feCommittature: ee REpoRt: FiiNDvuECsiarytment Pros fessioNs By Gregory J. Weinig, Charles J. Durante & Scott E. Swenson When Does a Signed Trust Document Not Create a Trust? When extrinsic evidence shows a grantor’s contrary intent our lines of cases over four decades have reached between the two beneficiaries. The father created the the remarkable result that even though a grantor trust, intending to protect the properties from attach- F signed a trust document, apparently creating a ment. Within two years of the trust’s creation, the trustee trust, that grantor didn’t, in fact, create a trust. How can conveyed the realty back to the father, who, years later, this be? How can a signed—and perhaps also witnessed, conveyed the properties back to the trustee (individually, notarized and funded—trust instrument not create a this time) and the trustee’s wife. Through the remain- trust? How is any trust safe from assault in light of such ing 26 years of his life, the father retained control of the rulings? realty, collected all rents, paid all bills on the properties Fear not. In each of the four lines of cases—from and treated the realty as his own.3 Colorado, Connecticut, Delaware and Massachusetts— After the father died, the two siblings who weren’t despite the existence of an instrument unequivocally trustees asked a court to determine their interests in the stating that a trust had been created, a court found that trust property. A master found that: property wasn’t subject to the terms of the trust because the grantor hadn’t actually intended to create one.1 • the father created the trust instrument in an effort Reviewing and categorizing the doctrines and evidence “merely to put the properties in question beyond the supporting these courts’ conclusions yields useful les- reach of a claimant” and never intended to create a sons for fiduciaries and advisors. valid, binding trust; Not Meant to Be • the father never divested himself of control over the In the family dispute at the heart of Porreca v. Gaglione,2 assets and continued to retain possession and control a Massachusetts father established an irrevocable trust over the assets and their proceeds; and to hold real estate that was later re-conveyed to him to avoid a possible claim from a creditor, a son-in-law, with • the son who was named as trustee never accepted the whom the father had difficulties and litigation. One trust and never assumed the duties of trustee. of his three children was the trustee. The written trust instrument required the trustee to hold the properties The master concluded that the other two children for the benefit of his two siblings. On the trust’s ter- had no interest in the realty or its proceeds.4 mination, the trust property was to be divided equally On appeal, the non-trustee siblings argued that the master erred in concluding that the trust was invalid because the grantor never intended to create a valid From far left, Gregory J. Weinig and Charles J. Durante trust. The appellate court accepted the master’s findings are partners, and Scott E. Swenson is an associate, in the as conclusive, as they weren’t on their face plainly wrong, Trusts, Estates and and stated: Taxation department of Connolly Gallagher To prevail the plaintiffs were required to show that LLP in Wilmington, they had an interest in the property as beneficia- Del. ries of a valid, subsisting trust. But, as the findings 40 Trusts & estaTeS / trustsandestates.com November 2013 Committee REpoRt: iNvEstments feature: FiDuCiary ProfessioNs of the master make plain, no trust ever came into revealing Conduct existence.5 In the Colorado case, Estate of Daniels, a grantor who executed a trust agreement naming six equal residu- The upshot for fiduciaries and advisors two gener- ary beneficiaries signed a will on the same day naming ations later: parol evidence—that is, evidence outside the trust as the residuary beneficiary. But, the grantor of a trust document itself—can be used to establish an further instructed that, “[i]f the trust created by said instrument’s validity; or here, whether it was intend- agreement is not in effect at my death,” then the residu- ed by the parties to have a binding effect on them. ary beneficiary under her will would be one of the trust’s The result may seem aberrant, but it’s not a one- residuary beneficiaries.11 off. Continuing the Massachusetts line of cases to this Evidence of the grantor’s conduct before and after effect, in Ecclesiastes 3:1, Inc. v. Cambridge Sav. Bank,6 signing the trust document, as well as other back- the court held that a publicly recorded notice of a ground facts and circumstances, led the trial court to 100-year lease had no effect in a later title dispute