Mutual-Wills Contracts Bind the Surviving Spouse’s Nonprobate Survivorship Property and Bar Bad-Faith Lifetime Diversions

Case: Susan Inouye v. Estate of Patricia McHugo (Gregory McHugo and Nancy Patricia McHugo, Appellants)
Court: Supreme Court of Vermont
Date: 2026-07-17 (2026 VT 33)

1. Introduction

This appeal is the latest chapter in intra-family litigation stemming from John and Patricia McHugo’s 1997 Arizona “mutual wills” executed after their divorce but while they continued to co-own assets—many titled in joint tenancy with rights of survivorship. The parents’ estate plan was designed to (i) allow the survivor to use the property during life and (ii) ensure that, upon the survivor’s death, the three children (Gregory, Susan, and Nancy) would share equally.

The central dispute arose because Patricia later executed a 2006 Vermont will revoking the 1997 will, disinheriting Susan (except small gifts to Susan’s children), and favoring Gregory and Nancy. After John died in 2010, joint-tenancy assets passed to Patricia by operation of law. Patricia then transferred two residential properties (the Tucson home and a Greensboro cottage) to Gregory and Nancy, and died in 2016.

After probate litigation confirmed the validity of Patricia’s 2006 will (In re Est. of McHugo (McHugo I)), Susan pursued a civil action seeking, among other remedies, unjust enrichment and constructive trust against Gregory and Nancy. Following an earlier appeal that held the mutual wills formed an enforceable contract on their terms (Inouye v. Est. of McHugo (McHugo II)), the trial court on remand entered judgment for Susan on unjust enrichment: a money judgment for one-third of certain financial assets and constructive trusts over one-third interests in each of the two properties. Gregory and Nancy appealed, contesting (1) whether Patricia’s actions breached the mutual-wills contract and (2) prejudgment interest.

Key issues:
  • Whether the mutual-wills contract required equal division among all three children of the surviving parent’s property at death, including property received via joint tenancy survivorship (i.e., nonprobate transfers).
  • Whether a personal-representative “allocation” clause authorized unequal distributions that effectively disinherit a child.
  • Whether the surviving parent’s lifetime transfers to two children can breach the implied covenant of good faith and fair dealing embedded in the mutual-wills contract.
  • Whether prejudgment interest was mandatory or, alternatively, properly awarded as an equitable matter.

2. Summary of the Opinion

The Vermont Supreme Court affirmed the judgment. It held that:

  • Plain-language control of survival clause: The “survival clause” unambiguously required that if John “does not survive [Patricia] by thirty days,” then “all” of Patricia’s property “real and personal” and “any residuary estate” must be divided equally among the three children. Because John predeceased Patricia by years, the clause applied and required equal division.
  • Nonprobate assets included: The mutual wills’ repeated “all my property” language, read as a whole, encompassed property the survivor owned at death regardless of how acquired, including assets that came to the survivor via joint tenancy survivorship.
  • No “freewheeling” unequal-distribution authority: The personal-representative power to allocate “different assets or disproportionate shares” was limited to avoiding fractional interests among multiple distributees; it did not authorize disinheriting a distributee in conflict with the wills’ equal-division scheme. It also never came into play here because John’s will was not probated.
  • Lifetime diversions can breach the implied covenant: Patricia’s inter vivos transfers of the two properties to Gregory and Nancy violated the implied covenant of good faith and fair dealing by evading the mutual wills’ shared purpose and Susan’s justified expectation of equal treatment.
  • Prejudgment interest upheld: Without deciding whether prejudgment interest was mandatory, the Court affirmed on the alternative ground that the trial court acted within its broad equitable discretion in awarding prejudgment interest on the liquidated monetary portion of the unjust-enrichment award.

3. Analysis

3.1. Precedents Cited

The Court’s analysis is built on a dense network of prior Vermont contract, wills, equity, and remedies doctrine, with selective support from out-of-state mutual-wills authority.

