Peck v. Froehlich

NO. 4-05-0996 Filed 8/9/06

IN THE APPELLATE COURT

OF ILLINOIS

FOURTH DISTRICT

JAMES B. PECK, SR., as Trustee of ) Appeal from
the MARJORIE SIMS Trust Dated ) Circuit Court of
August 6, 1987, ) Macon County
Plaintiff-Appellant, ) No. 04L167
v. )
DAVID E. FROEHLICH, as Trustee of )
the MARJORIE SIMS Trust Dated Sep- )
tember 25, 1991; DAVID E. )
FROEHLICH, Individually; and ) Honorable
FAIRHAVENS CHRISTIAN HOME, ) Katherine M. McCarthy,
Defendants-Appellees. ) Judge Presiding.
_________________________________________________________________

JUSTICE COOK delivered the opinion of the court:

This appeal involves two trusts created by the settlor,

Marjorie Sims, for the purpose of providing for her health,

support, and maintenance during her lifetime. The trustee (and

residuary beneficiary) of one of the trusts seeks reimbursement

from the trustee (and residuary beneficiary) of the other trust,

for one-half of the amounts paid for the settlor's extraordinary

caretaking expenses. The circuit court entered summary judgment

denying reimbursement. We reverse and remand.

I. BACKGROUND

The settlor, Marjorie Sims, created a revocable living

trust, the "Illinois Trust," on August 6, 1987. This trust

included essentially all the assets she owned, including her

accounts in Arizona banks. Sims spent her winters in Arizona.

The Illinois Trust was amended several times in the early 1990s

and finally on November 10, 1999. Sims created a second trust,
the "Arizona Trust," on September 25, 1991. The Arizona Trust

was intended to include only Sims' Arizona bank accounts. The

Arizona Trust was irrevocable (although it could be amended by a

successor trustee to carry out its purposes) and was intended to

protect Sims' Arizona bank accounts from her creditors.

The two trusts expressed a similar purpose, to provide

for Sims' health, support, and maintenance for her lifetime.

After her death, most of the residue of the Illinois Trust was to

be paid over to the plaintiff, James B. Peck, Sr., and most of
the residue of the Arizona Trust was to be paid over to defen-

dant, David E. Froehlich. Thirty percent of the residue of the

Arizona Trust was to be paid over to defendant Fairhavens Chris-

tian Home. Plaintiff and defendant Froehlich had been employed

by Sims' husband in his lumber business and were to him the sons

he never had. They were closer to Sims than any of her rela-

tives.
Section 2 of the Arizona Trust states Sims' "primary

desire that all of my needs shall be met, even if the trust

estate is thereby entirely depleted." The trustee was directed

to provide for those needs as follows:

"Trustee shall first distribute to me, or

for my benefit, for my lifetime, so much

of the net income and principal of the

trust as trustee believes necessary to pro-

vide for my health, support[,] and maintenance.

In making such payments to me or for my

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 benefit, trustee shall at all times exercise

discretion in favor of making such payments."

A similar provision is found in the Illinois Trust. There is no

question that the funds for which reimbursement is sought were

"necessary to provide for [the settlor's] health, support[,] and

maintenance." It is also clear that expenses for health, sup-

port, and maintenance were to be divided between the two trusts.

It would be illogical for the same expenses to be paid twice, or

not at all. When two funds are established for payment of the
same expenses, the payments must be coordinated between the two

funds.

Sims restated her intent to coordinate the two trusts

in her November 10, 1999, amendment to her Illinois Trust: "It

is further my intent that at such time as I shall incur expenses

for my care beyond the ordinary expenses of living in my home ***

that such expenses shall be shared equally between this trust and
the [Arizona Trust]." The 1999 amendment also clarified that the

Arizona Trust included only the Arizona Bank accounts listed on a

schedule attached to that trust, even though those accounts were

arguably a part of the Illinois Trust. Other assets were said to

be a part of the Illinois Trust even though they arguably were

included in the Arizona Trust. Sims noted that "each trust may

attempt to state a comprehensive plan for all of my assets," but

of course that was not possible.

