In re Trust D of Darby

IN THE SUPREME COURT OF THE STATE OF KANSAS

103,108


IN THE MATTER OF TRUST D CREATED UNDER THE LAST WILL AND TESTAMENT OF
HARRY DARBY.

SYLLABUS BY THE COURT

1.

The Internal Revenue Service is not bound by modifications to an irrevocable trust
instrument that have been approved by a district court unless they also have also been
approved by the highest court of the state.

2.
We have de novo review of cases decided on the basis of documents and stipulated
facts. We also have unlimited review when an appeal requires that we construe and apply
Kansas statutes.

3.
A support trust exists when the trustee is required to inquire into the basic support
needs of the beneficiary and to provide for those needs.

4.
K.S.A. 2009 Supp. 58a-411(b) permits modification of an irrevocable trust if all
qualified beneficiaries consent and the modification is not inconsistent with a material
purpose of the trust.

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5.
Material purposes of a trust instrument are not readily to be inferred. A finding of
such a purpose generally requires some showing of a particular concern or objective on
the part of the settlor, such as circumstantial or other evidence indicating that the trust
arrangement represented to the settlor more than a method of allocating the benefits of
property among multiple intended beneficiaries or a means of offering to the beneficiaries
(but not imposing on them) a particular advantage.

6.
In Kansas, a spendthrift provision is presumed to constitute a material purpose of
the trust.

7.
A spendthrift trust has been defined as a trust created to provide a fund for the
maintenance of a beneficiary and at the same time to secure the fund against his or her
improvidence or incapacity. Provisions against alienation of the trust fund by the
voluntary act of the beneficiary or by his or her creditors are its usual incidents.

8.
Under the facts of this case, a proposed modification to increase the specified
annual distribution payable to the first generation beneficiary of an irrevocable
spendthrift trust is inconsistent with a material purpose of the trust to preserve excess
funds for future generation beneficiaries.

9.
K.S.A. 58a-412(a) permits modification of an irrevocable trust if, because of
circumstances not anticipated by the settlor, modification will further the purposes of the
trust.

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10.
Courts have generally been more willing to allow modification of an irrevocable
trust 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. Kansas courts have allowed
such modifications in precisely such unanticipated circumstances.

11.
Upon a finding of unanticipated circumstances, the court must further determine
whether a proposed or contemplated modification or deviation of the trust would tend to
advance or detract from the trust purposes. It is appropriate that courts act with particular
caution in considering a modification or deviation that can be expected to diminish the
interests of one or more of the beneficiaries in favor of one or more others.

12.
Under the facts of this case, we conclude that funding an increase in the first
generation beneficiary's monetary distribution will inherently frustrate the intention of the
settlor for income growth as well as jeopardize—or at least reduce—distributions to the
second and third generation of beneficiaries. For these reasons, the proposed
modification to increase the first generation beneficiary's annual distribution cannot be
validated based on an unanticipated circumstance under K.S.A. 58a-412.

13.
K.S.A. 58a-416 permits modification of a trust to achieve the settlor's tax
objectives if consistent with his or her probable intent, but a modification of trust
provisions to achieve tax benefits cannot be validated when it would alter the dispositive
provisions of the trust.

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Appeal from Wyandotte District Court; DAVID W. BOAL, judge. Opinion filed June 25, 2010.
Judgment of the district court is reversed and remanded with directions.

Jeffrey R. King and Phillip Johnson, of Overland Park, were on the brief for appellant Marjorie D.
Alford.

GREENE, J.: In this appeal we must decide the propriety of the district court's order
approving modifications to an irrevocable testamentary trust created by the Last Will and
Testament of Harry Darby, deceased. Marjorie D. Alford, a daughter of Darby and a first
generation beneficiary of the subject trust, was successful in achieving an order of the
district court approving the modifications, but she has perfected this appeal because the
Internal Revenue Service (IRS) is not bound by such modifications unless approved by
the highest court of the state. See Commissioner v. Estate of Bosch, 387 U.S. 456, 18 L.
Ed. 2d 886, 87 S. Ct. 1776 (1967); In re Estate of Keller, 273 Kan. 981, 985-86, 46 P.3d
1135 (2002). For this reason, we granted Alford's motion to transfer the case from the
Court of Appeals pursuant to K.S.A. 20-3017.

