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Estate Planning & Probate Law FLASHPOINTS February 2021

Elizabeth A. Garlovsky & Jennifer J. Thurswell, Harrison & Held, LLP, Chicago
312-753-6185 | E-mail Elizabeth A. Garlovsky | 312-753-6126 | E-mail Jennifer J. Thurswell

Trustee Required To Make Accounting of Trust Upon Its Termination

In Cori v. Schlafly, 2021 IL App (5th) 200246, the court ruled on two issues: (1) personal jurisdiction over an out-of-state trustee of a trust and (2) interpretation of trust terms regarding when the trustee was required to terminate the trust and distribute the trust assets. The facts of the case begin with spouses John Fred Schlafly, Jr. (Mr. Schlafly), and Phyllis Schlafly (Mrs. Schlafly). On December 10, 1982, Mr. Schlafly executed his last will and testament. The will established the John Fred Schlafly Testamentary Trust, which provided that upon the death of Mr. Schlafly, the residue of his estate should be held in trust for Mrs. Schlafly’s benefit and named the Schlaflys’ sons, Roger and John, as cotrustees of the trust. Article III of the will created the trust, providing in paragraph (b) in relevant part:

I give the balance of the residue of my estate not disposed of by the preceding paragraph (a) to my sons JOHN SCHLAFLY and ROBERT SCHLAFLY as Trustees, to be held and disposed of as follows. All of the net income of this Trust shall be paid to my wife PHYLLIS SCHLAFLY . . . for the remainder of her natural life. In addition, the Trustees may pay to my wife . . . so much of the principal of this Trust as the Trustees in their sole discretion, from time to time, believe is desirable for her care, maintenance, health and support, in accordance with the standard of living she enjoyed during her lifetime. On my wife’s death, this Trust shall terminate and the balance thereof shall then be disposed of under the terms of this Will as if my wife had not survived me. 2021 IL App (5th) 200246 at ¶34.

Article IV of the will provided as follows:

In the event my wife PHYLLIS SCHLAFLY shall predecease me, then I hereby give, devise and bequeath all of the rest, residue and remainder of my estate, in six equal shares as follows:

(a) One share shall be paid to my wife PHYLLIS SCHLAFLY as Trustee for my daughter ANNE SCHLAFLY. The said Trustee shall apply so much of the income and principal of the trust estate as she shall determine for the benefit of my daughter ANNE, it being my intention that the Trustee shall have absolute discretion in this regard including the power to accumulate income. In the event my wife does not survive me then I appoint my son JOHN SCHLAFLY and my daughter LIZA FORSHAW as Co-Trustees. In the event the Co-Trustees are unable to agree, the decision of my daughter LIZA FORSHAW shall be controlling and binding. In the event either Co-Trustee appointed herein is or becomes unable to serve as such, then I appoint my son ROGER SCHLAFLY as Successor Trustee; and in the event of another vacancy, then I appoint my son ANDREW SCHLAFLY as Successor Trustee. Said trust shall vest absolutely in my daughter ANNE SCHLAFLY when she reaches the age of 26.

(b) The other five shares shall be distributed, share and share alike, to my surviving children other than ANNE, namely, JOHN SCHLAFLY, BRUCE SCHLAFLY, ROGER SCHLAFLY, LIZA FORSHAW, and ANDREW SCHLAFLY. 2021 IL App (5th) 200246 at ¶35.

Mr. Schlafly predeceased Mrs. Schlafly, and the trust was established. Mrs. Schlafly then died on September 5, 2016. On September 29, 2017, Anne filed a petition in the circuit court of Madison County, Illinois, stating that Roger and John did not terminate the trust and distribute the trust property as was required by the will and sought to have the circuit court enforce her rights as a beneficiary of the trust.

Subsequently, on December 31, 2017, John, an Illinois resident, resigned as cotrustee, leaving Roger as sole trustee of the trust. Roger, a California resident, filed a motion to dismiss Anne’s petition for a lack of personal jurisdiction, which was denied. Both Anne and Liza filed motions for partial summary judgment requesting that the circuit court compel distribution of their shares of the trust assets. The circuit court found that the trust terminated upon Mrs. Schlafly’s death and required Roger to distribute the trust assets outright in equal shares to Mrs. Schlafly’s six children. To effectuate the termination and distribution, the circuit court ordered Roger to prepare an accounting and a projected plan of distribution for the trust assets. Roger filed an interlocutory appeal arguing that the circuit court erred in denying his motion to dismiss based on a lack of personal jurisdiction and that the circuit court erred in granting Anne’s and Liza’s motions for partial summary judgment, thus requiring him to prepare an accounting and projected plan of distribution for the trust assets.

