TRUST REFORMATIONS

JULY 14, 2009

By STEVEN C. PERLIS

Steven C. Perlis is the founder of The Elder Law Office of Steven C. Perlis and Associates, P.C. He has practiced law since 1974. His educational credits include a Bachelor of Arts degree from the University of Iowa, a Masters of Business Administration from De Paul University, and a Juris Doctor degree from the University of Nebraska College of Law.

In 1980, after experiencing the devastating effects Alzheimer’s Disease had on his father and the multitude of legal and financial problems that needed to be solved, Steven Perlis focused his legal expertise on helping senior citizens and people with disabilities. He served as Chief Counsel for the Office of the State Guardian of the Illinois Guardianship and Advocacy Commission and Supervising and Project Attorney for Legal Aid Bureau Title 3 Older American’s Act contract with the City of Chicago Department on Aging before opening his own law practice in 1989.

Steve recently received a unanimous victory in the Illinois Supreme Court case Hines v. Department of Public Aid 221 Ill.2d222(2006), holding that the State cannot recover Medicaid payments made on behalf of the first to die spouse against the second to die spouse's probate estate.

Steve has received the following designations:

  • AV Rating by Martindale-Hubbell. The “A” ratingidentifies a lawyer with very high to preeminent legal ability, is a reflection of expertise, experience, integrity and overall professional excellence. The “V” rating signifies General Ethical Standards Rating. The General Ethical Standards Rating denotes adherence to professional standards of conduct and ethics, reliability, diligence and other criteria relevant to the discharge of professional responsibilities. The Martindale-Hubbell rating is established by attorneys for attorneys, and indicates a demonstration of the highest professional and ethical standards.
  • Certified Elder Law Attorney (CELA) by the American Bar Association and the National Elder Law Foundation. This designation was initially received in 1995 and must be re-certified every five years in order to retain this designation. His CELA designation has been recertified twice and is current and in full force and affect.
  • Fellow of the NationalAcademy of Elder Law Attorneys. Selection as a Fellow of the National Academy of Elder Law Attorneys acknowledges the highest degree of commitment to serving older person. To date, there are less than 70 Fellows nationwide.
  • Council For Advance Practitioners (CAP) Selected by other Attorneys in the National Academy of Elder Law Attorneys for membership in this advanced program. Membership in CAP is available to preeminent Elder Law Attorneys. Members of the Council are recognized as:
  • the innovators of the profession,
  • instrumental in leading the future of Elder Law
  • NAELA’s role models, providing a “vision” for NAELA and mentoring for NAELA members.
  • Leading Lawyer Network. Selected by other attorneys in the state of Illinois as a Leading Lawyer in the area of Elder Law.
  • 2007 ILLINOIS SUPER LAWYER - Selected by other attorneys in Illinois as a Super Lawyer in the area of Elder Law. Only 5 percent of the total lawyers in the state are selected for inclusion in Super Lawyers.
  • Outstanding Member of the Illinois Chapter of the NationalAcademy of Elder Law Attorneys in 1996, 1999, 2002, and 2006.
  • Member of the Academy of Special Needs Planners. The purpose of the Academy of Special Needs Planners is to assist special needs attorneys in providing the highest quality service and advice to individuals with special needs and to their families.

He is a member of the following organizations:

  • NationalAcademy of Elder Law Attorneys (NAELA)
  • Vice -Chairman of the 2007 NAELA Institutescheduled for November, 2007 and focusing on advocacy for elderly and disabled clients.
  • Member of the Board of Directors 1996-2000,
  • Chairman of the Guardianship Advocacy/Litigation Special Interest Group 2005-2006.
  • Past Chairman of the Guardianship Special Interest Group
  • Membership Committee
  • Co-chairman of the 2004 Unprogram
  • Illinois Chapter of the NationalAcademy of Elder Law Attorneys
  • Past President
  • Past Membership Chairman
  • Currently on the Board of Directors
  • Chicago Bar Association
  • Served as Past Chairman and Vice-Chairman of the Elder Law Committee
  • Served as Past Chairman of the Mental Health Law Committee
  • Illinois State Bar Association
  • Member Elder Law Section Council
  • Northwest Suburban Bar Association
  • Past Co-Chairperson of the Estate Planning/Tax/Probate Committee
  • Past Member of the Board of Directors
  • Past Vice Chairman of the NWSBA Committee Representing the Elderly and Handicapped
  • Northwest Suburban Estate Planning Council
  • Past member of its Board of Directors

