This article will look at four common problems that occur regarding trusts under Illinois law. First, what happens in a situation where a deed is granted to a trust instead of to a trustee? Second, what happens when there is a deed in trust but the trust agreement is missing? Third, what happens when property is properly deeded into trust but it is deeded by an individual and not the trust or trustee? And finally, how are open classes of beneficiaries dealt with when it comes to trusts? Not all of these questions have simple answers, but knowing how courts in have approached these issues will help make dealing with the law of trusts a simpler task.

1.A deed must be granted to a trustee, not a trust, but does not fail unless the trust agreement fails to name a trustee

The first common problem is a situation where a deed is granted to a trust and not to the trustee. The root of this problem seems to be the misconception that a trust is an entity that can be deeded to. A trust has no independent existence. It is simply a fiduciary relationship between people. There is a trustee or trustees, a trust maker (the settlor), and a beneficiary or beneficiaries. These people do not form an entity; the trust is their legal relationship with one another. The trustee is the party to whom the deed must be granted, because the trustee is an individual who can take title. So a deed cannot be granted to a trust, it must be granted to a trustee. But a grant to a trust without naming the trustee does not necessarily fail.

There is no case law in Illinois that directly stands for the proposition that a deed cannot be granted to a trust, but it is well established law that only a deed to a trustee is valid. Some courts, however, have found that the deed will not fail if the deed is granted to a trust as long as the trustees are named in the trust agreement: “A deed to a trust is not invalid because the grantee is designated by the name of the trust without naming the trustees where the trustees are parties to the trust agreement and could thus be identified.” 13 Am. Jur. 2d Business Trusts § 52.

This of course leads to a problem of what if the trustees are not named in the trust agreement and cannot be identified. Illinois courts have consistently held that a trust is not defeated because of the want of a trustee. “[I]t is elementary that courts of equity will not permit a trust to fail because no trustee is designated. In such cases, the court will appoint a trustee for the purpose of carrying out the trust.” Golstein v. Handley, 390 Ill. 118, 124 (1945). Therefore, it seems likely that a deed will not fail if it is granted to a trust and not a trustee. One can look at the trust agreement to determine who the trustee or trustees are. And if a trustee is not designated in the trust agreement, then a court can appoint one. If the trust agreement is missing, on the other hand, then that might present a different set of problems. Which leads us to…

2.If there is a deed in trust but the trust agreement is missing, parties must prove by clear and convincing evidence the existence and content of the trust agreement

The second common trust problem we will talk about is what happens when a trust agreement is missing. There are situations where a deed is in trust but the trust agreement, whether it was lost or destroyed, simply cannot be produced.

When a trust agreement is lost it can lead to a dispute between the parties as to whether the agreement ever existed in the first place. It is in these circumstances where missing trust agreement cases reach the appellate court level. One such case, Stowell v. Satorius, 413 Ill. 482 (1953), involved a lawsuit between siblings over the land of their deceased father. Rockwell V. Stowell had seven children and when he died he left his 559 acres of farmland to all of them equally. The property was heavily mortgaged, however, so the children came up with a plan to convey all of their shares to one sister – Myrtle Ann Satorius – who would then attempt to get a loan to save the farm. Id at 484. After she secured the loan, Satorius was then to hold the land in trust for all of the Stowell children. All of the children besides Myrtle claimed that a written trust agreement was signed by all of them. But when Myrtle Satorius refused to give back the land and denied that there ever was a trust agreement, the other six children, “the siblings,” filed suit against her.  When the case came before the Illinois Supreme Court, the trust agreement was missing.

The court stated that “the law requires proof of a trust agreement, reportedly lost, to be so strong and convincing as to leave no reasonable doubt as to the existence of such an instrument” Id at 485. To establish that there was a trust agreement there must be “evidence which must be so clear and convincing and unequivocal and unmistakable as to lead to but one conclusion” Id. The siblings offered testimony claiming that all of them had signed a trust agreement. There was evidence that meetings had occurred between the siblings and their lawyers to discuss the agreement. The siblings had the testimony of the attorney in whose office the agreement was signed and his secretary, who witnessed it. There was also a letter from the attorney to siblings absent at some of the meetings, explaining the trust agreement.

