California Court of Appeals, Second District, Seventh Division
ORIGINAL PROCEEDING. Petition for writ of mandate, Joseph S. Biderman, Judge. Writ granted. Los Angeles County (Super. Ct. No. SP001682
Holland & Knight, Bruce S. Ross, Vivian L. Thoreen and Roger B. Coven for Petitioner.
No appearance for Respondent.
Sandler and Rosen, Charles L. Birke and Adam W. Guerrero for Real Parties in Interest.
In 1992, Raymond Sandler, then an attorney at Sandler & Rosen, drafted wills for Willet Brown and his wife Betty Brown. Willet’s will established a marital trust that was expected to generate several million dollars in annual income. The will named Betty as the marital trust’s income beneficiary for life; upon her death, the principal of the trust was to be transferred into an Exemption Equivalent Trust that would benefit each of Willet’s four children. Betty’s will, in turn, left a large majority of her estate to the Exemption Equivalent Trust. After Willet died, Betty revoked the will that Sandler had prepared and drafted a new instrument transferring the large majority of her assets to a trust that was to benefit her daughter.
Following Betty’s death in 2011, a dispute arose between her personal representative–petitioner Fiduciary Trust International of California–and the marital trust trustees regarding whether the terms of Willet’s will required the trust to pay approximately $27 million in estate and inheritance taxes that were due on Betty’s assets. Fiduciary Trust filed a motion to disqualify Sandler & Rosen, arguing that the firm was barred from representing the trustees based on Sandler’s prior representation of Betty. The trial court denied the motion and Fiduciary now petitions this court for a writ of mandate compelling the court to vacate its ruling and enter a new order disqualifying Sandler & Rosen. We issued an order to show cause and we now grant the petition for writ of mandate.
FACTUAL AND PROCEDURAL BACKGROUND
A. The Browns’ Estate Planning Documents
Raymond Sandler, an attorney at Sandler & Rosen LLP, served as Willet H. Brown’s personal, family and business attorney. In 1992, Sandler drafted a will for Willet, whose estate was then estimated to be worth $200 million, and a separate will for Willet’s wife of 45 years, Betty Brown. At the time Sandler drafted the wills, Willet had four adult children: Kim Blake, who was his only child with Betty, and three children from a prior marriage: Michael J. Brown, Patricia Louise Brown and Peter Ransom Brown.
Willet’s will bequeathed his personal effects and real property to Betty. The remainder of his estate was to be divided between two trusts: the “Exemption Equivalent Trust” and the “Marital Trust.” The Exemption Equivalent Trust was to be initially funded with “a pecuniary amount equal to the maximum sum” of various gift and estate tax exemptions then in effect, which totaled approximately $600, 000. The trust was to be divided into equal shares among Willet’s four children. Each child was to receive the income from their respective share of the trust for life; upon their death, the principal of each child’s share was to go to his or her designated appointee.
The will placed all of Willet’s remaining assets into the Marital Trust and named Betty as the income beneficiary of the trust for her life. The will directed that, upon Betty’s death, the trustees of the Marital Trust were to pay all “legally enforceable claims against her or her estate, expenses of administration and any estate or inheritance taxes payable by reason of her death, including interest and penalties, from either income or principal of the Marital Trust... unless other adequate provisions shall have been made therefore.” After such payments were made, the trustees were to distribute the remaining principal of the Martial Trust into the Exemption Equivalent Trust.
The separate will that Sandler drafted for Betty bequeathed various personal and real property to her daughter Kim. The residue of Betty’s estate was to go to the “‘Trustees of the Exemption Equivalent Trust created under the Will of... [Willet Brown].”
In addition to the two wills, Sandler prepared a memo for Willet summarizing the terms of the estate planning documents. The memo stated that Sandler expected Betty to receive approximately $3 million in annual income from the Marital Trust, which would enable her to “accumulate a sizeable amount during her lifetime.” The memo further explained that, under the terms of Betty’s will, this accrued income “would go into the Exemption Equivalent Trust which... is for the benefit of all four of your children.” The memo also indicated that while there would be “no tax to pay under your present Will, ” substantial federal estate and state inheritance taxes would become due upon Betty’s death, which would be paid from the Marital Trust. After the payment of those taxes and any other debts, the remaining principal would be transferred to the Exemption Equivalent Trust and “divided into equal shares for each of your children...”
Betty signed her will in July of 1992 and Willet signed his will two months later. Willet died in October of 1993. Shortly thereafter, the Marital Trust and Equivalent Exemption Trust were established pursuant to an ex parte order appointing testamentary trustees.
