Taxation & Estate Planning

Creditors and Trusts -- Society of Lloyd's

By Joel A. Schoenmeyer

During a recent discussion on a ISBA (Illinois State Bar Association) listserv, the case of Society of Lloyd's v. Estate of McMurray case (available here) was brought to my attention. Given my interest in claims against non-probate property, it seems worthwhile to discuss it.

To begin with, this is a Federal (7th Circuit Court of Appeals) case. The issue is whether Society of Lloyd's can extra payment of a judgment from a decedent's trust. The order of events:

-9/11/96: deadline for payment of premium by McMurray
-9/18/96: McMurray creates (and later transfers property to) a living trust
-8/28/97: McMurray dies
-3/11/98: Society of Lloyd's obtains a judgment against McMurray in English court

The court's decision here seems pretty clear -- they use the language of the living trust to find that Society of Lloyd's is a valid creditor of the trust:

The trust instrument provides... in crystal-clear language, that at McMurray's death "the trustee shall pay from the residuary trust estate without reimbursement my legally enforceable debts."

Equally clear is the fact that the court does not hold trust creditors to the same limitations period as probate creditors:

Although the judgment is no longer legally enforceable against McMurray's estate, that fact is irrelevant for purposes of enforcing it against the trust.

What's tricky for estate attorneys, though, is the issue of what would happen if the trust did NOT allow for the payment of legally enforceable debts, or for the payment of any debts at all? Could the trust be forced to pay in that situation? If the answer to that question is no, then why would we as attorneys include language allowing the payment of debts in the trusts that we draft?

At bare minimum, I think it makes sense to draft a trust debt payment provision with specificity regarding when the debt is no longer considered valid. For instance, you could say that claims against a trust are only valid if they comply with the claim filing requirements of the Illinois Probate Act.

Full post as published by Death and Taxes Blog on May 06, 2009 (boomark / email).