Estate Plans Collide with the Dissolution of Marriage Act

Published in Chicago Lawyer, October 2016
by Daniel R. Stefani

Several interesting issues emerged in a recent Second Appellate Court Opinion of In re Marriage of Asta v. Pappas, 2016 IL App (2d) 150160. In Asta, during the marriage, wife acquired an interest in two companies (“Olsun”) founded in part by her father. She acquired the Olsun more than nine years after her father had died through a complicated transaction among her family which resolved multiple levels of litigation by a comprehensive settlement agreement.

Wife argued that she inherited the stock during the marriage and it was therefore her non-marital property. Husband contended that the stock was marital because wife purchased it with the assistance of marital collateral and the parties’ personal guarantees in the settlement of their family dispute.

The Trial Court determined that the stock was marital property because it was acquired during the marriage and wife failed to meet her burden of proving by clear and convincing evidence that she obtained it by inheritance.

The Olsun stock was held in trust upon wife’s father’s death with wife’s mother as trustee and beneficiary, and wife and her two brothers as the other three beneficiaries. Primarily because of estate tax liabilities, the father’s probate estate remained open for more than nine years during the parties’ marriage. After those nine years, wife and her two brothers filed a claim against their mother, the trustee, alleging that she mismanaged the trust and made excessive withdrawals for her own benefit. In addition to the probate litigation, a lawsuit was filed by Olsun against the two brothers. The three siblings and their mother then reached a comprehensive settlement agreement during wife’s marriage in which as a single transaction, wife acquired 100% ownership in Olsun. The settlement agreement specifically stated that it was a purchase by wife. The mother waived her interest as beneficiary of the trust in exchange for an annual payment. The two brothers received cash. The transaction was primarily funded by more than $3.6 million in cash and over $2.25 million in loans procured by Olsun. Security for the loans were Olsun’s assets, a $1 million life insurance policy on wife’s life and three parcels of real estate personally owed, two of which were found in the divorce to be wife’s non-marital property and one to be marital property. In addition, husband and wife signed personal guarantees. After wife’s acquisition of Olsun, it was undisputed that Olsun provided 100% of the repayment of the aforesaid loans and after almost four years, the loans were refinanced and the personal guarantees and security agreements involving husband and wife were canceled. A few years later, wife filed for divorce.

The Appellate Court analyzed four issues. First, whether wife’s mother’s death was a condition precedent to any disposition of property to wife under the trust. Second, whether wife’s acquisition of stock pursuant to the settlement agreement was different than what was contemplated in her father’s estate plan. Third, whether wife purchased the stock versus inherited. Fourth, whether the parties’ personal guarantees and/or use of marital collateral impacted the classification of the property.

Contrary to the Trial Court, the Appellate Court found that the mother’s death was not a condition precedent because wife could have received all of her share of the principle in trust during her mother’s lifetime. Additionally, under the settlement agreement, the mother waived her interest in the trust and therefore, wife’s 1/3 remainder interest accelerated and became possessory.

Next, the Appellate Court found that the four beneficiaries of the trust decided to settle their myriad of pending litigation and that the settlement was consistent with wife’s father’s original estate plan. Specifically, the Court cited that wife simply received her share of the inheritance in a different form, namely, 100% ownership in the businesses rather than a cash distribution. The Appellate Court rejected husband’s argument that the plain language of the settlement agreement described the transaction as a “purchase” by wife. Rather, the Appellate Court stated that despite the language, that is not what actually occurred.

The last issue was whether the fact that the settlement transition was funded in part by loans that were guaranteed by the parties and secured with a small amount of marital property defeated wife’s non-marital claim. The Court pointed out that at the time of the trial, the new Illinois Marriage and Dissolution of Marriage Act effective January 1, 2016 was not in effect even though it provides for a new category of non-marital property, namely, “all property by a spouse by the sole use of non-marital property is collateral for a loan and is then used to acquire property during the marriage”.

Ultimately, the Court analyzed several cases in Illinois that dealt with the significance of marital collateral and personal guarantees being used to acquire property during marriage. The Court ultimately concluded that wife acquired her stock consistent with the distribution from a trust because the personal guarantees had no effect on the parties’ personal assets and the marital collateral had such little equity compared to the amount of the loan. Also, both were only a tertiary form of collateral which was never called upon and no longer existed due to the subsequent refinance. In all events, the Court could not conclude that the loans were obtained substantially on marital credit and therefore, did not affect the non-marital character of the Olsun stock.