August 31, 2007
IN THE MATTER OF THE CHARITABLE TRUST OF SOUTH JERSEY HOSPITAL, INC.
On appeal from Superior Court of New Jersey, Chancery Division, Probate Part, Cumberland County, Docket No. A-27417.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Submitted January 30, 2007
Before Judges Payne and Graves.
Plaintiff South Jersey Hospital, Inc. (the Hospital), a non-profit New Jersey corporation, is the successor beneficiary of a charitable trust (the Trust) created by Mary A. Richter in her Last Will and Testament, executed on August 10, 1956. The Trust was funded in 1963 with approximately $306,000. The sole Trustee, PNC Bank, N.A., (the Trustee), successor to its predecessor the Tradesmens Bank and Trust Company of Vineland, was appointed pursuant to Paragraph Eleventh of the will. In Paragraph Sixth (B), the testator directed the Trustee "to hold, manage, invest, and reinvest" the Trust funds and "to pay over the net income derived therefrom to [the Hospital] in convenient installments, together with the sum of FIVE THOUSAND ($5000) DOLLARS, per year from the principal thereof." The Hospital appeals from an order dated January 13, 2006, denying its application to increase the annual principal Trust payment from $5,000 to $100,000. Because the facts are not disputed and the trial court's conclusions are consistent with controlling legal principles, we affirm.
In its verified complaint, the Hospital alleged that the dramatic increases in the cost of providing first-rate medical care and services were "changed circumstances and/or circumstances not anticipated by the testator, Mary A. Richter, at the time she executed her Will." The Hospital sought the "equitable modification" of the Trust to increase the annual principal payment to the Hospital "from $5,000 to $100,000" to reflect the "substantial increase in the cost of providing medical care and services, and to address the changes in the means and methods of providing first rate health care and the dynamics of the population and community serviced by [the Hospital]." The Hospital noted the present value of the Trust "exceeds $1,000,000.00," and it claimed the current payments ($44,246.78 in 2001; $40,919.68 in 2002; $41,805.04 in 2003; and $50,425.08 in 2004) were "inadequate to serve the charitable intent of Mary A. Richter in light of the dramatic industry and population changes."
The Trustee does not dispute the value of the Trust "is approximately $1 million," and it also agrees the "fundamental background facts are not disputed." But the Trustee contends the Hospital's proposal to dramatically increase the principal distribution would result in premature depletion of the Trust assets and termination of the Trust "in approximately seven to ten years, depending on investment performance." Thus, the Trustee claims the Hospital's application was properly denied because the requested relief would result in the early termination of the Trust, which was created to provide long-term benefits to the Hospital and the surrounding community.
As a general proposition, "it may be said that courts possess the power, in appropriate circumstances, to permit or direct some departures from the exact or specific terms of a charitable trust . . . ." J.R. Kemper, Annotation, Charitable Trusts: Elimination or Modification, by Court, of Restrictions on Amount of Donation or Expenditure Which Trustee May Make for Purposes of Trust, 50 A.L.R.3d 1116, 1118 (1973); see Howard Sav. Inst. v. Peep, 34 N.J. 494, 497 (1961) (affirming the use of the cy pres doctrine to eliminate the "Protestant-Gentile" restriction from the terms of a charitable trust that limited potential beneficiaries to "deserving American born, Protestant, Gentile boys of good moral repute, not given to gambling, smoking, drinking, or similar acts"). Thus, to determine whether a deviation or modification from the terms of the Trust is appropriate in this case, we must first examine the specific language of the document that created the Trust----the Last Will and Testament of Mary A. Richter.
Paragraph Sixth (B) of the will specifically directs the Trustee to pay the net income from the Trust with $5,000 "per year from the principal" to the Hospital. Additionally, in Paragraph Third (b) of the will, the testator made an outright bequest of $50,000 to the Hospital "to be used by the said Hospital as it sees fit." The testator also established a separate trust for the benefit of her daughter and grandchildren, and she specified the ages at which these beneficiaries would receive their distributions and the trust would terminate. The testator carefully planned how her estate was to be distributed, and she was fully aware she could elect to make either outright distributions or distributions in trust. She also understood she had the power to subject Trust funds to such conditions and restrictions as she deemed appropriate, and she utilized a spendthrift clause to prevent anticipation and control of income or corpus by beneficiaries:
NINTH: To the extent permissible by law, the shares of income and principal by this Will given to or directed to be held in trust for the benefit of the several beneficiaries shall in no way or manner be subject or liable to their anticipation, sale, assignment, pledge, debts, contracts, engagements, orders or liabilities and shall not be subject or liable to levy, execution, attachment, sequestration or seizure under any legal, equitable or other processes.
The Hospital contends, "the most persuasive authority addressing the issue in this matter is the case of In re Critchfield Trust, 177 N.J. Super. 258 (Ch. Div. 1980), which is directly on point and clearly supports the relief sought . . . ." We cannot agree. In Critchfield, the court applied the cy pres doctrine to modify the terms of a trust established in 1932 to provide "a yearly college scholarship for 'worthy boys of Summit High School' in the amount of $400." Id. at 260.
The court granted the trustee's request to permit the award of scholarships to eligible students, regardless of their gender, and it eliminated the $400 cap because the trust income in 1979 "had increased to approximately $1,300 due to higher interest rates." Id. at 261. The court reasoned the scholarship would "more effectively carry out the purpose of the trust," and it would "be in accord with the intent of the settlor" if the trust was allowed to award a yearly college scholarship in the amount of the income actually generated by the trust. Id. at 263. Thus, by removing the $400 cap on the scholarship and allowing the trustee to use excessive income, the Critchfield court advanced the educational purpose of the charitable trust.
