In Re Estate of Phelan

874 N.E.2d 185, 375 Ill. App. 3d 875
Appellate Court of Illinois·Decided August 6, 2007·No. 1-06-0820·Published·Cited by 6 cases

Opinion

JUSTICE GARCIA

delivered the opinion of the court:

John J. Phelan established two separate trusts to provide for his wife and their two minor sons and his two adult daughters from prior marriages. In the first trust, MJRNN Irrevocable Trust (MJRNN Trust), he included his two adult daughters as beneficiaries. In the second, the revocable Declaration of Trust (Revocable Trust), he provided for his wife and two minor sons but did not provide for his two adult daughters. This appeal concerns the validity of those two trusts and the pourover provision of his will.

The plaintiff, Nora Phelan Clifford, one of the two daughters, appeals from an order of the trial court granting the defendants’ motion for a finding pursuant to section 2 — 1110 of the Code of Civil Procedure (735 ILCS 5/2 — 1110 (West 2002)) on her reformation claims of her amended complaint and amended petition. The plaintiff contends she presented sufficient evidence to establish a prima facie case to reform both the MJRNN Trust and the Revocable Trust.

In the cross-appeal, the defendants, specifically Jimmie Baskin, acting as executor of the will and trustee of the Revocable Trust, argue that the trial court erred when it found that the Revocable Trust was not in existence at the time the decedent, John Phelan, executed his will. Based on this finding, the trial court determined that the pourover residuary provision of the will failed, resulting in the residue of the estate passing according to the laws of descent and distribution as if the estate were intestate.

Because we find the plaintiff has failed to carry her burden during her case in chief to warrant reformation of either trust, we affirm the trial court’s judgment against the plaintiff. Because we find the Revocable Trust was in existence at the time the will was executed, we reverse the trial court’s judgment on the cross-appeal.

BACKGROUND

The decedent, John Phelan, died on November 27, 2000. He was survived by his wife, Karen Phelan, their two minor sons, Joseph and Ryan, and two adult daughters from previous marriages, the plaintiff and Nellie Phelan Wilson. Phelan provided for the distribution of his assets in the MJRNN Trust, the Revocable Trust, and his will.

In 1999, Phelan contacted his brother-in-law Anthony D’Alexander and asked him to prepare an irrevocable life insurance trust for him. The trust, known as the MJRNN Trust, was to be funded with life insurance proceeds of $1.3 million and it named, among others, the plaintiff and Wilson as beneficiaries. Regarding the funding of a trust with proceeds of a life insurance policy, section 2035 of the Tax Code (26 U.S.C. §2035 (2006)) provides that if an individual owns or has incidence of ownership in an existing life insurance policy and gives the policy away within three years of his death, the proceeds of the policy will be included in his estate. This is true regardless of whether he transfers ownership to another individual or to a trust. See 26 U.S.C. §2035 (2006). In accordance with section 2035 of the Tax Code, the MJRNN Trust provided that if Phelan died within three years of giving up incidence of ownership of the insurance policies that formed the corpus of the trust, the proceeds of those policies would be distributed to the personal representative of the Phelan estate, not the trustee of the MJRNN Trust.

At oral argument, the defendants’ attorney explained that one consequence of the three-year rule was that the Phelan estate would be subject to a 50% estate tax that would reduce the value of Phelan’s insurance policies from $1.3 million to $650,000. He further explained that the only way Phelan could have avoided the ramifications of the three-year rule would have been to have established the trust before he purchased the life insurance policies. Phelan, however, had already purchased the life insurance policies by the time he sought to create the irrevocable trust so the application of the three-year rule was unavoidable short of purchasing replacement insurance polices after the creation of the MJRNN Trust.

Regarding Phelan’s understanding of the three-year rule provision of the MJRNN Trust, D’Alexander testified that he and Phelan discussed the three-year rule and that Phelan understood the consequences of that provision. In addition, Alan Bruggeman, who prepared Phelan’s will and Revocable Trust, testified in a deposition that Phelan understood the consequences of the three-year rule and that he only wanted to provide for the plaintiff and Wilson through the MJRNN Trust and only if it succeeded. His main concern was to provide for his minor sons.

Although the MJRNN Trust was dated June 1, 1999, D’Alexander testified that it was not signed until sometime after that date. Phelan died in November 2000, less than three years after the transfer of the insurance policies to the MJRNN Trust. In accordance with the three-year rule provision of the MJRNN Trust, the proceeds of the trust were distributed to the personal representative of Phelan’s estate and none of the beneficiaries under the MJRNN Trust received a distribution.

In May or June 2000, Phelan asked Bruggeman to review the MJRNN Trust and prepare a will and trust for him. After discussing each provision of the will and the Revocable Trust, Bruggeman faxed drafts to Phelan on July 7, 2000. Phelan signed both documents and returned them to Bruggeman with some changes made in ink. Bruggeman told Phelan that he would prepare clean copies of each document for him to sign, but Phelan indicated that drafts that were signed were sufficient.

The trustee of the Revocable Trust was the residuary beneficiary of Phelan’s estate pursuant to article IV of his will. That pourover clause provided:

“I give the residue of my estate, excluding any property over which I have a power of appointment, to the trustee acting under that certain [Revocable Trust] of John Phelan dated July 7, 2000, to be added to the principal held in trust thereunder as such [Revocable Trust] exists as of the date of my death to be administered pursuant to the terms and conditions of said [Revocable Trust] as they exist as of this date, which terms and conditions are hereby expressly incorporated by reference.”

In his deposition, Bruggeman testified that he believed that the Revocable Trust was funded on the date it was signed. Although he did not prepare any transfer documents, he testified that he believed that a deed in trust had been prepared.

On July 7, 2000, Phelan signed the will in the presence of Karen McGinnis, Barbara Vest, and Gwenda Landingham. He signed the will in the general office area of the building where he worked and each witness also signed it at that time. McGinnis and Vest testified that Phelan signed more than one document that day, but they only witnessed and signed the will. Vest also testified that D’Alexander and Michael Gavin were not present when the will was signed. The will was notarized by D’Alexander sometime after it was signed in the presence of others.

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In Re Estate of Phelan, 874 N.E.2d 185, 375 Ill. App. 3d 875 (Ill. Ct. App. 2007).

874 N.E.2d 185 (In Re Estate of Phelan) — published by Counsel Stack Legal Research, free access to 12M+ legal documents.

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