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Totten Trusts - Rights of Surviving Spouse Prevail Over Illusory Transfers

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Totten Trusts - Rights of Surviving Spouse Prevail Over Illusory Transfers DePaul Law Review Volume 23 Issue 3 Spring 1974 Article 13 Totten Trusts - Rights of Surviving Spouse Prevail over Illusory Transfers Craig H. Benson Follow this and additional works at: https://via.library.depaul.edu/law-review Recommended Citation Craig H. Benson, Totten Trusts - Rights of Surviving Spouse Prevail over Illusory Transfers, 23 DePaul L. Rev. 1247 (1974) Available at: https://via.library.depaul.edu/law-review/vol23/iss3/13 This Case Notes is brought to you for free and open access by the College of Law at Via Sapientiae. It has been accepted for inclusion in DePaul Law Review by an authorized editor of Via Sapientiae. For more information, please contact [email protected]. CASE NOTES TOTTEN TRUSTS-RIGHTS OF SURVIVING SPOUSE PREVAIL OVER ILLUSORY TRANSFERS Bernice D. Montgomery created eight separate bank savings accounts, or Totten Trust' accounts. Under the terms of each trust she was to act as trustee, with the beneficial interest in her two children by a previous marriage. Six of these accounts specifically provided that the funds were to be paid to the beneficiaries on her death. 2 Funds could be deposited or withdrawn from the accounts any time during her lifetime. She died intestate, and her husband was appointed administrator. Because the ac- counts contained the great bulk of her estate, her husband, as administra- tor and as surviving spouse, filed a citation petition to recover the funds on the grounds that the creation of the trusts constituted a fraud on his marital rights. He contended that the trusts were illusory because the decedent retained complete control over them during her lifetime. 3 The appellate court affirmed the trial court dismissing the petition. The Illinois Supreme Court, in a landmark decision, reversed, and held: that the trusts were illusory and invalid as against the surviving spouse; that the funds should be added to the decedent's estate for purposes of computing the survivor's statutory share; that the funds remaining should be paid to the beneficiaries under the trust proportionately; and that if the funds from the estate -were insufficient, the trust funds, and not the expenses and the legacies, would be -available for debts, administration4 surviving spouse's award. Montgomery v. Michaels. 1. So called because of the case Matter of Totten, 179 N.Y. 112, 71 N.E. 748 (1904). These trusts have been held valid in Illinois. See In re Estate of Pe- tralia, 32 Ill. 2d 134, 204 N.E.2d 1 (1965). See also Hayes, Illinois Dower and "Illusory" Trust: New York Influences, 2 DEPAUL L. REV. 1 (1952); Note, The Rights of the Surviving Spouse and Creditors of Savings Account Trusts, 50 C.- KENT L. REV. 159 (1973). 2. This condition is implicit, unless otherwise specified. ILL. REV. STAT. ch. 16Y, § 145 (1971). A similar provision is made for savings and loan associations. ILL. REV. STAT. ch. 32, § 770(b)(3) (1971). 3. Montgomery v. Michaels, 2 Ill. App. 3d 821, 277 N.E.2d 739, 742 (1972). 4. 54 Ill. 2d 532, 301 N.E.2d 465 (1973). 1247 1248 DE PAUL LAW REVIEW [Vol. 23 The court stated: The balances in the savings-account trusts should be treated as the prop- erty of the decedent for the purpose of determining Dr. Montgomery's stat- utory share in his deceased spouse's estate, and, if necessary, he may draw upon the varying amounts in the respective trust accounts on a proportion- ate basis to the extent required to pay him one third of the net estate re- maining after payment of all just claims. Such claims would include a surviving spouse's award, if such an award is appropriate, as well as the costs of administering the estate. (Ill. Rev. Stat. 1971, ch. 3, par. 2P2.) Thereafter the balance remaining in the accounts should be distributed to the beneficiaries named in the trust accounts. 5 This holding has great significance as it fashions a new standard for over- turning a trust as a fraud on marital rights. As will be illustrated later, the former test imposed the burden of proving actual intent to defraud at the time the trust was made. This element of intent has now been discarded. The purpose of this note is to review the law with respect to the use of trusts to defraud marital rights and to attempt to forecast the im- pact of Montgomery on other forms of quasi-testamentary dispositions of property. The property rights of a surviving spouse in Illinois are generally con- trolled by statute. Intestate rights give the surviving spouse a right to the entirety of the decedent's estate, except where decedent has surviving children, in which case the spouse receives one-third of the estate. 