On July 22, 2020, the Iowa Court of Appeals issued a ruling in the matter of the Inman Family Living Trust (No. 19-1045). Leland and Ella Mae Inman executed the Inman Family Living Trust in 2014. In 2016, Leland passed away. The Trust provided that the trustees possessed the powers, rights and discretion set forth in the Iowa Code; that the trustees are authorized to determine fairly and equitably the manner of ascertainment of income and principal and the allocation of all receipts and disbursements to income and principal accounts; and that the Trust shall be governed in accordance with the laws of the State of Iowa.
In 2017, the children of Leland and Ella Mae, who were the remainder beneficiaries of the Trust, filed a petition for the determination that the Trust became irrevocable upon Leland’s death, and sought to prevent Ella Mae from amending or modifying the terms of the Trust. In February 2018, the parties entered into a settlement agreement, which provided the following:
- The Trust shall continue in force.
- That pursuant to Article II A of the Trust, Ella Mae shall be entitled to enjoy all income from the Trust for the remainder of her natural life as she may request or direct.
- Pursuant to Article II B of the Trust, the trustee shall retain the discretion to invade principal of the Trust, to the extent it deems necessary or advisable, to provide for the proper care, support, maintenance, and education of Ella Mae Inman. The settlement went on to state that the Trust should not be construed to permit the invasion of the principal of the Trust other than for these purposes during the life of Ella Mae.
Said settlement agreement was approved by the court.
In April 2019, the trustee applied for guidance regarding payment of Trust income after Ella Mae requested that she be paid all gross income of the Trust as opposed to net income. The trustee stated that if all gross income was paid to Ella Mae, the trustee would be required to invade principal for normal and customary expenses. The trustee further noted that under the Iowa Uniform Principal and Income Act, Ella Mae was only entitled to net income. The district court ruled in favor of Ella Mae finding that she could demand the trustee distribute to her all gross income.
The Court of Appeals noted that the Trust and Trust proceedings are subject to the Iowa Trust Code and that chapter 637, the Iowa Uniform Principal and Income Act, applies to trusts subject to chapter 633A. The court further noted that the Trust is to be administered in accordance with chapter 637 unless the Trust contains a different provision.
The court found that Ella Mae is an “income beneficiary” with an “income interest” in the Trust. The court further noted that “income beneficiary” means a person to whom a trust’s net income is or may be payable and an “income interest” means an income beneficiary’s right to receive all or part of the net income, whether the terms of the Trust require it to be distributed or authorized it to be distributed in the trustee’s discretion. The court went on to state that interpreting the language to mean gross income would require the trustee to invade trust assets to pay ordinary expenses, and such invasion would only be allowed “to provide for the proper care, support, maintenance, and education of Ella Mae”. The court concluded that the words “all income” cannot be understood to mean dispersion of all gross income. The court concluded that interpreting “all income” to mean “net income” harmonizes section two and three of the settlement agreement, and is in accord with the Trust documents and Iowa law. The court reversed the district court’s ruling and remanded the matter for entry of an order consistent with the opinion of the court.