## I L L I N O I S 

## O F F I C I A L 

## RE P O R T S Appellate Court

Chu rch of the Little Flow er v. U S Ban k , 2012 IL App (4th) 120266

Appellate Court Caption CHU RC H O F T H E L I T T LE F L O WER, Plaintiff-Appellee
, v

. U S B A N K
, as Trustee of the Erma L

. Donelan Trust, Def endant- Appellant, and ST. J OSEPH’S HOME; HOSPI TAL SI STERS OF S T

. FRANCI S FOU NDATI ON, I

NC.; and THE OFF I CE OF THE I L L I NOI S ATTORNEY G ENERAL , as an I ntere sted Party , Def

endants.

District & N o. Four th District Docke t No. 4-12-0266

Argued Filed October 17, 2012 November

5, 2012

Held (Note : This syl lab us

con st it ute s no p art of the opi nio n of the cour t but has bee n pre

par ed by the Re

p ort er of D e c i s i o n s f

o r t h e

c o n v e n i e n c e o

f t h e

rea der

. ) A j u dg ment requiring the dissoluti on of a charitable trust based on t h e application of the doctrine of equitable deviation was reve rsed, notwithst an d ing plaintiff’s contention that the trustee’ s fee s and costs frustrated the trust’s purpose, since termination was not war rante d wher e other mea ns of dea ling with the trustee ’s fe es we re a vailable.

Dec ision Under Review Appea l from the Circuit Court of Sang amon County
, No. 10-CH-768; the Hon. J ohn Schmidt, J udg e, pre siding.

J udg ment Reverse d and re manded with dire ctions.Counsel on

Appea l Robert A. Stuart, J r. (ar gued), of Brown, Hay & Stephens
, L L P
, of Springf ield, for a ppellant.

J ason T.H. Ger

mera ad (ar gued), of Scott & Scott, P.C., of Springf ield, for appellee

.

Panel J USTI CE COOK delivere d the judgment of the c ourt, with opinion. Presidin g J u s tice Turner and J ustice Knec ht concur red in the judgme nt and opinion.

OP INION

¶ 1 In J une 2010, plaintiff, Church of the L it t l e Fl o we r, p et i t i o n ed the trial court for ref ormation of a trust of which plaintiff is one of three rema ining benef iciarie s. Plaintiff asked the court to apply the doctrine of equitable deviation to termin at e t he trust and distribute its assets to the benef iciarie s. One of the named defe ndants, US Ba nk, is curr ently the trustee of that trust. In Dec ember 2011, the court g rante d summary judgme nt in favor of plaintiff. The court’s judgme nt require d US Ba nk to dissolve the trust and distribute its assets to plaintiff and the other

two rema ining be nefic iaries. ¶ 2 US Ba

nk appea ls, arguing equitable deviation did not apply and ref ormation of the trust

was thus improper. We agree

. Acc ording ly
, we reve rse and rema nd with direc tions to enter summary judgme nt for US B ank.

¶ 3 I . BA CKGROUND ¶ 4 I n J u l y 1 9 9 1
, Erma L

. Donelan established the trust at issue, designating the Fi rs t National Ba

nk of Springf

ield as trustee. (US Ba

nk succe eded as trustee when it merg ed with or acquired Fi rst National Bank of Springf ield.) The trust provided for Donelan to rec eive quarte rly paym en t s o f t he trust’s income for the duration of her life and other emer g ency funds as ne eded. Any

trust assets exceeding$750,000 at the ti me of Donelan’ s death were to be distributed f

ree from trust to three charities, in the following share s: 20% to pla intiff; 20% t o St. J oseph’s Home; and 60% to Fr iends of t he Hospit al S isters of S t. Fr ancis, now known as Hospita l S isters of S t. Fr ancis Foundation, Inc. P roper ty worth $750,000 was to b e reta ined in trust following Donelan’ s death. There afte r, income or, if inco m e we re insufficient, income and principal worth 7% of the trust’s value at the beg inning of eac h tax year was to be paid i n eq u al quarte rly share s to Donelan’ s four sisters-in-law for their l i fe t imes. In 2005, the l ast of her sisters-in-law died. I f at that time the value of t h e t ru s t ’s
assets was below $500,000, the trust agree ment would have require d the trustee to dissolve the trust and distribute the rema ining principal to t h e t h re e charities–ag ain, 20% eac h to plaintiff and St. J oseph’s Home and 60% to Hospital Sisters of St. Fra ncis Foundation.

