Family Trust Set Up in Good Faith Shields Family Member from Creditor – IL Case Note

In Hickory Point Bank & Trust v. Natual Concepts, Inc., 2017 IL App (3d) 160260, the appeals court affirmed a trial court’s denial of a judgment creditor’s motion to impose a judicial lien and order the turnover of trust assets.

The corporate defendant defaulted on the loan that was guaranteed by corporate principals.

Plaintiff entered confessed judgments against the corporate and individual defendants.

Through post-judgment proceedings, plaintiff learned one of the individual defendants was trustee of an irrevocable family trust whose sole asset was four pieces of real estate formerly owned by the defendant’s father.

The document provided that upon death of defendants’ parents, the trust assets would be distributed 85% to defendant with the rest (15%) going to defendant’s three sons.

Defendant’s father is still alive and lives on one of the four trust parcels.  Nyla passed away in 2014. Donald is still alive and resides on one of the four parcels held in the trust.

To satisfy its default judgment against defendant, plaintiff alternately moved to liquidate and turnover the trust assets and to impress a judicial lien against the trust property.

The trial court held that the trust was protected from judgment creditors under Code section 2-1403 (735 ILCS 5/2-1403) and denied the plaintiff’s motion. Plaintiff appealed.

The central issue was whether or not the trust was self-settled.  A “self-settled” trust is “a trust in which the settlor is also the person who is to receive the benefits from the trust, usually set up in an attempt to protect the trust assets from creditors.” Black’s Law Dictionary 1518 (7th ed. 2002).

Like most states, Illinois follows the general rule that a self-settled trust created for the settlor’s own benefit will not protect trust assets from the settlor’s creditors. See Rush University Medical Center v. Sessions, 2012 IL 112906, ¶ 20.

Code Section 2-1403 codifies the rule that protects trusts that are not self-settled.  This statute states:

“No court, except as otherwise provided in this Section, shall order the satisfaction of a judgment out of any property held in trust for the judgment debtor if such trust has, in good faith, been created by, or the fund so held in trust has proceeded from, a person other than the judgment debtor.” 735 ILCS 5/2–1403 (West 2014).

Based on the plain statutory text, a creditor’s judgment cannot be satisfied by funds held in trust for a judgment debtor where (1) the trust was created in good faith and (2) a person other than the judgment debtor created the trust or the funds held in trust proceeded from someone other than the judgment debtor.

Here, there was evidence that the trust was formed in good faith.  It pre-dated by five years the date of the commercial loan and defendants’ default.  There was no evidence the trust was created to dodge creditors like the plaintiff.  The trust language stated it was designed for the care of Defendant’s elderly parents during their lifetimes.

The Court also deemed significant that Defendant was not the trust beneficiary. Again, the trust was set up to benefit Defendants’ parents and the trust was funded with the parents’ assets.  Since the trust assets originated from someone other than the defendant, the second prong of Section 2-1403 was satisfied.

Plaintiff’s alternative argument that the court should impress a judicial lien against defendant’s 85% trust interest also failed.  The law is clear that a creditor may not impose a lien on funds that are in the hands of a trustee.  But once those trust funds are distributed to a beneficiary, a creditor can access them. (¶¶ 26-27)

Since the trust assets (the four real estate parcels) had not been distributed to defendants under the terms of the trust, defendant’s interest in the properties could not be liened by the plaintiff.

Afterwords:

A good example of a family trust shielding trust assets from the reach of a family member’s creditor.

Self-settled trusts (trusts where the settlor and beneficiary are the same person) are not exempt from creditor interference.  However, where the trust is created in good faith and funded with assets originating from someone other than a debtor, a creditor of that debtor will not be able to attach the trust assets until the assets are distributed to the debtor.