The Alabama Supreme Court On Proving The Existence and Terms Of an Oral Trust

In Ledbetter v. Ledbetter, a sibling dispute over the existence of an oral trust, the Alabama Supreme Court reversed a summary judgment finding that the evidence was insufficient to support the existence of an oral trust under Alabama law.

The Facts Of Ledbetter v. Ledbetter

Lois died in August 2015 survived by her three children: William (known as "Russell"), Laurie Ann, and Warren.  Lois’s estate included a lake house and a $500,000 life insurance policy.  With respect to these two assets, Lois’s will stated:

"I give, devise and bequeath, subject to the conditions stated below, [the lake house] to my son, [Russell]. "... This bequest is made subject to any and all mortgage indebtedness against [the lake house]. As a condition of receiving this bequest, [Russell] shall be responsible for ... such mortgage indebtedness. I specifically note that I have identified [Russell] as the beneficiary of a $500,000.00 life insurance policy on my life. It is my intent that he use the proceeds from this life insurance policy to pay such mortgage indebtedness. Any life insurance proceeds over and above such mortgage indebtedness, if any, shall be and become the property of [Russell]."

Laurie Ann and Warren were expressly excluded from the will.  They tried, unsuccessfully, to contest the will.  During the will contest, they learned that the beneficiary of the life insurance policy was listed as “William R. Ledbetter, Trustee of The Lois Ann Ledbetter Family Irrevocable Trust dated August 19, 1998.”  Despite the beneficiary designation, Russell had claimed the life insurance proceeds and deposited them into his personal checking account. Laurie Ann and Warren sued Russell, alleging that Lois had created an irrevocable trust for their benefit and asserting various breach and fraud claims.  Laurie Ann and Warren alleged that the Trust was an oral trust since no signed trust had been found. Russell moved for a summary judgment, arguing that an oral trust must be proved by clear and convincing evidence and that Laurie Ann and Warren did not have such evidence.

Evidence Presented Supporting The Existence Of an Alabama Oral Trust

First, one of Lois’s attorneys testified at deposition that Lois and Russel visited him in August 1998.  At that time, it was the attorney’s practice to have his clients create an oral trust prior to applying for life insurance benefiting the trust.  After the life insurance policy was accepted, Johnson would refer the client to another attorney to memorialize the oral trust.   He testified that it appeared that this is what he did in this case. Second, Lois and Warren submitted the life insurance application listing Lois as the insured and “William R. Ledbetter, Trustee of the Lois Ann Ledbetter Family Irrevocable Trust dated August 19, 1998” as the sole owner and beneficiary.  The application was accompanied by a trust certification signed by Lois and Russel.  Laurie Ann and Warren submitted evidence that Russell, as trustee, applied for a tax-identification number for the Trust and made at least the initial premium payment on the policy. Next, Lois and Warren submitted an unsigned trust document prepared by another of Lois’s attorneys, titled "The Lois Ann Ledbetter Family Irrevocable Insurance Trust Agreement."  The preamble stated that the instrument reflects “an oral agreement between the Grantor and the Trustee effective as of August 19, 1998.” In addition to provisions concerning administration of the trust and distribution of the corpus and income, the trust document provided:

"The Grantor and any other person shall have the right at any time to make additions to the Trust Fund by ... designation of the Trustee as the beneficiary of the proceeds of life insurance policies or any other benefits payable by reason of a person's death .... In the absence of contrary instructions by the person making the additions to the Trust Fund, the additional property shall be divided into equal shares for each of the Grantor's children for whom a separate trust under this  instrument is then in existence and transferred to the trustee of each of those separate trusts."

In addition, handwritten notes made by the drafting attorney stated:

"Lois Ann Ledbetter Irrevocable Family Trust dated August 19, 1998[.] Policy in place[.] Keep Warren's share in trust and Laurie's share [illegible]." The second page of notes was dated March 1, 1999, and did not expressly reference the Trust. However, under the heading "ILiT" were the words "Give Warren 40% of ILiT[,] 30% to Laurie[,] 30% to Russ." Farther down the page was a second section headed "ILiT," with the notation: "40% to Warren - in trust w/ Russ as tee[,] 30% to Laurie outright[,] 30% to Russ outright."