find that she didn’t intend to create a trust. Among because the real purpose for recording the notice was to this evidence: avoid a local rent control ordinance, and the purchaser at foreclosure was granted possession over the claims of • The primary drafting attorney was married to anoth- an assignee under the lease. While the foreclosure pur- er of the trust’s six residuary beneficiaries, but didn’t chaser could well have prevailed under the traditional typically handle trust or estate matters. The primary rules governing secured transactions, the trial judge also permitted evidence, in the form of affidavits from the parties to the purported lease and an attor- ney involved in the transaction, stating that: (1) the in Estate of Daniels, evidence of the 100-year lease never existed, (2) the notice of lease wasn’t intended to constitute the lease, and (3) the notice was grantor’s conduct before and after recorded to address concerns about whether the rent control ordinances might affect the buyer’s proposed signing the trust document led the conversion of the property to cooperative apartments. “A person is competent to testify as to his own intent,” held trial court to find that the grantor the Suffolk County Appeals Court, and in a summary judgment proceeding can submit an “affidavit which didn’t intend to create a trust. shows what he did not intend.”7 The court cited Porreca for the proposition that, when a party attempts “not to vary or contradict [the] terms [of an instrument] but, drafter, therefore, engaged another attorney to help rather, to challenge its very existence,” the parol evidence draft the trust. The primary drafter even paid for the rule is inapplicable.8 services of the second attorney, yet the second attor- Similarly, parol evidence was admitted in a third ney had no contact with the grantor. The primary Massachusetts case, Fine v. Cohen,9 including testimony drafter advised the grantor that merely signing the from the grantor’s attorney about the grantor’s intent in trust document wouldn’t “activate” it and that to do creating the trust and transferring property to it. The so, the grantor would first have to fund the trust and attorney would have testified that the trust was a vehicle appoint a co-trustee.12 to convey appreciated property without immediate tax cost and neither created a traditional trust nor imposed • These conversations between the primary drafting any responsibilities on the named trustees. Under the lawyer and the grantor “were based on the assump- attorney’s retelling, his client, who was incapacitated tion that the trust did not exist and centered on [the by the time of trial, told him he wished to convey his grantor’s] concern over whether a trust should be interest in realty without incurring a capital gain. The created.”13 appellate court directed that this testimony be admitted because it could bear on the determination of whether • The grantor didn’t fill out the property schedules the trust document actually created binding legal obliga- attached to the trust document, so she never funded tions among the parties.10 the trust.14 November 2013 Trusts & estaTeS / trustsandestates.com 41 Committee REpoRt: feature: FiDuCiary ProfessioNs • Though the trust document contained a space for the Mum’s the Word co-trustee (the lawyer’s wife and grantor’s relative) to At issue in Palozie v. Palozie,19 meanwhile, was whether sign, the co-trustee never signed it. a Connecticut grantor who died intestate intended for an executed trust instrument and deed to govern • The grantor gave the trust document to her lawyer the disposition of her real property, when there was “to wait for further directions on it,”15 yet treated the no evidence the decedent ever disclosed the nature will differently, placing it in her safe deposit box. of either document to any third party. After invit- ing her grandson and his wife to her home, Sophie • No evidence was proffered that the grantor ever noti- Palozie signed, and they witnessed, a trust instrument fied any beneficiaries that the trust existed. by which she apparently appointed herself trustee to hold her real property for the benefit of her son (the witness’ father), who lived on the property in a trailer. They also witnessed her signature on a quit- The Connecticut supreme Court has claim deed purporting to transfer the real property to herself as trustee. Neither witness understood the determined that a failure to disclose nature of these documents, and Sophie didn’t share the existence of the documents or the arrangement a trust is evidence of a grantor’s with anyone else, locking the documents away in her home to be discovered only after her death. Neither intent not to create a trust.