A. Mutual wills as dual instruments (revocable as wills, enforceable as contracts)

  • In re Est. of McHugo (McHugo I), 2020 VT 59: The probate appeal established two important framing points later used here: (i) a will-allowance proceeding tests only whether a proffered instrument is valid as a will, and (ii) separate civil claims may exist even if the later will is valid and revokes the earlier one. This opinion quotes McHugo I for the proposition that a “single instrument may be both a will contractual in nature, and a contract testamentary in nature; as a will it is revocable but as a contract it is enforceable,” drawing on Garrett v. Read.
  • Inouye v. Est. of McHugo (McHugo II), 2024 VT 75: This was the doctrinal gateway for the present appeal. McHugo II held that John and Patricia “enacted a valid contract for mutual wills” that was “enforceable on its own terms,” rejected unilateral notice as rescission, and required adequate findings to show true consent. Here, the Court treats enforceability of the mutual-wills contract as settled.
  • Garrett v. Read, 102 P.3d 436 (Kan. 2004), disapproved on other grounds by Nelson v. Nelson, 205 P.3d 715, 272 (Kan. 2009): Cited (through McHugo I) to support the conceptual structure: mutual wills can be contractually enforceable even while remaining revocable as wills.

B. Unjust enrichment as an equitable path to recover diverted inheritances

  • Kellogg v. Shushereba, 2013 VT 76 and Beldock v. VWSD, LLC, 2023 VT 35: Provide the elements of unjust enrichment and the standard of review framework—fact-bound enrichment determinations, de novo review whether the claim can be maintained, and deferential review of equitable remedies.
  • McLaren v. Gabel, 2020 VT 8: Quoted via Beldock for the principle that equitable remedies are reviewed for abuse of discretion.
  • Mueller v. Mueller, 2012 VT 59: Critical bridge authority recognizing that unjust enrichment may lie where property or funds are diverted to a third person in violation of a contract to make a specific devise. This directly underwrites Susan’s theory against Gregory and Nancy, who were not contracting parties but were beneficiaries of the breach.
  • In re Est. of Elliot, 149 Vt. 248 (1988): Cited for the damages-measure perspective that unjust enrichment focuses on the value of the benefit conferred.

C. Contract and will interpretation: plain meaning, four corners, and limited use of extrinsic evidence

  • Avery v. Est. of Avery, 2018 VT 59: Confirms that construction of a will and interpretation of agreements are legal questions reviewed de novo, and reiterates that the goal is to discern testator intent from language used.
  • In re Cronan, 151 Vt. 576 (1989), Sutton v. Purzycki, 2022 VT 56, and Southwick v. City of Rutland, 2011 VT 105: Supply the core contract-interpretation method: intent is derived from the language in context; unambiguous language governs.
  • In re Est. of Holbrook, 2016 VT 13, In re Est. of Mattison, 122 Vt. 486 (1962), Ripley v. Benjamin, 111 Vt. 76 (1940), and Isbrandtsen v. N. Branch Corp., 150 Vt. 575 (1988): Establish the “four corners” approach, the threshold for ambiguity (“reasonable people could differ”), and the restraint against using canons or extrinsic evidence to “unravel what needs no unraveling.”
  • In re Est. of Barslow, 128 Vt. 192 (1969): Quoted in Avery for the principle that testator language controls so far as legally possible.
  • In re Peck's Est., 101 Vt. 502 (1929), In re Est. of Davis, 126 Vt. 19 (1966), and In re Beach's Est., 103 Vt. 70 (1930): Support enforcing clear will language and construing the instrument to avoid partial intestacy where possible, consistent with the will’s overall plan.
  • Downtown Barre Dev. v. C & S Wholesale Grocers, Inc., 2004 VT 47: Used to reject defendants’ invitation to insert a different contingency into the survival clause; courts do not add terms by implication unless indispensable to effectuate intent.
  • Shepard's Heirs v. Shepard's Est., 60 Vt. 109 (1888): Invoked to caution against overreliance on other jurisdictions’ “similar” will cases; each will is construed primarily on its own language and disclosed disposition scheme.