In the 1999 amendment, Sims noted her close relation-

ship with plaintiff and defendant and stated: "I do not want the

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gifts to either of them to be impaired by the entire burden of my

care and maintenance or of taxes imposed upon my estate, but I

want the burden of my care to be shared equally and the estate

taxes to be shared proportionately." Sims had a stroke in

November 2000 and required 24-hour care from that date. Plain-

tiff and defendant became successor trustees of their respective

trusts in the spring of 2001. Plaintiff sent quarterly bills to

defendant for one-half of Sims' extraordinary caretaking ex-

penses, but all requests for payment were refused. On February
8, 2001, defendant sent Sims a letter, advising that as long as

she had sufficient monthly income, she should not deplete the

assets in the Arizona Trust: "This will avoid unnecessary tax

consequences, allow for future growth of the trust and protect

your future financial security in the event of unforeseen circum-

stances." Denying reimbursement would also increase defendant's

residuary share.
Sims died June 10, 2004. Plaintiff filed this action

on October 28, 2004. On November 4, 2005, the circuit court

entered summary judgment in favor of defendant, concluding that

defendant had complete and total discretion as trustee in making

or not making disbursements from the trust. "Under the terms of

the Arizona Trust, it is not relevant whether the [d]efendant

[t]rustee properly exercised his discretion in making or not

making disbursements from that Trust." The court held that Sims'

intent is clear from the language of the Arizona Trust and

consequently extrinsic evidence is not proper, and the 1999

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amendment to the Illinois Trust cannot be considered for purposes

of determining Sims' intent. The court held that the Arizona

Trust is an irrevocable trust and Sims retained no right to alter

or modify that trust. Plaintiff appeals.

II. ANALYSIS

A. Standard of Review

Summary judgment is proper if, when viewed in the light

most favorable to the nonmoving party, the pleadings, deposi-

tions, admissions, and affidavits on file demonstrate that there
is no genuine issue as to any material fact and that the moving

party is entitled to judgment as a matter of law. 735 ILCS 5/2-

1005(c) (West 2004). We review the circuit court's grant of

summary judgment de novo. Illinois State Chamber of Commerce v.

Filan, 216 Ill. 2d 653, 661, 837 N.E.2d 922, 928 (2005). We also

review a trial court's construction of a trust instrument de

novo. Brown v. Ryan, 338 Ill. App. 3d 864, 871, 788 N.E.2d 1183,

1189 (2003). The construction of an unambiguous contract, or the

determination of whether a contract is ambiguous, is purely a

question of law. In re Estate of Steward, 134 Ill. App. 3d 412,
415, 480 N.E.2d 201, 204 (1985).

B. The Public-Benefits Paragraph

Defendant relies on the language of section 2 of the

Arizona Trust, "Payment of Income and Principal to or for Benefi-

ciary." Section 2 contains two paragraphs. As discussed above,

the first paragraph set out Sims' primary desire that her needs

be met and a direction that the trustee exercise discretion in

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favor of making the payments necessary for her health, support,

and maintenance. Defendant's argument is based on the second

paragraph:

"Notwithstanding the foregoing, in the

event I should require long-term care for

physical or mental disabilities, or a com-

bination thereof, Trustee shall, for my

lifetime, use the income and principal of

this Trust to provide me with those bene-
fits and services, and only those benefits

and services that, in Trustee's judgment,

are not otherwise available to me from other

sources, as or when needed to enable me to

lead as normal, comfortable, and fulfilling a

life as possible. It is my specific intent

not to displace any source of funds otherwise
available to me for my basic support, for

which I may from time to time be eligible

by reason of my age, disability, or other
factors, from federal, state, or local govern-

ment, or charitable sources, from all of

which sources, as appropriate, I direct

Trustee to seek such basic support in my

behalf, and I further direct Trustee to deny

any request made by any agency or governmental
entity requesting disbursement of Trust funds,

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 whether from income or principal, to satisfy

my support needs. Trustee's discretion in

making or not making disbursement of income

or principal from this Trust is final even

if found arbitrary or unreasonable, Trustee's

sole and independent judgment being the

criterion upon which any such disbursements

are made or withheld." (Emphasis added.)