After Willet died, Betty established the “Betty R. Brown Trust, ” which she amended on several occasions. The operative version of the trust acted to rescind Betty’s 1992 will and directed that, upon her death, a significant majority of the trust assets (which consisted of Betty’s personal effects, residences and income she had accumulated from the Marital Trust) were to be distributed to Kim outright. The Betty Brown Trust also included language indicating that the trustee should obtain all estate and inheritances taxes due on her estate from the trustees of the Marital Trust: “The terms of the Marital Trust established under the Will of [Betty’s] late husband, [Willet Brown], ... provide that upon [Betty’s] death, the trustees of the Marital Trust shall pay... any estate or inheritance taxes payable by reason of [Betty’s] death, ... unless other adequate provisions shall have been made therefore. [Betty] has made no provision for the payment of any such claims expenses or taxes... To the extent that Trustee hereunder shall be required to pay any such claims or expenses, or any such taxes payable by reason of [Betty’s] death, [Betty] directs the trustee to recover from the Marital Trust all such claims and expenses and all such taxes...”
Betty died on December 26, 2011. Fiduciary Trust International of California (Fiduciary) was appointed “administrator with will annexed” of Betty’s estate and letters of administration were issued on November 6, 2012.
B. Dispute Regarding Payment of Taxes Owed on Assets Held in the Betty Brown Trust
As a result of Betty’s death, approximately $100 million in estate and inheritance taxes became due on the property in the Marital Trust and the Betty Brown Trust. Although the trustees of the Marital Trust agreed to pay the portion of the taxes attributable to property held within the Marital Trust (approximately $74 million), they refused to pay the portion of taxes attributable to assets within the Betty Brown Trust.
In August of 2012, Fiduciary filed a petition for an order confirming its right “to seek payment from the Trustees of the Marital Trust... [for] any and all claims, expenses or taxes arising from Betty’s death, including the total federal estate tax liability attributable to the death of Betty Brown... of which the estimated remaining amount is approximately $27, 000, 000.” Fiduciary argued that it was entitled to this payment because Willet’s will specifically directed the trustees of the Marital Trust to pay “any estate or inheritance taxes payable by reason of [Betty’s] death... unless other adequate provision have been made therefore.” Fiduciary also argued that the Betty Brown Trust included specific language clarifying that Betty had made no other provisions for the payment of estate and inheritances taxes.
The trustees of the Marital Trust, who were represented by Sandler & Rosen, filed a cross petition seeking an order that it was only obligated to pay “estate and inheritances taxes, claims, and expenses attributable to property held by the Marital Trust” and had no further obligation to pay “taxes, claims, or expenses attributable to assets owned by the Betty Brown Trust.” The trustees alleged that, during the 18 years between Willet and Betty’s deaths, Betty had “accumulated more than $80 million in assets from the... income she received from the Marital Trust.” The petition asserted that, under the terms of Betty’s 1992 will, those assets would have been transferred to the Equivalent Exemption Trust upon her death, thereby benefitting each of Willet’s four children. Following Willet’s death, however, Betty had elected to revoke that will and established the Betty Brown Trust, which benefitted only Kim.
The Marital Trust trustees argued that, in light of the changes Betty made to her estate plan, it would be unfair to require the Marital Trust to pay the $27 million in estate taxes owed on the assets in the Betty Brown Trust: “[I]f the Betty Brown Trust prevails on its claim against the Marital Trust, then each of Willet’s other three children, Patricia, Michael and Peter will pay approximately $6, 750, 000 in death taxes on property they will never receive. Each of their Exemption Equivalent Trusts will be reduced by that amount if the Marital Trust pays the $27, 000, 000 death taxes for the Betty R Brown Trust... Such a result was never intended, contemplated or understood by Willet when he signed his Will and when he died. At the time of his death, he had knowledge of Betty’s will which bequeathed all her property, except personal property and the residences, to the Exemption Equivalent Trusts established by his Will for the benefit of his four children equally.”
The trustees articulated three reasons why the Marital Trust should not be required to pay the taxes attributable to the Betty Brown Trust. First, they asserted payment of such taxes was “not permitted by Probate Code section 20110 and 20111, ” which require estate taxes to be equitably prorated in proportion to the value of the property received by each person interested in the estate unless there exists a clear and unambiguous direction to the contrary. The trustees contended that the language in Willet’s will requiring the Marital Trust to pay any taxes that became due upon Betty’s death was not sufficiently clear in light of events that occurred after Willet’s death.
Second, the trustees argued that Betty’s decision to redirect the residuary of her estate from the Exemption Equivalent Trust to Kim constituted “other adequate provisions” for the payment of inheritance and estate taxes: “Betty Brown’s revised estate plan represents a tremendous change of circumstances from that existing when Willet Brown signed his Will. Approximately $80, 000, 000 in Betty Browns’ Residuary Estate are ‘adequate provisions’ for payment of the claims, expense, and death taxes attributable to the assets in the Betty R. Brown Trust in which the Marital Trust now has no interest.”
Finally, the trustees argued that the court had equitable and statutory authority “to alter or modify the distributive provisions of [Willet’s will] to accomplish [Willet’s] actual intent at the time the instrument was executed.” The trustees contended that the wills Sandler had drafted for Willet and Betty made clear that Willet only intended the Marital Trust to pay taxes on property that was to be transferred to the Equivalent Exemption Trust. Thus, according to the trustees, the court had authority ...