FACTUAL OVERVIEW

On July 15, 1986, Darby executed his last will and testament, which established
several trusts for the benefit of his daughters and sister. The only trust at issue in this
appeal is that denominated by his will as "Trust D," which was to be established at
Darby's death by a specific bequest in the amount of $240,000 to the trustee, The
Commercial National Bank of Kansas City, to be administered and distributed as follows:

"A. The trustee shall, at convenient intervals but not less frequently than
annually, pay an amount (as defined in the next sentence) each taxable year from Trust D
to my daughter, MARJORIE D. ALFORD, if she is living at the time for the payment of
such amount. The amount to be paid from Trust D in any taxable year as provided above
may be paid in such installments during such year as the trustee deems advisable and
shall be in the amount of Twelve Thousand Dollars ($12,000.00). I strongly recommend
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(but this recommendation shall not be deemed to be mandatory) that the payments to be
made from Trust D shall be in monthly installments which shall be as nearly equal as
possible. The amount to be paid shall be paid first out of the net income derived from
Trust D and then out of the principal of Trust D if said net income should not be
sufficient. Any excess income not needed to make the above payments shall be added to
the principal of Trust D at such times as the trustee deems advisable.
"B. Upon the death of the last to die of my daughter, MARJORIE D. ALFORD,
and me, the funds then comprising Trust D, shall remain in trust, and thereafter the
trustee shall continue to pay at convenient intervals the sum of Four Thousand Dollars
($4,000.00) each to the three daughters of MARJORIE D. ALFORD, namely, DIANE
CHRISTINE MUNKSGAARD, MARY CUBBISON RESTER, and JEAN ANNE
ALFORD, for their lifetime, and upon the death of each, the trustee shall pay one-third of
the funds then comprising Trust D to the issue per stirpes of the decreased daughter of
MARJORIE D. ALFORD."

In addition to these provisions, the will contained numerous provisions applicable
to all of the trusts so created, including the following provision restricting the powers of
the beneficiaries:

"J. During the entire duration of the trust, each and every beneficiary of the trust
shall be without power, voluntarily or involuntarily, to sell, mortgage, pledge,
hypothecate, assign, alienate, anticipate, transfer, or convey any interest in the trust estate
or the property constituting the trust estate or the income therefrom until the same is
actually paid into his or her hands, and no interest of any beneficiary in, or claim to, the
trust estate or any part of creditors of any beneficiary, or to judgment, levy, execution,
sequestration, attachment, bankruptcy proceedings or other legal or equitable process."

In January 1987, Darby executed a codicil to his last will and testament, which
increased the amount of the bequest establishing Trust D to $480,000, increased the
amount of the annual distribution to Alford to $24,000, and increased the annual
distributions to the second generation beneficiaries to $8,000 each. No further changes to
the trust were effected by this codicil. Darby died 9 days after executing this codicil.
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On July 27, 2009, Alford filed her "Petition for Modification of Testamentary
Trust under the Kansas Uniform Trust Code" seeking modifications to the trust
provisions as follows:

