Zilles v. American Legion – 12/23/2008

December 29, 2008

Arizona Court ofAppeals Division One Holds that a Lapsed Gift of Residuary Trust Assets Passes to the Other Residual Beneficiaries Identified in the Trust, Not to the Trustor’s Heirs According to the Law of Intestacy.

Frederick and Annabel Zilles created a revocable living trust, which upon their death, was to distribute their personal effects according to a self-prepared list of beneficiaries (which was never found) and their residual assets to three charities as follows: (1) the art collection and ninety-percent of any remaining assets to a to-be-named charity; and (2) the remaining ten percent to two named charities, five percent each.  The first charity was never named and, indeed, Annabel Zilles sold the entire art collection before she died.  Therefore, the first residual distribution was rendered impossible.  In light of this lapsed gift, the heirs of the Zilles claimed that the residual trust assets should be distributed to them, while the two named charities claimed that they should receive everything.  The trial court sided with the heirs, concluding that “[i]t is . . . probably more in accord with the trustors[’] intent that this failed devise be distributed to surviving heirs than to increase a minimal charitable devise [to the two named charities] by nine hundred percent.”  The charities appealed.     

The ArizonaAppeals Court reversed.  After concluding that the language of the trust itself did not evidence an intent to distribute the lapsed gift to the heirs, the Court turned to the question “whether Arizona law independently requires the failed bequest to be distributed to the Charities as the remaining residuary beneficiaries or to the Trustors’ heirs under the laws of intestacy.”  The Court relied heavily on In re Estate of Jackson, 106Ariz. 82, 471 P.2d 278 (1970), which found that “it is probably more in accord with the testator’s intent that a lapsed residuary bequest remain in the residue and pass to the surviving residuary legatees [of the will],” not through the laws of intestacy.  This conclusion was subsequently codified at A.R.S. § 14-2604.  Although both Jackson and section 14-2604 apply to wills, not to trusts, the Court found these authorities persuasive because the “Trust is operating like a will in that it is disposing of property on the death of the surviving Trustor.”  See also Restatement (Third) of Trusts § 25 (2003) (suggesting that trusts may be subject to the rules applicable to testamentary dispositions).  The Court, therefore, held that the two charities, “as residuary beneficiaries of the Trust, are entitled to split the remaining ninety percent of the Trust estate according to the relative (here, equal) proportions of their express interests in the residuary.”                                 

Judge Swann authored the opinion; Judges Portley and Thompson concurred.