The creation of joint accounts, particularly joint tenancy accounts, have long been used as an estate planning tool to allow individuals to make gifts in a way that avoids the probate court. In contrast, a convenience account is an apparent joint account which the creator established to enable another tenant to draw from the account at the direction and for the benefit of the creator.[ Johnson v. LaGrange State Bank, 73 Ill.2d 342, 369, 383 N.E.2d 185 (1978).] When the creator dies, the balance in the account would become a part of the probate estate. Distinguishing between the two accounts can be problematic because, at most banks, a joint tenancy account created for estate planning purposes will have no features to distinguish it from a convenience account. Generally, applicant for an account with two signatures will simply marked the “joint account” box as opposed to the “individual account” box without regard to the donative intent of the applicant. A convenience account designation is rarely offered by a financial institution as a choice. Prior to January 1, 2010, there was no statutory framework in Illinois to even allow financial institutions to create “convenience accounts”. A “convenience account” was purely a common law designation used to describe an apparent joint account that was actually an asset of a single individual. Following the January 1, 2010, enactment of the Illinois Banking Convenience Account for Depositors Act[ 205 ILCS 720/1 et seq], financial institutions now have the authority to establish convenience accounts; however, it has been this author’s experience that many banks have not yet created a new designation for convenience accounts to offer to their customers.
The lack of clarity on whether a joint account is a convenience account creates special problems when the joint tenant who did not originally own the cash uses the account for his or her personal purposes. In order to show how these special problems play themselves out, I will refer to a common scenario where an elderly, but unquestionably competent woman adds her eldest daughter to her checking account. In our scenario, the bank provided the elderly woman with two choices on her application: “Individual account” or “Joint account”. The elderly woman changed her account from an individual account to joint account with her daughter. No other written explanation was provided at the time the account was opened. For several years, the daughter wrote checks out of the “joint account” to help her mother pay expenses but also used that account to pay for her own expenses. The daughter continued her mother’s practice of depositing her mother’s social security check and pension check into the checking account each month. As mom got older and lost her competency, other relatives (some of whom hold powers of attorney for mom), began to question the eldest daughter’s use of the funds in the account and demanded that the daughter return the funds the daughter used for her benefit. The daughter insisted that her mother gifted the account to her, and noted that both of them had been using the account as joint tenants for many years without anyone complaining (including mother).
Conflicting Presumptions: Donative Intent v. Fraud in Self Dealing.
The above described scenario gives rise to the application of two conflicting presumptions: the presumption of donative intent in joint accounts and the presumption of fraud in self-dealing fiduciaries. On one hand, Illinois law creates a presumption of donative intent in creating joint accounts.[ Murgic v. Granite City Trust & Savings Bank, 31 Ill.2d 587, 202 N.E.2d 470 (1964).] To overcome the presumption, those challenging a withdrawal must show by clear and convincing evidence that the creator of the account did not intend to create a gift at the time the creator added the other person to the account.[ Vitacco v. Eckberg, 271 Ill.App.3d 408, 648 N.E.2d 1010 (3d Dist. 1995).] Such a burden may not be so easy to overcome when the creator did nothing to document her intentions at the time she created the account and lacks the present competency to testify as to her prior intentions. Therefore, if this presumption applies, those challenging a withdrawal likely lose.
On the other hand, there is a presumption of fraud when a fiduciary self-deals.[ Pottinger v. Pottinger, 238 Ill.App.3d 908, 917, 605 N.E.2d 1130 (2nd Dist. 1992).] To overcome this presumption, the fiduciary has burden to show by clear and convincing evidence that the transaction was made in good faith and did not breach the trust imposed by the principal.[ Id.] In the above scenario, the eldest daughter becomes a fiduciary of her mother and thus would have the burden of proving that her mother authorized the daughter to make withdrawals. Thus, the burden would be on the daughter to show her mother intended to create a gift at the time she added her daughter to the account.[ In re the Estate of Teall, 329 Ill.App.3d 83, 768 N.E.2d 124 (1st Dist. 2002).] The daughter would likely encounter the same difficulty in proof as the rest of her family—the lack of documentation and a principal incompetent to testify. Unless, the eldest daughter can point to a gift tax return, it may be impossible for her to overcome the presumption of fraud.
Appellate Districts Vary in Their Application of These Competing Presumptions.
As a result of the difficulties in offering evidence of the creator’s intentions at trial, the determination of which presumption applies likely would determine who prevails in a challenge. Thus, in deciding whether to bring suit, one should be careful to consider that Illinois courts do not uniformly apply these two competing presumptions, and the outcome of the challenge may very well depend upon the judicial district the case is presented.