D. Implied covenant of good faith and fair dealing as a limit on evasive performance

  • Carmichael v. Adirondack Bottled Gas Corp. of Vt., 161 Vt. 200 (1993): Provides the foundational description of the implied covenant: parties promise not to undermine each other’s rights to the contract’s benefits; duty is imposed by law and not bargained away; performance must be faithful to the common purpose and justified expectations (drawing on Restatement (Second) of Contracts § 205).
  • Tanzer v. MyWebGrocer, Inc., 2018 VT 124 and Monahan v. GMAC Mortg. Corp., 2005 VT 110: Provide standards for showing breach (community standards of fairness, diligence, avoidance of advantage-taking) and emphasize the fact-intensive, context-sensitive nature of the inquiry.
  • In re Estate of Erickson, 841 N.E.2d 1104 (Ill. App. Ct. 2006): Persuasive authority for the proposition that even where a mutual will gives the survivor property “absolutely,” the survivor may not, in bad faith, give away property shortly before death to circumvent the agreed dispositive scheme; the act can violate the contract’s spirit and the implied duty of good faith.
  • First United Presbyterian Church v. Christenson, 356 N.E.2d 532 (Ill. 1976): Persuasive authority that joint-tenancy property—although not passing “under the will”—can still be subject to a contractual agreement embodied in the mutual will, enforceable in equity to limit the survivor’s disposition.

E. Standards of appellate review and briefing discipline

  • Bruntaeger v. Zeller, 147 Vt. 247 (1986), Lofts Essex, LLC v. Strategis Floor & Décor Inc., 2019 VT 82, and Hirchak v. Hirchak, 2024 VT 81: Cited for deference to trial court factfinding and credibility, clear-error review for findings, and de novo review for pure questions of law.
  • In re S.B.L., 150 Vt. 294 (1988): Used to note that appellants must engage the trial court’s reasoning and show error.
  • In re Snyder Grp., Inc., 2020 VT 15: Used to decline considering an inadequately briefed argument (here, a per se claim about interest accrual during appeal).
  • Alberino v. Balch, 2008 VT 130: Supports affirmance on any legal ground supported by the record; used here to affirm prejudgment interest on discretionary grounds without deciding the “mandatory” question.

F. Prejudgment interest: mandatory vs. discretionary

  • V.R.C.P. 54(a): Establishes that judgments include principal and accrued interest.
  • Martin v. Lyon, 2024 VT 68: Distinguishes prejudgment interest expressly provided by contract from interest awarded as damages for detention of money.
  • EBWS, LLC v. Britly Corp., 2007 VT 37 and Agency of Nat. Res. v. Glens Falls Ins. Co., 169 Vt. 426 (1999): Explain that prejudgment interest is “awarded as of right” when damages are liquidated or reasonably certain, because defendants can stop accrual by tendering the amount.
  • Est. of Fleming v. Nicholson, 168 Vt. 495 (1998) and Legault v. Legault, 142 Vt. 525 (1983): Confirm broad equitable discretion to award interest when damages are uncertain or disputed; define abuse-of-discretion limits and emphasize equity’s role in preventing injustice.
  • Epsom v. Crandall, 2019 VT 74 and Winey v. William E. Dailey, Inc., 161 Vt. 129 (1993): Used to show how different facts can justify different equity balances; declining interest in one case does not dictate denial in another.
  • Hirchak v. Hirchak, 2024 VT 81: Noted for the proposition that prejudgment interest on unjust enrichment is discretionary; the Court distinguishes that context but ultimately does not decide whether the “mandatory” contract-like rule applies here because the discretionary basis suffices.

3.2. Legal Reasoning

A. The Court’s interpretive anchor: unambiguous text, read as a whole

The Court applies a disciplined plain-language methodology. It treats the mutual wills as the textual expression of the parents’ contract and uses the same interpretive “four corners” approach governing both contracts and wills: discern intent from the language used, in context, enforcing clear text without importing extrinsic contingencies.

