Farkas v. Williams

Supreme Court of Illinois
5 Ill.2d 417, 125 N.E.2d 600 (1955)

ELI5:

Rule of Law:

A settlor may create a valid inter vivos trust by declaring themself the sole trustee, even if they reserve a life interest in the income, the power to revoke or amend the trust, and the power to sell the trust property and retain the proceeds for their own use.

Facts:

Albert B. Farkas, a veterinarian, employed Richard J. Williams, who was not related to him.
On four separate occasions between 1948 and 1950, Farkas purchased shares of Investors Mutual, Inc.
For each purchase, Farkas executed an application to issue the stock in his name "as trustee for Richard J. Williams."
Contemporaneously with each purchase, Farkas signed a separate, formal "Declaration of Trust — Revocable" instrument.
The trust terms stipulated that Farkas would receive all cash dividends for his personal use during his lifetime.
The terms also allowed Farkas, as trustee, to sell, redeem, or exchange the stock and, upon any sale or redemption, to terminate the trust as to that stock and keep the proceeds for his own use.
Farkas reserved the absolute right to change the beneficiary or revoke the trust at any time through written notice to the company.
The trust provided that if Williams predeceased Farkas, the trust would automatically be revoked.
Farkas died intestate, and the stock certificates were found in his safety-deposit box.

Procedural Posture:

The coadministrators of Albert B. Farkas's estate sued Richard J. Williams and Investors Mutual, Inc. in the circuit court of Cook County (a trial court).
Plaintiffs sought a declaratory judgment that the trust instruments were invalid attempted testamentary dispositions.
The circuit court entered a decree finding the trusts invalid and awarded the stock to the estate.
Defendants (Williams and Investors Mutual, Inc.) appealed to the Appellate Court, First District (an intermediate appellate court).
The Appellate Court affirmed the circuit court's decree.
The defendants, as appellants, were granted a petition for leave to appeal to the Supreme Court of Illinois (the state's highest court).

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Issue:

Do declarations of trust, where the settlor names himself as sole trustee and reserves a life interest, the power to revoke the trust, the power to change the beneficiary, and the power to sell the trust property and retain the proceeds, constitute a valid inter vivos trust rather than an invalid testamentary disposition?

Opinions:

Majority - Mr. Justice Hershey

Yes, these declarations of trust constitute a valid inter vivos trust. The court held that upon execution of the trust instruments, the beneficiary, Williams, immediately acquired a present, though contingent, equitable interest in the trust property. Farkas, by naming himself trustee, was no longer the absolute owner but was bound by the terms of the instrument and the fiduciary duties implied by law. Although Farkas retained extensive powers, including the right to all income, the power to sell the assets and keep the proceeds, and the power to revoke, these powers did not negate the existence of the trust. The court reasoned that the power to sell and keep the proceeds is practically equivalent to the power of revocation, which is uniformly held not to invalidate an inter vivos trust. Because a present interest passed to the beneficiary and the settlor's retained powers were exercised in his capacity as trustee, the disposition was not testamentary and did not need to comply with the statute of wills.

Analysis:

This case is a landmark decision that validates the modern revocable living trust as a non-testamentary will substitute. The court's willingness to uphold a trust where the settlor retains such extensive control, including serving as sole trustee, provides a clear legal foundation for flexible estate planning. This ruling significantly diminished the 'illusory trust' doctrine, which previously could invalidate trusts where the settlor retained too much power. By focusing on the immediate creation of a beneficiary's equitable interest—however contingent—the court prioritized the settlor's formally expressed intent over the practical reality of their continued control, profoundly influencing modern trust and estate law.

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