-2-¶ 5 Since the trust held more than $50 0
, 0 0 0 wh en t h e l as t s i s t er-in-law died, the trust

agree ment provided for the continued quarte rly pay ment of tr u s t i ncome to the rema ining charitable benef

iciarie s in the same 20/20/60 share s. Howeve r, in order to lessen the trust’s
tax liability
, the trust was amende d pursuant to the so-ca lled “private foundation rules” (see I .R.C. §§ 4940 to 4948 (2006)) to provide for yearly distribution o f, i n s tead of its annual income, 5% o f th e trust’s assets. The trust agree ment expressly require d the trustee to maintain compliance with the private foundation rules and authorized the trustee to a mend the t rust as necessar

y

. As amende d, the t rustee’ s fee s and adminis trative ex penses we re to be take n out of the 5% distribution before the balanc e wa s paid to the bene ficiaries. ¶ 6 Eac h year from 2006 through 2010, the t ru s t ee ’s fe es an d fu n d -m an age ment fee s collected b y US Ba

nk exceede d plaintiff’s share of the distributions to the benef iciarie s. Trustee ’s fee s wer e based on a perc entag e of the trust’s value. The perc entag e of assets collecte d as trustee’ s fe es v aried betwee n differ ent investments. For example, US Ba nk collecte d trustee’ s fee s at a lower perc entag e of the value of assets invested in, among other things, US Ba

nk’s proprieta

ry mutual funds. (US Ba

nk rec eived 0.9% of the value of assets i n v es t ed in those funds, compar ed with, in g ener al, 1.5% of the value of funds inv es t ed outside of US Ba

nk.) In total, plaintiff and St. J oseph’s Home eac h rec eived $27,600.32 from the fund from 2006 through 2010; Hospital Sist ers of St. Fr ancis Foundation rec eived $ 8 2,800.96; and US Ba

nk collecte d $41,214.06 in fee s from the trust. In compar ison, the
trust income totaled $135,773.98 for those year s. These figures are illust rat ed i n t h e followingtable:

Yea

rly Trust Distributions & Income, 2006- 2010

Yea r Plaintiff St. J oseph’s Home Hospital

Sist ers US Ba

nk 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

-3-Over the same pe riod, US Ba

nk withdrew additional funds from the trust acc ount to cover administrative expenses. Acc ording to plaintiff, US Ba nk rec eived additional compensation for the trust’s investments in US Ba nk’s proprieta

ry mutual funds and o t h er mutual funds aff iliated with US Bank, but this compensation was not taken fr om the trust. ¶ 7 The year -t o -y ea r v ar i ation in the value of distributions to the charitable bene ficiaries

corr esponded to fluctuations i n the t rust’s over all value. On January 1, 2006, the t rust was worth $670,587.54; on J anuar y 1, 2007, $693,443.07; on J anuar y 1, 2008, $690,623.42; on J anuar y 1, 2009, $570,048.86; on J anu ary 1
, 2 0 1 0, $604,293.26; and on J anuar y 1, 2011, $637,186.38. W h i l e the trust incurre d substantial losses coinciding with the recession, t he
trust assets never fell below the $500,000 threshold value that would have t ri gger ed termination at the time of the death of Donelan’ s last living sister-in-law under the terms of the trust agree ment. ¶ 8 In J une 2010, plaintiff filed its pe tition for ref ormation of the trust. Plaintiff alleg ed, in rele vant part, that the trustee’ s fee s and costs, which outpace d the distributions to two of the three benef

iciarie s, substantially frustrated the trust’s purpose of providing the benef iciarie s with use ful reve nues, such that the doctrine of equitable deviation or, alternatively
, cy pres allowed the trial court to terminate the trust. US Ba nk, St. J oseph’s Home, Hospital Sist ers of St. Fr ancis Foundation, and the I llinois Atto rn ey General, as an interested party , wer e named as defe ndants. St. J o s ep h ’s Hom e and Hospital Sist ers of St. Fr ancis Foundation
consente d to the proposed ter mination of the trust. ¶ 9 I n Fe b ru ary 2011, US Ba nk filed its motion for summary judgme nt. In August 2011
, plai n t i ff fi l ed its own motion for summary judgme nt, in which it relied exclusively on its equitable- deviation theory , abandoningits cy pre s arg ument. ¶ 10 In September 2011, althoug h the Attorney Gene ral had not enter ed her appea ranc e in this

