Who is the Beneficiary’s Spouse?

Take-Away: It pays to use definitions in Wills and Trusts, especially when using words like spouse.

Background: Some Wills and most Trusts are too long in the eyes of the testator or settlor. When the instrument of transfer contains several paragraphs of definitions, that only adds to the document’s length, and the frustration of the testator or settlor, often manifested in the rhetorical question “am I paying you by the word?” That said, definitions can be important to assist a probate court in construing the legal document, or more importantly in avoiding costly probate litigation to construe the document when different meaning can be attached to the use of a word or phrase. One example of when a definition could avoid litigation is the use of the word spouse when a spouse of a beneficiary is named as a contingent or successor beneficiary, in light of the reality that close to 50% of the marriages in this country end in divorce with remarriage following thereafter. A recent example where the debate over the use of the word spouse in a trust brought a family to probate court was a Texas decision.

Texas Decision: Ochse v. Ochse, 2020 Tex.App, LEXIS 8922 (Tex. App. 4^th District, November 18, 2020)

• Facts: Amanda created an irrevocable trust, with some Crummey withdrawal rights, in 2008. The trust was for the principal benefit of her son, Bill, and then Bill’s two children Chloe and Billy. But it was a bit more complicated than that. At the time the trust was created Bill was married to Cynthia. The trust instrument used the language “for my son, my son’s descendants, and my son’s spouse.” Spouse was not defined in the trust instrument.

While the trust instrument expressly referred to Bill, Cynthia and Chloe and Billy in its introduction, throughout the trust instrument, Bill was referred to as the primary beneficiary, Chloe and Billy were referred to as the living descendants of the primary beneficiary, and presumably referring to Cynthia, she was referred to as the primary beneficiary’s spouse. The trust instrument also gave to Bill both a lifetime and testamentary limited power of appointment to appoint trust assets to members of a class that consisted of the primary beneficiary’s descendants and the primary beneficiary’s spouse.

Bill was expressly named as the initial trustee of the trust. If the trust continued for the benefit of Bill’s descendants, then Cynthia was expressly named in the trust as the successor trustee- this is the only other time in the trust instrument where her name actually appeared. Another individual was named as a trustee to succeed Cynthia if she could not act as a fiduciary. In 2012 Bill and Cynthia divorced after 30 years of marriage. In 2015 Bill married Carol. Let the games begin!

• Litigation: In 2018, starting what later seemed like a professional wrestling event when everyone jumped into the ring at the same time, Chloe and Billy sued their father, as trustee of the trust, for breach of fiduciary duties. The kids also asked the presiding judge to remove their father as trustee. In their petitions, the kids asked that Cynthia (their mother) be named as an interested party in the litigation (against her former husband.) Cynthia then jumped into the ring with her own petition for a declaratory decision that she, Cynthia, was the “primary beneficiary’s spouse”, or “my son’s spouse.” Just like professional wrestling, Cynthia’s petition filed with the court promptly brought Carol out of the locker room, running down the aisle, and jumping into the ring with her own petition to intervene to seek a judicial determination that she, Carol, not Cynthia, was the “primary beneficiary’s spouse”, or “my son’s spouse” as a replacement trust beneficiary to Cynthia. Cynthia and Carol each then filed her own dueling motion for summary disposition.
• Trial Judge: In a bit of a surprise, the trial judge found that Amanda’s trust did not present any ambiguity whatsoever. The judge found that the trust’s language was clear and unambiguous, that the trust only referred to Cynthia, not Carol, as the primary beneficiary’s spouse. That was because Cynthia was Bill’s spouse at the time that the trust was created and funded.
• Appellate Court: The appellate court sustained the trial judge’s finding that only Cynthia was the intended trust beneficiary, not Carol. Like the trial judge, the appellate panel found the trust’s use of the word primary beneficiary’s spouse to not be ambiguous, even though Cynthia was no longer legally  Bill’s spouse and Carol was Bill’s legal

Spouse as Beneficiary:  Not too many trusts are created where a beneficiary’s spouse is named as a remainder beneficiary or successor trust beneficiary. More often a beneficiary’s spouse is a named as potential discretionary distributee of a trust’s income among a class of discretionary beneficiaries, like a dynasty-type of trust. This would be the type of situation where a adding a definition of the use of the word spouse would help guide the trustee.

