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Public Act 097-0920 | ||||
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AN ACT concerning civil law.
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Be it enacted by the People of the State of Illinois,
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represented in the General Assembly:
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Section 5. The Trust and Trustees Act is amended by adding | ||||
Section 16.4 as follows: | ||||
(760 ILCS 5/16.4 new) | ||||
Sec. 16.4. Distribution of trust principal in further | ||||
trust. | ||||
(a) Definitions. In this Section: | ||||
"Absolute discretion" means the right to distribute | ||||
principal that is not limited or modified in any manner to or | ||||
for the benefit of one or more beneficiaries of the trust, | ||||
whether or not the term "absolute" is used. A power to | ||||
distribute principal that includes purposes such as best | ||||
interests, welfare, or happiness shall constitute absolute | ||||
discretion. | ||||
"Authorized trustee" means an entity or individual, other | ||||
than the settlor, who has authority under the terms of the | ||||
first trust to distribute the principal of the trust for the | ||||
benefit of one or more current beneficiaries. | ||||
"Code" means the United States Internal Revenue Code of | ||||
1986, as amended from time to time, including corresponding | ||||
provisions of subsequent internal revenue laws and |
corresponding provisions of State law. | ||
"Current beneficiary" means a person who is currently | ||
receiving or eligible to receive a distribution of principal or | ||
income from the trustee on the date of the exercise of the | ||
power. | ||
"Distribute" means the power to pay directly to the | ||
beneficiary of a trust or make application for the benefit of | ||
the beneficiary. | ||
"First trust" means an existing irrevocable inter vivos or | ||
testamentary trust part or all of the principal of which is | ||
distributed in further trust under subsection (c) or (d). | ||
"Presumptive remainder beneficiary" means a beneficiary of | ||
a trust, as of the date of determination and assuming | ||
non-exercise of all powers of appointment, who either (i) would | ||
be eligible to receive a distribution of income or principal if | ||
the trust terminated on that date, or (ii) would be eligible to | ||
receive a distribution of income or principal if the interests | ||
of all beneficiaries currently eligible to receive income or | ||
principal from the trust ended on that date without causing the | ||
trust to terminate. | ||
"Principal" includes the income of the trust at the time of | ||
the exercise of the power that is not currently required to be | ||
distributed, including accrued and accumulated income. | ||
"Second trust" means any irrevocable trust to which | ||
principal is distributed in accordance with subsection (c) or | ||
(d). |
"Successor beneficiary" means any beneficiary other than | ||
the current and presumptive remainder beneficiaries, but does | ||
not include a potential appointee of a power of appointment | ||
held by a beneficiary. | ||
(b) Purpose. An independent trustee who has discretion to | ||
make distributions to the beneficiaries shall exercise that | ||
discretion in the trustee's fiduciary capacity, whether the | ||
trustee's discretion is absolute or limited to ascertainable | ||
standards, in furtherance of the purposes of the trust. | ||
(c) Distribution to second trust if absolute discretion. An | ||
authorized trustee who has the absolute discretion to | ||
distribute the principal of a trust may distribute part or all | ||
of the principal of the trust in favor of a trustee of a second | ||
trust for the benefit of one, more than one, or all of the | ||
current beneficiaries of the first trust and for the benefit of | ||
one, more than one, or all of the successor and remainder | ||
beneficiaries of the first trust. | ||
(1) If the authorized trustee exercises the power under | ||
this subsection, the authorized trustee may grant a power | ||
of appointment (including a presently exercisable power of | ||
appointment) in the second trust to one or more of the | ||
current beneficiaries of the first trust, provided that the | ||
beneficiary granted a power to appoint could receive the | ||
principal outright under the terms of the first trust. | ||
(2) If the authorized trustee grants a power of | ||
appointment, the class of permissible appointees in favor |
of whom a beneficiary may exercise the power of appointment | ||
granted in the second trust may be broader than or | ||
otherwise different from the current, successor, and | ||
presumptive remainder beneficiaries of the first trust. | ||
(3) If the beneficiary or beneficiaries of the first | ||
trust are described as a class of persons, the beneficiary | ||
or beneficiaries of the second trust may include one or | ||
more persons of such class who become includible in the | ||
class after the distribution to the second trust. | ||
(d) Distribution to second trust if no absolute discretion. | ||
