The Illinois Appellate Court in Mendelson held that when a trust instrument lists a house as part of the trust, the house belongs to the trust even if the deed was not formally transferred there. Critics worry the ruling could put unsuspecting purchasers at risk.

On September 9, 2015, the Illinois Appellate Court issued its ruling in In re Estate of Mendelson, 2015 IL App (2d) 150084. The case arose from a dispute regarding who should inherit a home in Highland Park.

Although a trust instrument stated the house was part of the trust, there was no separate, formal documentation demonstrating a transfer of the home into the trust. When considering whether the home was properly transferred into the trust, the Mendelson court noted that it could "find no Illinois authority on point." In re Mendelson, at ¶ 30. The court held that the house was indeed part of the trust despite the absence of a recorded deed transferring the real estate to the trust.

The case quickly sparked discussion among members of the ISBA's transactional email discussion group. Several raised the concern that unsuspecting purchasers of real property will learn to their dismay that the property they bought had previously been transferred to a trust without that transfer having been recorded.

'Not new law'

For his part, Chicago attorney Sherwin Abrams wonders why the Mendelson court did not consider Ross v. Ross, 406 Ill. 598 (1950) in its opinion. To Abrams, the Mendelson court's ruling is not new law because "it's always been the law."

Abrams, a member of Abrams & Chapman LLP, points to Ross as a case that addresses the issue in Mendelson. At issue in Ross was the legal effect of an unrecorded deed and a subsequent trust instrument.

In Ross, John Ross received a deed to a piece of property in 1941. The deed was never recorded. In 1943, he executed a trust instrument. The instrument stated that the trustee had title to the same piece of property, which was to be held in accordance with the terms of the trust.

Upon John's death, the trustee - John's wife, Alice - was to convey the property to the trust's beneficiary, his sister Mary. Alice argued that the property wasn't properly deeded to the trust and thus should go to her.

The court held the trust instrument did not contain the "usual words of grant" but did contain "many words indicating that the parties agreed and intended that the legal title was in [trustee] Alice J. Ross." Ross, 406 Ill. at 602. The Illinois Supreme Court held that the property was properly conveyed into the trust, even without a formal deed. Abrams notes that the language of Ross largely supports the court's reasoning in Mendelson.

In Mendelson, the chain of title to the Highland Park home was a bit more complex. In 2005, Diane Mendelson executed a deed that placed title to the house in joint tenancy with herself and her son Michael. The deed was never recorded, apparently because Diane enjoyed a property tax benefit as the sole title owner of the property.

In 2006, she executed a living trust that placed title to the Highland Park home in the trust, which provided that the property would be divided equally among her four sons upon her death. In March 2011, the mortgage on the property was refinanced with Diane listed as the only owner.

Then in July 2011, she executed a new trust. The 2011 trust revoked the 2006 trust, naming Diane as trustee and her son Michael as the successor trustee. She did not draft a separate deed conveying the Highland Park home into the trust. However, the trust "identified the [home] as part of the trust estate and specifically stated that she intended that her home become Michael's sole and exclusive property upon her death." Mendelson, 2015 IL App (2d) 150084 at ¶ 7. She died on October 1, 2011.

Her estate claimed that the house was never properly transferred to the 2011 trust, and thus all four brothers inherited an equal interest. The circuit court agreed.

After looking to case law from other states and the Restatement (Second) of Trusts, the appellate court in Mendelson held "a settlor who declares a trust naming herself as trustee is not required to separately and formally transfer the designated property into the trust." Id. at ¶ 35.

The main difference between the holdings in Mendelson and Ross, Abrams says, is that the decedent in Ross was not the trustee. In Abrams' reading, Ross speaks to a general principle: a formal deed is not necessary to convey property into a trust if the trust demonstrates that intent. Mendelson addresses a specific factual scenario within Ross's framework, providing some additional clarity for situations where the settlor is also the trustee.

"Mendelson was correct, but not a new precedent. Why all the excitement?" Abrams asks.

A 'mischief-maker'

But Crystal Lake lawyer Scott A. Nolan sees a further distinction between Ross and Mendelson. "In Ross, the parties contesting the property had previously agreed that the sister was holding as trustee. In Mendelson, the [contesting parties] not only didn't agree that Mom was holding as trustee, [they] didn't know she was claiming the property as trustee," he said.

In other words, Ross was based on the parties' agreement, while "Mendelson was based on mom's unilateral right to declare the property to be in her trust," Nolan said.

"The court could reach this holding only because it first held that the deed to the son in joint tenancy was void," he said. In essence, "the holding of Mendelson is that an owner of property can settle a trust - a private document - without notifying the public that he no longer owns the property in his own right but rather as a trustee," Nolan said.

"One of the benefits of public recordation of deeds is that the public can find out who it has to deal with in order to buy or loan against the property," he said. "Ross did not interfere with that benefit [if its holding is] limited to its facts," a situation where the contesting parties, who were not "members of an unsuspecting public," were simply held to their agreement.

"I don't see how the Mendelson decision can avoid being a mischief-maker," Nolan said.

One thing Abrams and other discussion participants agree on: while it may not be essential to have formal documentation transferring property into a trust, it is always good practice to do so.

For more about Mendelson, see "How Do You Trust?" in the October issue of the ISBA Trusts & Estates newsletter.