Trusts; Estate Administration

In re The Valma M Hanson Revocable Trust No 103-83-1, 779 NE2d 1218 (Ind Ct App 2002).

Facts: In 1992, Hanson formed a trust, which provided that upon her death, the real estate then held in the trust would be distributed to Bergstrom, while the balance of the assets would be divided according to specified percentages among nine persons and a church. The trust instrument specified that it would be construed, regulated, and governed according to the laws of Illinois. After Hanson's death in 1998, Bergstrom, as trustee, allocated the payment of taxes and expenses exclusively to the non-real estate assets. After Bergstrom distributed to himself the real estate and paid the taxes, no property was available for distribution to the residual beneficiaries. The residual beneficiaries brought a claim asserting that Bergstrom violated the terms of the trust by failing to apportion the federal estate tax and Indiana inheritance tax against all of the property in the trust. Bergstrom appealed the trial court's denial of his motion to dismiss for failure to state a claim.

Holding: Affirmed. Both Illinois and Indiana look at the plain language of the instrument to determine the settlor's intent when construing a trust. Illinois law provides that expenses of the administration are borne by the residuary estate in the absence of a contrary indication in the instrument. The trust authorizes Bergstrom to pay the taxes due by charging them generally against the principal of the trust estate that was included in the settlor's estate for Federal estate tax purposes. Hanson demonstrated her intent in the instrument by providing that the taxes be charged generally against the principal of the trust included in her estate, which included the real estate. Because Hanson showed a contrary intention in the trust instrument, the apportionment of payment of taxes across all of the assets in the trust is consistent with Illinois law. Therefore, the trial court did not err in denying Bergstrom's motion.

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