June 26, 2013
Authored by: Kathy Sherby and Stephanie Moll
In a case of first impression, the Illinois Supreme Court has ruled in Rush University Medical Center v. Sessions, 2012 WL 4127261 (Ill., Sept. 20, 2012), that a self settled spendthrift trust is void as to the settlor’s creditors, so that Rush University Medical Center (“Rush”) was entitled to recover the unfulfilled pledge made by the settlor from the trust assets after the death of the settlor. The question of the relationship between a state’s law regarding self settled spendthrift trusts and its Fraudulent Transfers Act is again examined by this Court, but with a different twist than with the Kilker court.
Here, Robert Sessions (“Sessions”), created the Sessions Family Trust (“Trust”) in the Cook Islands in 1994, and transferred to the trust, among other property, certain real property located in Illinois, which at the time of his death had a value of about $2.7 Million. The Trust authorized distributions from income and principal to Sessions on a broad standard, named Sessions as Trust Protector, authorized him to change beneficiaries by Will, and contained a spendthrift provision prohibiting the payment of his creditors or the creditors of his estate.
In 1995, Sessions made a $1.5 Million irrevocable pledge to Rush to induce Rush to construct a new president’s house, which Rush built in reliance on Sessions’ pledge. At that time, Sessions provided in his Will that this pledge, to the extent it remained unsatisfied, would be paid from his estate after his death. In early 2005, Sessions was diagnosed with late stage lung cancer. Angry that the lung cancer had not been diagnosed on a timely basis by the medical staff at Rush, Sessions changed his Will and gave away all of his assets outside the Trust but $100,000. He died a couple of months later and Rush filed a claim against his estate and the Trustees of the Trust to enforce the pledge. The trial court had granted Rush’s Motion for Summary Judgment, declaring the Trust void as to Rush’s pledge.
On appeal, the Trustees argued that the common law principle that a self settled spendthrift trust was void as to the settlor’s creditors was supplanted by the Fraudulent Transfer Act, and that there was no transfer to the Trust in violation of the Fraudulent Transfer Act. The Court first stated that the common law rules remain in effect unless expressly, plainly and clearly repealed by the legislature or modified by court decision. Where the common law rule provides greater protection than the statute and the rule is not inconsistent with the purpose of the statute, the statute is supplemental to the common law rule and does not supplant it. The Court then ruled that the Fraudulent Transfer Act, the substance of which had been in effect in Illinois for over 100 years, did not supplant the common law rule; both have the same general purpose of protecting creditors. Invalidating the trust under the common law rule against self settled spendthrift trusts did not rely on a finding of an intent to defraud creditor, so that a violation of the Fraudulent Transfers Act was irrelevant. Under the common law rule, intent is irrelevant; instead the common law rule focuses on the interest retained by the settlor. Here, the transfer did not render the Trust void; rather, the spendthrift provision made the Trust void as to Sessions’ creditors. In the Court’s view, the common law rule applicable in Illinois prevents the injustice of allowing a person to continue to benefit from assets while keeping assets from creditors.
The Court likewise disagreed with the Trustees next argument that the common law rule does not come into play because Sessions’ spendthrift protected interest in the trust terminated with his death and Rush’s claim did not arise until Sessions died. The Court stated that the entire Trust, not just the spendthrift provision, was void as to Session’s creditors, so that, as to Sessions’ creditors, the Trust property fell into the estate and was available to satisfy Rush’s claim. Since Sessions had access to the assets of the Trust right up until his death, the Court reasoned that “there is no sound reason to treat creditors’ rights as suddenly defeated the moment the settlor dies, thereby giving the commensurate economic benefit to the settlor’s heirs.” The Court ruled that the common law rule is not limited to those creditors who are judgment creditors during the lifetime of the settlor, but extends to Rush who obtained a judgment against Sessions after his death. Since the Trust is void as to all creditors, both existing and future creditors, the transfer to the Trust is treated as if it had never occurred to the extent of Sessions’ creditors.
To the extent the Trust property was not required to satisfy the claims of Sessions’ creditors, the Trust is still valid as to the remainder beneficiaries. It is important to note in this case that the Illinois Supreme Court applied Illinois law to determine the effectiveness of the Trust on the claims of the Illinois decedent’s creditors, even though the law of the Cook Islands was adopted by the Trust terms and one of the Trustees was located in the Cook Islands. However, the other individual Trustees were U.S. persons and sufficient property of the Trust was located in Illinois, namely the Illinois real property necessary to satisfy Rush’s claim. Presumably, Rush was then able to execute on that Illinois real property to collect on its judgment against Sessions’ estate. It is unclear what the practical result would have been if all of the property of the Trust and the Trustees were located in the Cook Islands.
If you are considering this type of planning for your own estate planning needs, you should contact your attorney to consider whether a self settled spendthrift trust can be validly created and funded in your personal circumstances if the state whose law applies to the formation and administration of the trust has enacted the Uniform Fraudulent Transfer Act, without dealing with the inconsistency between the spendthrift protection and the Uniform Fraudulent Transfer Act.