Here, however, there is no excessive income. The Hospital already receives all of the income generated by the Trust plus $5,000 of Trust principal each year. Because the payment of excessive or increased income from the Critchfield trust did not deplete the trust corpus, we conclude the Critchfield case does not support the Hospital's present application to substantially increase the annual distribution of Trust principal.
In further support of its claim that the trial court committed reversible error by failing to order the Trustee to equitably deviate from the Trust terms, the Hospital relies on Trustees of Alexander Linn Hosp. Assn., Inc. v. Richman, 46 N.J. Super. 594 (Ch. Div. 1957). In that case, the Alexander Linn Hospital, which was not operating on a profitable basis, asked the court to authorize a distribution of principal from a charitable trust even though the decedent's will directed that only trust income could "be used for hospital purposes." Although the court did not authorize an outright distribution of principal to Alexander Linn Hospital, it permitted the hospital to borrow from the trust. The loan was secured by a noninterest-bearing mortgage (because the hospital was entitled to the income from the trust), and repayment of the loan was "to be on such terms as the [Hospital] and the AttorneyGeneral's [O]ffice can agree on," subject to approval by the court. Id. at 598. In doing so, the court explained that "[o]rdinarily the intent of the settlor controls, and any use of the trust estate must be in conformity with the settlor's instructions." Id. at 596. Nevertheless, because the hospital was in desperate need of funds to finance and complete a new building, the court concluded it had "the power to protect the public welfare by stepping in and modifying the settlor's intent to the extent necessary to preserve and continue the charitable trust." Ibid.
The necessitous circumstances that confronted the Alexander Linn Hospital are not present in this case. Here, the Hospital does not contend that it is on the brink of bankruptcy or that it is essential to modify the terms of the Trust to preserve and continue the Trust. Rather, the Hospital claims that the annual $5,000 principal distribution should be increased to $100,000 to "give effect to the probable intent of Mary A. Richter, and to address the changed circumstances that never could have been contemplated by her . . . ." On the other hand, the Trustee contends the Hospital's proposal will seriously erode the Trust corpus and result in its premature termination. But the Hospital claims these concerns are "easily addressed":
A primary argument advanced by [the Trustee] against the relief sought by [the Hospital], which was apparently accepted by the lower [c]court, was that the increased yearly principal payment sought by [the Hospital] may exhaust the Trust over time.
The lower court, however, could have easily addressed this issue (assuming it has merit) by granting the relief sought by [the Hospital] with the condition that [the Trustee] could, at some future time, petition the lower court for a subsequent downward adjustment of the yearly principal payment to [the Hospital] if there was sufficient proof that the Trust was in immediate danger of being exhausted.
Instead, the lower court, by denying the relief sought by [the Hospital] in its entirety, has permitted [the Trustee] to continue growing its deposit base to the clear detriment of [the Hospital] and the local community who benefits from the services rendered by [the Hospital]. . . .
There can be no dispute that this was not the intent of the testator, and the lower court committed reversible error.
If we accept this argument, then the Superior Court would be vested with the discretionary power to determine whether an annual principal payment should be made by the Trustee to the Hospital, and if so, the amount of any such principal payment. We are convinced, however, the Hospital's proposal would contravene the specific wishes and directions of the testator. As the New Jersey Supreme Court has recently stated, "[i]n interpreting a will, our aim is to ascertain the intent of the testator." In re Estate of Payne, 186 N.J. 324, 335 (2006); See In re Estate of Bonardi, 376 N.J. Super. 508, 515 (App. Div. 2005) ("It is well-settled that a court's primary function is to enforce the testator's expressed intent with respect to a testamentary trust.").
"[W]hen we say we are determining the testator's intent, we mean his probable intent." Fidelity Union Trust Co. v. Robert, 36 N.J. 561, 564 (1962) (quoting Simes and Smith, The Law of Future Interests, § 465, 452 (2d ed. 1956)). But we have warned that the doctrine of probable intent can be a "slippery slope." In re Estate of Gabrellian, 372 N.J. Super. 432, 441 (App. Div. 2004), certif. denied, 182 N.J. 430 (2005). "Where the doctrine has been used it has been done only with caution and to clarify ambiguities in a will, usually where an unforeseen contingency occurred which might have resulted in unexpected intestacies." Id. at 442.
In this case, the testator expressed her intention clearly and unambiguously, and the Hospital has not offered extrinsic documents or evidence to support its probable intent argument. Because Mary A. Richter's Last Will and Testament is clear on its face, and there is no failure of any bequest or provision, we conclude the probable intent doctrine is not applicable. Id. at 442-43.
Although the testator made an outright bequest to the Hospital in the amount of $50,000, and she specified that a family trust was to terminate upon the happening of certain events, she did not specify a termination date for the Trust and she named a corporate fiduciary to manage the Trust. The testator also provided the Trustee with specific directions regarding the distribution of Trust income and principal, and she specified that the Hospital could not anticipate the receipt of Trust funds. In light of these circumstances, we agree that the Hospital's proposal to increase the principal distribution from $5,000 to $100,000 would defeat the express intent of the testator, and, like the trial court, we conclude the testator's intent must prevail. See Speth v. Speth, 8 N.J. Super. 587, 598 (Ch. Div. 1950) ("[I]t is the intention of the settlor of the trust that governs and not the desires of the beneficiaries.") (quoting Mesce v. Gradone, 1 N.J. 159, 165 (1948)).
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