Defendant quotes this paragraph in his brief but

conveniently omits the highlighted language, breaking in mid-

sentence when the settlor begins to explain her "specific intent"

not to displace governmental or charitable sources of funds. The

highlighted language makes it clear that the powers granted the

trustee are not general powers, which are dealt with in another

section, but powers which apply only when public sources seek

reimbursement. This paragraph is a common one in trust instru-

ments. It makes explicit the presumption "that the trustee's

discretion should be exercised in a manner that will avoid ***

expending trust funds for purposes for which public funds would

otherwise be available." Restatement (Third) of Trusts '50,

Comment e(4), at 273-74 (2003); see also Department of Mental
Health & Developmental Disabilities v. Phillips, 114 Ill. 2d 85,

94, 500 N.E.2d 29, 33 (1986) (settlor did not intend, and Depart-

ment was not entitled to, reimbursement). Sims had the intent in

this paragraph not to reimburse public benefits; she did not have

the intent to allow one beneficiary to improve his share at the

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cost of the other by refusing to pay for her health, support, and

maintenance.

According to defendant we need only read the words in

the public-benefits paragraph that the "trustee's discretion ***

is final." We may ignore the discussion of governmental and

charitable sources and the settlor's specific intent not to

displace those sources. It is improper to select a few words

from a document and read them out of context. When construing a

trust, we cannot fix upon each of its provisions in isolation but
must instead consider the document as a whole in order to arrive

at the true intent of the settlor. Rubinson v. Rubinson, 250

Ill. App. 3d 206, 213, 620 N.E.2d 1271, 1276 (1993); Steward, 134

Ill. App. 3d at 414, 480 N.E.2d at 203. Words derive their

meaning from the context in which they are used, and the contract

must be viewed as a whole by viewing each part in light of the

others. Board of Trade of the City of Chicago v. Dow Jones &

Co., 98 Ill. 2d 109, 122, 456 N.E.2d 84, 90 (1983); Citicorp

Savings of Illinois v. Rucker, 295 Ill. App. 3d 801, 810, 692

N.E.2d 1319, 1326 (1998) (language allowing mortgagee to perform

certain acts on behalf of mortgagor did not impose fiduciary

duties of an agent on mortgagee).

The paragraph in section 2 is a specific provision,

giving the trustee broad powers, but only in connection with

reimbursement for public benefits. The First District has

addressed a public-benefits provision, although in a situation

different from ours. Stein v. Scott, 252 Ill. App. 3d 611, 625

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N.E.2d 713 (1993). In Stein, the settlor was not concerned with

her own needs, but those of a disabled daughter who was receiving

or likely to receive benefits from governmental or private

agencies. The daughter was incapable of bearing children. The

trust instrument provided, "[i]t is my express purpose that any

distributions to or for *** [the daughter's benefit] *** from her

share be used only to supplement other such benefits." (Emphasis

added.) Stein, 252 Ill. App. 3d at 613, 625 N.E.2d at 715. The

only provision for the disabled daughter in Stein was the public-

benefits provision. The disabled daughter sought reimbursement

for amounts she had allegedly expended for her care, maintenance,

and support, but the trustee refused. The First District agreed

with the trustee, contrasting an earlier case where "the trustee

was directed, not merely given discretion, to make distributions

to the beneficiary as necessary for her support or maintenance."

Stein, 252 Ill. App. 3d at 616, 625 N.E.2d at 717, citing Hart
v. Connors, 85 Ill. App. 2d 50, 228 N.E.2d 273 (1967). In Hart,

"there was a finding by the court that the testator was primarily

concerned with the comfort of the beneficiary and intended that

she have unencumbered use of the trust for that purpose." Stein,
252 Ill. App. 3d at 616, 625 N.E.2d at 717.

The present case is more like Hart than it is like

Stein. The language of the Arizona Trust states Sims' "primary

desire that all of [her] needs shall be met, even if the trust

estate is thereby entirely depleted." The trustee was specifi-

cally directed to exercise his discretion in favor of making such

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payments. As in Hart, "[i]t is apparent that the [settlor] was

concerned primarily with [her own] comfort and any residue to

others was secondary." Hart, 85 Ill. App. 2d at 54, 228 N.E.2d

at 275. There was a concern in Stein that disbursement of trust

funds might impair Scott's eligibility for public benefits.