Defendants attempted to re-characterize the “survival clause” as a technical survivorship condition operating only in the “close-in-time deaths” scenario (Patricia dies; John survives her but dies within 30 days). The Court rejects this by reading the clause’s actual words: “In the event that John Walter McHugo does not survive me by thirty days…” John did not survive Patricia at all; therefore, he did not survive her “by thirty days.” The contingency is satisfied.

A notable feature of the reasoning is the Court’s refusal to let an abstract dictionary definition override a specific instrument’s syntax and function. The Black’s Law Dictionary definition of “survival clause” may describe a common estate-planning technique, but the Court insists that the parties’ chosen language, not generalized labels, determines the operative contingency.

B. “All my property” means all property—nonprobate survivorship assets included

The opinion’s core doctrinal move is to treat the mutual wills as a contract to control ultimate distribution of the survivor’s estate broadly, notwithstanding that many assets passed outside probate by joint tenancy. The Court links:

  • Article III’s statement of “intention…to dispose of all of my property which I may own at the date of my death,” and
  • the survival clause’s direction to divide “all of my property, real and personal, and any residuary estate” equally.

The Court therefore rejects defendants’ effort to confine the mutual-wills contract to only assets that would have passed through the untriggered testamentary trust. This is both a textual and structural conclusion: the equal-division plan appears in both the trust-termination clause and the survival clause, ensuring equal disposition regardless of the path by which the survivor holds title at death (trust, survivorship, or otherwise).

C. The personal representative’s allocation power is not a disinheritance power

Defendants next argued that a “Personal Representative” clause authorizing allocation of “different assets or disproportionate shares” permitted unequal distribution among the children. The Court rejects this on two independent grounds:

  1. Triggering: The clause is a power of the personal representative/executor of John’s will. John’s will was never probated because the joint-tenancy assets passed by operation of law. There was therefore no personal representative exercising Article IV authority.
  2. Scope: The clause is explicitly limited to avoiding “undivided fractional interests” among multiple distributees (a pragmatic power to effectuate equal division without splitting every asset). It does not authorize eliminating a distributee’s share in contravention of the equal-division provisions.

In short, an administrative discretion to allocate assets “in kind” is not transformed into substantive permission to rewrite the dispositive scheme.

D. Lifetime transfers: breach via the implied covenant of good faith and fair dealing

The Court is careful to characterize the trial court’s holding accurately: the inter vivos transfers of the Greensboro cottage and Tucson home were not found to violate an express anti-transfer clause (none existed); rather, they violated the implied covenant of good faith and fair dealing embedded in every contract.

The reasoning is quintessentially “spirit of the bargain” analysis. The mutual wills’ common purpose was to permit lifetime use by the survivor while preserving the remainder for equal division among the three children at the survivor’s death. Patricia’s transfers to Gregory and Nancy—at Susan’s expense—subverted the contract’s benefits to John (and, derivatively, to Susan as intended equal beneficiary) by ensuring that significant assets would not be part of the divisible estate.

The Court reinforces its conclusion with persuasive authority (In re Estate of Erickson and First United Presbyterian Church v. Christenson) recognizing that equity can enforce mutual-wills agreements against evasive lifetime transfers even where property moved outside probate and even where the survivor otherwise had broad use rights. The Court’s focus is not on formal title mechanics, but on preventing contractual evasion.

E. Remedies: money judgment plus constructive trust

Having found that Patricia’s breach conferred benefits on Gregory and Nancy that equity would not allow them to retain uncompensated, the trial court’s remedies were affirmed:

  • Money judgment for one-third of identified financial assets at death (a quantified unjust enrichment benefit).
  • Constructive trusts over one-third interests in each of the two properties (a property-based remedy to prevent retention of wrongfully diverted assets and to capture appreciation).

F. Prejudgment interest: affirmed as a discretionary equitable remedy

The Court declines to decide the potentially consequential doctrinal question whether prejudgment interest was “mandatory” because the unjust enrichment recovery was tethered to a contractual breach theory. Instead, it affirms on the narrower ground: even if discretionary, the trial court did not abuse its discretion.

