May 2016 • Volume 104 • Number 5 • Page 10
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Overturning Mendelson: Bill would forbid conveying real estate to trust without deed
Proposed legislation would amend the Trusts and Trustees Act to require that all transfers of property into a trust be evidenced by a written conveyance and acceptance by the trustee.
On April 6, 2016, the Illinois Senate Judiciary Committee passed SB 2842, which is now up for consideration in the state Senate. The bill seeks to overrule the second district's holding in In re Estate of Mendelson, 2015 IL App (2d) 150084 ("Mendelson I"), which held that real property could be conveyed into a trust without a deed.
The bill, which is sponsored by Sen. Ira Silverstein, would amend the Trusts and Trustees Act to require that all transfers of property into a trust be evidenced by a written conveyance and acceptance by the trustee. It would also require that any transfer of real property into a trust be recorded with the proper county recorder of deeds.
A 'solution in search of a problem'?
The bill has spurred some discussion on the ISBA's transactional law discussion group, with some commenters wondering what purpose the bill serves, if any.
For his part, Sherwin Abrams, of Abrams & Chapman LLP, says that the "bill is a solution in search of a problem." He questions how a trustee is supposed to accept a conveyance when no other Illinois statute requires that a grantee execute a conveyance.
Abrams says that since a bona fide purchaser (BFP) takes priority over an unrecorded instrument, "fraud cannot happen. First to record is first in right," he notes, and "if someone doesn't want to record a deed and take a risk, then the innocent third party will prevail." Abrams believes that it is the trustee's job to ensure that deeds into the trust are recorded. "Failure to do so is a breach of the trustee's fiduciary obligations."
Joseph Fortunato, head of Momkus McCluskey, LLC's real estate practice group, says the Mendelson court, on rehearing (2016 IL App (2d) 150084 ("Mendelson II")), left open the issue of conveying title to a trust by self-declaration. Instead, the Mendelson II court held that "the trust document did not adequately declare that the real estate in question was made part of the trust." In doing so, Fortunato believes that the Mendelson II court established "significantly different burdens between conveyance to an individual and conveyance to a trust."
This result strikes Fortunato as inconsistent and unjustifiable. He notes that an innocent BFP may run into a problem when family members dispute the authority of a trustee to convey to the BFP due to a lack of record title in the trustee. As such, SB 2842 solves the problem of BFPs being "subjected to internecine quarrels" by requiring record title to be transferred to the trustee.
Fortunato also points out that, from the standpoint of a title examiner, the result left open by Mendelson I and II could require that an "Affidavit of No Transfer of Title by Self-Declaration" be executed as a routine matter in every real estate transaction. He sees this as a much more onerous burden than requiring an estate planner to simply include a deed of conveyance to the trust when executing an estate plan. Moreover, Fortunato points out that a BFP wouldn't have to be in the position of litigating the issue of entitlement to real estate if only the settlor and trustee would follow the formality of conveyance by deed.
The importance of verifying title
Neil Goltermann, an estate planning attorney at Momkus McCluskey, LLC agrees with Fortunato, saying that best practices "include the use of a deed to transfer title from a trust grantor to the trustee even if they are one in the same." The same goes for personal property, which should be accompanied by a bill of sale, assignment, or other transfer document.
Those best practices notwithstanding, Goltermann does not believe that SB 2842 is necessary. However, he does not find the provisions of SB 2842 to be problematic or burdensome, either.
For example, he does not find the requirement that a trustee accept a conveyance to be problematic. "It should not be perplexing," he says. If SB 2842 passes, then conveyance documents "will need to have an acknowledgment of acceptance signed by the trustee." He notes that, in many estate planning contexts, the grantor, grantee, and trustee will be the same person. Fortunato agrees with Goltermann on this point, observing that these types of formalities are typically followed in the estate planning field.
Goltermann says that the most important takeaway from the Mendelson cases and the resulting bill is that lawyers must follow the law. If SB 2842 is enacted, then practitioners will need to learn and adapt their practices accordingly.
He also believes that it is a good example of why lawyers need to be diligent in protecting their clients' interests. "Estate planning practitioners need to verify real estate title in order to make sure they make proper planning recommendations, properly assisting clients with funding their living trusts."