Stein, 252 Ill. App. 3d at 616, 625 N.E.2d at 717. There is no

such concern in the present case. The trustee's decision in

Stein, not to make discretionary payments to a secondary benefi-

ciary, is not support for the trustee's decision in this case not

to make payments he was directed to make for the benefit of the

primary beneficiary, the settlor.

Defendant attempts to fit himself with the public-

benefits paragraph, arguing that the Illinois Trust was a "source

of funds" and his discretion is "final even if found arbitrary or

unreasonable." As defendant points out, the paragraph states "It

is my specific intent not to displace any source of funds other-
wise available to me for my basic support." (Emphasis added.)

The sentence continues, however, "for which I may from time to

time be eligible by reason of my age, disability, or other

factors, from federal, state, or local government, or charitable

sources." The Illinois Trust was not a governmental or charita-

ble source. Defendant's discretion to deny reimbursement to the

Illinois Trust was accordingly not "final even if found arbitrary

or unreasonable." The first sentence of the paragraph does not

mention public benefits, but that sentence is clearly modified by

the following sentence, which begins "It is my specific intent."

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 C. Unlimited Discretion

Even if the public-benefits paragraph applied to

payments other than those for which public benefits were avail-

able, we disagree with the trial court's conclusion that it is

irrelevant whether defendant properly exercised his discretion,

that "[e]ven if *** his conduct was in bad faith, [the settlor]

has even excused such conduct and given him unbridled authority."

In construing a trust, a trial court's first concern is

to determine the settlor's intent and give effect to that intent
if it is not contrary to public policy. Harris Trust & Savings

Bank v. Donovan, 145 Ill. 2d 166, 172, 582 N.E.2d 120, 123

(1991). "[W]hat may constitute an abuse of discretion by the

trustee[] depend[s] on the terms of the discretion, including the

proper construction of any accompanying standards, and on the

settlor's purposes in granting the discretionary power and in

creating the trust." (Emphasis added.) Restatement (Third) of

Trusts '50(2), at 258 (2003). The purposes of the trust and the

powers of the trustee must be read together. When the settlor

has a particular purpose in mind, it would be improper for us to

ignore that purpose by concluding that the trustee could do

whatever he wanted. The settlor's intent in the Arizona Trust

was not to let defendant do whatever he wanted.

"It is contrary to sound policy, and a contradiction in

terms, to permit the settlor to relieve a 'trustee' of all

accountability." Restatement (Third) of Trusts '50, Comment c,

at 262 (2003). "Even under the broadest grant of fiduciary

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discretion, a trustee must act honestly and in a state of mind

contemplated by the settlor. Thus, the court will not permit the

trustee to act in bad faith or for some purpose or motive other

than to accomplish the purposes of the discretionary power."

Restatement (Third) of Trusts '50, Comment c, at 262 (2003). A

"trustee" who has no responsibility is not a trustee. See also

Amcore Bank, N.A. v. Hahnaman-Albrecht, Inc., 326 Ill. App. 3d

126, 759 N.E.2d 174 (2001) (general terms in a power of attorney

that literally purport to grant great authority will normally be

interpreted as authorizing the agent to act only in connection

with the business the agent is employed to perform).

Of course, it is possible for the settlor not to have a

particular purpose in mind and to simply vest discretion to

distribute principal or income in the trustee. That was the case

in Rubinson, where the plaintiff alleged the paramount purpose of

a trust was to benefit the plaintiff and her brother. Rubinson,

250 Ill. App. 3d at 213, 620 N.E.2d at 1276. The plaintiff

relied on the following recital: "'In compliance with the

request of FANNIE RUBINSON to use the [corpus of the trust] to

express her love for her grandchildren and children *** in any

manner considered suitable by [the trustees].'" Rubinson, 250

Ill. App. 3d at 213, 620 N.E.2d at 1276. Viewing the document as

a whole, the First District could not agree with the circuit

court that the main purpose of the trust was to benefit the

children and grandchildren of Fannie May Rubinson. Rubinson, 250
Ill. App. 3d at 213, 620 N.E.2d at 1276. Paragraph 4 of the

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trust expressly gave the trustees "complete and unfettered

discretion" with regard to the payment of monies out of the

trust. They could pay any amount or, if they chose, they could

make no disbursements at all. Rubinson, 250 Ill. App. 3d at 208,

214-15, 620 N.E.2d at 1273, 1276-77. In the present case, in

contrast, the settlor did have a primary purpose, that all of her

needs be met. In the present case, the discretion of the trustee

was not complete and unfettered. Rather, the trustee was ordered

at all times to exercise discretion in favor of making such

payments.

