Appeal from Circuit Court of Sangamon County No. 10CH768 Honorable John Schmidt,Judge Presiding.
The opinion of the court was delivered by: Justice Cook
JUSTICE COOK delivered the judgment of the court, with opinion. Presiding Justice Turner and Justice Knecht concurred in the judgment and opinion.
¶ 1 In June 2010, plaintiff, Church of the Little Flower, petitioned the trial court for reformation of a trust of which plaintiff is one of three remaining beneficiaries. Plaintiff asked the court to apply the doctrine of equitable deviation to terminate the trust and distribute its assets to the beneficiaries. One of the named defendants, US Bank, is currently the trustee of that trust. In December 2011, the court granted summary judgment in favor of plaintiff. The court's judgment required US Bank to dissolve the trust and distribute its assets to plaintiff and the other two remaining beneficiaries.
¶ 2 US Bank appeals, arguing equitable deviation did not apply and reformation of the trust was thus improper. We agree. Accordingly, we reverse and remand with directions to enter summary judgment for US Bank.
¶ 4 In July 1991, Erma L. Donelan established the trust at issue, designating the First National Bank of Springfield as trustee. (US Bank succeeded as trustee when it merged with or acquired First National Bank of Springfield.) The trust provided for Donelan to receive quarterly payments of the trust's income for the duration of her life and other emergency funds as needed. Any trust assets exceeding $750,000 at the time of Donelan's death were to be distributed free from trust to three charities, in the following shares: 20% to plaintiff; 20% to St. Joseph's Home; and 60% to Friends of the Hospital Sisters of St. Francis, now known as Hospital Sisters of St. Francis Foundation, Inc. Property worth $750,000 was to be retained in trust following Donelan's death. Thereafter, income or, if income were insufficient, income and principal worth 7% of the trust's value at the beginning of each tax year was to be paid in equal quarterly shares to Donelan's four sisters-in-law for their lifetimes. In 2005, the last of her sisters-in-law died. If at that time the value of the trust's assets was below $500,000, the trust agreement would have required the trustee to dissolve the trust and distribute the remaining principal to the three charities-again, 20% each to plaintiff and St. Joseph's Home and 60% to Hospital Sisters of St. Francis Foundation.
¶ 5 Since the trust held more than $500,000 when the last sister-in-law died, the trust agreement provided for the continued quarterly payment of trust income to the remaining charitable beneficiaries in the same 20/20/60 shares. However, in order to lessen the trust's tax liability, the trust was amended pursuant to the so-called "private foundation rules" (see I.R.C. 4940 to 4948 (2006)) to provide for yearly distribution of, instead of its annual income, 5% of the trust's assets. The trust agreement expressly required the trustee to maintain compliance with the private foundation rules and authorized the trustee to amend the trust as necessary. As amended, the trustee's fees and administrative expenses were to be taken out of the 5% distribution before the balance was paid to the beneficiaries.
¶ 6 Each year from 2006 through 2010, the trustee's fees and fund-management fees collected by US Bank exceeded plaintiff's share of the distributions to the beneficiaries. Trustee's fees were based on a percentage of the trust's value. The percentage of assets collected as trustee's fees varied between different investments. For example, US Bank collected trustee's fees at a lower percentage of the value of assets invested in, among other things, US Bank's proprietary mutual funds. (US Bank received 0.9% of the value of assets invested in those funds, compared with, in general, 1.5% of the value of funds invested outside of US Bank.) In total, plaintiff and St. Joseph's Home each received $27,600.32 from the fund from 2006 through 2010; Hospital Sisters of St. Francis Foundation received $82,800.96; and US Bank collected $41,214.06 in fees from the trust. In comparison, the trust income totaled $135,773.98 for those years. These figures are illustrated in the following table:
Yearly Trust Distributions & Income, 2006-2010
Year Plaintiff St. Joseph's Home Hospital Sisters US Bank Trust Income 2006 $4,049.32 $4,049.32 $12,147.96 $8,074.76 $25,074.18 2007 $6,197.81 $6,197.81 $18,593.42 $8,621.38 $28,512.11 2008 $6,454.60 $6,454.60 $19,363.81 $8,414.09 $29,767.15 2009 $5,698.60 $5,698.60 $17,095.82 $7,840.45 $26,128.21 2010 $5,199.99 $5,199.99 $15,599.95 $8,263.38 $26,292.33
Total $27,600.32 $27,600.32 $82,800.96 $41,214.06 $135,773.98 Over the same period, US Bank withdrew additional funds from the trust account to cover administrative expenses. According to plaintiff, US Bank received additional compensation for the trust's investments in US Bank's proprietary mutual funds and other mutual funds affiliated with US Bank, but this compensation was not taken from the trust.
¶ 7 The year-to-year variation in the value of distributions to the charitable beneficiaries corresponded to fluctuations in the trust's overall value. On January 1, 2006, the trust was worth $670,587.54; on January 1, 2007, $693,443.07; on January 1, 2008, $690,623.42; on January 1, 2009, $570,048.86; on January 1, 2010, $604,293.26; and on January 1, 2011, $637,186.38. While the trust incurred substantial losses coinciding with the recession, the trust assets never fell below the $500,000 threshold value that would have triggered termination at the time of the death of Donelan's last living sister-in-law under the terms of the trust agreement.
¶ 8 In June 2010, plaintiff filed its petition for reformation of the trust. Plaintiff alleged, in relevant part, that the trustee's fees and costs, which outpaced the distributions to two of the three beneficiaries, substantially frustrated the trust's purpose of providing the beneficiaries with useful revenues, such that the doctrine of equitable deviation or, alternatively, cy pres allowed the trial court to terminate the trust. US Bank, St. Joseph's Home, Hospital Sisters of St. Francis Foundation, and the Illinois Attorney General, as an interested ...