Steve is also a frequent guest lecturer at various community organizations, nursing homes, assisted living facilities, senior centers as well as law schools and area universities. He has served since 1989 on the Multidisciplinary Team coordinated by the KennethYoungCenter to assist with suspected cases of elder abuse, neglect and self-neglect. He is a past member of the Buffalo Grove Joint Commission on Aging and previously served on the Human Rights Commission for ClearbrookCenter.

He recently co-authored two chapters in Illinois Jurisprudence, covering Medicaid Planning and Basic Estate Planning. He recently authored a chapter in the 2005, and again for the 2007 Illinois Institute on Continuing Legal Education Elder Law Short Course on Medicaid entitled “Appeal Rights for Medicaid and Medicare.” He is the author of numerous articles on elder law topics and the past Illinois editor for Horner Probate Practice and Estates and Counseling the Older Client (published by West Group).He is on the planning board for the IICLE publication “Special Needs Trust,” and will be a chapter author for that publication. He is a frequent author and lecturer for IICLE, having written chapters on Medicaid Planning, Special Needs Trusts, and Medicaid Appeals for the Elder Law Short Course and for the handbook Estate Planning, the Basics and Beyond, and having lectured for these and other IICLE programs on numerous occasions, including a presentation at the ISBA Family Law Section Council Seminar in 2005.

He became an attorney accredited to appear before the Court of Appeals of the Veterans Administration in 2008, and just submitted paperwork to continue his accreditation.

In his spare time, Steve enjoys doing yoga, playing golf, doing aerobic exercise and spending time with his daughters and grandchildren. He is also a fan of Chicago sports teams. He has two married daughters, and is the proud "Papa" of Jordan Ava who was born in August, 2004, Brayden James who was born August, 2006, Samuel Isaac, who was born in May, 2007, and Ryan Joshua, who was born in November 2008.

I. INTRODUCTION:

Elder law is such a specialized field that it is dangerous for anyone besides a specialist to dabble in the area. Document drafting is a good case in point. This outline will address an actual case where court intervention is necessary, and a signed out of court (virtual representation) agreement is not possible.

In the case in question, an estate planning attorney wrote a third party special needs trust signed by the mother (now deceased) and the father (still alive) and solelybenefiting the special needs child. This should have been a classic third party trust with no payback language. Instead the attorney (or scrivener) told our office that he had anguished about what he had read and heard about DRA and lawyers being admonished by the States for doing public benefits work. Consequently, he thought back in 2003 when he wrote the trust document for the settlor that he was doing the conservative and correct thing when he included payback language in the special needs trust document.

So here we have a classic scrivener’s error. The legal draftsman is well advised not to bring the court action, since (s)he will have to make an affidavit, and might be looking at depositions, court testimony, and maybe even legal malpractice actions. Instead, because of our firm’s elder law background and reputation, we were retained by the daughter-trustee to get the trust reformed into a non-payback trust, consistent with the parents’ wishes.

II. VIRTUAL REPRESENTATION AGREEMENT TO STAY OUT OF COURT

The Illinoisvirtual representation statute[1] allows for resolution of disputes such as construction or reformation cases without resorting to a court when the trustee and the "primary beneficiaries" (generally, the current beneficiaries and the probable remaindermen) enter into an agreement construing a trust. This has the binding effect of a court order, but cannot be used if any of the trust beneficiaries is incapacitated. The definition of "primary beneficiaries" is potentially limiting and thus restricts the usefulness of the statute. Primary beneficiaries are described in the virtual representation statute in a manner that suggests that all interests under the trust must be fully vested in competent adult beneficiaries, not subject to divestment, to utilize the statute. Since few, if any, trusts are drafted in such a manner, case law interpreting this provision of the statute may be necessary to remove uncertainty as to the scope of its application.

In the case in question, two of the adult beneficiaries are disabled and thus a virtual representation agreement could not be used. Thus, court intervention is necessary, and the use of a virtual representation agreement is out of the question.

