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In re Estate of Reugh

Court of Appeals of Washington, Division 3

August 20, 2019

In the Matter of the Estate of K. WENDELL REUGH

          Fearing, J.

         The principal question in this appeal is whether the superior court committed error when removing appellants JoLynn Reugh-Kovalsky and Steve Gill as co-personal representatives of the estate of K. Wendell Reugh and as co-trustees of the Reugh revocable living trust. Nevertheless, the expanse of this opinion covers mainly the topics of subject matter jurisdiction and waiver by failure to assert an argument in the trial court. We uphold the trial court's removal of the co-personal representatives and co-trustees and the appointment of a successor personal representative and trustee.

         FACTS

         We introduce the parties. This complicated appeal concerns the estate of K. Wendell Reugh, who died in March 2015, at the age of 86. Wendell Reugh's wife, Mary Ann Reugh, died in 1996. Wendell and Mary Ann Reugh's three children, JoLynn Reugh-Kovalsky, Mark Reugh, and James Reugh, initiated this appeal. We refer to the three collectively as "the children."

         The former co-personal representatives of Wendell Reugh's estate and former trustees of the K. Wendell Reugh revocable living trust (the Reugh trust), the daughter JoLynn Reugh-Kovalsky and Steve Gill, also appea trial court rulings. Gill is a long-time business associate of Wendell Reugh. We refer to the two alternatively as "Reugh-Kovalsky and Gill," "co-personal representatives," "personal representatives," and "co-trustees." Notice that we refer to JoLynn Reugh-Kovalsky differently depending on her role as a child or as a co-personal representative or co-trustee. The two respondents are Inland Northwest Community Foundation (Community Foundation), the purported residual beneficiary of the Reugh revocable living trust, and Northwest Trustee & Management Services (Northwest Trustee), the successor personal representative of the estate of K. Wendell Reugh and successor trustee of the Reugh trust.

         Now the background. On January 4, 2011, K. Wendell Reugh, a successful Spokane businessman, executed a will and a revocable living trust. The will identified as heirs Reugh's three children, James Reugh, Mark Reugh, and JoLynn Reugh-Kovalsky and Reugh's close companion, Doreen Decker. The will bequeathed tangible personal property such as jewelry, household furniture, books, paintings, and automobiles to Reugh's heirs. The will then directed that the residuary estate pass to the "K. Wendell Reugh Revocable Living Trust" to be distributed in accordance with a separate trust agreement. Clerk's Papers (CP) at 337 (some capitalization omitted).

         K. Wendell Reugh's January 2011 will named Dominic Zamora and James Simmons as personal representatives of the estate. Portions of Article IV of the will further read:

2. In the event either of said co-Personal Representatives is or becomes unwilling or unable to serve, then the other shall serve as co-Personal Representative and shall nominate three individuals to serve as co-Personal Representatives with him. My children shall, by majority vote, designate one of said nominees to serve as the other co-Personal Representative.
B. My estate shall be administered by my Personal Representative named in this Will without the intervention of any court and with all powers granted herein and by law to a Personal Representative acting with nonintervention powers. I direct that such nonintervention powers be unrestricted and that they may be exercised whether or not necessary for the administration of my estate. My Personal Representative shall act with full power to:
. . . .
2. Select any part of my estate in satisfaction of any partition or distribution hereunder, in kind, in money, or both (including the satisfaction of any pecuniary bequest), in shares which may be composed differently, and to do so without regard to the income tax basis of specific property allocated to any beneficiary (including any trust).
. . . .
D. Except to the extent fundamentally inconsistent with the provisions of this Will and of my estate plan, I hereby authorize my Personal Representative to disclaim, in whole or in part, any devise or legacy or any interest in any trust provided for my benefit under the Will of any person or under any trust instrument at any time within nine (9) months after the date of the transfer which created an interest in me.

CP at 337-38 (emphasis added).