"Trust D shall be held, administered and distributed as follows:
"A. The Trustee shall distribute at convenient intervals, but not less frequently
than annually, an amount equal to Forty Thousand Dollars ($40,000) annually to my
daughter, MARJORIE D. ALFORD. Beginning January 1, 2010, this amount shall by
adjusted on January 1 of each year by the same percentage change in the Consumer Price
Index—Urban Wage Earners and Clerical Workers (CPI)— US City Average ALL
ITEMS 1967-100 since January 1 of the prior year. I strongly recommend, but do not
require, that such payments be made in monthly installments which shall be as nearly
equal as possible. The amount to be paid shall be paid first out of the net income derived
from Trust D and then out of the principal of Trust D if such net income is not sufficient.
Any net income not so distributed shall be accumulated and annually added to principal.
"B. Upon MARJORIE D. ALFORD's death, the assets then held in Trust D shall
be distributed to such federal or state taxing authorities for payment of estate taxes as
MARJORIE D. ALFORD may appoint by a Will or other signed writing that is
acknowledged before a notary public specifically referring to this power of appointment.
In default of appointment or insofar as an appointment is not effective, the Trustee shall
divide the Trust D into a number of equal shares so as to create one equal share for each
of DIANE CHRISTINE MUNKSGAARD, MARY CUBBINSON RESTER and JEAN ANNE
PETRICK who is then living and one equal share for each of DIANE CHRISTINE
MUNKSGAARD, MARY CUBBINSON RESTER and JEAN ANNE PETRICK who is then
deceased but who has descendants then living. Each share that is created for one of
DIANE CHRISTINE MUNKSGAARD, MARY CUBBINSON RESTER or JEAN ANNE PETRICK
who is then deceased shall be distributed to the deceased daughter's descendants then
living, per stirpes. Each share that is created for one of DIANE CHRISTINE MUNKSGAARD,
MARY CUBBINSON RESTER OR JEAN ANNE PETRICK who is then living shall be
distributed as follows:

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"1. The Trustee shall distribute at convenient intervals, but not
less frequently than annually, an amount equal to Eight Thousand
Dollars ($8,000) annually to the daughter of MARJORIE D. ALFORD for
whom the trust share was created. The amount to be paid shall be paid
first out of the net income derived from Trust D and then out of the
principal of Trust D if such net income is not sufficient. Any net income
not so distributed shall be accumulated and annually added to principal.
"2. Upon the death of the daughter of MARJORIE D. ALFORD for
whom the trust share was created, the assets then held in the daughter's
trust share shall be distributed to the daughter's descendants then living,
per stirpes."

Alford's petition alleged that her sole source of income "was her $24,000 annual
distribution from Trust D" and that the "parties have determined that this annual sum is
no longer sufficient to satisfy [her] basic living expenses." The petition also alleged that
the modification to Article VII, paragraph B, was "appropriate to achieve Mr. Darby's tax
objectives."

All of the identified qualified beneficiaries of Trust D voluntarily entered an
appearance, waived notice to the hearing, and consented to the proposed modifications.
No further facts were presented to the district court, and no evidentiary hearing was
requested or conducted.

The district court approved the modifications, concluding in material part:

"4. The Court is authorized, under K.S.A. § 58a-411, to modify the Trust as set
forth in the Petition because all of the qualified beneficiaries of Trust D consent to such
modification and such modification is not inconsistent with a material purpose of Trust
D. The Court is also authorized, under K.S.A. § 58a-412, to modify the Trust as set forth
in the Petition because Trust D is not providing enough income to satisfy the basic living
needs of Petitioner Marjorie D. Alford, and therefore circumstances exist that were not
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anticipated by the settler of Trust D, and modification will further the purposes of Trust
D. Finally, the Court is authorized, under K.S.A. § 58a-416, to modify the Trust as set
forth in the Petition because, under the terms that presently govern the administration of
Trust D, at Petitioner Marjorie D. Alford's death a significant amount of federal
generation-skipping transfer tax may be unnecessarily incurred by Trust D, and therefore
modification will achieve the settlor's likely tax objectives, in a manner that is not
contrary to the settlor's probable intention."

STANDARD OF REVIEW

To the extent facts were alleged to the district court, there was no dispute as to
those facts, and the court decided the matter on such undisputed facts and the written
instruments. We have de novo review of cases decided on the basis of documents and
stipulated facts. See Ward v. Ward, 272 Kan. 12, 30 P.3d 1001 (2001); Lightner v.
Centennial Life Ins. Co., 242 Kan. 29, Syl. ¶ 1, 744 P.2d 840 (1987). The sole question
before us is whether Kansas law supports the actions of the district court in approving the
modifications to the trust instrument; this requires that we construe and apply Kansas
statutes, thus also calling for unlimited review by this court. Double M. Constr. v.
Kansas Corporation Comm'n, 288 Kan. 268, 271, 202 P.3d 7 (2009). We are not bound
by the determination of the district court. In re Estate of Haneberg, 270 Kan. 365, 371,
14 P.3d 1088 (2000).