III. TRUST REFORMATION – SCRIVENER’S ERROR

Reformationof trusts is allowed under the Restatement of Trusts and the common law of most states, including and courts are usually willing to allow reformation if there is some evidence of the original intent of the settlor.

That courts have the power to reform trusts to correct scrivener’s error is well established in Illinois[2]. A scrivener’s error may be a mistake made during the drafting process such as an omission of words or misdescription of property[3]. In Reinberg and Kraus, reformation of a trust was allowed to correct inadvertent drafting errors that had a substantive effect on the disposition of the property. Trust reformation has been approved in an unpublished New York case[4] involving a trust that,, as written, allowed payment of medical expenses and power to make loans. The court acknowledged that this was a scrivener’s error whose unintended consequence could be defeating the settlor’s intent to have the trust beneficiary be able to qualify for Medicaid in New York state. A copy of that case is attached as Exhibit F.

Make note that the Illinoiscourts are much harsher with requests to reform a will[5]. Here, not only Illinois law, but also Massachusetts and Delaware law were cited. Note also that the distinction between inadvertent drafting errors that have an unintended substantive effect and careless mistakes is not completely clear in Illinois law.

IV. PLEADING THE REFORMATION CASE

Attached is the pleading we are using, with the personal identification information removed. The complaint is in word format. The five exhibits are in pdf.

V. DISCUSSION

This is an actual case, with the personal information redacted. Although the “scrivener’s error” approach is uncomfortable, it is more factual than “change of circumstances”. The mother is deceased, and the father of the disabled beneficiary is filing a supporting affidavit, together with the attorney-scrivener, sister-trustee, and financial advisor. The four adult children are not opposed to the trust reformation.

The attorney for the Illinois Medicaid agency has already been given a copy of the complaint, and he and assistant general counsel have voiced no objection to the complaint. Office of Regional Counsel for Region 5 of Social Security will be sent a notice of the complaint. It is extremely unusual to hear from them. Here, the trust has no apparent bearing on the payment of SSI, so a response would come as a great surprise.

V.CONCLUSION

Ideally, of course, trust drafting errors will not have occurred in the first place. However, discussion of trust drafting errors will undoubtedly help our organization to recognize cases where reformation, or possibly a virtual representation agreement substitute, is the proper way to go to correct a problem in carrying out the settlor’s intent and in ultimately benefiting the trust beneficiary.

1

[1]760 ILCS 5/16.1

Sec. 16.1. Virtual representation.

(a) If all primary beneficiaries of a trust are adults and

not incapacitated, except as provided in subsection (c), any

written agreement; including, without limitation, an

agreement construing any provision of the trust or an

agreement regarding any duty, power, responsibility, or

action of the trustee, between a trustee and all of the

primary beneficiaries of a trust shall be final and binding

on the trustee and all beneficiaries of the trust, both

current and future, as if ordered by a court with competent

jurisdiction over all parties in interest, if all other

persons who have a contingent, future, or other interest in

the trust would become primary beneficiaries only by reason

of surviving a primary beneficiary.

b) For purposes of this Section, "primary beneficiary"

means a beneficiary who is either: (1) currently entitled or

eligible to receive any portion of the trust income or

principal, or (2) assuming nonexercise of all powers of

appointment, will receive, or be entitled to withdraw, all or

a portion of the principal of the trust, if the beneficiary

survives to the final date of distribution with respect to

the beneficiary's share.

(c) This Section shall not apply to an agreement that

accelerates the termination of a trust, in whole or in part.

(d) In the trustee's sole discretion, the trustee may

obtain opinion of counsel that any agreement proposed to be

made under this Section is not clearly contrary to the

express terms of the trust instrument. The trustee may, but

is not required to, enter into an agreement under this

Section. On and after its effective date, this

Section applies to all existing and future trusts, but only as to

agreements entered into on or after the effective date.

(Source: P.A. 88-367.)

[2]Reinberg v. Heiby, 404 Ill. 247, 88 N.E.2d 848, 852 (1949). Here a reformation of a trust was allowed to correct inadvertent drafting errors that had a substantive effect on the disposition of the property.