D. Alter or Modify

Assuming that the Arizona Trust was an irrevocable

trust, it does not appear that Sims attempted to alter or modify

that trust by her 1999 amendment to her Illinois Trust. Sims

stated in the 1999 amendment that she desired "to explain and
clarify the purpose and [her] intent with respect to the declara-

tion of trust [she] signed on September 25, 1991, [the Arizona

Trust]" (emphasis added), and it seems logical that she was in

fact doing so, not making a change. As discussed above, expenses

for health, support, and maintenance were to be divided between

the two trusts. Absent of any further direction, it seems

logical that the expenses were to be divided equally. When Sims

expressly stated, in the 1999 amendment, that the expenses were

to be divided equally, she was not altering or modifying the

Arizona Trust but making clear what the language of the Arizona

Trust already seemed to require. Defendant asks for an inverse

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application of the 1999 amendment. We should not accept what

Sims declared to be her intent but do the opposite--because Sims

felt it necessary to explain what her intent was in the Arizona

Trust, she must have been changing the Arizona Trust.

E. Extrinsic Evidence

We also disagree with the circuit court's conclusion

that the settlor's clear language in the 1999 amendment to the

Illinois Trust must be ignored because it is extrinsic to the

Arizona Trust. Extrinsic evidence may be admitted to aid inter-
pretation of a trust instrument only if the document is ambiguous

and the settlor's intent cannot be obtained. Stein, 252 Ill.

App. 3d at 615, 625 N.E.2d at 716. Ambiguity can be found if the

language is reasonably or fairly susceptible to more than one

interpretation. Stein, 252 Ill. App. 3d at 615, 625 N.E.2d at

716. Certainly if the language of a document is clear, it is not

the function of a court to modify the document or create new

terms. Steward, 134 Ill. App. 3d at 414, 480 N.E.2d at 203.

Even if the document is not particularly ambiguous, however, we

should still examine it carefully and try to understand it

considering the entire document and the various meanings which

words may have. We should not seize upon one word or phrase in

isolation and use that word as an excuse not to consider the

entire document.

The "four-corners" rule may make sense in a contract

situation where the parties intend their written contract to be

the complete and exclusive statement of their agreement. Some-

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times a trust instrument may stand alone as the complete and

exclusive statement of a settlor's intent, but that was not the

situation here. The settlor executed two trust agreements

dealing with the same subject: her health, support, and mainte-

nance. The trusts also covered some of the same assets. It was

impossible to administer one trust without considering what was

being done by the other. "'When there are two or more instru-

ments creating, defining, or relating to a trust, they may, or

should, be construed together to effectuate the intention of the
creator.'" Harris Trust, 145 Ill. 2d at 176, 582 N.E.2d at 124,

quoting 90 C.J.S. Trusts '164, at 32 (1955). The two trust

instruments here should be construed together.

Even if we accept defendant's argument that the 1999

amendment was not a clarification or restatement of Sims' origi-

nal intent in the Arizona Trust, but an attempt to change an

irrevocable trust, the Arizona Trust had to take note of what

happened in the Illinois Trust. If Sims had dissolved the

Illinois Trust, the Arizona Trust would have been responsible for

all Sims' health, support, and maintenance payments. Sims did

not dissolve the Illinois Trust, but she did direct it not to pay

more than 50% of her expenses. Actions taken by Sims regarding

the Illinois Trust had consequences that affected the Arizona

Trust. Other actions taken by Sims after the creation of the

Arizona Trust also had consequences. Sims would decide whether

to live at home or in an expensive extended-care facility. Sims

would decide whether to seek expensive experimental medical care.

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 Although Sims made the Arizona Trust irrevocable ("but hereby

provide for its possible amendment"), subsequent actions by Sims

could reduce the amount received by defendant under the Arizona

Trust.

III. CONCLUSION

For the reasons stated, we reverse the circuit court's

entry of summary judgment and remand for further proceedings

consistent with this opinion.