The Fifth District of the Illinois Appellate Court first addressed the issue of personal jurisdiction. Roger argued that the circuit court did not have personal jurisdiction over him. Roger signed an affidavit in which he asserted that “(1) he is a resident of California; (2) he has not been a resident of Illinois since 1983; (3) he has not conducted business in Illinois in any way that is relevant to the current lawsuit; (4) he does not own any real property in Illinois; (5) he is not licensed or registered to do business in Illinois; (6) he has not ‘at any relevant time’ had an address, office, telephone number, bank account, employee, agent, or representative in Illinois; (7) he is the trustee of the Trust; (8) he has managed the Trust from California; and (9) the Trust does not have any assets in Illinois.” 2021 IL App (5th) 200246 at ¶6.

Roger also argued to the Fifth District that the circuit court did not have personal jurisdiction over him in his capacity as trustee of the trust because the trust was not administered in Illinois. In support of this position, Roger argued that “(1) the Will does not contain a choice of law provision requiring that the Trust be administered under the laws of Illinois, (2) Roger is not a resident of Illinois, (3) five out of six of the trust beneficiaries reside outside of Illinois, (4) the property constituting the Trust is held in an investment portfolio under an address outside of Illinois, and (5) Roger does not conduct the business of the Trust in Illinois.” 2021 IL App (5th) 200246 at ¶25.

In response, Anne filed a counteraffidavit in which she stated that Roger was a cotrustee of the trust with John, who was a resident of Illinois, and because John resided in Illinois, it was unavoidable that some trust administration was conducted in Illinois, that the trust paid taxes to the State of Illinois, that the will that created the trust was executed in Illinois, and that the will that created the trust was probated in Illinois. Anne also filed a taxpayer’s statement from the Illinois Department of Revenue that stated that the trust owed several years of unpaid Illinois taxes. The statement was addressed to the trust, in care of John, at his Illinois address. Anne also filed correspondence sent from John at his address in Illinois to the IRS and to the State of Illinois paying several years of income taxes. The checks that were used to make the payments listed the trust’s address as being in Illinois.

The Fifth District first analyzed the jurisdiction issue by noting that “Illinois courts may assert personal jurisdiction over a nonresident defendant only if the assertion comports with section 2-209 of the Code (735 ILCS 5/2-209 (West 2010)), known as Illinois’ long-arm statute, and with the due process guarantees of both the Illinois and the United States Constitutions.” 2021 IL App (5th) 200246 at ¶20, quoting Aasonn, LLC v. Delaney, 2011 IL App (2d) 101125, ¶11, 961 N.E.2d 939, 356 Ill.Dec. 550. As Roger did not argue that he was entitled to more due-process protections under the Illinois Due Process Clause than the federal Due Process Clause (U.S.CONST. amend. XIV, §1), the court considered the due-process issue under the federal Due Process Clause. Cori, supra, 2011 IL App (2d) 101125 at ¶21, citing Kaufman v. Barbiero, 2013 IL App (1st) 132068, ¶¶37 – 38, 999 N.E.2d 764, 376 Ill.Dec. 589. The federal Due Process Clause states that a defendant must have certain minimum contacts with a forum state, such that the maintenance of a suit there against the defendant does not offend traditional notions of fair play and substantial justice. Cori, supra, 2011 IL App (2d) 101125 at ¶22, citing Kaufman, supra, 2013 IL App (1st) 132068 at ¶40. The court did not find any evidence of Roger’s continuous and systematic activities in Illinois for a finding of general jurisdiction; therefore, the court evaluated the issue solely regarding specific jurisdiction.

To find specific jurisdiction, the court analyzed whether Roger purposefully directed his activities in Illinois and whether the cause of action arose out of or related to Roger’s contacts with Illinois. “ ‘Under specific jurisdiction, a nonresident defendant may be subjected to a forum state’s jurisdiction based on certain “single or occasional acts” in the state but only with respect to matters related to those acts.’ . . . ‘[W]hen a nonresident defendant purposefully derives [a] benefit from its interstate activities in other jurisdictions it would be unfair to allow that defendant to avoid any legal consequences that proximately arose from those same activities.’ ” 2021 IL App (5th) 200246 at ¶23, quoting Kaufman, supra, 2013 IL App (1st) 132068 at ¶42.

The court noted that an express trust has a discrete legal status and can be a party to litigation through its trustee in a representative capacity. When litigation arises over a trust that is administered in Illinois, an Illinois court would have specific jurisdiction over the trust as well as the designated trustee for purposes of that litigation. In an analysis of whether a trust is administered in Illinois, the court analyzed the following factors: “(1) the provisions of the trust instrument, (2) the residence of the trustees, (3) the residence of the beneficiaries, (4) the location of the trust assets, and (5) the location where the business of the trust is to be conducted.” 2021 IL App (5th) 200246 at ¶24, quoting Sullivan v. Kodsi, 359 Ill.App.3d 1005, 836 N.E.2d 125, 131, 296 Ill.Dec. 710 (1st Dist. 2005).

