A recent court decision from South Dakota highlights an issue many do not think about when developing estate and succession plans, how will attorneys’ fees affect the plan? We may not always want to plan for litigation and assume children will get along, but that might not always be the case. This decision is in the Matter of Fred Petersen Land Trust (S.D., 2022).
Background
Peterson farmed and had a cattle operation in South Dakota consisting of approximately 1,000 acres of cropland and pastureland with a 20-acre homestead that included a house, barn, and cattle yard. With his first wife, Peterson had three daughters (Jody, Mindy, and Sally). After they grew up, only Sally remained on the farm with her husband. By the late 1990s, Sally and her husband had rented all of Peterson’s cropland and began farming it for themselves.
Peterson and his first wife divorced in the 1970s, and he remarried a second wife later. Peterson eventually set up a living revocable trust funded by his real and personal property. Peterson and his second wife were the income beneficiaries, with his three daughters as successor income beneficiaries. The living trust included several instructions, including that Peterson’s 20-acre homestead be surveyed, platted, and distributed to Sally and her husband. Another instruction was an option for Sally and her husband to continue renting the farmland from the trust after Fred’s death at 90 percent of the county’s average rental rate. This option would have been for the remainder of his second wife’s life, plus three years.
After Peterson’s second wife filed for divorce in 2013, this forced Peterson to create a new living trust that was funded entirely by the farmland in the living trust, known as Peterson Land Trust. With the land trust, Sally, her husband, and Peterson’s sister are listed as co-trustees, with Peterson as the sole income beneficiary. To settle the divorce, Peterson agreed to a cash payment of $800,000. Of the $800,000, $253,000 was funded by cash Peterson had available, and a loan covered the rest. The loan was for 20 years with required annual payments and secured by a mortgage on the property owned by the Land Trust.
Looking at the new Land Trust, the provisions allowed for rental income after Peterson’s death to cover the annual mortgage payments. Sally and her husband could still lease the farmland after Peterson’s death at 90 percent of the county average rental rate for up to three years after Peterson’s death or three years after the mortgage was paid off. After Peterson's death, the trust designated Jody, Mindy, and Sally as income beneficiaries. The trust did contain a provision that three three income beneficiaries had to unanimously agree to accelerate the mortgage payments beyond the minimum annual amount. However, the trust instrument did contain one error. With the deed conveying all the real property to the Land Trust, Peterson forgot to exempt the homestead intended for Sally and her husband from the larger tract.
Peterson died in 2018 with a balance of $150,000 on the mortgage. Following his death, the estate realized for the first time the error in the deed not exempting the homestead. This error discovery and discussions on accelerated annual mortgage payments led the three daughters to meet with Peterson’s law firm multiple times. Mindy expressed a desire to accelerate the mortgage payments, to pay the mortgage off faster, so the sisters could decide to terminate the land trust and distribute the land among themselves. Sally expressed concerns that Mindy would not sign off on the homestead transfer unless Sally agreed to accelerate the loan payments.
In the final meeting, the sisters decided on three important terms. The first would be that the sisters would allow the homestead to be surveyed and deeded to Sally and her husband as initially intended. Second, the parties would use the additional income from the land trust to accelerate the mortgage payments in an amount to be determined later. Finally, Sally and her husband would retain the three-year option to lease the farmland at 90 percent of the county average rental rate and a seven-year option after that at 100 percent of the county average rental rate. Jody and Sally signed the stipulations, but Mindy refused to sign.
Sally filed an action for court supervision of the land trust and petitioned to reform the land trust to correct the error in the deed in August 2019. Mindy then filed her action seeking the court to remove the provision requiring unanimous approval to accelerate the mortgage payments and require all the trust income to be used to pay off the mortgage until it was fully paid off.
The court eventually consolidated the two actions and held a two-day trial. The court ultimately ruled in Sally’s favor to reform the land trust and ruled against Mindy. However, Sally eventually moved for reimbursement of attorney fees and expenses from the land trust for $290,000, which the other two sisters opposed. The court focused on the need to show economic benefit to the land trust from the litigation to recover attorney fees under the statute. Sally focused on the rents received by the trust over the life of the option and the upkeep costs saved on the homestead by deeding it to Sally and her husband. The circuit court concluded that no attorney fees could not be recovered because the litigation only benefited Sally and her husband, not the trust. Sally appealed on the issue of attorney fees.
Appeals Decision
On appeal, the Supreme Court of South Dakota only looked at the issue of awarding attorney fees to Sally and her husband. The statute in question allows for awarding attorneys’ fees when appropriate. Past court decisions had allowed attorneys’ fees when the services are beneficial to the trust and necessary because of negligence, fraud, or inactivity. Recent court decisions highlight that the court has moved away from the second prong. In this case, the court points out that the benefit to the trust need not be economic and can be as simple as reforming the trust to reflect the settlor's intent (i.e., Peterson). In this case, because the litigation helped reform the trust, Peterson’s intent to transfer the homestead to Sally and her husband could benefit the trust. Here the court determines the circuit court erred in not awarding Sally and her husband attorney fees for efforts to obtain the homestead.
Turning to the issue of the litigation to resist attempts by Mindy to reform the trust to pay off the mortgage debt sooner, Sally and her husband point to no benefit to the land trust. The economic benefit that Sally and her husband highlight, the continued rental income over the term of the lease option, did not establish an economic benefit. To the court, to show an economic benefit, Sally and her husband would have also needed to show how the rental income they would pay to the trust over the option period was more beneficial than other producers renting the land over the same period absent the option. The circuit court was correct in denying attorney fees to Sally and her husband on these claims.
Why Care?
I often enjoy using decisions from other states to highlight common succession and estate planning issues. This case highlights what can happen when heirs are in litigation over the plan. In many cases, states will allow for attorney fees on successful litigation with estate plans. Working early on to develop plans that meet on-farm and off-farm heirs' concerns and lead to drama-free results is often what we discuss in succession and estate planning workshops. Developing these plans takes time and requires communication with heirs to determine if the plan is operating correctly early on.
Looking at the decision above, Sally and her husband had sought reimbursement of attorney fees of over $290,000. The decision does not break down which portion of this request was for the costs to reform the trust to reflect the original intent of Peterson. On remand to the circuit court, Sally and her husband will present evidence on the cost of that portion of the litigation. Either way, the trust will need to spend additional money to cover Sally and her husband's attorney fees and continue paying down the mortgage. Additional planning may have prevented this situation from arising in the first place.
References
Matter of Fred Petersen Land Trust, 2022 WL 17173661, 2022 S.D. 72 (S.D., 2022).