         Also, on January 4, 2011, K. Wendell Reugh signed a revocable living trust agreement. The trust agreement also identified K. Wendell Reugh's three children. The trust instrument listed Wendell Reugh as both settlor and initial trustee of the trust. The document read that "[t]he Settlor hereby transfers to the Trustee the sum of One Hundred Dollars ($100.00)." CP at 342. Reugh, however, never transferred the $100 or any other property into the trust, at least during his lifetime. On Reugh's death, the trust, according to the terms of the trust agreement, would convert to an irrevocable trust. The trust instrument directed the trust to pay funeral expenses, costs of administration, estate taxes and other taxes resulting from Reugh's death and any debts owed by Reugh from the trust estate before any distribution to the residuary beneficiary.

         The revocable living trust instrument listed gifts to be paid before any distribution of the trust assets to the residual beneficiary. The gifts included $250, 000 to Wendell Reugh's sister, $20, 000 to Reugh's niece, $20, 000 each to two nephews, $10, 000 to the Spokane Shriner's Hospital for Crippled Children, $25, 000 to Spokane's United Central Methodist Church, $50, 000 to Reugh's former daughter-in-law unless she had remarried, and $1.5 million to each of Reugh's three children. The Trust also directed that $1 million be transferred to a charitable remainder trust for the benefit of Doreen Decker.

         The K. Wendell Reugh's Trust instrument anticipated that Wendell Reugh would establish a charitable foundation or a charitable donor-advised fund before his death. The revocable living trust agreement directed that the residuary of the trust estate, after payment of gifts, pass to either Reugh's charitable foundation, the donor-advised fund, or both if Reugh had created both. The trust instrument read:

2. If Settlor established neither a charitable foundation nor a charitable donor advised fund, said remainder shall be distributed to the Inland Northwest Community Foundation, to be held as an endowed donor-advised fund known as the Wendell and MaryAnn Reugh Family Fund. Such fund shall have Settlor's three children as its initial advisors. Upon the death, disability or resignation of any such advisors, a replacement shall be appointed by the Board of Directors of the Inland Northwest Community Foundation from among the descendants (including descendants by adoption) of the Settlor. Settlor wishes that charitable distributions be made from the fund primarily to the kinds of charitable organizations Settlor has given to during his lifetime, serving the people of the Inland Northwest.

CP at 347-48 (emphasis added).

         Similar to the will's identification of personal representatives for the estate of K. Wendell Reugh, Wendell Reugh named Dominic Zamora and James Simmons to serve as co-trustees "of this Trust and of any testamentary trusts established by the terms of this Trust." CP at 349. If the trustees were unable or did not wish to serve, the Trust provided for the selection of successor trustees through the same process that the will established for appointment of successor personal representatives, by which process the children would, by majority vote, choose among nominees.

         K. Wendell Reugh died on March 22, 2015. Dominic Zamora and James Simmons thereafter declined their appointments as co-personal representatives of the estate of K. Wendell Reugh and co-trustees of the Reugh trust. On March 27, 2015, pursuant to Wendell Reugh's will and the revocable living trust instrument, the children of Reugh appointed JoLynn Reugh-Kovalsky and Steve Gill as successor co-personal representatives and co-trustees.

         On March 27, 2015, co-personal representatives JoLynn Reugh-Kovalsky and Steve Gill petitioned, under Spokane County Superior Court cause no. 15-4-00471-1, for probate of the will and the grant of nonintervention powers afforded in the will. The trial court entered an order admitting the will to probate, declared the estate solvent, and granted nonintervention powers to the co-personal representatives.

         The estate of K. Wendell Reugh's administration has been complex due to Reugh's high net worth. The co-personal representatives toiled for two and one-half years to value the estate and to file an estate tax return. Beginning in 2016, the Internal Revenue Service fastidiously examined estate records.

         JoLynn Reugh-Kovalsky and Steve Gill, as co-trustees of the revocable living trust, distributed to each beneficiary named in the trust the gift listed, including $1.5 million to each of Wendell Reugh's children. The distributions totaled nearly $5 million. Oddly, despite the distributions in accordance with the trust agreement, Reugh-Kovalsky and Gill contend they never administered the trust, but only administered the estate. They claim the trust never held any assets to administer.

