In a recent decision from the Kentucky Court of Appeals, two generations of the descendants of Edna Murphy battled over a trust which held the Murphy family farm. Edna Murphy contributed her 180-acre Larue County farm to the Murphy Family Farm Trust created by her five then-living children. Three of those children were ultimately named as co-trustees of the trust, which held the farm at the time of litigation.
Litigation focused on the appointment of family members to an advisory committee created under the trust to consult with and direct the co-trustees regarding all important matters affecting the disposition, purchase and sale of trust investments and trust distributions, farm sale and early trust termination. The litigation also focused on the proper method of voting by the advisory committee on the proposed sale of the farm.
Underlying the entire controversy was the balance of interests and rights of the two generations, the children and grandchildren. The trust agreement stated that the purpose of the trust was to keep the farm intact and under the control of the children, and that the trust was for the mutual benefit of all of the children. The advisory committee provision also specified that it was to take actions for the benefit of the children. At the same time, the grandchildren were afforded the right to use the farm for their enjoyment and hunting rights, but only after the children were given priority as to farm usage. Upon the termination of the trust, the grandchildren would become the remainder beneficiaries, but again only if the child who was the parent of that grandchild were deceased.
Being guided by the apparent intent of the trust to benefit the children and allow them to manage the trust, the Court upheld the living children having appointed themselves as the advisory committee members, along with a grandchild that two of the children had chosen. The Court concluded that the grandchildren were “second-class beneficiaries,” whose rights and interests were subject to the priority of the children. The rights of the grandchildren both to use the farm during the trust term and to a portion of the trust assets upon remainder distribution, were expressly made secondary to the interests of the children, supporting the Court’s conclusion that the trust clearly intended to benefit the children first and foremost. This election of the grandchild to the advisory committee based on her willingness to cooperate with the two children who voted for her was not impermissible, as the purpose of the advisory committee was to act in the best interests of the children. Rejecting the response to the argument that the children’s choice of the favorable grandchild as an advisory committee member was somehow self-dealing, the Court found that the terms of the trust permitted the children to do so, thereby eliminating that argument.
The Court addressed whether the advisory committee must act unanimously regarding the sale of the farm, under the clause requiring unanimous voting on the sale of any “investment.” In what was argued to be a related clause, unanimous approval was also required for the advisory committee to terminate the trust at any time. Other than these specific voting provisions, the general voting provision for the advisory committee allowed the majority to control. The trust included a separate provision, which allowed the advisory committee’s written direction to sell the farm, and no unanimity requirement was stated. The Court also noted the absence of a definition of “investment” for purposes of the advisory committee unanimous voting clause in the trust. Based on this analysis, the Court concluded that the settlor’s intent was to allow a majority vote of the advisory committee to direct the sale of the farm.
The Court also rejected the argument that the provision requiring the unanimous decision of the advisory committee to terminate the trust was inconsistent with allowing only a majority of the advisory committee to sell the farm, which was in itself a trust termination event. The Court reasoned that the power of the advisory committee to terminate the trust generally was exercisable without reference to cause, and thus the heightened requirement of a unanimous decision by the advisory committee to exercise such a broad power was appropriate, and consistent with the stated purpose of the trust to keep the farm intact and under the control of the children. The Court concluded that the fact the trust had different requirements for terminating the trust based on different scenarios or reasons did not make it contradictory.