Reversed and remanded.
McCULLOUGH, J., concurs.

STEIGMANN, J., dissents.

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 JUSTICE STEIGMANN, dissenting:

Sims made her wishes clear when she created the Arizona

Trust in 1991: the trustee's discretion in making or not making

disbursements from that trust was essentially unlimited. The

majority has decided that either Sims could not have so intended

or, if she did, she was wrong to do so. After so concluding, the

majority has arrogated to itself to decide what Sims really

meant, thereby disregarding what Sims wrote and reaching a

conclusion that the majority finds more agreeable. I respect-
fully dissent.

I. THE IRREVOCABLE TRUST

The Arizona Trust at issue was created in September 1991 and

entitled "Irrevocable Declaration of Trust." During the entire

course of this litigation, including questioning of plaintiff at

oral argument, plaintiff's position has been to concede that the

Arizona Trust was irrevocable. Thus, this case presented the
court with the question of the powers of the trustee of the

Arizona Trust as set forth in the 1991 document creating the

Arizona Trust.

Despite this procedural posture, the majority writes

the following: "Assuming that the Arizona Trust was an irrevoca-

ble trust, it does not appear that Sims attempted to alter or

modify that trust by her 1999 amendment to her Illinois Trust."

Slip op. at 13. This phraseology betrays the majority's unwill-

ingness to concede what plaintiff has already conceded--the

Arizona Trust was irrevocable. But, the majority states, assum-

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ing the Arizona Trust was irrevocable, the 1999 amendment to the

Illinois Trust did not constitute a change in the Arizona Trust

(presumably because an irrevocable trust, by definition, cannot

be so modified), but, instead, merely constituted an effort by

Sims to make "clear what the language of the Arizona Trust

already seemed to require." Slip op. at 13. Thus, the majority

creates in Illinois the doctrine of "Irrevocable Trust (Sort

Of)," which means that even if a trust is irrevocable, it may be

subject to "clarification" eight years after the fact to "ex-

plain" what its terms meant.

The majority is not clear regarding the scope of this

new doctrine. That is, can such "clarification" occur only in

subsequent trust documents, or would some other legal document

(like a will) suffice? In addition, what would be the effect of

a letter the settlor writes to the trustee eight years after the

creation of the trust, indicating her "clarification" of the

terms of the trust?

II. THE TRUSTEE'S DISCRETION

In my judgment, the key to this case is the extraordi-

nary language Sims used in empowering the trustee of the Arizona

Trust--language that literally could hardly be stronger in
expressing her intent. The Arizona Trust provides that the

trustee's "discretion in making or not making disbursements of

income or principal from this trust is final." That would be a

strong statement by itself, but just in case someone might have

missed its significance, the trust goes on to provide that the

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trustee's discretion is final "even if found arbitrary." Again,

an extraordinary statement. But just in case someone still

missed its import, the trust instrument goes even further,

stating that the trustee's discretion is "final even if found

unreasonable." Then, just in case any lingering doubt could

somehow exist as to the scope of the trustee's discretion, this

sentence concludes as follows: "trustee's sole and independent

judgment being the criterion upon which any disbursements are

made or withheld." An interesting exercise for the majority
would be to ask: Assuming Sims in fact wished to grant the

trustee essentially unlimited discretion, what additional lan-

guage could she have employed to make her wishes clear?

III. THE AMBIGUITY AS TO THE PURPOSE OF THE TRUST

The majority is correct that the creation of multiple

trusts in this case creates some ambiguity regarding both their

purpose and their relationship to each other. However, no
ambiguity exists regarding Sims' wish as to who was empowered to

resolve all such questions regarding any disbursements from the

Arizona Trust: the trustee of the Arizona Trust possessed

essentially unlimited discretion--that is, the trustee was to

make disbursements from that trust in his sole discretion, even

if someone else might find his exercise of that discretion

arbitrary or unreasonable.

Last, I note that this case does not involve any

reimbursement of, or claim made by, any governmental agency.

Here, plenty of money was available in both trusts at all times

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to address all of Sims' then-current and future needs. In fact,

even after the trustee of the Arizona Trust refused to pay

anything regarding Sims' expenses before she died, the Illinois

Trust (which paid all of those expenses) still contained over

$60,000.

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