Opinion ID: 734162
Heading Depth: 2
Heading Rank: 3

Heading: Examination of the Trust

Text: 18 The Tax Court determined that Mrs. Bowgren, the settlor, did retain a personal power to direct the trustee (one that could be exercised by her alone), but that Illinois courts would not find the power to be one that could defeat the beneficiaries' interests. The Tax Court further concluded that Mrs. Bowgren's exercise of the power was subject to a fiduciary duty. In reaching these conclusions, the Tax Court properly recognized that Illinois law controls the dispositive issues of whether Mrs. Bowgren retained a personal power of direction and, if so, the scope of that power. See Helvering v. Stuart, 317 U.S. 154, 162, 63 S.Ct. 140, 144-45, 87 L.Ed. 154 (1942); Estate of Lidbury v. Commissioner, 800 F.2d 649, 652 n. 3 (7th Cir.1986) (Where federal tax liability turns upon the character of a property interest, federal courts are constrained to follow state law determinations of the interest in or right to such property.). When looking to Illinois law to determine the contours of the power at issue here, we are mindful that our task is to interpret the documents in the same manner the Illinois Supreme Court would if it were faced with this question. See Estate of Kraus v. Commissioner, 875 F.2d 597, 600 (7th Cir.1989) (noting that only the state's highest court can make a ruling on state law that binds federal courts). Nevertheless, federal courts are to give proper regard to other Illinois courts' rulings on state law determinations. See id. at 601; cf. Clarin Corp. v. Massachusetts Gen. Life Ins. Co., 44 F.3d 471, 474 (7th Cir.1994) (noting in a diversity case that [w]here the state supreme court has not ruled on an issue, decisions of intermediate state courts control unless there are persuasive indications that the highest state court would decide the issue differently).
19 We now turn to the circumstances of the case before us. To determine the existence and scope of the power of direction retained by Mrs. Bowgren, we must look to the trust agreement itself and to the transfers she made. See In re Estate of Bork, 145 Ill.App.3d 920, 99 Ill.Dec. 754, 758, 496 N.E.2d 329, 333 (1986) (The relationship between the trustee, the beneficiaries, and the holder of the power of direction is determined by the documents comprising the trust agreement, including any amendments to the trust agreement effectuated by assignment or otherwise.). 20 We first examine the original trust agreement. That document provided that the interest of any beneficiary hereunder shall consist solely of a power of direction to deal with and to manage the property and of the right to receive proceeds and avails from the real estate. Joint Ex. 1-A at 1. It further provided that the trustee would convey title, would execute and deliver deeds for or would otherwise deal with the property only on the written authorization of Mrs. Bowgren, notwithstanding any change in the beneficiary or beneficiaries, or on the written direction of the beneficiary or beneficiaries at the time. Id. at 2. We believe that an Illinois court would interpret this language of the trust agreement as granting Mrs. Bowgren two distinct powers of direction: the power of direction as the individual specifically named in the trust agreement and the power of direction as the sole beneficial interest holder. 21 In In re Estate of Bork, 99 Ill.Dec. at 758, 496 N.E.2d at 333, the Appellate Court of Illinois determined that a virtually identical trust agreement permitted the power of direction to be exercised by deceased (Mr. Bork) solely or by the beneficiaries at the time. The court further concluded, It is clear that, until his death, deceased had the power to direct the trustee to convey title without the concurrence of any other holder of part of the beneficial interest. Id. Similarly, unless the assignment documents divested Mrs. Bowgren of her personal power of direction, Illinois courts would find that she too, until her death, had the power to direct the trustee to convey title without the concurrence of any other beneficiary. 22 We therefore must turn to the documents by which Mrs. Bowgren assigned the units of beneficial interest to determine whether, upon execution of these instruments, she divested herself of her personal power to direct the trustee. The guiding principles are well established. The creation and existence of an assignment [are] to be determined according to the intention of the parties.... Williams v. Independence Bank, 201 Ill.App.3d 685, 147 Ill.Dec. 201, 204, 559 N.E.2d 201, 204 (1990). The power of direction is a separable property interest that can be transferred or retained apart from the property interest represented by the rest of the beneficial interest 11 and can be reserved without explicit language. 12 In interpreting these documents, the court is limited to establishing not what the settlor 'meant to say, but rather what was meant by what he did say.'  Kavanaugh v. Estate of Dobrowolski, 86 Ill.App.3d 33, 41 Ill.Dec. 358, 365, 407 N.E.2d 856, 863 (1980) (quoting In re Bentley's Estate, 14 Ill.App.3d 630, 303 N.E.2d 166, 168 (1973)). 23 Under these principles, it is clear that, had Mrs. Bowgren wanted to deprive herself of this power of direction, she could have done so in these assignments. We must therefore examine the language of these assignments to determine her intent. Mrs. Bowgren's assignments transferring the units of beneficial interest to her children provided that she transferred the units of beneficial interest in and to [the] ... trust agreement ... including all interest in the property subject to said trust agreement. Joint Exs. 2-B to 16-P. We do not believe that this language can be read as effectuating a transfer of assignment of Mrs. Bowgren's personal power of direction explicitly retained by the original trust agreement. 