In the Matter of the Inman Family Living Trust

IN THE COURT OF APPEALS OF IOWA
No. 19-1045
Filed July 22, 2020
IN THE MATTER OF THE INMAN FAMILY LIVING TRUST,
ALVIN INMAN and SANDRA INMAN-ROBINSON,
Appellants.
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Appeal from the Iowa District Court for Adams County, Michael Jacobsen,
Judge.
Appellants appeal a district court ruling on a trustee’s application for court
direction regarding payment of trust income. REVERSED AND REMANDED.
Elizabeth R. Meyer and Lucas B. Draisey of Davis, Brown, Koehn, Shors &
Roberts, P.C., Des Moines, for appellants.
Jonathan Mailander of Mailander Law Office, Atlantic, for appellee.
Considered by Vaitheswaran, P.J., and Mullins and Ahlers, JJ.
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MULLINS, Judge.
Appellants Alvin Inman and Sandra Inman-Robinson appeal a district court
ruling on a trustee’s application for court direction regarding payment of trust
income, which directed the trustee to pay Ella Mae Inman the gross income of the
trust upon her request regardless of whether trust expenses must then be paid by
invading the trust’s assets.
I. Background Facts and Proceedings
Leland and Ella Mae Inman established the Inman Family Living Trust in
2014. Leland passed away in 2016. The Trust expressly states the trustees
possessed “such powers, rights and discretion as are presently set forth in the
Iowa Code,” that the trustees are authorized “to determine fairly and equitably the
manner of ascertainment of income and principal and the allocation of all receipts
and disbursements to income and principal accounts,” and the trust “shall be
governed in accordance with the laws of the State of Iowa.”
In 2017, the appellants, alongside their sister, filed a petition in which they
sought a determination the trust became irrevocable upon Leland’s death. They
also sought to prevent their mother, Ella Mae, from amending or modifying the
terms of the trust. In February 2018, the parties entered into a settlement
agreement, which provided, in relevant part, the following:
1. [The trust] . . . shall continue in force.
2. Pursuant to Article II A[1] of the Trust Declaration, Ella Mae
shall be entitled to enjoy all income from the Trust for the remainder
of her natural life as she may request or direct.
1Article II.A. provided: “The Trustee shall pay to either of us or to our order, so
much of the income and principal of the Trust as we may request or direct.”
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3. Pursuant to Article II B[2] of the Trust Declaration, the
Trustee shall retain the discretion to invade principal of the Trust, to
the extent it deems necessary or advisable, to provide for the proper
care, support, maintenance, and education of Ella Mae Inman. The
Trust Declaration shall not be construed to permit the invasion of the
principal of the Trust other than for these purposes during the life of
Ella Mae.
The agreement was approved by the district court.
In April 2019, the trustee applied for guidance from the court regarding
payment of trust income. The trustee explained Ella Mae was requesting she be
paid all gross income of the trust, as opposed to net income, and doing so would
require the trustee to “invade principal for normal and customary expenses,
including without limitation payment of real estate taxes, insurance, land repairs,
and trustee’s and attorneys’ fees.” The appellants responded that, pursuant to the
Iowa Uniform Principal and Income Act, Iowa Code chapter 637 (2019), Ella Mae
was only entitled to net income, as opposed to gross income.
The matter was submitted on briefs, and the district court ultimately
concluded that the “‘all income’ clause of the settlement agreement does not limit
Ella Mae in how she directs distribution of the income” and “Ella Mae could demand
the Trustee distribute to her all gross income.” This appeal followed.
II. Standard of Review
Appellate review of equitable proceedings concerning the internal affairs of
a trust and interpretation of a trust agreement is de novo. Iowa R. App. P. 6.907;
In re Steinberg Family Living Trust, 894 N.W.2d 463, 468 (Iowa 2017); In re Trust
2 Article II.B. provided: “In addition, the Trustee may pay to either of us or apply for
our benefit such amount or amounts of the income of the principal of the Trust as
the Trustee, in the Trustee’s discretion, deems necessary or advisable to provide
for our proper care, support, maintenance, and education.”
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No. T-1 of Trimble, 826 N.W.2d 474, 482 (Iowa 2013). When reviewing a case de
novo, we review “the entire record and decide anew the factual and legal issues
preserved and presented for review.” Hensch v. Mysak, 902 N.W.2d 822, 824
(Iowa Ct. App. 2017). “[W]e will affirm the district court unless the district court
failed to do substantial equity.” Id.
III. Analysis
The question before us is whether the language “all income” in the
settlement agreement entitles Ella Mae to net income or gross income of the trust.
