Matter of Will of Kline

In 1988, Helyn Kline died, leaving a trust that named her daughter, Denise Jo Levy (defendant), as the income beneficiary for life. The trust document stated that a trustee could invade the principal for Levy only in an emergency and that such “extraordinary circumstances” were not likely to occur. Levy’s three children, Peter Judson (plaintiff) and his two brothers, were the trust’s remainderman, meaning they would receive the trust’s remaining principal after Levy’s death. Over time, the trust’s principal grew faster than its income. By 2021, the trust’s annual income represented only 2 percent of its principal. At that time, the trust’s cotrustees were Robert Friedman (defendant) and Levy. Friedman was concerned that distributing this small percentage to Levy could violate his fiduciary duty to her as the income beneficiary. However, the investment changes needed to generate more income would reduce the trust’s long-term value, so the most prudent investment strategy was to continue focusing on principal growth. To balance these competing interests, Friedman invoked a state statutory power to adjust to (1) continue his principal-focused investment strategy but (2) adjust the characterization of the trust’s assets to increase the amount treated as income for distribution purposes. Using the adjusted values, Friedman applied a unitrust-like system to distribute 3.2 percent of the trust’s overall value to Levy as income. Judson sued both trustees, arguing that the distribution was improper because it exceeded the trust’s actual net income. Judson contended that the default statutory power to adjust did not apply because the trust’s own terms limited distributions of principal to emergencies, and no emergency existed. The probate court granted judgment to the trustees. Judson appealed.