[3]Estate of Kraus v. Commissioner, 875 F..2d 597 (7th Cir. 1989), the court reversed the Tax Court’s refusal to allow reformation of a trust to remedy a scrivener’s error that prevented the trust from achieving its stated intent. The scrivener’s error at issue was the drafting attorney’s omission of five words that were necessary to create a general power of appointment (necessary for the trust to be eligible for the mar4ital deduction). The tax court had refused to allow reformation based on its determination that the testimony of the scrivener and other evidence presented did not reach the “clear and convincing” evidentiary standard required under Illinois law, but the Seventh Circuit determined that newly discovered evidence strongly corroborated the scrivener’s testimony.

[4] In Matter of Scheib, 343541 (1-26-2007), 22007 New York Slip Op 50122 (U).

[5] In Handelsman v. Handelsman, 366 Ill.Appp.3d 1122, 852 N.E.2d 862, 304 Ill.Dec.406 (2d Dist. 2006). The trial court granted plaintiff summary judgment. Relying on Reinberg v. Heiby, 404 Ill. 247 (1949), and In re Estate of Hurst, 329 Ill. App. 3d 326 (2002), the court held that the undisputed evidence of Richard's intent required reforming the Trust Agreement. Therefore, the court ordered the trustee (1) to pay the mortgage on the Woodstock property and reimburse plaintiff for any mortgage payments that she had made from her funds since Richard died; and (2) to distribute assets to plaintiff

... acres into two equal tracts, labeled "Tract A" and "Tract B." Jarmuth then gave an attorney, LeVine, a copy of the plat of survey and documents of title to the property. He told LeVine of his plan to give part of the property to each daughter. Reinberg, 404 Ill. at 248-49.

... that he inadvertently copied the descriptions of the properties from the original title documents instead of from the plat of survey, as he had been instructed. The plaintiff and the defendant both signed the trust agreement as beneficiaries. Reinberg, 404 Ill. at 249-50.

... received only 4 acres of the original 24-acre property, the plaintiff sued to reform the trust agreement, alleging that the division of the property into two unequal tracts was the result of a scrivener's error and contrary to Jarmuth's intent. Reinberg, 404 Ill. at 250-51. The trial court agreed, holding that relief was available to correct the "mutual mistake of the grantor and plaintiff and defendant, the donee beneficiaries." Reinberg, 404 Ill. at 251.

... court noted that, in general, a grantee of a voluntary conveyance could not obtain reformation of the deed against the grantor or one claiming through the grantor, as the grantee had given no consideration in exchange for "the grantor's bounty." Reinberg, 404 Ill. at 253. This was so even when the grantee rested his claim upon a scrivener's error (Reinberg, 404 Ill. at 253), as was the situation before the court (Reinberg, 404 Ill. at 250).

... Nonetheless, the court held that the plaintiff could obtain reformation against the defendant. The court emphasized that the plaintiff was seeking relief against a cobeneficiary of the trust and not against the settlor or one claiming through him. Reinberg, 404 Ill. at 254. Thus, reformation was available because "[t]he power and authority of a court of equity to correct the mistakes of a scrivener incorporated into a contract, deed, or other instrument is * * * well known." (Emphasis added.). Causes of action against co-beneficiaries are allowed in other states outside of Illinois as well. See Berman v. Sandler, 399 N.E.2d 17 (Mass. 1980); Roos v. Roos, 203 A.2d 140 (Del. Ch. 1964).... 404 Ill. at 254. Thus, reformation was available because "[t]he power and authority of a court of equity to correct the mistakes of a scrivener incorporated into a contract, deed, or other instrument is * * * well known." (Emphasis added.) Reinberg, 404 Ill. at 255. Therefore, equity required that the defendant be divested of "the portion of the property which she undeservedly acquired by an admittedly mutual mistake of all the parties to the trust agreement." (Emphasis added.) Reinberg, 404 Ill. at 256.

... description of the property at issue was attributed to her as well as to the settlor, and the supreme court held that equity required her to return property that she "undeservedly acquired by an admittedly mutual mistake of all the parties." Reinberg, 404 Ill. at 256. Here, by contrast, defendants had no role in the creation of the Trust Agreement and never signed it and cannot be said to have participated in making the mistakes of which plaintiff now complains.