One couple of modest means engages an estate plan which includes a simple will with the surviving spouse as beneficiary, a health care power of attorney and a property power of attorney with most of their property in joint tenancy. A second couple with loftier resources executes a pour over will, an AB trust, an irrevocable life insurance trust, a health care power of attorney and a property power of attorney. A spouse in couple one executes a codicil to the will to provide for a brother instead of the surviving spouse, and a spouse in couple two amends the AB trust by removing the marital trust and the surviving spouse as trustee and provides for a charity. Upon the death of the spouse in couple one who executed a codicil, the surviving spouse may renounce the will within 7 months of the date of death by filing a renunciation with the court. Whereas, in couple two, upon the death of the spouse who amended the AB trust, the surviving spouse may file a suit against the estate, trustee and beneficiary alleging that the amendment is an attempt to fraudulently deprive the surviving spouse of marital rights in property. So why the disparate results? This article will focus on the law in Illinois, both legislative and judicial; delve into the reasoning behind the law; argue the shortcomings of this law, and make recommendations.
A. Read the statute.
While some of the particulars have changed (examples include the abolishing of dowry and the ownership of property by the wife), the law in Illinois has provided for a renunciation of a will in substantially the same form at least since 1925. The current law can be found in the Probate Act of 1975 which provides, in part, that: [i]f a will is renounced by the testator’s surviving spouse . . . the surviving spouse is entitled to . . 1/3 of the entire estate if the testator leaves a descendant or 1/2 of the entire estate if the testator leaves no descendant. 755 ILCS 5/2-8(a). It continues that: [i]n order to renounce a will, the testator’s surviving spouse must file in the court in which the will was admitted to probate a written instrument signed by the surviving spouse and declaring the renunciation. 755 ILCS 5/2-8(b). There is a 7-month filing deadline for filing, but the statute actually empowers the court to extend the deadline if litigation is pending and a petition is made by the surviving spouse as to such. 755 ILCS 5/2-8(b).
In a period of time which is increasingly concerned about streamlined processes, saving resources and benefiting the users of the system, the renunciation provisions meet those goals by simply requiring a filing in the court and no protracted litigation to establish one’s right, 755 ILCS 5/2-8(b). The legislation has it’s own statute of limitation and the required facts necessary to extend it, id. But the statute is limited in that it doesn’t address other transfers during the testator’s life which may have a testamentary nature and may disinherit the surviving spouse, such as inter vivos trusts, a Totten trust, joint tenancy or estate planning partnerships.
B. What the cases say and the response from the legislature.
While there are many cases on this section of the Probate Act, this article will focus on inter vivos transfers in general and trusts in particular. In general, one can dispose of his or her property as one sees fit. In re Estate of Mocny, 196 Ill.Dec. 390, 257 Ill.App.3d 291 (1st Dist. 1993). In particular, one can dispose of his or her property to minimize or defeat the right of the surviving spouse to statutory marital ownership in the property so disposed. Wood v. Wood, 219 Ill.Dec. 877, 284 Ill.Appp.3d 718 (4th Dist. 1996).
This general rule is limited by the renunciation statute which provides for a marital right in the surviving spouse to take pursuant to the will or the law a intestacy. Id. The common law has extended this right to include a cause of action for fraud on a marital right. In re Estate of Mocny, 196 Ill.Dec. 390, 257 Ill.App.3d 291. The Supreme Court had expressly extended the ability to renounce wills to Totten trusts. Montgomery v. Michaels, 54 Ill.2d 532 (1973). Its application was retroactive. Mertes v. Lincoln Park Federal Sav. & Loan Ass’n of Chicago, 34 Ill.App.3d 557 (1st Dist. 1975). It has been held that the Montgomery decision applies only to Totten trusts and not to other types of inter vivos trusts in the land trust context, Elliott v. Alexson, 33 Ill.App.3d 1046 (1st Dist. 1975). In Montgomery, it was found that Totten trusts were sufficiently testamentary in nature that, by analogy, the renunciation of wills applies. The same arguments could have been used in Montgomery for inter vivos trusts, but the legislature limited the ruling of Montgomery with the passage of the Lifetime Transfer of Property Act.
