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Northern Trust Co. v. Tarre





Appeal from the Appellate Court for the First District; heard in that court on appeal from the Circuit Court of Cook County, the Hon. Joseph M. Wosik, Judge, presiding.


Rehearing denied November 25, 1981.

___ N.E.2d ___ The Northern Trust Company filed suit in the circuit court of Cook County seeking instructions as to the proper distribution of assets held on behalf of Harry and Fannie Kaplan, deceased settlors under a trust agreement executed by them and naming Northern as trustee. Joined as defendants were Leonard Kaplan and Sylvia Tarre (the settlors' children); Raymond Kaplan and Linda Kaplan Beatus (son and daughter of Leonard); Mark Tarre and Laurel Tarre Goodman (son and daughter of Sylvia); and Joseph Tarre (the minor son of Mark Tarre), all beneficiaries under the trust. The controversy centered around the validity of an amendment executed by Harry Kaplan following the death of his wife. The trial court found the amendment to be a valid exercise of the powers reserved by the settlors. However, the appellate court held that the trust agreement was executed pursuant to a contract between the settlors, and that Harry's amendment was executed in violation of this contract and was consequently invalid. (83 Ill. App.3d 684, 691.) The judgment of the trial court was reversed and the cause remanded with directions. The Northern Trust Company as well as the Tarre defendants petitioned this court for leave to appeal. We granted both petitions and consolidated the cases in this court.

On August 26, 1969, Harry and Fannie Kaplan entered into a trust agreement whereby the settlors transferred various property to Northern under the terms and provisions of a document entitled "Trust Agreement, Trust No. 35458." The trust agreement is quite comprehensive (34 pages) and is broken down into 10 separate "articles," each containing several numbered paragraphs. Articles I and II of the document are designated "Trust A" and "Trust B," respectively. The preamble to the agreement states that Harry is conveying his interest in certain specified property into Trust A, while Fannie is conveying her interest in certain property into Trust B. Substantially identical provisions in articles I and II describe how the property in the respective trusts is to be managed, how the income is to be distributed to the respective settlors during their lifetimes, and the power of the trustee to invade the principal for limited purposes. Both articles contain payout provisions directing disbursement of one-half of the value of the respective trust assets (after certain deductions) upon the death of the settlor. The payment is to be made to the surviving settlor's trust, but only if that settlor survives the death of the other by 180 days. In no event is the payout to diminish the trust of the decedent to a value of less than $75,000. Both articles also provide that the income generated by the residue in the deceased settlor's trust is to be paid to the survivor for life.

Article III sets out the distribution scheme to be employed upon the death of the surviving settlor. It directs that after payment of certain expenses outlined in both article I and article II, as well as a specific devise of $5,000 from Trust B to Fannie's nephew, the trustee shall commingle the assets of the two trusts and make a distribution. The thrust of article III's distribution plan is that, if Sylvia is then alive, $100,000 of the commingled Trusts A and B is to be held in "Trust C" for her benefit as provided in article IV. The residue of the commingled trusts is then to be split with one-half going to Leonard and the other half (or the entire residue if Leonard is not alive) divided among the settlors' grandchildren, Raymond and Linda Kaplan, and Mark and Laurel Tarre, with alternate distribution provisions operating in the event of a deceased grandchild. Article III also describes alternative gifts which are to take effect if Sylvia does not survive the settlors as well as a gift of $5,000 to the Northwest Home for the Aged.

Article IV is designated "Trust C" and sets out the income and distribution scheme to be employed with respect to Trust C assets. Articles V through X contain various provisions regarding alternative distributions, the rights and duties of the trustee, as well as other general administrative matters not immediately relevant to this appeal. The agreement is signed by both settlors and a representative of Northern Trust Company. Appended to the trust agreement and bearing the title "Trust No. 36468" are two documents listing the property transferred by each settlor. The two schedules are identical in every respect except for the name of the transferor.