An authorized trustee who has the power to distribute the | ||
principal of a trust but does not have the absolute discretion | ||
to distribute the principal of the trust may distribute part or | ||
all of the principal of the first trust in favor of a trustee | ||
of a second trust, provided that the current beneficiaries of | ||
the second trust shall be the same as the current beneficiaries | ||
of the first trust and the successor and remainder | ||
beneficiaries of the second trust shall be the same as the | ||
successor and remainder beneficiaries of the first trust. | ||
(1) If the authorized trustee exercises the power under | ||
this subsection (d), the second trust shall include the | ||
same language authorizing the trustee to distribute the | ||
income or principal of a trust as set forth in the first | ||
trust. | ||
(2) If the beneficiary or beneficiaries of the first | ||
trust are described as a class of persons, the beneficiary |
or beneficiaries of the second trust shall include all | ||
persons who become includible in the class after the | ||
distribution to the second trust. | ||
(3) If the authorized trustee exercises the power under | ||
this subsection (d) and if the first trust grants a power | ||
of appointment to a beneficiary of the trust, the second | ||
trust shall grant such power of appointment in the second | ||
trust and the class of permissible appointees shall be the | ||
same as in the first trust. | ||
(4) Supplemental Needs Trusts. | ||
(i) Notwithstanding the other provisions of this | ||
subsection (d), the authorized trustee may distribute | ||
part or all of the principal of a disabled | ||
beneficiary's interest in the first trust in favor of a | ||
trustee of a second trust which is a supplemental needs | ||
trust if the authorized trustee determines that to do | ||
so would be in the best interests of the disabled | ||
beneficiary. | ||
(ii) Definitions. For purposes of this subsection | ||
(d): | ||
"Best interests" of a disabled beneficiary | ||
include, without limitation, consideration of the | ||
financial impact to the disabled beneficiary's | ||
family. | ||
"Disabled beneficiary" means a current | ||
beneficiary, presumptive remainder beneficiary, or |
successor beneficiary of the first trust who the | ||
authorized trustee determines has a disability | ||
that substantially impairs the beneficiary's | ||
ability to provide for his or her own care or | ||
custody and that constitutes a substantial | ||
handicap, whether or not the beneficiary has been | ||
adjudicated a "disabled person". | ||
"Governmental benefits" means financial aid or | ||
services from any State, Federal, or other public | ||
agency. | ||
"Supplemental needs second trust" means a | ||
trust that complies with paragraph (iii) of this | ||
paragraph (4) and that relative to the first trust | ||
contains either lesser or greater restrictions on | ||
the trustee's power to distribute trust income or | ||
principal and which the trustee believes would, if | ||
implemented, allow the disabled beneficiary to | ||
receive a greater degree of governmental benefits | ||
than the disabled beneficiary will receive if no | ||
distribution is made. | ||
(iii) Remainder beneficiaries. A supplemental | ||
needs second trust may name remainder and successor | ||
beneficiaries other than the disabled beneficiary's | ||
estate, provided that the second trust names the same | ||
presumptive remainder beneficiaries and successor | ||
beneficiaries to the disabled beneficiary's interest, |
and in the same proportions, as exist in the first | ||
trust. In addition to the foregoing, where the first | ||
trust was created by the disabled beneficiary or the | ||
trust property has been distributed directly to or is | ||
otherwise under the control of the disabled | ||
beneficiary, the authorized trustee may distribute to | ||
a "pooled trust" as defined by federal Medicaid law for | ||
the benefit of the disabled beneficiary or the | ||
supplemental needs second trust must contain pay back | ||
provisions complying with Medicaid reimbursement | ||
requirements of federal law. | ||
(iv) Reimbursement. A supplemental needs second | ||
trust shall not be liable to pay or reimburse the State | ||
or any public agency for financial aid or services to | ||
the disabled beneficiary except as provided in the | ||
supplemental needs second trust. | ||
(e) Notice. An authorized trustee may exercise the power to | ||
distribute in favor of a second trust under subsections (c) and | ||
(d) without the consent of the settlor or the beneficiaries of | ||
the first trust and without court approval if: | ||
(1) there are one or more legally competent current | ||
beneficiaries and one or more legally competent | ||
presumptive remainder beneficiaries and the authorized | ||
trustee sends written notice of the trustee's decision, | ||
specifying the manner in which the trustee intends to | ||
exercise the power and the prospective effective date for |
the distribution, to all of the legally competent current | ||
beneficiaries and presumptive remainder beneficiaries, | ||
determined as of the date the notice is sent and assuming | ||