• Example: June was a beneficiary who was married to Ward at the time the trust was created by Ward’s mother. The trust instrument authorizes discretionary distributions to my son’s spouse. June and Ward later divorce. Ward then remarries Lucy, like the facts in June, no longer married to Ward the principal trust beneficiary, claims that as a discretionary beneficiary of the trust, the trustee is required by the Michigan Trust Code to promptly answer any questions that she has with regard to the trust, as she is still a beneficiary of the trust. [MCL 700.7814(1): Unless unreasonable under the circumstances, a trustee shall promptly respond to a trust beneficiary’s request for information related to the administration of the trust.] The trustee however concludes that June is a former beneficiary and that she no longer a beneficiary since she is no longer married to Ward, i.e. Lucy now is my son’s spouse. The Oschse decision suggests that the trustee’s refusal to respond to June’s inquiry and request for information with regard to the trust’s administration would be incorrect, and perhaps even trigger a finding that the trustee’s refusal to provide information to June breached a fiduciary duty.
• Marital Deduction Trust: A trust like a lifetime QTIP that is intended to achieve the gift and estate tax exemption is not likely to present a problem. Even if the settlor-spouse and the QTIP beneficiary-spouse later divorce, the former beneficiary spouse will still be the lifetime beneficiary of the trust. Otherwise, a divorce that causes the spouse to no longer be the beneficiary of the ‘marital’ trust will be treated as a terminable interest, meaning that the transfer into the trust will be taxable and not eligible for the unlimited federal gift tax marital deduction.
• SLATs: More likely to present this problem is the use of a SLAT where a taxable gift is made by the settlor to a trust for the lifetime benefit of their spouse. If the settlor and the beneficiary later divorce, that creates a problem (at least for the settlor spouse.)

Conditional Gift/Status: If there is a divorce between the settlor and his/her spouse, then the named beneficiary spouse can forfeit their role as a trust beneficiary, e.g. My wife Linda shall be the income and principal beneficiary of this trust so long as we are married, and if we are later divorced, or our marriage is annulled, then Linda shall cease to be a beneficiary of this trust. Conditioning the spouse’s beneficiary-status to continue to being married to the settlor, addresses one problem of the settlor, i.e. benefiting a former spouse,  it does not address the other perceived feature of a lifetime SLAT, which is the settlor’s indirect access to the income generated by the SLAT’s assets.

Floating Spouse Provision: The fear of losing indirect access to the income generated by the SLAT is often when a SLAT will use a floating spouse concept. In this situation, the SLAT might be drafted to describe the beneficiary of the trust as follows:  The discretionary beneficiary of this trust shall be the person to whom I am legally married at any point during the duration of this trust according to its terms, excluding any claims of a common law marriage which shall not be recognized in the construction or administration of this trust. Accordingly, if the SLAT uses a floating spouse concept to describe the lifetime trust beneficiary, the settlor of the SLAT is assured that their former spouse will forfeit his/her position as the lifetime beneficiary, and if the settlor remarries, then his/her new spouse will become the lifetime trust beneficiary, offering indirect access to the SLAT’s income to the settlor.

Conclusion: While settlors and testators may not appreciate the length of their estate planning documents, which is only made worse by including lengthy provisions that contain specific definitions, they may be necessary to avoid future litigation in determining the settlor’s intent. While the term spouse is readily understood, it is a status that comes and goes, to possibly be replaced by another. It is best to provide a clear definition to what is meant when a Will and Trust use the term spouse.