OVERVIEW OF APPLICABLE STATUTES

As statutory authority for the proposed modifications, Alford urges us to
consider—and the district court relied upon—the following statutes within the Kansas
Uniform Trust Code, K.S.A. 58a-101 et seq.

K.S.A. 2009 Supp. 58a-411(b) and (c):
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"(b) A noncharitable irrevocable trust may be terminated upon consent of all of
the qualified beneficiaries if the court concludes that continuance of the trust is not
necessary to achieve any material purpose of the trust. A noncharitable irrevocable trust
may be modified upon consent of all of the qualified beneficiaries if the court concludes
that modification is not inconsistent with a material purpose of the trust.
"(c) A spendthrift provision in the terms of the trust is presumed to constitute a
material purpose of the trust."

K.S.A. 58a-412(a):
"(a) The court may modify the administrative or dispositive terms of a trust or
terminate the trust if, because of circumstances not anticipated by the settler, modification
or termination will further the purposes of the trust. To the extent practicable, the
modification must be made in accordance with the settlor's probable intention."

K.S.A. 58a-416:
"To achieve the settlor's tax objectives, the court may modify the terms of a trust
in a manner that is not contrary to the settlor's probable intention. The court may provide
that the modification has retroactive effect."

DID THE DISTRICT COURT ERR IN APPROVING THE MODIFICATION INCREASING THE
ANNUAL DISTRIBUTION TO ALFORD?

Alford contends on appeal that the proposed modification (Article VII, paragraph
A) increasing her annual distribution amount is necessary to satisfy her basic living
expenses and that this increase is consistent with Darby's "clear" intent "to ensure
sufficient trust distributions to support Ms. Alford's basic needs." Alford points to no
specific trust provisions to support this suggestion as to Darby's intent, but she argues that
the doubling of her annual distribution in the will's codicil is indicative of Darby's intent
to "properly support" Alford.

Applying Kansas law, a modification of this nature may not be approved despite
consent of all beneficiaries unless it "is not inconsistent with a material purpose of the
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trust," K.S.A. 2009 Supp. 58a-411(b), or "because of circumstances not anticipated by the
settlor, modification . . . will further the purposes of the trust." K.S.A. 58a-412.

Inconsistent with a Material Purpose?

First, we disagree that the "basic support" of Alford was a "material purpose" of
this trust. Darby employed no language indicating any such desire, despite the ease of
inserting a clear directive to the trustee in this regard, or to permit an invasion of
principal by ascertainable standards for her basic support needs. This was clearly not a
support trust. See Miller v. Kansas Dept. of S.R.S., 275 Kan. 349, 354, 64 P.3d 395
(2003) (support trust exists when trustee is required to inquire into the basic support
needs of the beneficiary and to provide for those needs). And we are not inclined to infer
a material purpose to support Alford's basic needs when the express terms fail to indicate
any such purpose.

"Material purposes are not readily to be inferred. A finding of such a purpose
generally requires some showing of a particular concern or objective on the part of the
settlor, such as concern with regard to a beneficiary's management skills, judgment, or
level of maturity. Thus, a court may look for some circumstantial or other evidence
indicating that the trust arrangement represented to the settlor more than a method of
allocating the benefits of property among multiple intended beneficiaries, or a means of
offering to the beneficiaries (but not imposing on them) a particular advantage."
Restatement of the Law Third, Trusts § 65, comment d, p. 477 (2001).

We also disagree that the changes effected by the will's codicil are indicative of
any intent to support Alford's basic needs. In the codicil executed within 6 months of the
original will, Darby merely doubled his trust bequest as well as all the beneficiaries'
annual distribution amounts. No language or circumstantial evidence supports an
inference to create a support trust.

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Whereas no direct or circumstantial evidence has been offered to indicate that a
material purpose of the trust was to provide for Alford's basic needs, we note that a
specific trust provision does substantially restrict the beneficiaries' rights and interests;
this provision has been characterized as a spendthrift provision. In Kansas, a spendthrift
provision is presumed to constitute a material purpose of the trust. K.S.A. 2009 Supp.
58a-411(c). Kansas law is in material contrast to the Uniform Trust Code, which
specifically negates any such presumption. See Unif. Trust Code, § 411(c), 7C U.L.A.
498 (2004) (made optional in 2004).

