Cite as B268326
Filed August 6, 2018, Second District, Div. Three
By Matthew R. Owens
Withers Bergman LLP
Arthur died in 2011, leaving most of his assets in trust for his four children in unequal subtrusts. The trust provided that Arthur’s son, Raymond, was to receive 35% of the trust and that Raymond’s subtrust would include Arthur’s ranch, which was worth $7.2 million at Arthur’s death. The trust also provided that the income tax of any subtrust was to be paid by that subtrust’s beneficiary. In 2014, the ranch sold for $14 million. The trustee allocated proportionately among the beneficiaries the appreciation between the $7.2 million date-of-death value and the $14 million sale price. The trustee also allocated solely to Raymond’s subtrust the $2.3 million in income tax from the sale. When the trustee filed an accounting reflecting these allocations, Raymond objected and contended he should have received the entire net proceeds from the sale, including the appreciation. The probate court approved the trustee’s accounting over Raymond’s objection, and Raymond timely appealed.
The appellate court affirmed. Raymond correctly noted on appeal that the probate court had ruled that his gift was not a residual gift. As a result, Raymond argued, it was a specific gift, which meant he should have received his 35% of the trust, plus the $4.5 million net proceeds from the sale of the ranch. The appellate court determined, however, that the probate court erred when it ruled the gift was other than a residual gift. Despite its mischaracterization of the gift, the probate court still reached the correct result in its ruling on the trustee’s allocation of value and income tax following the sale of the ranch. The trust’s directive to distribute the ranch to Raymond’s subtrust was merely a mechanism for funding his 35% residual gift, assuming Arthur still owned the ranch at death. The trust’s reference to a specific source of funding—the ranch—did not make it a specific gift. Separately, Raymond had to pay the $2.3 million in income tax because the trust contained a clear provision requiring that income tax of a subtrust be paid by that subtrust’s beneficiary.