         On June 29, 2015, an attorney for the co-personal representatives and co-trustees wrote to the Community Foundation:

Please be advised that Inland Northwest Community Foundation has been named in the K. Wendell Reugh Revocable Living Trust to receive residue funds. The amount of the funds to be distributed to Inland Northwest Community Foundation is unascertainable at this time. It will be quite some time before an appraisal of the estate assets is completed.
The funds are to be held as an endowed donor-advised fund, known as the Wendell and Mary Ann Reugh Family Fund. Such funds shall have the three Reugh children as its initial advisors.
As soon as it can be ascertained as to the amount of funds involved, I will notify you in behalf of the trust.

CP at 612.

         The three children of Wendell Reugh and representatives from the Community Foundation planned to meet on December 4, 2015. The parties later canceled the meeting with the intention of resetting the meeting after the co-personal representatives filed the federal estate tax return.

         JoLynn Reugh-Kovalsky and Steve Gill met with Thomas Culbertson, the estate of K. Wendell Reugh's attorney, in late December 2015. Reugh-Kovalsky and Gill mentioned during the meeting that Reugh, preceding his death, uttered comments about his wishes, which comments conflicted with the revocable living trust language. The attorney responded that the law would not assign any weight to the comments, but that the trust language controlled disposition of the estate. On January 8, 2016, the attorney wrote a letter to Reugh-Kovalsky and Gill, which read in part:

JoLynn, you have an obvious conflict of interest since on the one hand you are one of the specific beneficiaries and on the other hand you are a fiduciary as co-personal representative of Wendell's estate and co-successor trustee of his living trust. Conflicts of interest are common and permissible in the context of trusts and estates; it is not the conflict itself which gets people into trouble, but what they do in light of the conflict.
As fiduciaries, there are a number of duties and responsibilities which you owe to all the beneficiaries, but there are two duties which are paramount. First, you have a duty of impartiality to the beneficiaries; that is, you cannot favor the interests of any beneficiary or group of beneficiaries over the interests of another beneficiary. Second, you have a duty of full disclosure; that is, a duty to keep all the beneficiaries sufficiently informed that they are in a position to protect their best interests. In short, you cannot (consistent with your fiduciary duties) treat the Community Foundation as an adversary, as you might if you had a dispute with another party as to which you owe no fiduciary duties.

CP at 185-86 (emphasis omitted). We do not know how this confidential letter, covered by the attorney-client privilege, became part of the court record.

         On January 26, 2016, Dominic Zamora, accountant for the estate of Wendell Reugh, sent a letter to the Inland Northwest Community Foundation's counsel, which letter read, in part:

Our firm has been retained to prepare the associated state and federal estate tax returns for the Estate of K. Wendell Reugh. Mr. Reugh passed away on March 22nd, 2015. The personal representatives of the estate, Mrs. Jolynn Reugh-Kovalsky and Mr. Steve Gill, have asked me to prepare this letter as it relates to a charitable contribution to the Inland Northwest Community Foundation.
Mr. Reugh's will contains a charitable disposition. As such, we are prepared to transfer approximately $2.2 million to the Inland Northwest Foundation. The charitable contribution would consist of an IRA in the name of Mr. Reugh with an approximate fair market value of $1.5 million and approximately $720, 000, which is the current actuarial value of the remainder interest in a charitable remainder unitrust created in Mr. Reugh's will. The transfers would be completed with a combination of cash and publicly traded securities by the end of the first quarter of 2016.
We ask that you talk with your client for the purposes of considering our proposal. If the Foundation finds this proposal suitable, we will have the necessary documents drawn up and complete the process of the transfer.

CP at 585. The letter did not disclose that the Community Foundation might receive $15 million through the trust. The Community Foundation rejected the co-trustees' offer.