A spendthrift trust has been defined as a trust created to provide a fund for the
maintenance of a beneficiary and at the same time to secure the fund against his or her
improvidence or incapacity. Provisions against alienation of the trust fund by the
voluntary act of the beneficiary or by his or her creditors are its usual incidents. In re
Estate of Somers, 277 Kan. 761, 764, 89 P.3d 898 (2004).

Language nearly identical to Article IX, paragraph J (quoted above) of Darby
Trust D was characterized as a spendthrift provision by this court in Somers. Notably,
this court in Somers construed the spendthrift trust in a manner that prohibited a
modification to enable distributions to life beneficiaries in excess of the specific monthly
amount stated in the trust instrument, even though the additional distributions would be
paid from the remainder interest. 277 Kan. at 771-72. Following Somers, the proposed
modification at issue here would be inconsistent with the material purpose manifested by
the spendthrift provision.

We conclude that the modification increasing the distribution amount to a first
generation beneficiary (Alford) would be inconsistent with the obvious material purpose
to preserve sufficient income and principal to fund the distributions to beneficiaries after
Alford's death. Due to the limited factual presentation at district court, we have no way
to determine whether the proposed increase in Alford's share may exhaust the trust's
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corpus to the extent that amounts specified to surviving beneficiaries cannot be funded,
but any reduction in the corpus would seem to be inconsistent with the purpose to have
sufficient funds to continue specified distributions to the second and third generation of
beneficiaries. See Restatement Third, Trusts § 66, comment b, p. 494. It is beyond
dispute that any increase in the annual distribution to Alford will reduce the remainder in
trust to the third generation beneficiaries, who are to receive "one-third of the funds then
comprising Trust D." Moreover, the increase is contrary to Darby's express direction to
add to the principal any excess income not needed for the specified distributions.

For all of these reasons, we conclude that the proposed modification increasing
Alford's annual distribution is inconsistent with material purposes of the trust and cannot
be validated under K.S.A. 2009 Supp. 58a-411(b).

Circumstances Not Anticipated by the Settlor?

Under K.S.A. 58a-412, the subject modification increasing Alford's annual
distribution may be approved if, because of circumstances not anticipated by the settlor, it
would further the purposes of the trust and can be made in accordance with the settlor's
probable intention. On appeal, however, Alford does not argue that there were
circumstances not anticipated by Darby; indeed, there is no evidence in the record that
indicates that Darby failed to anticipate that the value of future distributions would be
devalued by routine inflation. In fact, he was willing to permit principal to be invaded for
purposes of the specified distributions, but he recognized that income growth alone could
someday exceed that necessary for the distributions, and in this event, he directed that it
be added to the principal rather than to increase the distribution to Alford.

Courts 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
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diminution in value of a trust asset. See, e.g., In re Nobbe, 831 N.E.2d 835, 843 (Ind.
App. 2005). Indeed, our appellate courts have allowed such modifications in precisely
such unanticipated circumstances. See, e.g., Somers, 277 Kan. at 770 (dramatic growth
in the Trust's corpus was "'a unique and unusual set of facts'"); In re Harris Testamentary
Trust, 275 Kan. 946, 959, 69 P.3d 1109 (2003) (change in case law could not have been
anticipated by settler); White v. Kansas Health Policy Authority, 40 Kan. App. 2d 971,
981, 198 P.3d 172 (2008) (change in legislation requiring additional language for trust to
remain a supplemental needs trust). No such truly unforeseen circumstance has been
shown here.

More important, however, is that the proposed increase has not been shown to be
practicable given Darby's probable intention. Again, we have no basis in the record to
determine what the impact of the increase would be on the corpus of the trust. Given the
inherent diminution of the trust's overall value in order to fund the proposed increase, we
must consider that Darby's intent to flow excess income to future beneficiaries would be
frustrated by the increase.