Beginning with the first factor, the provisions of the trust instrument, the will that created the trust neither contained a provision regarding choice of law nor provided that the trust was to be administered in Illinois. However, in the will, the only references to a state were to Illinois. The will stated that Mr. Schlafly resided in Illinois at the time of the will’s execution and allowed for the investment of funds located outside of Illinois. Further, the will, which was probated in Illinois, created a testamentary trust. The court noted that unlike trusts created during the grantor’s lifetime, “testamentary trusts are created by the probate of the decedent’s will in state court, owing their very existence to the laws and courts of the state of the grantor, thus providing a permanent tie to the state.” 2021 IL App (5th) 200246 at ¶26, citing Linn v. Department of Revenue, 2013 IL App (4th) 121055, ¶28, 2 N.E.3d 1203, 377 Ill.Dec. 922. Therefore, the court found that the first factor weighed in favor of a finding that the trust was administered in Illinois.

As to the second factor, the residence of the trustees, the court noted that when determining whether specific personal jurisdiction exists, “the relevant time period begins when the claim arose and extends to the date the lawsuit was filed and service was attempted, with ‘the critical point of inquiry [being] the time the defendant was made a party to the suit and was served.’ ” 2021 IL App (5th) 200246 at ¶24, quoting Robertsson v. Misetic, 2018 IL App (1st) 171674, ¶23, 116 N.E.3d 205, 426 Ill.Dec. 356. Thus, the court reviewed the trustees’ states of residence between the date that Anne’s claim arose, which was the date of Mrs. Schlafly’s death, and the date that Roger was served with Anne’s complaint. The court found that at the time Anne filed her complaint, John, an Illinois resident, and Roger, a California resident, were cotrustees of the trust. Thus, one of the trustees resided in Illinois at the time the complaint was filed.

Regarding the third factor, the state of residence of the beneficiaries, John is one of six beneficiaries and the only beneficiary who lived in Illinois. As to the fourth factor, the location of the trust’s assets, the court found that at the time Anne filed her complaint, the trust’s investment portfolio was held under John’s address in Illinois. Only after Anne filed her complaint did John resign and, at that time Roger changed the address for the investment portfolio to his address in California. Furthermore, all the trust’s tax returns were filed in Illinois and listed John’s address in Illinois.

Finally, as to the fifth factor, the location where the business of the trust is to be conducted, the court found that John had conducted much of the business of the trust from his home in Illinois. John’s address in Illinois was printed on the trust’s checks, listed on the tax returns for the trust, and recorded as the address on the investment portfolio. Therefore, the court found that the factors weighed in favor of a finding that the trust was administered in Illinois at the time Anne filed her complaint. Accordingly, the court found that the circuit court had personal jurisdiction over the trust, and consequently over Roger in his capacity as trustee.

The court next addressed the issue of the summary judgment granted to Anne and Liza, finding that the trust terminated upon Mrs. Schlafly’s death and requiring Roger to distribute the trust assets outright in equal shares to Mrs. Schlafly’s six children. The court explained that in the interpretation of trusts and wills, the objective is to ascertain the settlor’s intent. The court found, based on the plain language of will, that it was evident that Mr. Schlafly’s goal for the trust was to provide for Mrs. Schlafly during her lifetime, that the trust should terminate upon Mrs. Schlafly’s death, and that the trust assets should be distributed among the six children. The will’s distribution provisions unambiguously provided that Anne should receive her one-sixth distributive share if she attained the age of 26 years at the time of that distribution and that Liza was entitled to her one-sixth share. The evidence established that Mrs. Schlafly died and that Anne was over the age of 26 years. Thus, the provisions of the will and trust required that the trustee terminate the trust and distribute one-sixth of the assets to each of the children, including Anne and Liza.

Nevertheless, notwithstanding the plain language of the will and trust, Roger argued that he had the option to withhold an accounting and distribution of the trust assets because the statute of limitations for Illinois to seek estate taxes against Mrs. Schlafly’s estate had not yet expired. However, Roger cited no authority to support his assertion that he has the discretion to withhold the assets of the trust despite a clear termination provision. Roger also argued that Anne violated the trust’s spendthrift provision by starting this litigation and other litigation involving the trust. However, the court found that Roger was not able to use the spendthrift provision to withhold distribution of the assets of the trust considering the termination provision. “Spendthrift trust provisions restrict the beneficiary’s ability to alienate and the beneficiary’s creditors’ ability to attach the trust corpus.” Cori, supra, 2021 IL App (5th) 200246 at ¶39, quoting In re Marriage of Sharp, 369 Ill.App.3d 271, 281, 860 N.E.2d 539, 549, 307 Ill.Dec. 885 (2d Dist. 2006). As the trust had terminated by its terms, Anne was entitled to her distributive share of the trust assets; therefore, the spendthrift provision was no longer effective because Anne’s “unfettered right of control negate[d] any future effect of the spendthrift clause.” Id. Thus, the Fifth District concluded that the circuit court neither erred in granting Anne’s and Liza’s motions for partial summary judgment nor in ordering Roger to account for and submit a distribution plan for the trust assets.

For more information about estate planning and probate, see ASSET PROTECTION PLANNING (IICLE®, 2018). Online Library subscribers can view it for free by clicking here. If you don’t currently subscribe to the Online Library, visit www.iicle.com/subscriptions.

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