Finally, Laurie Ann and Warren submitted an affidavit from one of Lois’s friends.  The friend testified that she visited Lois about a month before she died and that during the visit Lois said “that there was a life insurance policy of $500,000 that was to be equally split between Warren, Laurie and Russell Ledbetter.” Despite this evidence, the Alabama trial court ruled against Laurie and Warren on their claims of an oral trust and entered summary judgment in favor of Russel.

How Do You Prove an Oral Trust Under Alabama Law?

Under the Alabama Uniform Trust Code, proponents of an oral trust must prove its creation and terms by clear and convincing evidence. See AL Code § 19-3B-407. Therefore, Laurie Ann and Warren had to present evidence at the summary judgment stage that would qualify as clear and convincing if accepted and believed by the fact-finder.

When Is an Oral Trust Created Under Alabama Law?

A trust is created when a settlor "transfer[s] ... property to another person as trustee during the settlor's lifetime or by will or other disposition taking effect upon the settlor's death." AL Code § 19-3B-401. Regarding the existence of the oral trust, the Alabama Supreme Court stated:

Here, Johnson, the attorney Lois and Russell visited in August 1998, testified regarding his consistent use of oral trusts in preparing clients to apply for life insurance. Lois's life-insurance application specified that Russell was to be the beneficiary of the insurance "as trustee." The trust certification stated that Russell was the trustee of the Trust. The unsigned trust document stated that it reflected an oral  agreement between Lois and Russell. Attorney Spier's notes from his meetings with Lois indicated that the Trust had been created on August 19, 1998, and was intended to benefit Laurie Ann, Warren, and Russell. Drawing all inferences in favor of Laurie Ann and Warren as the summary-judgment nonmovants, we conclude that a fact-finder could reasonably have found, by clear and convincing evidence, that an oral trust was created.

How Do You Establish The Terms of An Oral Trust Under Alabama Law?

The "terms of a trust" are defined as "the manifestation of the settlor's intent regarding a trust's provisions as expressed in the trust instrument or as may be established by other evidence that would be admissible in a judicial proceeding." AL Code § 19-3B-103(19). As for the terms of the oral trust, the Alabama Supreme Court noted that the unsigned trust document provided for equal distribution among the three children, and the affidavit from Lois’s friend reflected the same equal split.  The Alabama Supreme Court acknowledged that the notes from the drafting attorney referenced a 40-30-30 split, but stated that this evidence merely created an issue of fact, and declined to resolve that issue of fact on summary judgment. The Alabama Supreme Court reversed the summary judgment, holding that Laurie Ann and Warren submitted substantial evidence from which a fact-finder could reasonably have concluded that they established by clear and convincing evidence, the creation and terms of an oral trust benefiting them.

The Dissent — Failure To Provide Clear And Convincing Evidence Of The Terms Of The Trust

The dissent in this case argued that in order to survive summary judgment, Laurie Ann and Warren were required to present clear and convincing evidence of both the existence of an oral trust and the terms of the trust.  The dissent agreed that they presented evidence from which a jury could find the existence of a trust, but argued that they failed to support the allegation that the Trust required an equal distribution with clear and convincing evidence. First, Laurie Ann and Warren submitted an unsigned trust agreement, which was allegedly drafted for Lois and purported to divide the Trust proceeds equally among her living children. The parties cited no Alabama cases in which a court accepted an unsigned trust agreement as evidence of the terms of an irrevocable oral trust. Second, Laurie Ann and Warren offered the 2015 affidavit as evidence of Lois's alleged intentions to divide the Trust proceeds equally among her children. But the 2015 affidavit said nothing about Lois's intentions at the time the oral trust was allegedly created; nor did it reference a trust. In addition, the failure to provide clear and convincing evidence as to the terms of the oral trust was underscored by the fact that Laurie Ann and Warren provided counterevidence showing that Lois intended to make a 40-30-30 distribution of the Trust proceeds as shown in the attorney’s notes. Proving the existence of an oral trust under Alabama law is difficult.  Time will tell if an oral trust is found to have been created in this case.