non-exercise of all powers of appointment; and | ||
(2) no beneficiary to whom notice was sent objects to | ||
the distribution in writing delivered to the trustee within | ||
60 days after the notice is sent ("notice period"). | ||
A trustee is not required to provide a copy of the notice | ||
to a beneficiary who is known to the trustee but who cannot be | ||
located by the trustee after reasonable diligence or who is not | ||
known to the trustee. | ||
If a charity is a current beneficiary or presumptive | ||
remainder beneficiary of the trust, the notice shall also be | ||
given to the Attorney General's Charitable Trust Bureau. | ||
(f) Court involvement. | ||
(1) The trustee may for any reason elect to petition | ||
the court to order the distribution, including, without | ||
limitation, the reason that the trustee's exercise of the | ||
power to distribute under this Section is unavailable, such | ||
as: | ||
(a) a beneficiary timely objects to the | ||
distribution in a writing delivered to the trustee | ||
within the time period specified in the notice; or | ||
(b) there are no legally competent current | ||
beneficiaries or legally competent presumptive | ||
remainder beneficiaries. |
(2) If the trustee receives a written objection within | ||
the notice period, either the trustee or the beneficiary | ||
may petition the court to approve, modify, or deny the | ||
exercise of the trustee's powers. The trustee has the | ||
burden of proving the proposed exercise of the power | ||
furthers the purposes of the trust. | ||
(3) In a judicial proceeding under this subsection (f), | ||
the trustee may, but need not, present the trustee's | ||
opinions and reasons for supporting or opposing the | ||
proposed distribution, including whether the trustee | ||
believes it would enable the trustee to better carry out | ||
the purposes of the trust. A trustee's actions in | ||
accordance with this Section shall not be deemed improper | ||
or inconsistent with the trustee's duty of impartiality | ||
unless the court finds from all the evidence that the | ||
trustee acted in bad faith. | ||
(g) Term of the second trust. The second trust to which an | ||
authorized trustee distributes the assets of the first trust | ||
may have a term that is longer than the term set forth in the | ||
first trust, including, but not limited to, a term measured by | ||
the lifetime of a current beneficiary; provided, however, that | ||
the second trust shall be limited to the same permissible | ||
period of the rule against perpetuities that applied to the | ||
first trust, unless the first trust expressly permits the | ||
trustee to extend or lengthen its perpetuities period. | ||
(h) Divided discretion. If an authorized trustee has |
absolute discretion to distribute the principal of a trust and | ||
the same trustee or another trustee has the power to distribute | ||
principal under the trust instrument which power is not | ||
absolute discretion, such authorized trustee having absolute | ||
discretion may exercise the power to distribute under | ||
subsection (c). | ||
(i) Later discovered assets. To the extent the authorized | ||
trustee does not provide otherwise: | ||
(1) The distribution of all of the assets comprising | ||
the principal of the first trust in favor of a second trust | ||
shall be deemed to include subsequently discovered assets | ||
otherwise belonging to the first trust and undistributed | ||
principal paid to or acquired by the first trust subsequent | ||
to the distribution in favor of the second trust. | ||
(2) The distribution of part but not all of the assets | ||
comprising the principal of the first trust in favor of a | ||
second trust shall not include subsequently discovered | ||
assets belonging to the first trust and principal paid to | ||
or acquired by the first trust subsequent to the | ||
distribution in favor of a second trust; such assets shall | ||
remain the assets of the first trust. | ||
(j) Other authority to distribute in further trust. This | ||
Section shall not be construed to abridge the right of any | ||
trustee to distribute property in further trust that arises | ||
under the terms of the governing instrument of a trust, any | ||
provision of applicable law, or a court order. In addition, |
distribution of trust principal to a second trust may be made | ||
by agreement between a trustee and all primary beneficiaries of | ||
a first trust, acting either individually or by their | ||
respective representatives in accordance with Section 16.1 of | ||
this Act. | ||
(k) Need to distribute not required. An authorized trustee | ||
may exercise the power to distribute in favor of a second trust | ||
under subsections (c) and (d) whether or not there is a current | ||
need to distribute principal under the terms of the first | ||
trust. | ||
(l) No duty to distribute. Nothing in this Section is | ||
intended to create or imply a duty to exercise a power to | ||
distribute principal, and no inference of impropriety shall be | ||
made as a result of an authorized trustee not exercising the | ||
power conferred under subsection (c) or (d). Notwithstanding | ||