The Fifth District has the clearest set of rules. If the account was created before the fiduciary relationship was created, the presumption of donative intent applies.[ In re the Estate of Foster, 104 Ill.App.2d 447, 244 N.E.2d 620 (5th Dist. 1969).] If, however, the account was created after the fiduciary relationship was created, the presumption of fraud applies.[ In re the Estate of Miller, 334 Ill.App.3d 694, 778 N.E.2d 262 (5th Dist. 2002).] In our above described scenario, mom was unquestionably competent when she created the account. There was no fiduciary relationship between mom and her eldest daughter at the time the account was created. Therefore, the presumption of donative intent applies, and the challenging relatives would have the burden of proving that the account was a convenience account as opposed to a joint tenancy account in order to prevail. On the other hand, if mom lived in a nursing home, relied on the daughter to manage her affairs, and executed powers of attorney prior to creating the account, then the presumption of fraud applies, and the burden would be on the daughter to justify her use of the account.
The Fourth District has rules similar to the Fifth District based on when the account was created. Like the Fifth District, the Fourth District applies the presumption of fraud when the account was created after the fiduciary relationship.[ In re the Estate of DeJarnette, 286 Ill.App.3d 1082, 677 N.E.2d 1024 (4th Dist. 1997).] The Fourth District seems to also apply the presumption of donative intent if both the creation of the account and the withdrawals from the account were made prior to existence of the fiduciary relationship.[ Id.] However, unlike the Fifth District, the presumptions may cancel each other out in the Fourth District. [In re the Estate of Harms, 236 Ill.App.3d 630, 603 N.E.2d 37 (4th Dist. 1992).] If the account was created before the fiduciary relationship existed and if deposits into the account were similar before and after the existence of the fiduciary relationship, then the presumptions cancel each other, leaving the trial court free to make its own determination based upon the credibility of the witnesses and the facts of the case without the constraints of either presumption.[ In re the Estate of Rybolt, 258 Ill.App.3d 886, 631 N.E.2d 792 (4th Dist. 1994).] In our scenario, there is a pattern of similar deposits before and after the creation of the fiduciary relationship (the social security and pension checks). Thus, the trial court would make its determination based upon the facts of the case and the credibility of the witnesses alone. No presumption would apply.
The First District and the Third District seem to ignore the timing of when the account was created in its analysis. Both districts apply the presumption of donative intent unless there has been an abuse of the fiduciary relationship.[ In re the Estate of Teall, 329 Ill.App.3d 83m 768 N.E.2d 124 (1st Dist. 2002); In re the Estate of Copp, 132 Ill.App.2d 974, 271 N.E.2d 1 (3d Dist. 1972).] Thus, in the both the First and Third districts, those challenging a withdrawal from a joint account have a choice: either prove a convenience account by clear and convincing evidence or show an abuse of a fiduciary relationship.
Neither district defines what exactly constitutes an “abuse” of a fiduciary relationship and what distinguishes an “abuse” of a fiduciary relationship from a simple “breach” of a fiduciary duty. However, there is a plethora of case law setting forth factual circumstances from which the appellate court found an abuse of the fiduciary relationship. For example, an abuse of the fiduciary relationship can occur in cases in which the fiduciary unjustly enriches himself to detriment of the principal and leaves the principal unable to support herself.[ People ex. Rel Hartigan v. Candy Club, 149 Ill.App.3d 498, 501 N.E.2d 188 (1st Dist. 1986).] In our scenario, if the daughter’s withdrawals rendered her mother unable to pay for expenses, then it is far more likely that an “abuse” occurred than if the withdrawals were small in comparison to the amount of money in the account minus the projected expenses. The First District has also found an abuse of the fiduciary relationship where the fiduciary does not account to the principal or make full disclosures of his or her activities.[ Kurz v. Solomon, 275 Ill.App.3d 643, 656 N.E.2d 184 (1st Dist. 1995).] Thus, if the eldest daughter changed the mailing address on her mother’s account and refused to discuss the account statements with her mother (or the other members of her family with valid powers of attorney), then it could be reasonably inferred that she intended to conceal her withdrawals and “abused” her fiduciary duties.