case , an assistant Attorney Gene ral addre ssed a letter to the parties expressing that office ’s support for termination of t he trust. Acc ording to the l etter, the Attorney Gene ral believed that termination “would save charitable assets and be in the best interests of the public as ultimate benef

iciarie s of the ac tiviti es of the c harities involved.” ¶ 11 In Dec ember 2011, the trial court g rante d plaintiff’s motion for summary judgme nt. It found t hat t he substantial fe es that US Ba nk collecte d interfe red w ith the trust’s charitable
purpose

. “T h e p u rpose of the Trust,” the court conclude d, “is not to have the proce eds disproportionately eate n by bank fee s, but rathe r to allocate funds for the benef it of the benef iciarie s. Given the settlor’s i n t en t o f establishing a t hreshold level to cause the Trust
to terminate, it is inconce ivable that the settlor woul d h av e unrea sonably intended for the
trustee to collect more in a dminist ration fee s than two of the benef iciarie s rec eive in actua l income.” ¶ 12 In Marc h 2012, the trial co u rt d en i ed US Ba n k ’s motion to rec onsider. This appea l followed.

¶ 13 I I . ANALYSI S ¶ 14 On appea l, US Ba nk argues equitable deviation did not apply and the trial court err ed in ref orming and dissolving the trust. Plaintiff maintains the trust benef its US Ba nk more than

-4-the benef iciarie s, “which by all measure s must be considere d a substantial impairment of the
purpose of the Trust. The settlor cer tainly did not intend to leave her leg acy to US Ba nk.” We
agree with US Bank that termination is inappropriate in this ca se. ¶ 15 Summary judgme nt is appropriate wh er e t h e pleading s, depositions, admissions, and aff idavits on file, when viewed in the light most favor able to the nonmoving party , show that there is no g enuine issue of m ater ial fac t and the moving pa rty is entitled to a judgment as

a matter of law. Pec k v. Froehli ch
, 3 6 7 I ll. App. 3d 225, 227, 853 N.E.2d 927, 930-31 (2006). On appea l from the entry of summary judgme nt, we revie w the trial court’s judgme nt de novo

. Id. at 227-28, 853 N.E.2d at 931. Moreove r, we revie w the trial court’s construction of a trust instrument de novo

. Id. at 228, 853 N.E.2d a t 931. ¶ 16 The court’s object in interpre ting and apply ing a trust instrument is to g ive eff ect to the settlor’s intent. Citi

zens National

Bank of Paris v. Kids Hope United, I nc. , 235 I ll. 2d 565, 574, 922 N.E.2d 1093, 1097 (2009). I f the trust instrument’s languag e clea rly expresses that intent, then we will adher e to that languag e unless contra ry t o l aw o r p ublic policy

. Id. Charitable trusts, in particula r, “ar e viewed with pecu l iar favor by the courts, and ever y presumption consistent with the languag e contained in the instruments of g ift will be employed in orde r to sustain them.” (Interna l quotation marks omitted.) Id. ¶ 17 Under the doctrine of equitable deviation, “[t] he court may modify an administrative or distributive provision of a trust, or direc t or p er m i t th e t rustee to deviate from an administrative or dist ributive provision, if beca use of c ircumstance s not anticipated by the settlor the modification or deviation will further the purposes o f the trust.” Restatement (Third) of Trusts § 66 (2003); see also Burr v. Brooks
, 83 I ll. 2d 488, 496, 416 N.E.2d 231, 234 (1981) (“ ‘The court will direc t or permit the trustee of a charitable trust to deviate from
a ter m of the trust if it appea

rs t o the court that compliance is impossibl e or illega l, or that owing to circ umstances not known to the settlor and not anticipated by him com p l i ance woul d d ef

