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In Re: the Administration of the

March 7, 2012

IN RE: THE ADMINISTRATION OF THE FLORENCE Y. WALLBAUM REVOCABLE LIVING TRUST AGREEMENT.


APPEAL FROM THE CIRCUIT COURT OF THE FIRST JUDICIAL CIRCUIT YANKTON COUNTY, SOUTH DAKOTA THE HONORABLE ARTHUR L. RUSCH Judge

The opinion of the court was delivered by: Severson, Justice

#25849-a-GAS

ARGUED NOVEMBER 16, 2011

[¶1.] Certain remainder beneficiaries of the Florence Y. Wallbaum Revocable Living Trust petitioned the trial court to interpret the terms of the trust and to determine whether the trustee breached its fiduciary duties. The trial court found the trust was ambiguous. After considering extrinsic evidence, the trial court found that the settler of the trust, Florence Wallbaum, intended for the trustee to use trust principal to maintain the Wallbaum residence. The trial court also ruled the trustee did not breach its fiduciary duties in administering the trust. The remainder beneficiaries of the trust appeal, raising the following issues: (1) whether the trial court erred in interpreting the terms of the trust; (2) whether the trial court erred in finding Florence intended for the trustee to expend trust principal to maintain the Wallbaum residence; and (3) whether the trial court erred in finding the trustee did not violate its fiduciary duties. We affirm.

Background

[¶2.] Florence Wallbaum established the Florence Y. Wallbaum Revocable Living Trust (Trust) on June 17, 1991. The beneficiaries of the Trust were Florence's children and grandchildren. Florence had two children, Douglas Wallbaum and Daniel Wallbaum. Daniel was married and had four daughters: Lori Hoesing, Carla Malik, Lisa Brueckner, and Julie Allen. Douglas was not married and had no children. At the time the Trust was created, Douglas was a member of the Community of Damien of Molokoi, a religious order whose monastery was located in Albuquerque, New Mexico. Although the religious order provided Douglas with food, housing, and other necessary support, Douglas earned very little additional income.

[¶3.] To address concerns Florence had regarding Douglas's ability to manage money, a spendthrift clause was included in Article VIII of the Trust. The spendthrift clause provided: No title in the trust or in the income therefrom shall vest in any beneficiary and neither the principal nor the income of any such trust shall be liable for the debts of any beneficiary and no beneficiary shall have any power to sell, assign, transfer, encumber or in any other manner to anticipate or dispose of his or her interest in any such trust or the income produced thereby prior to the actual distribution in fact by the Trustee to said beneficiaries.

[¶4.] Under Article XI of the Trust, if the trustee determined the continued administration of the Trust was unduly burdensome or expensive, the Trust was to terminate and all Trust assets were to be "distributed to the person or persons then entitled to receive the net income to such trust in the proportions in which they are entitled to receive such net income." Florence appointed herself as trustee and First Dakota National Bank (First Dakota) as successor trustee.

[¶5.] Florence amended the Trust three times.*fn1 However, Article VIII and

Article XI of the Trust remained unchanged. The third and final amendment to the Trust, which went into effect on June 3, 1997, amended the distribution of assets set forth under Article III(4)(b) of the Trust. The portion of the amended version of Article III(4)(b) that is relevant to this appeal provides as follows:

The real estate listed on Schedule A and referred to as the "home tract" is to be distributed outright to my son, Daniel L. Wallbaum, should he survive me; should he not survive me, to his issue in equal shares. The real estate listed on Schedule A as my residence and the parcel denominated "The Inch Farm", as well as my undivided one-third interest in the Nebraska farm shall be held in trust by First Dakota National Bank for my son, Douglas Wallbaum, under the following terms and conditions:

1. Douglas Wallbaum is hereby given a life estate in the real estate listed on Schedule A as my residence. It is my intention that Douglas shall be allowed to live in the home if and when he desires. Should Douglas decide not to reside there he shall notify the trustee in writing and trustee shall have discretion to rent the home. At Douglas' [sic] death or sooner if Trustee, in its sole discretion, determines that Douglas for reasons of incapacity is unable to occupy the home, the property, known as my residence shall be distributed outright to my four granddaughters should they survive me; should they not survive me to their issue by right of representation.

2. The real estate parcel denominated the "Inch Farm" along with my undivided one-third interest int he [sic] Nebraska farm shall be held in trust for my son, Douglas Wallbaum, and he shall have a life estate in the income generated by said real estate. It is my intention that my Trustee manage this portion of the trust to assure that the Inch Farm is preserved in its entirety for my grandchildren and that my undivided one-third interest in the Nebraska farm is managed compatibly with the interests of my brother, Frank, and my sister, Alice. Upon the death of my son, Douglas Wallbaum, said real estate shall be distributed to my four granddaughters, should they survive me; should they not survive, to their issue by right of representation.

3. Any other property, real or personal, shall be divided into equal portions with one-half (1/2) being distributed outright to my son, Daniel Wallbaum, should he survive me; should he not survive me, to his issue in equal shares. The remaining one-half (1/2) shall be held in trust for my son, Douglas Wallbaum, and he shall have a life estate in the income generated by said property. It is my intention that my trustee manage this portion of the trust to assure income therefrom. Any accounts being advised by Wayne Ibarolle distributed to the trust shall remain with Mr. Ibarolle. Upon the death of my son, Douglas Wallbaum, said property shall be distributed to my four granddaughters should they survive me; should they not survive me, to their issue by right of representation.

4. That such income be paid by my Trustee to Douglas Wallbaum in such installments as are convenient but at least quarterly.

[¶6.] Florence died on July 7, 1998, at which time First Dakota became trustee. Shortly after Florence's death, Douglas left the religious order and moved back to Yankton where, pursuant to Article III(4)(b)(1), he lived in the Wallbaum residence. Although Article III(4)(b)(4) of the Trust required the trustee to make quarterly income distributions to Douglas, First Dakota did not strictly adhere to this provision of the Trust. Instead, First Dakota made income distributions to Douglas on an "as-needed" basis. Douglas raised no objection to First Dakota's method of distributing income.

[¶7.] While First Dakota initially used Trust income to maintain the

Wallbaum residence for Douglas, it soon concluded that the income from the Trust was insufficient. First Dakota contacted Celia Miner, the attorney who assisted Florence in drafting the Trust. Miner advised First Dakota that the principal of the Trust could be used to maintain the Wallbaum residence for Douglas. First Dakota then began to invade Trust principal to cover ordinary maintenance, taxes, and other charges associated with the residence.

[ΒΆ8.] Approximately one year later, First Dakota became concerned about the deteriorating condition of the Wallbaum residence. After evaluating the cost of maintenance, First Dakota concluded it would be in the best interest of the beneficiaries of the Trust to sell the residence and purchase a condominium for Douglas to live in. First Dakota also ...


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