Blast From the Past: The Rule Against Spendthrift Trusts

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One of the quirky pleasures of every first-year law student's property class is the amount of time taken up studying rules which were settled around the time that the Tudors were on the British throne -- sometimes even earlier.

On Thursday, the Illinois Supreme Court brought back one of the classics, a rule first propounded in the common law at least a half a millennium ago -- "spendthrift trusts are void against current and future creditors." The rule against spendthrift trusts has been the law in Illinois for nearly a century and a half, and remains the law in most states.

Rush University Medical Center v. Sessions arises from a Trust established in 1994. The settlor placed around $19 million in property in the trust, and named himself lifetime beneficiary. The trustees were authorized to make distributions to him of both income and principal, and the settlor retained absolute power to appoint or remove trustees, and to veto any discretionary actions. Finally, the trust had a spendthrift provision -- no trust assets could go to creditors of the settlor or his estate.

The following year, the settlor made an irrevocable pledge of $1.5 million to the plaintiff, expressly for the construction of a new residence for the president of the University. He executed codicils to his will providing that any unpaid balance on the pledge should be paid on his death. In reliance on the pledge, the University built the residence and named it after the settlor. The settlor was present at the dedication, cut a ceremonial ribbon, and a plaque was placed bearing the settlor's name.

Ten years later -- with the pledge still unpaid -- the settlor was diagnosed with lung cancer. The settlor executed a new will revoking all previous wills and codicils and making no provision for payment of the pledge. Just before his death, he created a second revocable trust, transferring additional assets into it, and he then made additional gifts, further reducing his estate. When the plaintiff filed a claim in probate to enforce the pledge, the estate was found to include less than $100,000.

So the plaintiff sued the trustees of the trust. Count III of the plaintiff's claim, the only aspect of the case at issue before the Supreme Court, invoked the common law rule that a spendthrift trust is void against existing or future creditors. Although the Circuit Court agreed, entering summary judgment for the plaintiff, the Appellate Court reversed, finding that the Fraudulent Transfer Act, 740 ILCS 160/5, supplanted the common law rule by providing specific mechanisms for proving that a transfer by a debtor was fraudulent.

The Supreme Court unanimously reversed. Illinois has a heavy presumption against overturning the common law, the Court noted. Legislative intent to override the common law was not to be lightly found; the legislature's intentions must be plainly and clearly stated, and cannot be inferred from ambiguous or questionable language. Implied repeal of the common law is disfavored, and can be found only in the face of irreconcilable repugnancy between the statute and the common law. Where the common law is more broad than the statute, there is a presumption that the statute merely supplements the common law; and remedies by statute are presumed to be cumulative only.

Turning to the statute, the Court found no indication of an intent to overturn the common law; indeed, to the contrary: Section 11 of the Act, 740 ILCS 160/11, stated that the common law was not to be displaced but by express provisions of the Act.

Nonetheless, the defendant trustees argued that Section 5(a) of the Act, which sets out a statutory cause of action for fraudulent transfer, was necessarily irreconcilable with the common law rule, which conclusively presumed all transfers under certain circumstances to be fraudulent.

Not so for a variety of reasons, the Court concluded. Where the statute was intended for the general protection of unsecured creditors from unfair reductions in the debtor's estate, the common law rule applied whether or not the transfer was technically a fraudulent conveyance, and whether or not there was any intention to defraud creditors. The rule and statute did not entirely overlap; each operated in spheres where the other did not. Although the Appellate Court found that the plaintiff's claim must fail for lack of an allegation of intent to defraud, the Supreme Court noted that the common law rule on spendthrift trusts had coexisted with a rule against fraudulent conveyances for almost the whole of its half-millennium life span.

The trustees argued that the common law rule applied only to assets actually distributed to the settlor before his or her death, as opposed to the remaining assets, but the Court found no conceptual difference between the two. The Court also rejected the trustees' argument that the plaintiff had not become a creditor of the settlor until his death, concluding that the common law rule applied whether or not the claimant was a creditor during the settlor's lifetime, and whether or not the claim accrued during the settlor's life.

 

Published In: Wills, Trusts, & Estate Planning Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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