Courts grapple with the issue of pre-death challenges to trusts of disabled settlors
Reproduced with permission of Trusts & Estates magazine (September 2010)
“What happens when the settlor of a revocable trust has been declared disabled or incompetent?” asked our partners Eric Maasen and Greg Monday in their July 2010 Trusts & Estates article, “Settlor Incompetence and the Trustee’s Quandary.” While their article dealt primarily with a trustee’s concerns in such situations, the following case highlights the difference at least one Illinois appeals court sees between the rights of revocable trust beneficiaries and will beneficiaries. (Estate of Michalak: No. 1-09-0976 (Ill. App. 1st Dist. Aug. 20, 2010.)
In October and November 2006, Bozenna Michalak, an 83-year-old widow, met with an attorney to execute an estate plan. Bozenna’s estate plan included a revocable trust that left the trust assets to her neighbors, Robert and Jolanta Kaleta. The revocable trust also named Robert as trustee upon Bozenna’s death. In January 2007, Chicago police officers alerted Bozenna’s niece, Jacqueline Nagorski, that Bozenna was potentially being financially exploited. Jacqueline then accompanied Bozenna to her various banks and had her name added to Bozenna’s accounts. Jacqueline didn’t see her aunt again until May 2007 when a bank alerted her that someone was attempting to withdraw funds from Bozenna’s account. On numerous occasions in June 2007, Robert came to Bozenna’s house and, according to Jacqueline, made comments such as, “Well, I’m the boss here as far as the house goes.” Robert also said something along the lines that the house was “coming to him.” Jacqueline applied for guardianship of Bozenna.
A physician evaluated Bozenna in June 2007 and diagnosed her with Alzheimer’s disease. The physician concluded that Bozenna was unable to handle her financial affairs, but didn’t opine as to whether she possessed capacity when she executed her revocable trust. Jacqueline was appointed as Bozenna’s plenary guardian. In February 2008, after being reappointed to evaluate Bozenna’s assets, the original guardian ad litem presented a report advocating invalidation of Bozenna’s revocable trust and suggesting that there was undue influence by the Kaletas.
Illinois law permits a guardian of the estate of a disabled adult ward to petition the guardianship judge to do estate planning on behalf of the ward. The primary inquiry is what the ward’s wishes are, best as they can be determined. A hearing to engage in estate planning followed, during which witnesses for both sides testified: one side arguing that the Kaletas unduly influenced Bozenna and that she lacked capacity to execute the trust and the other side arguing that the Kaletas were dutiful neighbors who helped Bozenna around the house, ran errands for her and drove her to her appointments. Also, the guardian ad litem testified that Bozenna no longer wanted Robert and Jolanta to have her property. The trial court granted Jacqueline’s petition to amend the trust, naming Jacqueline as successor trustee and Bozenna’s heirs as the beneficiaries.
The most significant aspect of the appeal court’s lengthy opinion is its analysis of Jacqueline’s argument that the Kaletas lacked standing to contest the probate court order. The court spent some time discussing a 2009 case (also from the First District), In re Estate of Henry (396 Ill. App. 3d 88). Henry involved a disabled ward’s 2004 will that named his caretaker as well as his executor as beneficiaries. The guardian of the ward’s estate asked a court for permission to create a new pour-over will and inter vivos trust that eliminated the beneficiaries’ interests. The court agreed, and the beneficiaries challenged the decision. The appeals court concluded that the beneficiaries lacked standing to challenge the lower court’s decision because their interests in the ward’s property wouldn’t vest until the ward’s death. The appeals court reasoned that the fact the ward was alive negated any present vested interest in assets, resulting only in expectancies by the beneficiaries. The Henry court concluded that the beneficiaries’ proper recourse was to file a will and trust contest after the ward died.
Unlike the court in Henry (which found that the beneficiaries lacked standing), the court in Michalak rejected Jacqueline’s argument that the Kaletas lacked standing. The Michalak court distinguished between an inter vivos trust and a will, which doesn’t take effect until a testator’s death. In other words, a beneficiary of a will has no interest until the testator dies; a trust beneficiary has an interest the moment the trust is created.
Our longer-standing readers may remember that in August 2008, we wrote about the California case of Murphy v. Murphy (164 Cal. App. 4th 376). The Murphy court held that a will contest was barred by collateral estoppel or res judicata insofar as those issues were in fact litigated or could have been litigated in a substituted judgment proceeding (that is, a guardianship proceeding in which a will was created for the ward) while a decedent was still alive and where the potential will contestants were involved or had notice.
Unlike California, Illinois courts have yet to face the issue of whether a decedent’s will or trust can be contested if the contestant had notice or participated in a guardianship action in which an instrument was created for a ward. In Henry, the appeals court held that a will and trust contest following the death of the ward wouldn’t be barred by res judicata because the beneficiaries didn’t have standing to attack those instruments while the ward was alive. In Michalak, the appeals court didn’t address the issue of whether the Kaletas’ failure to prevent the change in Bozenna’s estate plan following notice and a hearing in the guardianship case precluded them, on res judicata grounds, from re-litigating this issue once she dies.
We talked with Peter Schmiedel, former deputy public guardian for the Adult Guardianship Division in the Public Guardian’s Office for Cook County, Ill. (now practicing with Fischel & Kahn in Chicago) to get his views on this emerging trend in estate litigation. Here’s what he had to say:
As guardianship courts wade into the arena of engaging in estate planning for now-disabled wards, complicated issues arise. These issues include who has standing to challenge a guardian’s ability to change a prior will and/or inter vivos trust; when such challenges may occur; and whether having failed in a guardianship case to prevent court approved changes to a ward’s prior estate plan, a disgruntled beneficiary may nonetheless get a second bite once the ward dies.
Peter also raises a concern that applies in jurisdictions such as Illinois, which hold that a beneficiary of an inter vivos trust receives some interest in the trust corpus once the trust is created — even though that interest may be eliminated through amendment or revocation. He notes that in those jurisdictions, the question arises whether during the settlor’s life former beneficiaries may challenge changes a settlor makes to his trust, and allege that the settlor’s changes were made through the undue influence of others or at a time when the settlor lacked capacity. Finally, Peter states (and we agree) that allowing pre-death challenges to amendments to inter vivos trusts clearly opens a Pandora’s box, especially in light of the fact that such challenges to changes a person makes to his will are treated differently and precluded until the testator’s death.
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John T. Brooks
Samatha E. Weissbluth