"[U]pon a finding of unanticipated circumstances, the court must further determine
whether a proposed or contemplated modification or deviation would tend to advance (or,
instead, possibly detract from) the trust purposes. This latter inquiry is likely to involve a
somewhat subjective process of attempting to infer the relevant purpose or purposes of a
trust from the general tenor of its provisions and from the nature of the beneficial
interests, together with the family or personal relationships involved in the trust. In this
process, it is appropriate that courts act with particular caution in considering a
modification or deviation that can be expected to diminish the interests of one or more of
the beneficiaries in favor or one or more others." (Emphasis added). Restatement Third,
Trusts § 66, comment b, p. 494.

We are simply not convinced that devaluation due to normal inflation should be
considered an unanticipated circumstance where the settlor has specified on two separate
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occasions that the distribution be measured by a fixed dollar amount. If Darby's codicil
and its increase in annual distribution amount (executed only 6 months after his execution
of the will) indicates an objective to provide more income for Alford's basic needs—as
suggested by Alford on appeal, why would not we find in that codicil an escalator to
protect against future devaluation—just like the escalator contained in the proposed
modification?

In the last analysis, Darby's recognition that income might exceed the amount
needed for the annual distribution, and that any such excess be added to principal rather
than fund larger distributions, is antithetical to any purported failure to anticipate the
normal inflationary devaluation of the specified amount. We conclude that funding an
increase will inherently frustrate his intention for this growth, as well as jeopardize—or at
least reduce—distributions to the second and third generation of beneficiaries. For these
reasons, the proposed modification to increase Alford's annual distribution cannot be
validated as an unanticipated circumstance under K.S.A. 58a-412.

DID THE DISTRICT COURT ERR IN APPROVING THE MODIFICATION GRANTING A LIMITED
TESTAMENTARY POWER TO ALFORD?

Alford contends on appeal that the second modification to the trust (Article VII,
paragraph B) achieves favorable tax treatment "consistent with Senator Darby's intent."
See K.S.A. 58a-416. By granting Alford a limited testamentary power of appointment,
the apparent intent of this modification was to vest the assets of the trust in Alford's
taxable estate, thus subjecting them to federal estate tax rather than federal generation-
skipping transfer tax (GSTT). Because the exemption for federal estate taxation exceeds
the value of the trust assets, the modification was apparently intended to minimize federal
tax liability.

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At the outset, we note the curious nature of the power granted in this proposed
modification. The language requires that the assets of the trust "shall be distributed to
such federal or state taxing authorities for payment of estate taxes as [Alford] may
appoint by a will [or otherwise]." The language then states that in default of such
appointment (or if ineffective), the trust shall be divided into equal shares for each of the
second generation beneficiaries. Although Alford claims on appeal that this language
creates a "general testamentary power of appointment," we disagree. Instead, Alford
would be granted only a limited power to appoint federal or state taxing authorities to
receive a distribution for payment of estate taxes. The taxes to be paid are not limited
only to Alford's estate taxes, but rather could include generically any and all federal and
state estate taxes of anyone. We also fail to see any logical nexus whatsoever between
the limited power granted and the specified consequences of default of such
appointment—division of the trust into shares for each of the second generation
beneficiaries. Finally, we find it curious that Alford seeks avoidance of the federal GSTT,
which has been eliminated effective December 31, 2010. Pub. L. No. 107-16 § 501, 115
Stat. 38, 69 (2001); see 26 U.S.C. § 2601(2006) et seq. Notwithstanding these curiosities,
we analyze the validity of the proposed modification.

The tax problem addressed by the proposed modification is exposure to the GSTT.
As described by Alford's brief on appeal:

"As drafted, the Will failed to account for the generation-skipping transfer tax ('GSTT').
See 26 U.S.C. § 2601, et seq. As a general rule (which applies here), the federal transfer
tax system subjects assets to estate tax in every generation. Otherwise, assets fall under
the GSTT. Id. 'The generation-skipping transfer tax is designed to tax these transfers of
accumulated wealth to successive generations in much the same way that a gift or estate
tax would have done if the property had been transferred outright by gift or inheritance.'
In re Estate of Tubbs, 21 Kan. App. 2d 395, 399, 900 P.2d 865[, rev. denied 258 Kan.
858] (1995) . . . . As such, the GSST 'impos[es] a [45%] tax on transfers which skip
generations.' Id. See also 26 U.S.C. § 2641(a) . . . .
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"At the time of Senator Darby's death, the GSTT was subject to a $1 million
exemption for the entirety of his estate. [Citation omitted.] Under the Will, Mr. Darby left
over $7 million in separate trusts for his children and, upon their deaths, for their
children. All of these trusts including Trust D, were designed to 'skip' estate taxation in
the child's generation. Id. The GSTT is triggered, therefore, when the trust funds pass to
the second generation of beneficiaries (in the case of Trust D, Ms. Alford's children). Id.
See also 26 U.S.C. § 2623 (same). Thus, under the Will as originally drafted, a 45%
GSTT would apply to the remaining value of Trust D upon Ms. Alford's death, with only
minimal set off for its pro rata portion of the $1 million GSTT exemption. [Citation
omitted.]"

In other words, Alford argues that when the Darby Trust D was created,
generation skipping may have been a vehicle to avoid federal estate taxation on the trust
assets passed to each generation, but changes to both the federal GSTT and the federal
estate tax exemption have now turned the table and optimal tax minimization would
avoid the generation skip and expose the assets to estate taxation because they do not
exceed the increased exemption. Applying K.S.A. 58a-416, would such a change
"achieve the settlor's tax objectives" in a manner that is "not contrary to the settlor's
probable intent"?

Questions of this nature have puzzled courts across the nation. Treatise law
acknowledges that some courts have been sympathetic to a postmortem request to a
modification that achieves more favorable tax treatment, but to say that such a request
achieves the settlor's objectives in a way that is not contrary to probable intent can be a
stretch.

"Indeed, many of the cases pretty plainly boil down to nothing more than an attempt to
obtain, through post-mortem litigation, the benefits of better, or more sophisticated, estate
planning than the settler was able or willing to procure while alive. So, though it is
possible to rationalize each of these cases as merely correcting 'mistakes,' in many, the
petitioner is plainly asking the court to rewrite a document whose dispositive terms are
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exactly the way the settler intended them to be, simply to improve its tax efficiency. It is
hardly surprising, then, that the courts sometimes balk at tax-driven reformations."
. . . .
". . . Proof that there was a more tax-efficient way to dispose of the settlor's
property, therefore, is and should be far short of what is necessary to justify reformation
of a governing instrument, even if there is also proof that the settler wanted to 'minimize
taxes.' Under current law, it is always possible not just to 'minimize' the federal estate
tax, but to eliminate it altogether, by leaving everything, in appropriate ways, to either a
surviving spouse or a charity. Yet a great many people, who may well think of
themselves as wanting to 'minimize taxes,' do not do so; they deliberately dispose of their
property in ways that will not 'zero out' their taxes. When the claim is later made that the
arrangement was not tax-efficient, it may be that the only way to make it more tax-
efficient would have involved different dispositive provisions. The courts are quite
naturally less inclined to do this." 5 Scott and Ascher on Trusts §33.5, pp. 2193-95 (5th
ed. 2008).

See Bogert and Radford, Trusts & Trustees § 994, pp. 196-205 (3d ed. 2006) (and cases
collected therein).

Here, Alford does not point us to any specific provision of the trust that indicates
Darby's tax objectives or probable intent relative thereto. Alford argues on appeal only
that "[c]onsistent with Senator Darby's intent, the district court's restatement of the will
would also lower Trust D's future tax burden." It may be difficult to divine Darby's
objectives, but it is not difficult to see that the requested modification could seriously
jeopardize his overall intent manifested within the instrument, and this boundary may not
be crossed. See Bogert and Radford, Trusts & Trustees § 994, pp. 197-98 ("power to
modify the tax related provisions . . . is limited by the requirement that the settlor's
overall intent, especially the dispositive provisions, not be disturbed by the
modification").

17

Regarding Darby's tax objectives, we perceive within the four corners of the will
nothing more than an oblique idea that taxes should be minimized or avoided by
restricting or directing certain investment practices by the trustee as a part of Article IX.
As to Trust D, however, there is merely a straightforward generation skipping bequest
subject to a spendthrift clause. The generation skipping design may have been intended
to minimize federal estate taxes, but we decline to believe that Darby failed to understand
it would expose the trust to the GSTT.

