put into action by her IRA beneficiary designation of 1995.”).13
Like the reformation cases, the unanticipated circumstances cases are highly fact-
dependent, defying easy categorization. As the comment to the Restatement predicts, see
Restatement (Third) of Trusts § 66 cmt. (a), virtually all the cases involved changed
circumstances, although that is not required. See, e.g., City of Augusta v. Attorney Gen.,
943 A.2d 582, 591–92 (Me. 2008) (modifying 1815 charitable trust to allow city to sell
property on which high school located, remove restrictions from property, and use sale
proceeds to maintain trust and benefit new high school, where operation of high school
was no longer permitted on property and modification would further settlor’s “overriding
purpose of educating youth”); In re Nobbe, 831 N.E.2d 835, 841–43 (Ind. Ct. App. 2005)
(significant increase in value to stock was not the sort of unanticipated circumstance that
justified equitable deviation); In re Trust D Created Under Last Will & Testament of
Darby, 290 Kan. 785, 794, 234 P.3d 793, 800–01 (Kan. 2010) (devaluation of future
distributions due to normal inflation is not an unanticipated circumstance that justifies
modification).
Petitioner relies on In re Riddell, 157 P.3d 888 (Wash. Ct. App. 2007), as amended
on reconsideration (July 3, 2007). There, a beneficiary’s mental illness that developed
after the creation of the trust was considered an unanticipated circumstance for purposes
13 In the probate cases, Petitioner filed an amendment to his petition asserting that, in 2016, Benjamin Kay,
Jr. (Benjamin Kay’s son and Pamela’s grandson) was sexually abused by his maternal grandfather and a
companion of his grandfather and that Pamela “would not have anticipated or foreseen such events.” Am.
to Pet. at 1–2 (Pet’r’s Ex. 14). Included with the amendment is a two-page written statement by David Kay
titled “Background relating to Pamela J. Kay with regard to her trusts.” The written statement, which is not
in affidavit form, constitutes inadmissible hearsay. Furthermore, Petitioner does not argue in his briefing
on appeal that the grandson’s sexual abuse is an unanticipated circumstance that would be grounds for
modification.
19
of modifying testamentary trusts into special needs trusts. Id. at 891–93. The facts of
Riddell, however, do not demonstrate why modification is appropriate here. The
unanticipated circumstance in Riddell was the beneficiary’s mental illness, unknown to
the settlors at trust creation. Here, the unanticipated circumstance articulated by
Petitioner is the effect of the 1995 IRA beneficiary designation.14
Perhaps the most analogous case is Purcella v. Olive Kathryn Purcella Trust, 325
P.3d 987 (Alaska 2014). There, the settlor sought modification of an irrevocable trust
based on an unawareness of the legal effect of the trust. She argued that she did not
“anticipate[ ] that the circumstance would arise where she would have no control as to
when or if her bills would be paid, or when or how her money was to be spent.” Id. at 992.
Affirming the trial court’s decision that modification or termination was not warranted,
the Alaska Supreme Court held that
a misunderstanding about the effect of a legal instrument is
not an unanticipated circumstance. Something “anticipated”
is “foresee[n],” “give[n] advance thought,” or
“expect[ed].” That is, unanticipated circumstances are facts
about the future that were not known to the settlor at the time
the trust was executed and, if they had been known, would
have caused the settlor to draft the trust provisions
differently. That a settlor was mistaken about the legal effect
of a trust is not an unforeseen fact about the future but a
mistake “in expression in the trust” that might warrant
reformation under AS 13.36.350(a).15
Id. at 992–93 (emphasis in original) (citations and footnotes omitted). As the Kansas
14 Petitioner cites two additional cases modifying instruments to create special needs trusts. See In re Will
of Kamp ex rel. Kamp, 7 Misc. 3d 615, 790 N.Y.S.2d 852 (N.Y. Sur. Ct. 2005) (reforming testamentary trust);
In re Rappaport, 21 Misc. 3d 919, 866 N.Y.S.2d 483 (Sur. 2008) (reforming will). Both cases turned on the
court’s analysis of the testator’s intent. Neither case offers much guidance here.
15 The statute cited, Alaska Stat. 13.36.350(a), is Alaska’s equivalent to 14A V.S.A. § 415 (reformation to
correct mistake).