Based on all of this evidence, despite Satorius’ claim that she never saw or signed any trust agreement and the fact that the trust agreement was nowhere to be found, the court held that proof of the trust had been established. “It is perfectly proper, under our law,” the Court said, “when a document is lost or not available for production in court, to prove its loss or destruction and then prove its contents by oral evidence.” Id at 494, citing  Hiss v. Hiss, 228 Ill. 414. Although the evidence was conflicting because of Satorius’ testimony, the court nonetheless found that the evidence was clear and convincing enough to prove that the trust had existed and Satorius was bound to the missing agreement.

In another case involving squabbling siblings, a party failed to prove that a missing trust agreement had ever existed. Jones v. Royal Builders of Bloomington Normal, Inc., 39 Ill.App.3d 489 (Ill. App. Ct. 1976). In this case, Florence Jones executed a deed in trust and appointed two of her children as trustees. The deed referred to a trust agreement, but unfortunately the trust agreement went missing. Jones’ son Anthony, who was not one of the trustees appointed in the deed in trust, conveyed the property to Royal Builders after his mother’s death. The two trustees, Frederick and Louise, then filed suit against Royal Builders to quiet title and have the conveyance set aside. They claimed that they had gone to an attorney with their mother to have the deed in trust and the trust agreement drawn up. They testified that their mother had explained the terms of the trust agreement to the attorney, that they saw the trust agreement briefly, and then they and their mother had signed it. The attorney never filed either document, and eventually Louise Jones filed the deed in trust herself. When she asked the attorney about the trust agreement he claimed he had never created one.  Based on this evidence, the court found that there was insufficient evidence to prove that a trust agreement had ever existed. Without “clear and convincing” or “unequivocal and unmistakable proof” of the trust agreement, Anthony was not prevented from conveying his interest in the property that he inherited as an heir.

3.Property owned in trust can be deeded only by a trustee, unless the beneficiary has the sole power to direct the trustee to convey title.

The third problem that can often occur when dealing with trusts is a situation in which property is properly deeded into trust, but then it is conveyed by someone in an individual capacity. Perhaps the person conveying the deed was not aware of the trust, was not aware that the deed could only be conveyed by the trust, or maybe they simply forgot that it was in trust. Whatever the case, the general rule is that land held in trust can only be conveyed by the trustee. In cases where property has been deeded by the beneficiary of a trust as an individual, rather than by the trustee, courts will usually invalidate the conveyance. In certain circumstances, however, courts will make an exception to this general rule and find that a conveyance made by a beneficiary can be valid.