ea t or substantially impair the acc omplishm ent of the purpose of the trust.’ ” (quoting Restatement (Sec ond) of Tr usts § 381 (1959))). Rather than a llowing the c ourt to disreg ard the settlor’s intent, equitable deviation enable s the court “to g ive eff ect to what the settlor’s i n t en t probably would have been had the circ umstances in question been anticipated.” Restatement (Third) of Tr usts § 66 cmt. a, at 493 ( 2003). The c ourt’s powe rs under equitable de v i at i o n ex tend t o termination of the trust if under the circ umstances the
purposes of the trust would be best serve d by termination. Restatement (Third) of Trusts § 66
cmt. b, at 493 (2003). “In the event of t er m i n at i o n under [equitable deviation], the trust proper ty is to be distributed in acc ordanc e with the trust purposes and the settlor’s probable intention.” Restatement (Thir d) of Tr usts § 66 cmt. b, at 493 (2003). ¶ 18 The alleg ed unforesee n circ umstances plaintiff ide ntifies in this case are the collection of fee s by US Ba

nk in excess of the distr i b u t i o n s t o the 20% benef iciarie s. Acc ording to plaintiff, this results from the operation of the specia l fede ral tax laws related to private foundations. The trust agree ment (par agraph (d) of the seventh article ) expressly require d the trustee’ s compliance with the private foundation rules. Moreov er , the parties agree that,
reg ardle ss of that mandate
, I llinois law permitted US Ba nk to amend the terms of the trust
agree ment “to the extent nece ssary to bring the trust into confor mity with the require ments for” tax exemption under the private foundation rules. See 760 IL CS 60/ 1(2) ( West 2010).

-5-In turn, to qualify for exemp t i o n u nder the private foundation rules, a trust must make

minimum annual distributions equal to at least 5% of the “ag g reg ate fair marke t value of all assets of t h e fo u n d ati on.” I .R.C. § 4942(e) (1)( A) (2006). A qualifying distributi on is “any
amount ( including that portion of re asonable and nece ssary administrati ve expe nses ) paid
to acc omplish” the private foundation’s, in this case , charitable purpose. (Emphasis added.) I .R.C. § 4942(g) (1)( A) (2006)

. ¶ 19 Her e, US Ba

nk brought the trust at issue into confor mity with the private foundation rules by annually distributing–instead of the trus t’ s in come, as the trust agree ment orig inally called for–5% of the trust’s assets. Trustee ’s fee s and administrative expenses wer e included in the 5% distribution. The distribution to benef iciarie s, which was further divided betwee n them, thus amounted to 5% of the trust’s value, less the trustee’ s fee s and administrative costs. To illust rate , if US Ba

nk collecte d only its minimum trustee’ s fee of 0.9% of t he trust’s value (in other words, if all of the t ru s t ’s as s et s wer e invested in US Ba nk’s proprieta

ry mutual funds and no further expenses wer e withdrawn)
, then 4.1% of the trust’s value would rema in
to be divided among the three benef iciarie s–0.82% eac h to plaintiff and St. J oseph’s Home and 2.46% to Hospital Sist ers of St. Fr ancis Foundation. As currentlyformulated, therefore, the fees paid to US Bank will always nece ssarily exc eed plaintif

f’s distribut ion. This fac t is ref lected in the acc ounting of annual distributions –in all, from 2006 through 2010, US Ba nk

rec eived a

bout 1.5 times as much from the trust as pla intiff did. ¶ 20 Plaintiff conte n d s eq u i t ab l e d ev i at ion is justified beca use Donelan could not have fore seen the amendment of the trust to comply

with the private f

oundation rules. The trust agree ment, which direc ts the trustee to maintain compliance with those rules, plainly ref utes that premise. ¶ 21 Moreove r, even if the trust’s amendment wer e unfore seen, the private foundation rules cannot be blamed for the amount of the distribut ions that plaintiff complains are too small
to justify continuation of the trust. Under the private foundation rules, the total distributions
to the charities from 2006 through 2010 actua lly exc eede d the trust’s income. That is, if not for the ope ration of those r ules, plaintiff would have rec eived e ven less money

. ¶ 22 The siz e of the distributions natura lly results from the pay ment of the trustee’ s fee s and
expense s an d fl u ctuations in the trust’s value. Trustee ’s fee s and costs are inhere nt in Donelan’ s ch o s en mode of proper ty transfe r–periodic distribution of the income of trust funds to the benef

iciarie s. So are fl u ct u ations in the marke t value of those funds and the income they g ener ate. Notably
, plaintiff has not arg ued that US Ba

nk’s fee s are unrea sonable

or that it has violated any fiduciar y duty related to self-de ali n g o r re sponsible investment (although it has intimated that the trustee’ s fee s are underse rved)