The trial court’s equity calculus—endorsed on appeal—was that Susan had been deprived of the time value of money for years while Gregory and Nancy had the use of funds to which Susan was entitled under the contract’s intended scheme. The Court also notes that uncertainty about liability does not automatically defeat equitable interest (Est. of Fleming v. Nicholson), and that differing outcomes in other cases (e.g., Epsom v. Crandall) merely reflect fact-specific balancing.

3.3. Impact

This opinion’s practical and doctrinal significance lies in three main areas:

  1. Mutual-wills enforcement reaches beyond probate assets: By reading “all my property” and the survival clause as encompassing survivorship-held assets, the Court signals that Vermont will not allow nonprobate titling (joint tenancy with rights of survivorship) to function as a loophole where the mutual-wills contract shows a contrary, comprehensive plan.
  2. Implied covenant as the primary control on lifetime evasions: Even absent an express restriction on gifts or transfers, a surviving spouse’s inter vivos conveyances may breach the implied covenant if they are designed to defeat the mutual-wills bargain’s common purpose and justified expectations. This gives future litigants a concrete doctrinal handle—good faith—rather than forcing courts to find implied “no-transfer” terms.
  3. Equitable remedial flexibility, including interest: The approval of money judgment, constructive trust, and discretionary prejudgment interest underscores the Court’s willingness to deploy a full range of equitable tools to make an intended beneficiary whole when a mutual-wills contract is breached and third parties retain the diverted benefit.

For estate planners, the decision is a caution that joint-tenancy and nonprobate transfers do not necessarily insulate a survivor’s later choices from contractual commitments embedded in mutual wills. For litigators, it highlights the value of framing claims against non-contracting recipients as unjust enrichment and constructive trust, while using the contract and implied covenant to supply the “inequity” that makes retention unjust.

4. Complex Concepts Simplified

  • Mutual wills: Two wills executed as part of a reciprocal arrangement. Each will is revocable like any will, but the promises exchanged can form a contract. If one party breaches after the other has performed (e.g., dies without changing), equity can enforce the contract.
  • Joint tenancy with rights of survivorship: A form of co-ownership where, at death, the deceased owner’s interest passes automatically to the survivor—outside probate. The key point here: even if the transfer mechanism is nonprobate, the parties can still contract about the ultimate distribution the survivor must make.
  • Testamentary trust: A trust created by a will that comes into existence at death (and typically through probate). Here it never arose because there was no probate estate.
  • Residuary estate: What remains after debts, expenses, taxes, and specific gifts are satisfied.
  • Per stirpes: A method of distribution where descendants take the share their deceased parent would have taken.
  • Unjust enrichment: An equitable claim requiring return (or compensation) when someone receives and retains a benefit in circumstances where keeping it without paying is unfair.
  • Constructive trust: A court-imposed equitable remedy that treats the holder of legal title as holding property for the benefit of another who has the better equitable right. It is often used to prevent unjust enrichment.
  • Implied covenant of good faith and fair dealing: A legal duty in every contract not to undermine the deal’s benefits or evade its spirit. It can be breached even without violating an express clause.
  • Prejudgment interest: Compensation for the time value of money wrongfully withheld before judgment. It can be mandatory for liquidated sums, but courts also have equitable discretion to award it to prevent injustice.

5. Conclusion

Inouye v. Estate of Patricia McHugo (2026 VT 33) reinforces and extends Vermont’s enforcement of mutual-wills contracts in two crucial ways: (1) it reads broad “all my property” language and an unambiguous survival clause to require equal distribution of the surviving spouse’s property at death, including assets acquired via joint tenancy survivorship; and (2) it confirms that the implied covenant of good faith and fair dealing can invalidate lifetime transfers designed to defeat the bargain’s common purpose.

The opinion also underscores Vermont courts’ equitable toolkit—money judgments, constructive trusts, and discretionary prejudgment interest—to prevent recipients of diverted assets from retaining benefits that, in good conscience, belong to an intended equal beneficiary under an enforceable mutual-wills contract.