Avoiding Ambiguity in an Irrevocable Educational Trust

June 12, 2013 by Scott C. Soady

Trusts are a common estate planning device used to shield assets from the probate process. Trusts also enable an individual (or married couple) to provide for the maintenance, education and health of family members by utilizing specific assets for those purposes. When making a trust to provide for family after your death, however, it’s essential to be precise as to your intentions and instructions. Ambiguity may lead to confusion, and possibly litigation, between your trustee and the very family members you hope to support.

Paying for Your Grandchildren’s Law School

A recent California case illustrates the complications that can arise from a trust intended to provide for a deceased couple’s grandchildren. Please note this case is only discussed for informational purposes and should not be construed as legal advice or a binding statement of current California law.

Edward and Ann Muldoon established an irrevocable trust in 1998 to pay the educational expenses for any of their eight grandchildren who chose to attend college or graduate school. The Muldoons provided the trust with $160,100, out of which the trustees used all but $100 to purchase life insurance on the lives of the Muldoons. After their deaths, the trust would receive $1.6 million to fulfill the purposes of the trust.

The Muldoons instructed the trust to reimburse a grandchild for “the cost of the Educational Program in which they enroll,” provided said enrollment took place before their 25th birthday. Kevin Muldoon, one of the grandchildren, completed his undergraduate studies while his grandparents were still alive. Edward Muldoon paid those expenses personally using non-trust assets. When Kevin enrolled in law school in 2003, however, Edward declined to pay for that himself on the advice of his wife.

Both Muldoon grandparents had passed away by 2010, at which time the trust received the proceeds from the $1.6 million life insurance policy. Kevin Muldoon then asked a probate judge to order the co-trustee, Linda Rogers, to reimburse him for his law school expenses--about $155,000--pursuant to the terms of the trust. Rogers opposed the petition. She interpreted the trust to mean a grandchild could only be reimbursed if he made the request while enrolled in school, not afterwards.

The probate court rejected that argument but found Kevin Muldoon should only receive $100, the only liquid assets in the trust at the time he attended law school, i.e. before the insurance policies paid out. Kevin Muldoon appealed that decision. The California Court of Appeals agreed he was entitled to full reimbursement from the 2010 insurance proceeds.

What Did the Trust’s Creators Intend?

The Court of Appeals noted its job was to determine the intent of Edward and Ann Muldoon at the time they made the trust in 1998. This means, for example, that the court put no stock in the fact that Edward Muldoon declined to personally pay Kevin’s law school tuition from non-trust assets in 2003. Nor did it matter that Kevin Muldoon enrolled in law school without requesting immediate reimbursement for the trust.

The key language in the trust stated that “during any period” a grandchild was enrolled in school, the trustee should reimburse his or her expenses. The court of appeals noted that the trust did not say “during any current period.” As written, the trust did not prohibit reimbursement for prior expenses like those incurred by Kevin Muldoon.

The presence or absence of a single word therefore might have altered the trust’s meaning and blocked Kevin Muldoon’s award. This is why it’s imperative to work with an experienced San Diego estate planning attorney when drafting any sort of trust instrument. Your trustee and the courts can only honor your true intentions if they are made clear and without ambiguity. If you have any questions about using an irrevocable trust as part of your estate planning, contact the Law Office of Scott C. Soady today at 1-877-435-7411.