When a spouse dies, leaving behind a surviving spouse, children, and considerable assets, the surviving spouse should tread carefully with respect to estate planning instruments governing those assets.
The 2016 Illinois Appellate case, Gwinn v. Gwinn, is a good example of this premise.
Background Facts
Ken Gwinn, Sr. and Betty were married with 4 children. In 2002, Betty established a trust, providing for Ken and their children. If Betty predeceased Ken, he was the designated Trustee, which meant that he had a fiduciary duty to abide by the terms of the trust.
In 2009, Betty died. Her estate consisted of approximately $600,000 in liquid assets, a mortgage-free home in Illinois valued at approximately $750,000, and farm property. The terms of the trust gave Ken as much of the trust income as he wanted and a discretionary, albeit limited, amount of the trust principal. Upon Ken’s death, the remaining trust assets were to be divided equally among the children.
Two years after Betty’s death, Ken married Maria. After marrying Maria, Ken withdrew $475,000 from the trust to buy a home in Colorado for him and Maria. The Colorado home was titled solely in Maria’s name and, thus, represented a gift from Ken Sr.’s late wife’s trust to his new wife.
Needless to say, the kids were not pleased. So 3 of the 4 children filed a lawsuit against their father claiming breach of trust and breach of fiduciary duty because this gift was “extraordinary” (a legal term of art for gifts that are beyond the scope of intent) and went beyond trust terms.
The lower court ruled in favor of the father and the children appealed.
Appellate Court Analysis and Findings
The Appellate Court agreed with the children, in finding that the trust was established for their benefit in addition to their father’s benefit. However, the Court also asserted that their father was the intended primary beneficiary during his lifetime and, as trustee, had broad discretion over distributing gifts from the trust to himself as beneficiary. Nevertheless, that discretion was not absolute.
After considering the cardinal rule of the “intent of the testator or settlor,” specific limiting language in the trust, relevant case law, and persuasive legal treatises, the Court ruled that the discretion of gifting from the trust was limited to Betty’s descendants. Clearly, Maria was not Betty’s descendant. Additionally, even if Ken tried to cloak the gift to Maria in his own beneficiary status, the law precluded him, in his capacity as trustee, from increasing any beneficiary’s gift, including his own. The Illinois home was sufficient; taking $475,000 from the $600,000 corpus was deemed an “extraordinary gift.”
The Court, therefore, found that the nearly half-million-dollar gift from Betty’s trust to Maria was not Betty’s intent (ya think?!) and, thus, Ken breached the trust terms. In breaching Betty’s trust terms, he also breached his fiduciary duty to all of the beneficiaries.
This year, if your Valentine’s Day gift requires retitling, think twice, just in case.