In response to the holding in Montgomery and within a relatively quick four years, the legislature in 1977 enacted the Lifetime Transfer of Property Act, 755 ILCS 25. This act states, in part, that:
[a]n otherwise valid transfer of property, in trust or otherwise, by a decedent during his or her lifetime, shall not, in the absence of an intent to defraud, be invalid, in whole or in part, on the ground that it is illusory because the decedent retained any power or right with respect to the property.
755 ILCS 25/1.
It also provides, that: "[t]his Act takes effect upon becoming law and applies to savings account trusts established on or after its effective date, and as to all other transfers this Act is declaratory of existing law." 755 ILCS 25/2. This act codified the common law as it pertained to a surviving spouse attempting to invalidate an inter vivos trust by requiring the allegation of intent to defraud.
The intent to defraud in this act is not common law fraud, but rather a sham transaction that is essentially a disposition by will. In re Estate of Mocny, 196 Ill.Dec. 390, 257 Ill.App.3d 291 (1st Dist. 1993). There must be an intent to defraud as evidenced by retention of ownership and lack of present donative intent at the time of disposition. Id. This includes colorable or illusory transfers.
In the context of inter vivos trusts, a number of questions arise because by their natural trusts are testamentary in purpose and most grantors retain some interest. The courts have held that certain retained interests are allowed for the purpose of establishing a valid relinquishment of ownership in relation to the surviving spouse’s marital rights. These include the power to direct the trustee, Payne v. River Forest State Bank & Trust Co., 37 Ill.Dec. 136, 81 Ill.App.3d 1128 (1st Dist. 1980); the power to revoke, alter or amend the trust; naming oneself as trustee; retaining a life estate; and the discretionary power to invade principal, Johnson v. La Grange State Bank, 73 Ill.2d 342 (1978). Factors to be considered in determining whether valid inter vivos trust constitutes fraud on marital rights are intent to defraud, proximity in time between transfer and testator’s death, proportion of settlor’s property transferred to trust, absence of consideration and fairness to the wife if the trust is operative. See Rose v. St. Louis Union Trust Co., 43 Ill.2d 312 (1969)(although applying Missouri law). Lastly, a court will make a determination by considering all the facts and circumstances as they relate to the fraud on the marital share. Johnson.
While there is some overlap between retained interest and present donative intent, it is necessary to independently allege and prove a lack of present donative intent for fraud on marital rights. Some of the same facts which are used to show retained interest may prove lack of present donative intent, such as, a secret agreement between the settlor and beneficiary that the settlor of trust retained complete ownership of the res or a retained life estate. Id.
While a majority of courts have found that an inter vivos trust is valid and can not be renounced, Williams v. Evans, 154 Ill. 98 (1895) (finding that surviving spouse did not live with the testator for 20 years and that surviving spouse was disinherited for a charity); West v. Miller, 78 F.2d 479 (Ill. 1935), a court did invalidate a trust based on the argument that to do otherwise would defraud a statutory marital share, Smith v. Northern Trust Co., 322 Ill.App. 168 (1944). In Smith, upon the husband’s death, his estate paid for expenses, but there was nothing left to his wife because all of his property had been conveyed to a trust, except a pension which was administered by a bank-with the beneficiaries of the trust being his two children. Id. The husband retained the right to revoke the trust and received all the income during his life. Id. Therefore, even though a surviving spouse may bring a claim that the testator transferred property to an inter vivos trust with intent to defraud the surviving spouse’s marital share, the hurdles of proof for present donative intent and retained life interest are high, while the probability of a successful outcome is very low.
C.The intent of the drafters and those behind the bench with a little speculation.
The intent of the drafter can be very elusive. While at the federal level, we have the help of congressional testimony, it is still not very instructive because what one person says may or may not be indicative of the intent of the legislature as a whole or the president individually. In the case of renunciation, the judiciary has stated that the purpose of the renunciation statute is to enable a surviving spouse to elect to take under a will or not. First Nat. Bank of Danville v. McMillan, 12 Ill.2d 61 (1957); In re Estate of Groce, 210 Ill.Dec. 433, 273 Ill.App.3d 599 (1st Dist. 1995).