6 This provision cannot be avoided 'by will. Statutory provisions give the surviv- ing spouse the option of renouncing testamentary dispositions. After re- nunciation the spouse receives one-half of the estate if there are are no descendents.7 Where there is a descendent, the spouse receives one-third 5. Id. at 539, 301 N.E.2d at 468. 6. ILL. REV. STAT. ch. 3, § 11 (1971) provides: The intestate real and personal estate of a resident decedent, and the in- testate real estate in this state of a non-resident decedent after all just claims against his estate are fully paid, descends and shall be distributed as follows: (1) If there is a surviving spouse and also a depcendant of the decedent: one-third of the entire estate to the surviving spouse and two-thirds to the decedent's descendant's per stirpes. (3) If there is a surviving spouse but no descendant of the decedent: the entire estate to the surviving spouse. 7. ILL. REV. STAT. ch. 3, § 16 (1971). SHARE OF SPOUSE ON RENUNCI- ATION OF WILL When a will is renounced by the testator's surviving spouse in the manner provided in Section 17, whether or not the will contains any provision for the benefit of the surviving spouse, the surviving spouse is entitled to the following share of the testator's estate after payment of all just claims: 1974] CASE NOTES 1249 of the estate. Through the use of a trust, even if revocable, it is possible to avoid these two statutory provisions because trusts have been held not to be testamentary dispositions.8 The Totten Trust is simply another form of revocable inter vivos trust.9 In determining the validity of trusts with respect to marital rights, prior Illinois decisions have looked at two factors: the revocability of the trans- ,fer and the intent of the transferor at the time the transfer was made. The general rule had developed that only a colorable or illusory transfer; when made with the intent to defraud the spouse, could be overturned as a fraud on marital rights. In Williams v. Evans'° a bill in equity was brought to obtain a construc- tion and enforcement of a 'trust agreement executed by the decedent's wife. The spouses had not lived together for twenty years. The dece- dent had transferred all of her property into a trust and retained a life estate. On her death the trustee was directed to sell the trust property and to purchase property for a church. The decedent had retained pos- session of the realty, and prior to her death, had regained 'the possession of the personalty placed in the trust after the trustees resigned. The court held that although the trustees had breached their duty in allowing the decedent to retain possession of the trust property, the validity of the completed and absolute '(irrevocable) transfers into the trust were not affected. The evidence showed that the decedent's motives were religious and not fraudulent as to her spouse. The court said, "[ftlhere is nothing in the transaction which tends to show that it was designed to take effect as a testamentary disposition . .; the property was absolutely disposed of."" Thus the transfer was valid against the spouse. Despite the suggestion in Williams that even an absolute conveyance could be overturned as a fraud, the recent decision in Dennis v. Dennis held that an irrevocable trust was so absolute and binding that it could not be overturned, even though made with the intent to defraud.12 Fur- ther, it has been decided that a husband has the right to dispose of his onethird of the entire estate if the testator leaves a descendant, or one- half of the entire estate if the testator leaves no descendant. 8. Farkas v. Williams, 5 I11.2d 417, 125 N.E.2d 600 (1955); Gurnet v. Mutual Life Ins. Co., 356 Ill. 612, 191 N.E. 250 (1934); Bear v. Milliken Trust Co., 336 Ill. 366, 168 N.E. 349 (1929); Kelly v. Parker, 181 Ill. 49, 54 N.E. 615 (1899); Merchants Nat'l Bank v. Weinold, 12 Ill. App. 2d 209, 138 N.E.2d 840 (1956); Bergmann v. Foreman State Trust and Say. Bank, 273 Ill. App. 408 (1934). 9. In re Estate of Petralia, 32 Ill. 2d 134, 204 N.E.2d 1 (1965). 10. 154 Ill. 98, 39 N.E. 698 (1895); Annot., 39 A.L.R.3d 40 (1971). 11. 154 Ill. at 107, 39 N.E. at 700-01. 12. 132 Ill. App. 2d 952, 271 N.E.2d 55 (1971). 1250 DE PAUL LAW REVIEW [Vol. 23 property during his lifetime without the concurrence of his wife, 13 and that he may make an absolute gift or other voluntary disposition of his property without violating her rights.' 4 The Illinois Supreme Court suggested in Padfield v.
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