3 minutes reading time (624 words)

Rush to the Finish Line

The Rush University Medical Center, Appellant v. Roger Sessions et. al., Trustees, Appellees[1]decision was recently handed down by the Illinois State Supreme Court (the “Court”).  Rush involved an individual who settled a Cook Islands Trust in 1994, and subsequently (but unrelated thereto) intentionally failed to fulfill a 1995 philanthropic pledge he made to Rush University (the “University”).

Proceedings to enforce the pledge were brought by the University against the U.S.-based co-trustees, in their capacities as such.

The trust was funded with a mix of U.S.real estate and other property interests.

A single principle of Illinois common law was pivotal in the Court finding for the University against the trust, even though the trust was not itself obligated on the pledge; which is, self-settled trusts are not enforced in llinois.  At paragraph 20 of the decision, the Court states:

“Traditional law is that if a settlor creates a trust for the settlor’s own benefit and inserts a spendthrift clause, the clause is void as to the then-existing and future creditors, and creditors can reach the settlor’s interest under the trust.”3  Helene S. Shapo et al., Bogert’s Trusts and Trustees § 223, at 424-67 (3d ed. 2007).  “And the rule is “applicable although the transfer is not a fraudulent conveyance *** and it is immaterial that the settlor-beneficiary had no intention to defraud his creditors.”  Restatement (Second) of Trusts § 156 cmt. a (1959).

In its footnote 3, the Court states that “this rule has a 500-year lineage…, has been consistently applied as the law in Illinois for over 140 years…, at least until the instant appellate court’s decision, and remains the law in the vast majority of states through-out the nation….”

The Illinois Supreme Court thus reversed the decision of the Appellate Court that found in favor of the trust, and remanded the proceedings to the Circuit Court of Cook County for further action consistent with the decision.

The "500-year lineage" rule of common law is well-known and is in fact the impetus to approximately 25% of the states in the United States and more than 20 offshore jurisdictions having enacted asset protection trust legislation since 1989.  When an individual is domiciled in a state that follows this common law rule, then in the event of a challenge to the trust, a number of factors will be important in determining the outcome, including (i) the design of the trust; (ii) the applicable law of the trust; (iii) the mix of assets in the trust; and (iv) the physical location of the trust property.

Several planning principles are reinforced by the Rush decision. One is that protective measures can be considered by the trustee(s) of a trust when it is threatened with litigation.

Second, real estate requires special consideration when it forms a part of a trust’s corpus, whether offshore or domestic.  Its protection by the trust cannot be as assured as asset classes that can be physically repositioned if need be by the trustee(s), out of harm’s way.

Third, a trust can be designed flexibly by and for its settlor without meeting the definition of a classic discretionary self-settled trust, which would then limit the effective application of the common law rule relied on in Rush.

Finally, even when the outcome of a case appears fairly predictable (such as when a trust holds real estate sitused in a state that does not recognize self-settled trusts), nothing is certain when it comes to litigation. Indeed, here, the law and the facts were reviewed by the appellate bench, which is by no means a body that lacks legal credentials, and the outcome at that high level of proceedings was favorable for the trust.

[1] ___ N.E.2d _____, 2012 IL 112906, 2012 WL 4127261 (Ill., Sept 20, 2012).

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