Court Construes A Trust To Allow A Trustee To Sell Real Estate And To Consider The Proceeds As Principal Of The Trust

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In In re John O. Yates Trust, a trustee of a trust filed suit to obtain declarations on whether it could sell certain real estate held in the trust, and if so, whether the proceeds should be designated as principal. No. 04-21-00365-CV, 2022 Tex. App. LEXIS 9470 (Tex. App.—San Antonio December 28, 2022, no pet. history). A beneficiary appeared and argue that the trustee could not sell the real estate, and if it did, the proceeds should be considered income. The trial court rule that the trustee could sell the real estate and that the proceeds would be considered principal. The beneficiary appealed.

Article IX(c) of the will provides: “Except as may otherwise be provided herein, my Trustee or its successor shall not have or exercise the right, power, privilege or authority to sell, convey or dispose of any of the trust property or any part thereof.” Article IX(m) states:

Otherwise, my Executor and/or Trustee shall, with the consent and approval of the Advisory Committee, lease or otherwise dispose of said properties [the disputed ranch] and the rentals or proceeds shall become part of the income or principal of the trusts created under my Will in equal parts or by stirpes as the case may be.

Id. The court of appeals held that the term “dispose” allowed the trustee to sell the ranch:

As these definitions illustrate, the plain and usual meaning of the term “dispose of” encompasses the sale of property. Nothing in Yates’s will demonstrates a clear intent to use the term “dispose of” in a different sense. Focusing, as we must, on the meaning of the words Yates actually used in his will, we conclude that the phrase “otherwise dispose of said properties” includes the sale of the Bexar County ranch.

Id. The court concluded: “The trial court did not err in declaring that the language at issue in article IX(m) authorizes the trustee, with the consent and approval of the advisory committee, to sell the Bexar County ranch.” Id.

Regarding whether the proceeds should be considered principal or income, the will stated that, generally, the Texas Trust Code would control. “The current statutory scheme governing trusts, the Texas Trust Code, provides that ‘money or other property received from the sale . . . of a principal asset’ ‘shall’ be allocated to the principal of the trust. Id. (citing Tex. Prop. Code § 116.161(2)). Despite a general provision that stated that receipts should be considered income where possible, the court noted that a different provision “specifically addresses the permissible dispositions of the Bexar County ranch, [and] does not contain any language creating an exception to the general rule set out in article IX(a) that the administration of the trust ‘shall be in accordance with and governed by the terms and provisions of the Texas Trust Act . . . as it may hereafter be amended.’” Id. The court held that the proceeds should be considered principal.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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