         In June 2016, JoLynn Reugh-Kovalsky and Steve Gill, as executors of Wendell Reugh's estate filed a federal estate tax return. The return confirmed that the Inland Northwest Community Foundation, a charity, would receive the remaining residue of Wendell Reugh's wealth, estimated at $15 million. Despite Reugh-Kovalsky and Gill claiming to have never activated the Reugh trust, the two identify themselves in the estate return as co-trustees. JoLynn Reugh-Kovalsky and Steve Gill never informed the Community Foundation of entries in the estate tax return.

         On July 7, 2016, counsel for the Community Foundation received a letter from an attorney for Mark and Jim Reugh. The letter reads, in part:

. . . Jim and Mark hired us to ensure their late father's charitable objectives are carried out through the large charitable distribution in the Trust.
Mr. Reugh was a charitable man who wanted his charitable legacy continued by his children, his grandchildren, his great grandchildren, and to continue for a long time thereafter. Mr. Reugh openly discussed with his children, and his advisors, his desire to set up a private family foundation (hereinafter, "Reugh Family Foundation") to meet his charitable objectives. This discussion carried over to Mr. Tom Culbertson, who prepared the Trust and Mr. Reugh's Will. Mr. Culbertson drafted the Trust in anticipation that he would set up the Reugh Family Foundation for Mr. Reugh. For reasons unknown to Jim and Mark, Mr. Culbertson failed to set up the Reugh Family Foundation and failed to carry out Mr. Reugh's charitable objectives.
The Reugh Family Foundation is critically important to Jim and Mark for two primary reasons. First, Jim and Mark desire to benefit charities that were important to their father during his lifetime. Most of these charities are outside the reach, and are not permissible donees, of the Inland Northwest Community Foundation. For example, charities to which Mr. Reugh contributed during his lifetime that would likely be donees of the Reugh Family Foundation include: (1) St. Jude Children's Research Hospital; (2) Pulmonary Fibrosis Foundation; (3) Foundation for Sarcoidosis Research; (4) American Macular Degeneration Foundation; (5) The Brain Aneurysm Foundation; (6) National Boy Scouts of America Foundation; (7) PATH; (8) Stand up for Kids; (9) Angel View; (10) Cure Alzheimer's Fund; (11) Literacy; and (12) Room to Read.
The second reason the Reugh Family Foundation is critically important to Jim and Mark is to continue their father's charitable ethic and instill this in their children (Mr. Reugh's grandchildren) and their grandchildren (Mr. Reugh's great grandchildren). Jim and Mark recognize and admire the great work the Inland Northwest Community Foundation does in Eastern Washington and Northern Idaho. However, the legal control that would be exercised by Inland Northwest Community Foundation over the charitable funds received from the Trust and the ultimate decision of what organizations would receive distributions from these charitable funds is contrary to Mr. Reugh's charitable objectives.
We acknowledge that Mr. Culbertson, in drafting the Trust, inserted the Inland Northwest Community Foundation as the "backup" recipient of Trust's residuary assets. We also acknowledge that Mr. Culbertson, in failing to establish the Reugh Family Foundation during Mr. Reugh's life, knew these funds would likely end up being distributed to the Inland Northwest Community Foundation under the terms of the Trust he drafted.
. . . .
Instead of engaging in expensive litigation to change the charitable beneficiary of the Trust, involving extensive fact finding into why Mr. Culbertson behaved the way he did, Jim and Mark desire to reach a compromise with the Inland Northwest Community Foundation to ensure their father's charitable legacy continues to benefit the charities important to their father. Consequently, Jim and Mark propose a binding Trust and Estate Dispute Resolution Act (TEDRA) Agreement, subject to approval by JoLynn Reugh-Kovalsky (as beneficiary and Co-Trustee), Steve Gill (as Co-Trustee), and the Washington Attorney General (as a necessary party under RCW 11.110.120). We anticipate that a settlement, memorialized by a binding TEDRA Agreement, would provide for an immediate distribution to the Inland Northwest Community Foundation.
As expressed by the Co-Trustees of the Trust, if we are unable to settle, the residuary charitable distribution (whether to the Reugh Family Foundation, the Inland Northwest Community Foundation, or both) will not be made until all estate tax matters are settled with the Washington Department of Revenue and the Internal Revenue Service. Due to the nature of the assets included in Mr. Reugh's estate, lifetime taxable gifts made by Mr. Reugh, the taxable distributions included in the Trust, and the provision in the Trust that requires all estate tax and administration expenses be paid from the residue of the estate/trust, the Co-Personal Representatives and Co-Trustees have indicated that they do not anticipate completing the administration of the estate and trust, including making large distributions of the residue, until an estate tax closing letter has been issued by the Internal Revenue Service and the Washington Department of Revenue. Because the size of the taxable estate, and the very high likelihood Mr. Reugh's estate will be audited by the Internal Revenue Service, this audit and estate administration could be as short as a couple of years or could stretch out for a decade (or longer) if there is any estate tax litigation. There is no way of knowing for certain the timing of when the Internal Revenue Service or the Washington Department of Revenue will begin its review of the estate tax returns filed for Mr. Reugh's estate.

