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Trugman v. Klein

APRIL 21, 1967.




Appeal from the Circuit Court of Cook County, Chancery Division; the Hon. DANIEL A. COVELLI, Judge, presiding. Reversed and remanded with directions.


Rehearing denied May 22, 1967.

This is an appeal from a decree construing the terms of a living trust established by Lottie Klein, who was deceased prior to the commencement of this action.

In 1962 plaintiffs, as trustees, filed a suit seeking a determination of whether $90,000 was distributable as trust income or whether it constituted trust corpus. In 1964 Bertram Klein and his wife, Patricia, filed a counterclaim requesting a determination that the heirs at law of Lottie Klein in existence at her death are entitled to the trust corpus upon final distribution. (Patricia Klein, in the capacity of executrix of the estate of Bertram Klein, was substituted for Bertram upon his death in 1966.) The court found that the $90,000 constituted trust corpus and that the heirs at law of Lottie Klein were to be determined at the date of the termination of the trust, not at the death of Lottie Klein.

The facts are not in dispute. Lottie Klein and her sons, Alec and Bertram, were the owners of the F.L. Klein Noodle Company, a partnership business. Immediately following the death of Alec Klein in January 1940 the partnership interests in the business were as follows: the estate of Alec, 50%; Lottie Klein, 25%; and Bertram, 25%. Approximately six months after Alec's death, Lottie and Bertram Klein each entered into a contract with Alec's estate pursuant to which each would purchase a one-quarter interest in the business. The consideration for each one-quarter interest, to be paid over a period of time, was $90,000.

Subsequently, on November 1, 1941, Lottie Klein established two trusts, commonly known as Trusts Nos. 1 and 2, respectively. She assigned a 20% interest in the company to Trust No. 1 (this trust is not at issue in this case) and she assigned a 5% interest in the company to Trust No. 2 (the trust at issue, hereinafter referred to as "the trust"). The trust was for the express purpose "of establishing certain independent incomes and estates for members of her immediate family," and it was to continue until the death of both Lottie and Bertram. Under paragraph 19 of the trust agreement the trustees were granted "full power and authority to determine the manner in which expenses are to be borne and the manner in which receipts are to be credited, as between principal and income, and also to determine what shall be `income,' `net income' and `principal'. . . ." Various paragraphs of the trust empowered the trustees to accumulate, invest and reinvest any or all of the trust income in their discretion in lieu of paying it to the income beneficiary otherwise entitled thereto; and to subsequently pay to the beneficiary the accumulated income "and the proceeds and avails thereof." However, under paragraph 3 the trustees were required to "distribute income accumulated . . . during any given year within ten (10) years after the year of the creation thereof."

The income beneficiaries are designated by paragraphs 3 through 7 of the trust agreement, as follows:

Paragraph 3 provides that while both the trustor and Bertram A. Klein are living, Bertram A. Klein is the sole income beneficiary;

Paragraph 4 provides that if Bertram A. Klein predeceases the trustor leaving "no lawful, living descendants or widow," her descendants are the income beneficiaries;

Paragraph 5 provides that if Bertram A. Klein predeceases the trustor but leaves a "widow or lawful, living descendants," the income is to be paid (if the trustees decide to pay it) to the "then living heirs at law of Bertram A. Klein, per stirpes";

Paragraph 6 provides that if the trustor predeceases Bertram A. Klein and he has a wife, the wife becomes the new income beneficiary; and

Paragraph 7 governs the situation where Bertram A. Klein survives his mother but has no wife. In this event the income is payable to "the then living heirs at law of Bertram A. Klein" (sic).

Under paragraph 20, "income accrued or collected but not distributed at the time of the termination of any estate or interest hereunder shall belong and be payable as income to the beneficiary or beneficiaries entitled to the next eventual estates or interests."

The trustor also directed (in paragraph 9) that upon termination of the trust the principal and accumulated income should be distributed "to the heirs at law of the Trustor, per stirpes."

On December 15, 1942, Bertram Klein assigned to the trust his interest under the aforesaid agreement to purchase a 25% interest in the business from Alec's estate. Payment for this interest was made by utilizing the trust's share of partnership earnings from 1943 and 1944 and also from a loan to the trust by the business. The debt due Alec's estate thus was satisfied in 1944 and repayment of the loan was completed in 1952. *fn1 In 1957 the business was sold to the Sunshine Biscuit Company and the trust received its pro rata portion of the proceeds. Shortly thereafter Bertram Klein demanded that $90,000 be distributed to him as accumulated income. The trustees disagreed as to whether the money represented accumulated income or trust corpus and therefore no distribution was made.

At the trial of this cause Harry Trugman, a trustee, testified that in his opinion the $90,000 in question was trust income. He stated:

I was involved in this Trust from the very beginning. And I was in contact with all parties whoever had anything to do with this Trust. And based on the original planning and intent of the various parties, particularly B.A. Klein [referring to Bertram Klein], at the time when he transferred his 25% interest which he had purchased from the estate of Alec Klein to Trust No. 2 — Based on that background material I felt that B.A. would never have sold his interest to Trust No. 2 if he had known that this amount would be converted to corpus.

The primary purpose at the time for the assignment of the 25% interest to Trust No. 2 was to spread income to another taxpayer so as to reduce the total income taxes for the ...

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