13 This conclusion is strengthened when the two documents--the original trust agreement and the later assignments--are considered together. The original trust agreement, it will be recalled, provides that the trustee will deal with the real estate only when authorized to do so in writing and that it will (notwithstanding any change in the beneficiary or beneficiaries hereunder[) ] ... on the written direction of Helen E. Bowgren or on the written direction of such persons as may be beneficiary or beneficiaries at the time, make deeds for or otherwise deal with said real estate. Joint Ex. 1-A at 2 (emphasis added). This instrument contemplates that Helen Bowgren would convey beneficial interests in trust units while retaining for herself an independent power of direction. Therefore, the plain language of the agreement and of the assignments, especially when read together, leads us to agree with the Tax Court that the Illinois Supreme Court would likely conclude that Mrs. Bowgren retained her personal power to direct the trustee. 14 24 However, we respectfully disagree with the Tax Court's conclusion with regard to the extent and scope of this power. Having concluded that Mrs. Bowgren retained the power to direct the trustee, without the concurrence of the other beneficiaries, we can find no basis for concluding that, although she retained the power to amend or alter the trust arrangement, she nevertheless did not have the power to defeat completely the beneficial interests of the other beneficiaries. 15 Specifically, we do not believe that the original trust agreement's qualifying language, unless otherwise directed in writing by the beneficiaries, can be read to mean that Mrs. Bowgren's right of direction must be construed as inherently subordinated to the rights of the holders of a beneficial interest. As the Commissioner points out, an Illinois court was confronted with identical language in Bork and yet determined that the decedent had retained an exercisable power of direction. See 99 Ill.Dec. at 758, 496 N.E.2d at 333. Therefore, under the terms of the documents, Mrs. Bowgren could have exercised this power, for example, to direct the trustee to convey the title into another land trust, naming herself or anyone else the sole beneficiary. 16 See, e.g., Rudolph, 100 Ill.App.2d 253, 241 N.E.2d 600. Such an act would undermine completely the other beneficiaries' enjoyment of their beneficial interests. 25 We also must respectfully decline to accept the Tax Court's conclusion that the Illinois Supreme Court likely would find that Mrs. Bowgren only could exercise her retained power of direction subject to a fiduciary duty owed to the other beneficiaries. Under Illinois law, the settlor does not owe a fiduciary duty to the recipient of a gratuitous assignment of a beneficial interest in a land trust. 17 In the present case, the assignment was gratuitous, 18 and Mrs. Bowgren, the settlor, continued to be a substantial beneficiary of the trust agreement. Therefore, we must conclude that Illinois courts, if faced with this issue, would conclude that Mrs. Bowgren, until her death, could have exercised her sole power of direction unconstrained by a fiduciary obligation to the other beneficiaries.
26 Having concluded that Mrs. Bowgren retained a power to direct the trustee, exercisable without the concurrence of the other beneficiaries, and that this power could be exercised (subject to no fiduciary duty) to defeat the other beneficiaries' interests, we also must disagree with the Tax Court's conclusion that the Commissioner's determination of a tax deficiency was incorrect. By their plain language, §§ 2036 and 2038 require that the value of any property transferred by a decedent be included in the gross estate if the decedent retains any power of control over the property. 19 Sections 2036(a)(2) and 2038(a)(1) require that the value of these units should have been included in decedent's gross estate. Although Mrs. Bowgren transferred a property interest to her children (the units of beneficial interest), she had the right, at the time of her death, to designate who would possess or enjoy the property because she retained the power to direct the trustee to convey title to a separate trust and to designate whomever she pleased as the beneficiary. Therefore, under § 2036(a)(2)'s provisions, the value of the property should have been included in the gross estate. Similarly, Mrs. Bowgren's power to direct the trustee gave her the ability to alter, amend, revoke or terminate the donee's enjoyment of the property; thus, under § 2038(a)(1), the value of such property was includable in decedent's gross estate. 20 27 In sum, although we agree with the Tax Court that Mrs. Bowgren retained a personal power of direction after assigning a portion of the beneficial interest to her children, we cannot agree with the Tax Court's evaluation of the scope of the power under Illinois law. At the time of decedent's death, Mrs. Bowgren retained a power of direction that was not subject to a fiduciary obligation and that could have been used to defeat the other beneficiaries' enjoyment of their units of beneficial interest that she had transferred to them. The CIR was correct, therefore, in issuing the notice of deficiency because the estate failed to include the value of the units in decedent's gross estate.