CP at 202-04.

         On January 27, 2017, legal counsel for the Reugh children sent the Community Foundation's counsel a letter. The children's counsel acknowledged an earlier offer, but stated a closer inquiry into the facts surrounding the trust had led the children to conclude that Wendell Reugh never intended to activate the trust. The children now believed the trust to be invalid because the trustor named himself as the initial trustee and because the trust was to be funded with a $100 transfer that Reugh never consummated. The January 27 letter continued:

. . . [I]n the event Inland Northwest Community Foundation (INWCF) still has designs on the Reugh family's assets, this letter is intended to encourage INWCF to spend its resources elsewhere. As explained herein, Mr. Reugh's intent was to ensure that his children received his assets directly.
. . . .
. . . [I]f the beneficiaries are forced by INWCF to litigate to carry out their father's intent, then if they prevail, and benefit his estate thereby, they will seek recovery of all fees and costs. RCW 11.96A.150.
In sum, this is notice of the beneficiaries' intent to claim their father's estate absent an invalid trust diverting his assets, and we will proceed in that vein. We are hopeful that INWCF will appreciate the foregoing, and Mr. Reugh's obvious intent, and avoid litigation in this distribution. If there are any issues, please let me know.

CP at 578, 582. Wendell Reugh's children have since sued Reugh's estate planning attorney and alleged that the attorney failed to prepare documents to fulfill the intent of Reugh.

         On February 27, 2017, the children of Wendell Reugh filed a petition, under Spokane County Superior Court cause no. 15-4-00471-1, the probate case number, contesting the Reugh revocable living trust's validity. The caption only mentioned the estate of K. Wendell Reugh. Paragraph 1.5 of the petition declared:

1.5 This Court has taken jurisdiction over the above numbered probate of the Estate of K. Wendell Reugh, and thus also has jurisdiction to hear this petition to contest the validity of the K. Wendall Reugh Revocable Living Trust.

CP at 28-29. The paragraph referenced a footnote, which read:

RCW 11.96A.040 (superior court has original jurisdiction in probate and trust matters); RCW 11.96A.020 (superior courts has power and authority to administer and settle all matters concerning the estates and assets of deceased persons, including trust matters); In Re Estate of Campbell, 46 Wn.2d 292, 297 (1955) (Superior court has inherent power in probate proceedings to clarify status at any time).

CP at 29.

         One week later, and on March 6, 2017, the children refiled the petition contesting the validity of the Reugh trust under Spokane County Superior Court cause no. 17-4-00311-7, without dismissing the petition filed in the probate proceeding. The caption for this petition named the estate of K. Wendell Reugh, but the caption added the children, JoLynn Kovalsky-Reugh, Mark Reugh, and Jim Reugh as petitioners. This second petition included the same paragraph 1.5 and footnote to the paragraph as found in the February 27 petition. The petition prayed for relief, in part:

         This Court should declare:

5.1 That Article III of the Reugh Will provision activating a trust is invalid. Exhibit A, Last Will and Testament, ...

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