But what are some of the possible unstated reasons? It may be because we don’t want surviving spouses on the public dollar, but then one should be able to renounce all transfers as they apply to the marital share. It is obvious that the surviving spouse’s right to renounce is greater then the right of the deceased spouse to dispose of his or her property by a will. But this right is very limited in that it is only applicable to wills.
So why limit it to wills? What is so particular about wills? It may be because the richer members of society tend to have most of their money in trusts. Since the law is very old, this rational is becoming less and less persuasive as trusts become more and more popular.
On the other hand, it may be a convenient place to draw the line, so that we are not renouncing all the estate planning partnerships, L.L.C.’s, or business ventures, or gambling escapades. If we value the ability of people to dispose of their property as they see fit because it promotes capitalistic values such as productivity, consumerism, and economic growth, then why limit it by this provision. For the attorney-bashers, it may be because it is a relatively easy provision to draft around, thereby promoting legal services needlessly. For the cynical, it may be because the trust lobby is very powerful as evidenced by the emerging trend to abolish the rule against perpetuities. It may be because a disinheriting spouse may have more difficulty in doing so during his or her life time with an inter vivos trust because it has to be funded, records have to be kept and taxes paid, whereas a will is easier to conceal from the disinherited spouse. And that is the problem with intent-it is so speculative.
D. What if...
If the Probate Act, the Lifetime Transfer of Property Act or another act were amended to provide for the renunciation of inter vivos trusts as it relates to the surviving spouse’s marital share in a similar fashion to the renunciation of wills which the surviving spouse currently enjoys, the benefits would outweigh the detriments. The arguments in favor of such a law include, at least, the following:
• the inability to disinherit ones spouse unless you make yourself a pauper (in which case you might be single);
• valuing the intention of those who are alive which, similar to the arguments in favor of the rule against perpetuities, assumes that those in the present would make the most productive use of the property over the intention of those who are deceased;
• protecting the people of Illinois from a disinherited spouse taxing the resources of welfare; and
• limiting renunciation to wills is an arbitrary line which should be extended to the ever popular trusts.
The arguments against such law include, among other reasons, the following:
• the more one limits the ability to freeing use his or her property as he or she sees fit, the less likely one is to want more property;
• an individual is the best person to know what is in his or her best interest including the disposition of property; and
• if we extend the renunciation to trusts, we are heading down a steep slope.
The first argument that such law is a detriment can be dismissed by looking at the federal tax system which taxes one more as the value of the income, estate, gift, etc. increases. The second argument can be limited by changing circumstances. And as to the slippery slope, this would simply be a racketing or stepping down. For the bottom line, it appears logical that if we, as a society, value the ability to renounce a will upon the death of our spouse that this right should be extended to inter vivos trusts.
E. Problem and Solution.
To summarize, as to wills, the surviving spouse may renounce by filing a document with the court within 7 months of the date of death. As to inter vivos trusts, the surviving spouse may not renounce, but can sue the trustee, beneficiary, and estate based on a claim that the testator attempted to defraud the surviving spouse’s right to a marital share. This includes alleging and proving that the testator lacked present donative intent and the testator retained ownership of the property. The steps to invalidate a trust are more onerous than the requirements for renouncing a will. With the ever-increasing popularity and use of inter vivos trust in estate planning, it is my recommendation that one consider amending the Probate Act, the Lifetime Transfer of Property Act or other acts to provide for the renunciation of inter vivos trusts in similar context as the renunciation of wills. This would conserve the resources of the judiciary and the surviving spouses, while at the same time protecting the surviving spouses interest in a marital share. The surviving spouse in couple one and couple two would have the same protections in their marital share upon the death of their spouse regardless of which estate planning vehicle is chosen.
Justin J. Karubas, J.D. is an associate at Rolewick & Gutzke, P.C. He received his Law Degree from Chicago-Kent College of Law in 1998 and his Undergraduate degree from the University of Illinois at Champaign-Urbana in Economics and Finance in 1995.