In the First and Third Districts, the overwhelmingly majority of decisions go in favor of the presumption of donative intent. In fact until 1955, no attack on a joint tenancy account was successful in either the First District or Third District.[ Hon. Jeffrey Matlak, Presentation, Citations to Discover/Recover Assets, Illinois Inst. of Continuing Legal Education, (Oct. 19, 2010) (materials available at: http://www.iicle.com/download/C1885-02-M.pdf).] The rationale was simple: the instrument creating the joint account spoke the whole truth.[ Id.] Thus, these Courts often applied the parole evidence rule and barred the application of other evidence showing that the joint account may have been intended for other purposes such as convenience.[ In re the Estate of Schnieder, 6 Ill.2d 180, 127 N.E.2d 445 (1955).] Following 1955, these two districts began recognizing convenience accounts; however, they been quite reluctant to rebut the presumption of donative intent. In Vitacco v. Eckberg, the Third District suggested that only a definitive creation of a convenience account will rebut the presumption of donative intent.[ Vitacco v. Eckberg, 271 Ill.App.3d 408, 412, 648 N.E.2d 1010 (3d Dist. 1995).] Likewise, the First District, in Estate of Mocny, also required evidence that an account be created solely for convenience in order to rebut the presumption of donative intent.[ 257 Ill.App.3d 291, 630 N.E.2d 87 (1st Dist. 1993).]
The Second District has yet to provide any clear direction on what presumptions apply and when they apply. In re the Estate of Trampenau, the Second District noted the conflicting presumptions of donative intent and fiduciary self dealing, but found that the competing presumptions only give rise when the principal is involved in creating the account.[ In re the Estate of Trampenau, 88 Ill.App.3d 690, 410 N.E.2d 918 (2nd Dist. 1980).] In Trampenau, the Court found that only the presumption of fraud applied to a scenario where a fiduciary took it upon himself to convert a principal’s investment account into a joint tenancy account without obtaining the signature of the principal.[ Id.] Since the principal was not involved in creating the account, the Trampenau Court did not find any reason to apply the presumption of donative intent. The Trampenau Court applied only the presumption of fraud. The alleged donor must have been involved in creating the account in order to trigger the possibility that the presumption of donative intent controls.
In re the Estate of Blom and In re the Estate of Shea, the Second District applied only the presumption of donative intent but found the presumption of donative intent was overcome by showing that an account was created for convenience. However, in Blom and Shea, the parties did not challenge withdrawals made by the fiduciary so presumption of fraud was not triggered. Instead, the parties were fighting over who owned the account upon the death of the creator. In Blom, the Second District found that the executor had the burden of proving the account was created only as a convenience.[ 234 Ill.App.3d 517, 600 N.E.2d 427 (2nd Dist. 1992).] In Blom, the executor was able to offer testimony of the decedent’s other fiduciaries about the account in question and found the executor had carried its burden of proving the account was created as a convenience account by offering testimony from these fiduciaries. Blom was an unusual circumstance in that there were multiple disinterested witnesses able to testify about an account’s creation. The far more likely scenario is that there are not disinterested witnesses able to testify.
In Shea, the court seemed to reject Blom, Mocny and Vittaco’s holding that only a convenience account would overcome the presumption of donative intent in joint tenancy accounts.[ 364 Ill.App.3d 963, 848 N.E.2d 185 (2nd Dist. 2006).] Instead, the Shea court required clear and convincing evidence that the original tenant intended any kind of ownership other than pure joint tenancy in order to overcome the presumption of donative intent.”[ Id. at 968; 848 N.E.2d at 190.] Under Shea, the presumption of donative intent for joint accounts is rebutted if a petitioner can show that creator intended to retain the entire right to use the funds in the accounts during his life, even if he intended them to go to joint tenant at his death.[ Id.]
The Shea court reasoned that if the gift of an account is to take effect only on the creator’s death, its ownership is different from traditional joint tenancy which allows the account holders to immediately share ownership. If the owner of an account intends to make a present transfer of a future interest in the account, e.g., the remainder of the account upon the owner’s death, that is also something for which an ordinary joint tenancy account agreement does not provide. Thus, the Shea Court did not limit the executor to establishing that the account in question was actually a convenience account in deciding whether the presumption of donative intent was overcome. However, the Shea Court did require the executor to show that the decedent intended that the ownership of the account remain with the decedent until the time of his death in order to overcome the presumption of donative intent.
Applying the Second District’s analysis in Trampenau, Blom, and Shea to our above described scenario, it seems that the Second District would first focus its inquiry on whether the mother intended to bestow immediate ownership rights to the daughter before deciding whether the daughter could justify the withdrawal as being made in good faith. However, these decisions do not provide any insight as to who would hold the burden of proof. Thus, Second District litigants face the most uncertainty when a challenge is made to a withdrawal in a joint account.