. For us to conclude that this particula r result–US Ba

nk’s fee s exceeding pay

ments to plai nti f

f a n d St

. Jo s ep h ’ s Home–wa s unanticipated or unintended, we would have to overlook the fac t that it was brought about by the oper ation of the trust pursua nt to Donelan’s e x press instructions. ¶ 23 The parties raise the further issue of whether the trust is so uneconomic that termination is warr anted. In g ener al, “[i] f the trust estate is or becomes s o small that the i ntere st of t he benef iciarie s, or the trust purposes, would be better serve d by terminating the trust, the court may so order and shall then direc t dis t ri b u tion in a manner consistent with the probable

-6-i n t en tion of the settlor.” Restatement (Third) of Trusts § 66 cmt. d, at 497 (2003).

Acknowledg ing that its terms are not met in this case , plaintiff cites section 15.5 of the Charitable Trust Act (760 I L CS 55/15.5 (West 2010) ) as persua sive authority that the trust at issue should be terminated due to ineffic iency

. Under that statute, a trustee may , with the Attorney Gene ral’s consent, terminate a char i t ab l e trust if it deter mines that its continued administration “has become impractic al b eca use of the trust’s small siz e or beca use of chang ed circ umstances that adver sely aff ect the charitable purpose or purposes of the trust.” 760 I L CS 55/15.5(a) (West 2010). A trust qualifies for termination due to its “small siz e” if “the annual expense s o f ad minist ration, including the trustee’ s fee s, the investment
manag ement and acc ounting fee s and excise taxes would, if charg ed entirely ag ainst income, exceed 25% of the inco m e of the trust.” 760 I L CS 55/15.5(b) (West 2010). “Chang ed circ umstances” allowing termination “shall mean a condition in which the c h a rit a ble purpose

or purposes of the trust shall, in the judgme nt of the trustee, have bec o m e illega l,

unnece ssary , incapa

ble of fulfillment, or inconsistent with the charitable needs of t h e community .” 760 I L C S 55/15.5(b) (West 2010). Clearly
, as US Ba nk contests this action aimed at terminating the trust, the cited provision of the Charitable Trust Act does not apply

. Fur ther, a s we noted e arlier , no chang ed cir cumstance s are prese nt here

. ¶ 24 And while US Ba nk does collect more than 25% of the trust’s income in fee s–from 2006
t o 2010, its $41,214.06 in fee s was about 30% of the trust’s $135,7 7 3

. 9 8 i n income–neve rtheless, the trust is not inhere ntly uneconomic. As of J anuar y 1, 2011, the trust

was worth more than $630,000 and had aver ag ed 5.7% g rowth over the two previous year s. That siz e of a trust oug ht to be productive and self-sustaining

. Indeed, Donelan believed the
trust would be eff

icient so long as it r etained a value of more than $500,000. In the interest of g iving eff

ect to Donelan’ s intent (re flec ted in the car eful design of the trust agree ment, the substantial estate left for the charities, and the inclusion of a spendthrift cl ause) and her
purpose of memorializing her family ’s continued support of the charitable benef iciarie s, we conclude these funds should be kept, at least for now, in trust. There are methods other than termination by which the courts can addre ss the amount of US Ba nk’s trustee’ s fee s if they

are deeme d troublesome. ¶ 25 Deviation, including te rmination, “mere ly beca use [i t] would be more advanta g eous to the benef iciarie s” is inappropriate. Restatement (Second) of Trusts § 167 cmt. b, at 354 (1959). Rather, the trust must be so ineffic ient that its continuation would nece ssarily interfe re w ith the trust’s purpose. This ca se does not rise to that le vel. The trial c ourt err ed in concluding that equitable deviation was war rante d in this case

. Summary judgme nt should have be en ente red f

or US Ba nk rathe r than plaintiff.

¶ 26 I I I . CONCLUSI ON ¶ 27 For

the fore g oing r easons, we reve rse the trial court’s judgment. On re mand, we dir ect the cour t to enter summary

judgme nt for US B ank.

¶ 28 Reverse d and re manded with dire ctions.

-7-