The appellants’ primary argument is that the Iowa Trust Code and the Iowa
Uniform Principal and Income Act apply to the determination of the dispute over
the trust and that the applicable statutory provisions require that income interest
paid to Ella Mae as the income beneficiary be only net income, and not gross
income. The district court’s order did not mention any provision of the Iowa Trust
Code or the Iowa Uniform Principal and Income Act. Instead, the order cited the
“all income” wording in paragraph two of the settlement agreement and the powers
vested to the trustee as reasons for its ruling.
It is undisputed that the trust and trust proceedings are subject to the Iowa
Trust Code. See Iowa Code §§ 633A.1106, .1107; see also id. § 633A.1102(18)
(defining trust). Additionally, chapter 637, the Iowa Uniform Principal and Income
Act “shall apply to trusts subject to” chapter 633A. Id. § 633A.4705. A trust is to
be administered in accordance with chapter 637 unless the trust contains a
different provision. Id. § 637.103(1)(c). The trust specifically acknowledges it is
governed by the laws of Iowa, and the settlement agreement recites the trust is
still in force.
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“Settlement agreements are essentially contracts, and general principles of
contract law apply to their creation and interpretation.” Sierra Club v. Wayne
Weber, LLC, 689 N.W.2d 696, 702 (Iowa 2004). While the plain meaning of
contracts generally prevail, statutes may also affect a contract’s interpretation.
See, e.g., Thoams v. Progressive Cas. Ins. Co., 749 N.W.2d 678, 682 (Iowa 2008).
“The intent of the parties controls the interpretation issues.” Sierra Club, 689
N.W.2d at 702.
The agreement provided Ella Mae is entitled to request she receive “all
income.” The appellants argue various provisions contained in chapter 637
mandate interpreting the phrase to mean net income as opposed to gross income.
Indeed, Ella Mae amounts to an “income beneficiary” with an “income interest” in
the trust. “‘Income beneficiary’ means a person to whom a trust’s net income is or
may be payable,” and an “‘Income interest’ means an income beneficiary’s right to
receive all or part of the net income, whether the terms of the trust require it to be
distributed or authorize it to be distributed in the trustee’s discretion.” Iowa Code
§ 637.102(5), (6) (emphasis added); accord id. § 637.301(1) (“An income
beneficiary is entitled to net income from the date on which the income interest
begins.” (emphasis added)). So, unless the settlement agreement contains a
“different provision,” the trust must be administered in accordance with those
definitions and Ella Mae is only entitled to the net income of the trust. See id.
§ 637.103(1)(c).
Ella Mae points to chapter 637’s definition of “income” and argues use of
the phrase “all income” creates a different provision and excepts the trust from
chapter 637. “Income” means money or property [the trustee] receives as the
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current return from a principal asset.” Id. § 637.102(4). Then, “net income”
amounts to those receipts, minus disbursements. Id. § 637.102(8).
Disbursements include the ordinary expenses of the trust, which, by default are
paid from income. See Iowa Code § 637.501. As the trustee has explained,
interpreting the language to mean gross income would require the trustee to invade
trust assets to pay ordinary expenses. The settlement agreement made clear such
invasion would only be allowed “to provide for the proper care, support,
maintenance, and education of Ella Mae.” Thus interpreting section two of the
settlement agreement in Ella Mae’s favor would frustrate section three of the
agreement.
The words “all income” do not in themselves mean all gross or net income
and are ambiguous when there are different forms of income that can be
considered. But when the settlement agreement contemplated particular
situations in which the trustee could invade the principal assets of the trust—“to
provide for proper care, support, maintenance and education of Ella Mae”—and
then for good measure stated that “[t]he Trust Declaration shall not be construed
to permit the invasion of the principal of the Trust other than for these purposes,”
the words “all income” cannot be understood to mean the dispersion of all gross
income. As such, we are unable to conclude the parties’ intended “all income” to
mean gross income. Furthermore, interpreting “all income” to mean “net income”
harmonizes sections two and three of the settlement agreement, and is in accord
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with the trust documents and Iowa law. Consequently, we interpret the language
to mean net income as defined under chapter 637.3
IV. Conclusion
We reverse the district court’s ruling on the trustee’s application for court
direction and remand the matter for entry of an order consistent with this opinion.
REVERSED AND REMANDED.
3 Ella Mae argues a provision of the settlement agreement, that “no further actions
to construe and determine the terms of the trust shall be brought so long as Ella
May is living,” should bar the appellants from advancing their arguments in this
appeal. However, this litigation concerns the interpretation of the settlement
agreement, not construction of the trust. We reject the argument