Paragraph 1.5 of article I (Harry's trust — Trust A) and paragraph 2.5 of article II (Fannie's trust — Trust B) contain identical provisions reserving certain powers to the settlors of Trust A and B, respectively. Those paragraphs provide:

"By written instrument executed by Harry [Fannie] and delivered to the trustee during his [her] lifetime, Harry [Fannie] may at any time and from time to time (a) withdraw or dispose of such portions of the principal or any asset of Trust A [B] as he [she] may direct; (b) direct the trustee as to the purchase, sale, mortgage, pledge or other disposition of assets of Trust A [B], irrespective of the risk involved, but the sole responsibility for and risk of any such action in accordance with any such direction shall be Harry's [Fannie's], and neither the trustee nor any successor trustee shall be liable or responsible or assume any risk whatsoever for any action taken or omitted in accordance with any such direction; or (c) revoke or amend this agreement as to Trust A [B], but no amendment affecting or limiting the trustee's powers, duties or discretions shall be made without its consent." (Emphasis added.)

Fannie died on April 12, 1976, not having exercised her power to amend the agreement during her lifetime. At the time of her death, the net value of Trust B was $110,868.87. Pursuant to the trust agreement, $75,000 was held in her Trust B and the excess paid over to Trust A. On May 26, 1976, Harry executed an amendment to Trust A in which he continued the gift of $5,000 to the Northwest Home for the Aged, which had been provided for in article III of the original trust agreement. However, he deleted certain provisions of the agreement noted below and provided that the remaining Trust A assets, upon Harry's death, be held in Trust A and be administered for the benefit of Sylvia and, at her death, be distributed to her children.

The document executed by Harry is entitled "AMENDMENT TO THE HARRY M. KAPLAN TRUST A, TRUST NO. 36468" and contains 10 numbered paragraphs, the first 5 of which alter specific provisions of article I to provide the gifts described above. Paragraph 6 of the amendment states, "ARTICLES III, IV and V are deleted from this Trust A." Paragraphs 7, 8 and 9 of the amendment modify articles VI and VII of the original agreement and adopt the Trusts and Trustees Act (Ill. Rev. Stat. 1975, ch. 148, par. 101 et seq.) as applicable to Trust A. Paragraph 10 states that, in all other respects, articles VI through X remain unchanged.

The obvious purpose of the amendment is to extend the life of Trust A beyond Harry's death, thereby escaping the commingling and distribution provisions of article III of the original agreement. This amendment, if valid, would adversely affect the amount of the distribution to which Leonard and the Kaplan grandchildren would be entitled under the original agreement.

At the time of Harry's death, the gross value of his trust (Trust A) was $164,744.60. Of this amount, $30,868.67 had been received from Fannie's Trust B following her death. After Harry's death, pursuant to the trust agreement, Northern paid out $14,200.90 in expenses, claims and the distribution to Northwest Home for the Aged. The balance remaining in Harry's Trust A is $150,543.70. Had the trust agreement not been amended, this amount and the $75,000 remaining in Fannie's Trust B would have been commingled pursuant to article III of the original agreement, and would have totaled $225,543.70. Of this amount, $100,000 would have been transferred to Trust C for Sylvia (settlors' daughter) and $5,000 would have been distributed under article III to the Northwest Home for the Aged. The balance of $120,543.70 would have been distributed one-half to Leonard (settlors' son), and the other one-half would have been divided equally and distributed to the four grandchildren of the settlors (two grandchildren are the children of Leonard and two are the children of Sylvia).

In response to Northern's complaint for construction of the trust agreement, the Kaplan defendants (Leonard and his children) did not contest the validity of the amendment, but requested that the $75,000 remaining in Trust B be distributed one-half to Leonard and one-eighth to each of the four grandchildren. Later, the Kaplan defendants filed an amended answer in which it was alleged that the original agreement was a joint and mutual agreement between Harry and Fannie and since Harry had received the benefits of the agreement following Fannie's death, he could not amend his trust. It was alleged that the amendment was therefore of no effect. The amended answer filed by the Kaplan defendants, in the alternative, alleged that the $75,000 should be distributed to Leonard and his children. As a second alternative the amended answer prays that the $75,000 be distributed as intestate property.

The trial court held the amendment valid. The $150,543.70 balance in Harry's Trust A was therefore directed to be held for the benefit of Sylvia. The court directed the trustee to pay from the $75,000 remaining in Trust B the attorney fees for the parties and directed that the balance be held under Trust C as provided in article IV ...

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