Bequests (gifts) in a Will or a Trust can require a beneficiary to meet a “condition precedent” in order to receive the bequest. Only if the condition is met does the beneficiary’s interest vest. Must a condition precedent always be satisfied?
If a requirement becomes impossible to fulfill, a beneficiary may sometimes still inherit if he or she did what he or she could to fulfill the requirement before it became impossible. That was an important issue decided by the California Court of Appeal, First District Court in Schwan v. Permann (A151070 and A151073).
In 1999, Walter C. Permann, a successful business owner, established a Trust that included three employees as beneficiaries. Mr. Permann openly attributed much of his success to their loyalty. He also wanted these employees to continue working for his company after he died in order to help his wife with the company. Accordingly, Mr. Permann conditioned the gifts on their still working for his company when he died.
However, before Mr. Permann died, he sold his company. Nevertheless, he did not amend his Trust to reflect the sale. He even continued to tell these employees that they were taken care of in his Trust.
After Mr. Permann died, a lawsuit ensued amongst all possible parties over who was a beneficiary. The lawsuit raised various legal issues including whether the foregoing “condition precedent” prior to vesting — regarding employment at Mr. Permann’s death — was ambiguous because the Trust did not address the possibility of the business being sold.
Under California law, the express terms in a will or trust are given their plain and ordinary meaning, all words are given effect, and external (extrinsic) evidence is used only if necessary to clarify an ambiguity within the document in order to give effect to the testator’s intention.
Here, the condition precedent was unambiguous as the words had a plain meaning even though they did not contemplate the possible sale of the business.
Resolving whether the condition precedent still applied to the employees — who were still employees when the business was sold – rested on whether the Settlor primarily made the employee gifts to benefit the beneficiaries or to see that the requirement itself was satisfied.
The Court looked outside the trust at the extrinsic (external) evidence that demonstrated the decedent’s long relationship with the employee beneficiaries. The Court then applied the Doctrine of Impossibility found in California case law; even though its codification within the Probate Code was repealed.
The Court recognized California law’s favorable treatment of gifts to employees and the unfairness of upholding the condition precedent. Also, California law limits the application of conditions precedent.
The Court found a way out of its dilemma through the Doctrine of Impossibility: A condition precedent may be removed if its satisfaction becomes impossible provided that doing so is consistent with the settlor’s intent.
Although Mr. Permann could have amended the Trust after the sale to remove the contingency, the Court found that his not doing so did not evidence his intent to disqualify two employee beneficiaries who still worked for his business at the time of sale. The third employee, however, was removed as a beneficiary due to the fact that she no longer worked for the business when it was sold.
Given Mr. Permann’s appreciation and desire to reward his employees — whom he said “were taken care of” even after he sold the business — he would have wanted this favorable result.
No one intends for their estate planning to fail, but people do fail to plan. Here, Mr. Permann failed to update his Trust after he sold his business. Had he either addressed what happened to the employee gifts if the business were sold or later updated it to address the issue then much litigation would have been avoided.