In Hoxha v. LaSalle Nat. Bank, 365 Ill.App.3d 80 (Ill. App. Ct. 1^st Dist. 2006), the Hoxhas entered into an agreement to purchase property from Doris Robbert. Robbert died before the transaction was finalized and it was then discovered that the property was actually held in trust. The court held that the agreement between Robbert as an individual was not valid. There were several circumstances surrounding the agreement that the court deemed “suspicious” including that the Hoxhas did not sign the document, it was addressed “to whom it may concern” and had other “peculiar wording”, and that a notary had backdated Robbert’s signature. Id at 86. The court was also concerned that there was no mention whatsoever of the trust.  “There is no language indicating the property is held in trust and no language directing the trustee to sell the property. In fact, the document does not suggest the name or title of the person or entity who is to sell the property to the Hoxhas. The successor beneficiary is not mentioned by name or title.” Id. The court held that this was not a valid, binding contract because Robbert had not been acting as trustee but rather as an individual in contracting to sell the property. The court stated that “the beneficiary must either explicitly or constructively exercise her power to direct the trustee; she cannot contract to convey title as if she were the owner of the property. First National Bank of Barrington, 101 Ill.App.3d at 289, 56 Ill.Dec. 766, 427 N.E.2d 1312, citing Madigan v. Buehr, 125 Ill.App.2d 8, 16–17, 260 N.E.2d 431 (1970).” The beneficiary may constructively exercise her power to direct by disclosing either that the property is held in trust or that she is the beneficiary of a land trust. “ ‘[I]f a beneficiary of a land trust deals with the property as if no trust existed and contracts as an owner to sell the property, the contract is void as being beyond the beneficiary’s power to act.’ ” Nikolopulos v. Balourdos, 245 Ill.App.3d 71, 78, 185 Ill.Dec. 278, 614 N.E.2d 412 (1993), quoting Jacobs v. Carroll, 46 Ill.App.3d 74, 79, 4 Ill.Dec. 389, 360 N.E.2d 136 (1977).” Id at 87. Because the purported contract made no mention of the trust, and the Hoxhas admitted they knew nothing about the trust, Robbert was not deeding in her capacity as trustee but rather as an individual and under Illinois law this is not allowed.

In the case of In v. Cheng, 232 Ill. App. 3d 165 (Ill. App. Ct. 1^st Dist. 1991), the Chengs were legal title holders to property and in 1976 conveyed it to a land trust, named LaSalle National Bank as trustee and reserved to themselves sole beneficial interest in the trust. In the trust agreement LaSalle had “full power and authority to sell and convey the trust property” Id at 167. In 1981 Kiyoko Cheng entered into an agreement with Hong Sik In to sell the property through an installment contract. Although Cheng was represented by an attorney, the contract made no mention of Cheng’s husband or of LaSalle. By 1987, In was behind on installment payments and Cheng entered negotiations with the Hicks Corporation to sell the property. After closing, the Hicks corporation attempted to evict In from the property and In filed suit.

The general rule under Illinois law is that “a beneficiary cannot convey an interest in real property held by the trust” Id at 170-71. However, Illinois courts began making exceptions to this general rule beginning with Rizakos v. Kekos, 56 Ill. App. 3d 404 (1977) which held that a beneficiary could convey title if the trust agreement gave the beneficiary the sole power to direct the trustee to convey title. In Farley v. Roosevelt Mem’l Hosp., 67 Ill. App. 3d 700 (1978) the court noted that the “trend of decisions in Illinois appears to be expanding the authority of beneficiaries to contract to sell real estate owned in a land trust, particularly where enforcement of the contract is sought by a purchaser who was not informed by the seller that his status was that of beneficiary under a land trust.” The court in Cheng relied on this trend to hold that the contract between Cheng and In was valid and enforceable even though Cheng conveyed the title held in trust when she was not the trustee. The court said that “the parties should not be able to take advantage of the language in the… trust agreement which vested power in the trustee, LaSalle National Bank, to convey title” and said that it was sympathetic to the fact that In had been “very badly treated” in this situation. Id at 276.

In other cases though, courts have not allowed a beneficiary to convey title held in trust. An Illinois Appellate court found that a series of deeds executed by a beneficiary were void because he did not hold legal or equitable title in In re Estate of Crooks, 266 Ill. App. 3d 715, 721-22 (1994). The court stated that “It is well-established that a beneficiary may not enter into a land trust agreement with a trustee and then deal with the property as if no trust existed; persons dealing with the trust property must strictly observe the trust’s features.” Id.  The court made no mention of Cheng, Farley, or Rizakos or an exception to the rule.

This leaves things slightly unclear when it comes to the question of what a court will do if property is in trust but is deeded in an individual capacity. It is possible that the court will find that the conveyance is valid anyway depending on the language of the trust agreement and the power vested in the beneficiary. It is also possible that the contract will simply be found to be void and the conveyance fails. In that case, one should get a new deed from the trustee or the successor trustee. As a matter of policy, this is why it is important for attorneys to know the condition of title before drafting deeds.