When Darby designed and executed his original will, the 1976 Tax Reform Act
imposed the GSTT on trusts or similar arrangements having beneficiaries in more than
one generation below that of the transferor, subject only to a $250,000 "grandchild
exclusion." Pub. L. No. 94-455 §§ 2006-2622, 90 Stat. 1520, 1879 (1976); grandchild
exclusion at I.R.C. § 2613(b)(6) (repealed 1986). The Tax Reform Act of 1986, effective
in October 1986, retroactively repealed the original GSTT and substituted a flat tax rate
on such transfers, subject to a new exemption of $1 million per transferor. Pub. L. No.
99-514 §§ 1431-33, 100 Stat. 2085, 2717 (1986) exemption at I.R.C. § 2631; see 26
U.S.C. § 2601 (2006) et seq. As recognized by most commentators at the time of the
1986 enactment, "there appear to be several methods by which one can avoid the full
impact of the new [GSTT]." See, e.g., Plant and Wintriss, Generation Skipping Transfer
Tax, 17 U. Balt. L. Rev. 271, 272 (Winter 1988).

Whether we examine Darby's original will or his codicil, it is clear that he could
have done a far better job of tax planning had he desired to avoid the GSTT implications
for Trust D. This is especially true of his later testamentary device, the codicil, which
ratified his dispository scheme despite the changes to the GSTT effective months prior to
his execution of the codicil and which created an even more burdensome tax impact for
his grandchildren. Because it is just as likely that Darby intended exposure to the GSTT
for his grandchildren and avoidance of federal estate tax on the death of Alford as that he
more generally sought to avoid or minimize overall taxation, there is no reason to believe
18

that the requested modification somehow "achieves his tax objectives." In fact, it is just
as likely that the proposed modification defeats his precise tax objective for Trust D.

An easier call, however, is that the proposed modification would seriously
jeopardize Darby's overall intent for Trust D. In distributing all assets at Alford's death to
whichever taxing authority she may appoint to pay anyone's federal or state estate taxes is
not only directly contrary to the spendthrift clause prohibiting such powers in
beneficiaries, but it must be seen as completely destroying his intent to preserve assets for
the second and third generations. Moreover, if the grant is construed as a general power
of appointment as characterized by Alford in her appellate brief, the proposed
modification may expose the trust assets to the claims of Alford's creditors in direct
contravention to the express terms of the trust. See Restatement (First) of Property § 329
(1940).

In either event, we stand with a majority of courts in holding that a modification of
trust provisions to achieve tax benefits cannot be validated when it would alter the
dispositive provisions of the trust. See, e.g., Matter of Estate of Branigan, 129 N.J. 324,
336-37, 609 A.2d 431 (1992) (court prohibited modification to power of appointment
because it would alter the dispositive provisions and grandchildren would face possibility
of losing inheritance); Bogert and Radford, Trusts & Trustees § 994, pp. 197-98.

Finally, we note that the limited power of appointment granted to Alford in the
proposed modification may not have succeeded in achieving the desired tax result. We
express no opinion in the matter but note in passing that the curious attempt to vest the
assets in Alford for payment of estate taxes may not have satisfied the IRS that vesting
sufficiently occurred to avoid the GSTT. Moreover, we note that the entire GSTT scheme
is currently in a state of uncertainty, given scheduled expiration and unknown
reinstatement. See, e.g., McCouch, The Empty Promise of Estate Tax Repeal, 28 Va. Tax
Rev. 369 (Fall 2008).
19

20


In summary, we conclude that the proposed modifications to the Darby Trust D
would contravene applicable Kansas law. The district court must be reversed and this
matter remanded with directions to invalidate the modifications.

Reversed and remanded with directions.

DAVIS, C.J., not participating.
GREENE, J., assigned. 1

1REPORTER'S NOTE: Judge Greene, of the Kansas Court of Appeals, was appointed
to hear case No. 103,108 vice Chief Justice Davis pursuant to the authority vested in the
Supreme Court by K.S.A. 20-3002(c).