20
Supreme Court has similarly explained, “[c]ourts have generally been more willing to
allow modification for unanticipated circumstances where there are truly unforeseen
events resulting in economic hardship, the incapacity of a beneficiary, the impossibility
or imprudence of a trust provision, or the diminution in value of a trust asset.” Darby, 234
P.3d at 800; see also Niemann v. Vaughn Cmty. Church, 113 P.3d 463, 471 (Wash. 2005)
(“[C]ircumstances not anticipated by the settlor . . . include significant congregational
growth, limitations with the building and property, stricter development and building
codes, drastic changes in the community . . . , including growth, expansion, and relocation
of its business core, and . . . changes in the attitudes, expectations, and needs of
parishioners compared with the 1950s.”) (citation and quotations omitted).
Yet, even Purcella is not directly on point. While Purcella involved a settlor’s
mistaken understanding of the legal effect of the trust that she sought to modify, the
modification sought here is based on Pamela Kay’s subsequent IRA beneficiary
designation to the trusts. Thus, modification of the trust is requested not because of a
mistake in the trust, but because of a mistake in an instrument distinct from the trust. In
other words, Petitioner is arguing that what was unforeseen when the trusts were created
was the later beneficiary designations. While this court agrees with the implication in
Purcella that one cannot make an end-run around the clear and convincing proof
requirement of 14A V.S.A. § 415 by seeking modification under section 412 based on
mistake, the same cannot be said for mistakes external to the trust instrument itself.
The Department, as the moving party, has the burden to demonstrate the absence
of genuinely disputed material facts. However, the Department has failed to directly
address Petitioner’s grounds for modification under section 412. The Department argues
only that evidence of the circumstances of Pamela’s grandson and the unsworn statement
21
of David Kay are inadmissible hearsay. Motion for Summ. J. at 10–11. The court agrees
and does not consider that evidence, but also notes that Petitioner does not even rely on
that evidence as grounds for modification. See supra, note 13. The Department does not
argue that Pamela was aware of the legal effect of her IRA beneficiary designation, nor
does it offer a statement of undisputed fact to that effect.16 The record does not
dispositively establish that Petitioner cannot show by a preponderance of the evidence
that (1) modification would further the purposes of the trusts, and (2) Pamela’s probable
intent was to avoid reimbursing the State for Medicaid expenses. See Pet’r’s Ex. 3–6.
Petitioner is entitled to an evidentiary hearing on this issue.
F. Potential Retroactive Medicaid Eligilibility
The Department contends that modification might result in retroactive Medicaid
eligibility because, even if an applicant is not ineligible due to resource limitations, they
might still be ineligible as a result of income. Motion for Summ. J. at 7–8, 10; Dep’t’s
Reply at 4–5. This, the Department contends, would be “inconsistent with a material
purpose of the trust[s] . . . .” Motion for Summ. J. at 10. Although the Department makes
this contention in the context of the laches issue and the section 411 claim, it is arguably
pertinent to both sections 412 and 415 as well.
However, the Department includes no statement of undisputed fact to support its
arguments regarding eligibility. Instead, it cites to Vermont Medicaid regulations, and
asserts that such retroactive eligibility “cannot be determined with certainty.” Dep’t’s
16 The Department asserts that any mistake by Attorney Goldberg in failing to properly advise Pamela
regarding her IRA beneficiary designations is a mistake in legal representation, not in the trust, and that
the proper remedy is therefore a malpractice claim rather than reformation. Motion for Summ. J. at 14.
Even if it does constitute malpractice, the Department fails to demonstrate that it cannot also fall under the
purview of 14A V.S.A. § 412.
22
Reply at 4–5. The court cannot grant summary judgment on the basis of such vague
claims.
G. Unjust Enrichment and Restitution
Petitioner contends that, based on the doctrines of unjust enrichment and
restitution, the court can “fashion a remedy to redirect the transferred IRA to the intended
beneficiaries: in trust for Pamela’s family without exposure to claims by the State of
Vermont.” Pet’r’s Opp’n at 12–13. There is no claim for unjust enrichment or restitution
in this case. This is a petition to modify a trust, and the Vermont Trust Code contains
specific procedures for such an action. To the extent Petitioner is arguing that he is
entitled to modification based on the doctrines of unjust enrichment and restitution even
in the absence of meeting the Vermont Trust Code requirements, the court rejects that
argument.
III. Order
The Department’s motions for summary judgment are granted in part and denied
in part as set forth above. Petitioner is entitled to an evidentiary hearing on the issue of
modification under 14A V.S.A. § 412. The court will schedule a half-day hearing. If counsel
believe more time is required, please inform the court promptly.
Dated at Burlington this 6th day of June, 2019.
_______________________
Helen M. Toor
Superior Court Judge
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