The Trusted Adviser January 2010 | Volume 3 • Number 1

Real Estate and Title Insurance News

Trust or Distrust: Vena v Vena

A person normally creates a trust to ensure the people they care most about are taken care when the creator of the trust passes on. The most important element of a trust is the word itself. Trust between the person creating the trust and the trustee managing the trust is important. Courts try to make sure trusts are being managed in the way the trustor intended. Some courts are even going a step further and voiding some clauses in a trust that may create an unfair situation. One such instance is the Illinois second district appellate court decision inVena v Vena, 387 Ill App 3d 389, 899 NE2d 522, 326 Ill Dec 305 (2d D, 2008),app. den'd, 231 Ill 2d 688, 904 NE2d 986, 328 Ill Dec 476 (Ill, 2009). There, the Illinois Supreme Court voided a clause inserted into a trust by the creator of the trust.

Harry Vena chose his brother, Guy Vena, as trustee of a trust Harry executed in February of 2002. According to the terms of the trust, Guy was to distribute the trust principal and any undistributed income among 19 individuals when Harry passed away.

There was a clause in the trust agreement that provided a "majority in interest of the income beneficiaries may at any time approve the trustee's accounts&€¦with the same effect as if a court having jurisdiction over the trusts approved the accounts."

About a year and a half after Harry died, Guy began to make distributions to the 19 beneficiaries. All of the beneficiaries, except for one, identified as "Philip," returned a signed "Receipt and Release" to Guy after receiving a distribution of the trust's funds. Guy proceeded to file for a declaratory judgment that, because a majority of the beneficiaries had approved the accounting, the accounting was therefore binding on all of the beneficiaries. Philip counterclaimed alleging Guy had breached his fiduciary duties.

An Illinois trial court granted Guy's motion for summary judgment holding that the majority-approval provision of the trust was enforceable. This was a case of first impression for the Illinois trial court and therefore the trial court based its decision on Section 83, commentdof theRestatement (Third) of Trusts. This section condones trust provisions authorizing a designated individual, including beneficiaries, to approve the accounts and discharge a trustee from liability. However, commentdallows a court to review the designated person's approval for abuse, with particular attention to neglect or to the possible effects of conflict of interests between the designated person and the trustee. Also, this review is available to a beneficiary regardless of a trust provision to the contrary.

Philip appealed on the grounds that the majority-approval clause is unenforceable because it improperly restricts judicial review of trustees' actions.

The Illinois appellate court had to decide whether the 19 individuals were "income beneficiaries" or only remainder beneficiaries. The litigants filed supplemental briefs at the appellate court's request and the appellate court ruled that the 19 were "income beneficiaries" under the terms of Harry's trust.

Next, the Illinois appellate court stated that theRestatement, used by the trial court, was not binding but merely guidance. The appellate court differentiated the majority-approval clause at issue from theRestatementbecause Harry's trust substituted majority approval for the concept of approval by a sole designated individual, and Harry's trust made majority approval equivalent to court approval for discharging a trustee.

Therefore, the Illinois appellate court held the majority-approval provision in Harry's trust was contrary to public policy because it "too thoroughly deprives an individual beneficiary of the ability to enforce his or her rights and too thoroughly insulates the trustee from accounting to a court" and overturned the decision of the trial court. The appellate court also stated that, "a settler who attempts to create a trust without any accountability in the trustee is contradicting himself&€¦If the court finds that the settler really intended a trust, it would seem that judicial accountability&€¦must inevitably follow as an incident."

The court gave two reasons why the majority approval clause does not provide effective trustee oversight. The first reason is that responsibility is too disseminated; making it likely the beneficiaries will make an uninformed choice. The appellate court discussed how reviewing financial accounts is generally tedious work for someone who knows what to do, but will be difficult work for someone who cannot do the work. Therefore, the court said it would be useless for a beneficiary to be part of an informed minority that actually does the tedious work because, to have an effect, one must be part of the majority. It is possible if Harry's trust had required deliberations amongst the beneficiaries then maybe the informed minority could then display their expertise and command a majority.

The second reason offered by the Illinois appellate court on why the majority approval clause does not provide for effective oversight was the fact that Harry's trustee had too much control over the process. The opinion suggested Guy had the power to present the accounts of the trust to a group of the beneficiaries most likely to approve the accounts before the other, maybe more resistant, beneficiaries even saw the accounts. The effect would be that the trustee could present accounts to only the favorably disposed beneficiaries and obtain an approval, while the remaining beneficiaries had no input.

In general, the Illinois appellate court noted that the majority approval clause was an exculpatory clause and such a clause exculpating a trustee of serious misconduct raises significant public policy concerns. Even though the clause in Harry's trust was retrospective and not prospective, combined with the other concerns discussed above, the majority approval clause could not stand.

It is possible some practioners are not going to agree with the decision of the Illinois appellate court. Many may feel the primary principle of trust construction is to determine the settlor's or testator's intention. If the settler wants to have a majority approval clause in their trust then they should be able to include that clause. However, the Illinois appellate court determined there should be some oversight for the trustee so all of the beneficiaries have their interests protected and not only a select few.






THE TRUSTED ADVISER is published by Attorneys’ Title Guaranty Fund, Inc., P.O. Box 9136, Champaign, IL 61826-9136. Inquiries may be made directly to Mary Beth McCarthy, Corporate Communications Manager. ATG®, ATG® plus logo, are marks of Attorneys’ Title Guaranty Fund, Inc. and are registered in the U.S. Patent and Trademark Office. The contents of the The Trusted Adviser © Attorneys' Title Guaranty Fund, Inc.

[Last update: 12-14-09]