4.When there is an open class of beneficiaries, unborn members of the class are determined to be virtually represented by the primary beneficiaries.

The final common problem we will address is the confusion over open classes of beneficiaries to a trust. How is it determined when a class is closed, and what happens to the trustee’s power over the property when there is an open class of beneficiaries?

The general rule regarding classes of beneficiaries is that they must be “sufficiently identifiable, definite, or ascertainable.” 76 Am. Jur. 2d Trusts § 53; Uniform Trust Code § 402(a)(3). In Illinois, creation of a trust requires “ascertainable beneficiaries” Eychaner v. Gross, 202 Ill.2d 228, 253 (2002). A trust need not specifically name people, it can create a definite class of beneficiaries with language such as “To A and then to my children,” “to B for life, then my descendants,” “to my/his/her/heirs” etc. “A beneficiary designation is sufficient for a private trust if the identity of the beneficiary can be ascertained objectively, solely from the standards stated in the instrument. A beneficiary is definite if the beneficiary can be ascertained now or in the future…” 76 Am. Jur. 2d Trusts § 53. Because the law allows some ambiguity as to who the beneficiaries are as long as they are ascertainable, determining when a class is closed can be difficult.

For example, what happens if a woman’s children would be beneficiaries but she does not have any children. Certainly the class remains open for some time, but at what point can it be definitively said that she will not have children and the class is closed. This is a quandary that should be familiar to anyone who ever took a law school Property class – it is often referred to as the fertile octogenarian.  In applying the Rule Against Perpetuities, the common law presumed that anyone was capable of having children, regardless of health or age. Illinois law has specifically legislated out this common law presumption in 765 ILCS 305/4 ,which states that anyone over the age of 65 is legally presumed to not be able to have children. This statue, however, applies only to the Rule Against Perpetuities.  For purposes of trust law in Illinois the octogenarian remains fertile.

The question as to how a trust can be properly run and maintained while there is still an open class of contingent beneficiaries is answered by the Illinois Trust and Trustee Act, 760 ILCS 5/et seq. Under 760 ILCS 5/16.1 the primary beneficiaries of a trust may virtually represent the contingent beneficiaries. As long as there is no conflict of interest, because the primary beneficiaries have “a substantially identical interest with respect to the particular question or dispute” in a trust, they can represent and legally bind any minor, disabled person, unborn person, or any “ person whose identity or location is unknown and not reasonably ascertainable.” Id. This allows the beneficiaries who are alive and adults and mentally capable to act without worrying about future beneficiaries that may or may not ever exist.

Section 17.1 of the Trust and Trustee Act also allows the primary beneficiaries to benefit from the sale of property held by the trust, even if it was subject to future interests, if “it is made to appear that such lands or estate are liable to waste or depreciation in value, or that the sale thereof and the safe and proper investment of the proceeds will inure to the benefit and advantage of the persons entitled thereto, or that it is otherwise necessary for the conservation, preservation or protection of the property or estate or of any present or future interest therein that such lands or estate be sold, mortgaged, leased, converted, exchanged, improved, managed or otherwise dealt with.” 760 ILCS 5/17.1. A court may then direct the trustees to “receive, hold and invest the proceeds thereof under the direction of the court for the benefit of the persons entitled or who may become entitled thereto according to their respective rights and interests.” Id. As long as the primary adult beneficiaries can agree on an action, 17.1 allows them to make decisions regarding the property if necessary for the property’s preservation, even if there is an open class of beneficiaries.

Acting under either of these two statutes requires a petition, hearing and court order to proceed, so while a clear procedure exists, some time and preparation is necessary to follow it.

Conclusion

While there is some common law and statutory guidance on common trust problems, the outcome of any particular problem is not always clear. If you are faced with any of these problems when reviewing search results, please contact an Underwriter to discuss ATG’s requirements to insure clear title.