Avoid Donative Intent Problems By Documenting Intentions.
In the event of a challenge to a withdrawal in a joint account, the challenger would confront conflict conflicting presumptions, contradictory case law, and a difficult burden of proof especially when considering that in most of these challenges, the creator of the account is either incompetent or dead. Of course, legitimate disputes over withdrawals can be entirety avoided if the creator of the account takes the steps to document his intentions when adding a person to an account. Estate planning attorneys and elder law attorneys should particularly caution those who desire to add someone to an account to take steps to document their intentions, given the uncertainty of how a court would resolve a dispute.
On one hand, if a person desires to create a true convenience account, then that person should create an agreement signed by both the creator of the account and the convenience tenant. The agreement could, among other things, designate the account as a convenience account and could specify the authorized uses of the account by the convenience tenant. These types of side agreements would be enforceable and admissible because, as the Second District noted in Shea, the side agreements would be evidence that the instrument creating the joint account did not “speak the whole truth”.[ 364 Ill.App.3d at 970, 848 N.E.2d 185.] In the event the convenience tenant self deals from the convenience account, the creator of the account (or those acting on his or her behalf) could simply bring a breach of contract claim that would not depend on the application of conflicting presumptions and a messy set of appellate court precedents.
On the other hand, if a person intends to create a gift by adding another to an account, then a gifting document should be created that reflects the specific donative intention. That document should be kept with the person’s other estate planning documents, such as the person’s will, trust, life insurance policies, etc. The gifting document should specify when the donee’s interest in the account vests and when, and to what extent, the donee has the right to withdraw funds from the account for the donee’s benefit. Such documentation would go a long way to settle controversies arising over the use of joint accounts.
James L. Ryan is an associate at the law firm of Roberts & Caruso. He concentrates in commercial
litigation, probate and construction law. He is a member of the DuPage County Bar Association’s Estate
Planning and Probate Law Committee and the Elder Law Committee.
i Johnson v. LaGrange State Bank, 73 Ill.2d 342, 369, 383 N.E.2d 185 (1978).
ii 205 ILCS 720/1 et seq.
iii Murgic v. Granite City Trust & Savings Bank, 31 Ill.2d 587, 202 N.E.2d 470 (1964).
iv Vitacco v. Eckberg, 271 Ill.App.3d 408, 648 N.E.2d 1010 (3d Dist. 1995).
v Pottinger v. Pottinger, 238 Ill.App.3d 908, 917, 605 N.E.2d 1130 (2nd Dist. 1992).
vii In re the Estate of Teall, 329 Ill.App.3d 83, 768 N.E.2d 124 (1st Dist. 2002).
viii In re the Estate of Foster, 104 Ill.App.2d 447, 244 N.E.2d 620 (5th Dist. 1969).
ix In re the Estate of Miller, 334 Ill.App.3d 694, 778 N.E.2d 262 (5th Dist. 2002).
x In re the Estate of DeJarnette, 286 Ill.App.3d 1082, 677 N.E.2d 1024 (4th Dist. 1997).
xii In re the Estate of Harms, 236 Ill.App.3d 630, 603 N.E.2d 37 (4th Dist. 1992).
xiii In re the Estate of Rybolt, 258 Ill.App.3d 886, 631 N.E.2d 792 (4th Dist. 1994).
xiv In re the Estate of Teall, 329 Ill.App.3d 83m 768 N.E.2d 124 (1st Dist. 2002); In re the Estate of Copp, 132 Ill.App.2d 974, 271 N.E.2d 1 (3d Dist. 1972).
xv People ex. Rel Hartigan v. Candy Club, 149 Ill.App.3d 498, 501 N.E.2d 188 (1st Dist. 1986).
xvi Kurz v. Solomon, 275 Ill.App.3d 643, 656 N.E.2d 184 (1st Dist. 1995).
xvii Hon. Jeffrey Matlak, Presentation, Citations to Discover/Recover Assets, Illinois Inst. of Continuing Legal Education, (Oct. 19, 2010) (materials available at: http://www.iicle.com/download/C1885-02-M.pdf).
xxiv 234 Ill.App.3d 517, 600 N.E.2d 427 (2nd Dist. 1992).
xxv 364 Ill.App.3d 963, 848 N.E.2d 185 (2nd Dist. 2006).
xxvi Id. at 968; 848 N.E.2d at 190.
xxviii 364 Ill.App.3d at 970, 848 N.E.2d 185.