Land v. Marshall
39 A.L.R. 3d 1, 11 Tex. Sup. Ct. J. 276, 426 S.W.2d 841 (1968)
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Rule of Law:
An inter vivos trust created by one spouse using community property is invalid as an illusory trust if the settlor spouse retains complete control and beneficial enjoyment of the property during their lifetime, as it functions as an impermissible testamentary disposition of the other spouse's community interest.
Facts:
- Viola Walker Marshall and W. E. Marshall were married in 1905 and accumulated 760 shares of Franklin Life Insurance Company stock as community property, which constituted nearly their entire estate.
- On August 23, 1960, without his wife's knowledge, W. E. Marshall transferred the stock into a trust, naming their daughter, Erie Darnall Land, as trustee.
- The trust instrument provided that W. E. Marshall would receive all income and dividends during his life, and after his death, his wife would receive them for her life.
- W. E. Marshall reserved extensive powers, including the right to direct the trustee in all matters (selling, voting, etc.), the power to revoke the trust, and the power to invade the principal for his own benefit.
- After the death of both spouses, the remaining trust property was designated to go to their granddaughter, and was later amended to go to their daughter.
- Throughout his life, W. E. Marshall continued to receive all dividends and proceeds from any stock sales made by the trustee upon his instruction.
- Viola Marshall only learned of the trust's existence three weeks before her husband’s death on August 4, 1965.
Procedural Posture:
- Viola Walker Marshall (plaintiff) filed suit in a Texas trial court against Erie Darnall Land (defendant) and others to set aside a trust created by her deceased husband.
- Both parties filed motions for summary judgment.
- The trial court granted the defendants' motion for summary judgment, upholding the validity of the trust.
- Viola Walker Marshall appealed to the Texas Court of Civil Appeals (an intermediate appellate court).
- The Court of Civil Appeals reversed the trial court's judgment, holding the trust was invalid and awarding Marshall a one-half interest in the assets.
- The defendants then appealed to the Supreme Court of Texas.
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Issue:
Does a revocable inter vivos trust created by a husband with community property, where he retains the right to all income for life, the power to revoke, and full control over the trustee's actions, constitute an invalid 'illusory' trust that improperly disposes of the wife's community property interest upon his death?
Opinions:
Majority - Pope, Justice.
Yes. A trust created by a husband with community property is invalid as an illusory trust where he retains such complete control that the transfer is not genuine but merely a device to dispose of his wife's community interest upon his death. The court resolves the conflict between the husband's managerial power over community property and the rule against unilateral testamentary disposition of the wife's share by adopting the 'illusory trust' doctrine. While the Texas Trust Act permits revocable trusts, this power is limited by the principles of community property law. The court found that because W. E. Marshall retained every power over the trust assets that he possessed before its creation—including the right to income, the power to revoke, and absolute control over the trustee—the trust was not a real transfer of property. Citing Newman v. Dore, the court held that judged by its substance rather than its form, the conveyance was 'illusory, intended only as a mask for the effective retention by the settlor of the property which in form he had conveyed.' Such a trust cannot defeat the surviving spouse's community property rights. The court invalidated the entire trust, concluding that voiding only half would disrupt the settlor's whole scheme.
Analysis:
This case is significant for formally introducing the 'illusory trust' doctrine into Texas community property law. It establishes a crucial limit on a spouse's managerial powers, clarifying that these powers cannot be used to create a trust that functions as a will substitute to dispose of the other spouse's community property interest. The decision provides a framework for courts to look beyond the form of a trust to its substance, preventing spouses from circumventing community property protections through carefully drafted but functionally meaningless conveyances. Future litigation in this area will focus on applying the flexible 'illusory' test to determine how much retained control and benefit is sufficient to invalidate a trust.
