In a recent Illinois appellate decision, the beneficiaries of a trust disagreed as to who was entitled to receive the proceeds from the sale of real estate held in the trust. The dispute arose between two sets of beneficiaries under the trust.

One set of beneficiaries was comprised of the deceased Settlor’s nieces and nephews to whom the trust terms provided the option to purchase the real estate in the trust. If this option was not exercised, then the trustee of the trust was directed to sell such real estate and divide the proceeds equally among all the Settlor’s nieces and nephews. The other set of beneficiaries was made up of individuals and entities to which the terms of the trust directed bequests in specified dollar amounts. The group of beneficiaries who were provided such cash gifts argued that the proceeds from the realty sale should be part of the residue of the trust estate, and could be used to first fund their cash bequests. In opposition, the Settlor’s nieces and nephews argued that they were entitled to all the proceeds of the realty sale in equal shares.

The Court’s decision turned on some technical concepts regarding bequests made under a will or trust. The question here was whether the bequest of the realty sale proceeds was “demonstrative,” as argued by the beneficiaries receiving cash gifts, or “specific” as asserted by the Settlor’s nieces and nephews. The Court explored the distinguishing factors of both of these categories, noting that specific bequests provide a particular item or fund that can be identified separately from the residue of the estate in question. Conversely, a demonstrative bequest may be a precise monetary gift from a particular fund, but the estate’s residue also can be used to satisfy such gift if the specific fund referenced is not sufficient to fulfill the bequest.

As in so many trust and estate cases that involve interpreting terms, the Court’s opinion emphasized: words matter. The Court determined that the trust language itself was clear and concluded that the trust term directing the realty sale proceeds to the Settlor’s nieces and nephews in equal shares was a “classic example of a specific bequest.”

The Court noted that if the Settlor had intended the bequest to be demonstrative, he could have provided an exact dollar amount gift to each niece and nephew as he did for the other beneficiaries of the trust. Instead, the trust identified a specific pot of money that would fulfill the bequest to the Settlor’s nieces and nephews – a pot of money that would exist if, and only if, the real estate was part of the trust estate in the first place, and if the Settlor’s nieces and nephews did not exercise their option to purchase such real estate. Because such funds could clearly be distinguished from the residue of the trust estate, and because the trust terms only provided equal shares of an undetermined amount to each niece and nephew, the bequest was not demonstrative.

While ultimately not applicable to the case at hand, the Court did provide some discussion in its opinion about instances where beneficiaries may stand to inherit nothing through a specific bequest if the specific asset or fund does not exist at the time of trust administration. This concept is known as the ademption doctrine. The Court acknowledged that the very act of creating a specific bequest takes ademption into consideration when a specific asset or fund that could conceivably no longer exist at some point is made a security for the bequest. For example, in this case, the Settlor specifically chose real estate proceeds as the fund to fulfill the bequest for his nieces and nephews. In doing so, he should have understood reasonably that if he sold that real estate prior to death or conveyed it to different beneficiaries through a different estate planning tool, that fund would not exist and his nieces and nephews would not benefit from his trust. The Court went on to acknowledge that in other cases where courts leaned toward interpreting bequests as demonstrative, there was not only unclear language used, but also the prospect of an ademption hardship. The Court explained that the ademption doctrine was inapplicable here as there was perfectly clear language in the trust, and no hardship was on the horizon for the nieces and nephews since the real estate in question was fully part of the trust estate.

As a result, the entire pool of funds from the sale of the realty passed to the nieces and nephews, without reduction to satisfy the monetary bequests to the other trust beneficiaries.

Bruno v. Knippen (Ill. App/ 2023).