any other provision of this Section, a trustee has no duty to | ||
inform beneficiaries about the availability of this Section and | ||
no duty to review the trust to determine whether any action | ||
should be taken under this Section. | ||
(m) Express prohibition. A power authorized by subsection | ||
(c) or (d) may not be exercised if expressly prohibited by the | ||
terms of the governing instrument, but a general prohibition of | ||
the amendment or revocation of the first trust or a provision | ||
that constitutes a spendthrift clause shall not preclude the | ||
exercise of a power under subsection (c) or (d). | ||
(n) Restrictions. An authorized trustee may not exercise a |
power authorized by subsection (c) or (d) to affect any of the | ||
following: | ||
(1) to reduce, limit or modify any beneficiary's | ||
current right to a mandatory distribution of income or | ||
principal, a mandatory annuity or unitrust interest, a | ||
right to withdraw a percentage of the value of the trust or | ||
a right to withdraw a specified dollar amount provided that | ||
such mandatory right has come into effect with respect to | ||
the beneficiary, except with respect to a second trust | ||
which is a supplemental needs trust; | ||
(2) to decrease or indemnify against a trustee's | ||
liability or exonerate a trustee from liability for failure | ||
to exercise reasonable care, diligence, and prudence; | ||
except to indemnify or exonerate one party from liability | ||
for actions of another party with respect to distribution | ||
that unbundles the governance structure of a trust to | ||
divide and separate fiduciary and nonfiduciary | ||
responsibilities among several parties, including without | ||
limitation one or more trustees, distribution advisors, | ||
investment advisors, trust protectors, or other parties, | ||
provided however that such modified governance structure | ||
may reallocate fiduciary responsibilities from one party | ||
to another but may not reduce them; | ||
(3) to eliminate a provision granting another person | ||
the right to remove or replace the authorized trustee | ||
exercising the power under subsection (c) or (d); provided, |
however, such person's right to remove or replace the | ||
authorized trustee may be eliminated if a separate | ||
independent, non-subservient individual or entity, such as | ||
a trust protector, acting in a nonfiduciary capacity has | ||
the right to remove or replace the authorized trustee; | ||
(4) to reduce, limit or modify the perpetuities | ||
provision specified in the first trust in the second trust, | ||
unless the first trust expressly permits the trustee to do | ||
so. | ||
(o) Exception. Notwithstanding the provisions of paragraph | ||
(1) of subsection (n) but subject to the other limitations in | ||
this Section, an authorized trustee may exercise a power | ||
authorized by subsection (c) or (d) to distribute to a second | ||
trust; provided, however, that the exercise of such power does | ||
not subject the second trust to claims of reimbursement by any | ||
private or governmental body and does not at any time interfere | ||
with, reduce the amount of, or jeopardize an individual's | ||
entitlement to government benefits. | ||
(p) Tax limitations. If any contribution to the first trust | ||
qualified for the annual exclusion under Section 2503(b) of the | ||
Code, the marital deduction under Section 2056(a) or 2523(a) of | ||
the Code, or the charitable deduction under Section 170(a), | ||
642(c), 2055(a) or 2522(a) of the Code, is a direct skip | ||
qualifying for treatment under Section 2642(c) of the Code, or | ||
qualified for any other specific tax benefit that would be lost | ||
by the existence of the authorized trustee's authority under |
subsection (c) or (d) for income, gift, estate, or | ||
generation-skipping transfer tax purposes under the Code, then | ||
the authorized trustee shall not have the power to distribute | ||
the principal of a trust pursuant to subsection (c) or (d) in a | ||
manner that would prevent the contribution to the first trust | ||
from qualifying for or would reduce the exclusion, deduction, | ||
or other tax benefit that was originally claimed with respect | ||
to that contribution. | ||
(1) Notwithstanding the provisions of this subsection | ||
(p), the authorized trustee may exercise the power to pay | ||
the first trust to a trust as to which the settlor of the | ||
first trust is not considered the owner under Subpart E of | ||
Part I of Subchapter J of Chapter 1 of Subtitle A of the | ||
Code even if the settlor is considered such owner of the | ||
first trust. Nothing in this Section shall be construed as | ||
preventing the authorized trustee from distributing part | ||
or all of the first trust to a second trust that is a trust | ||
as to which the settlor of the first trust is considered | ||
the owner under Subpart E of Part I of Subchapter J of | ||
Chapter 1 of Subtitle A of the Code. | ||
(2) During any period when the first trust owns | ||
subchapter S corporation stock, an authorized trustee may | ||
not exercise a power authorized by paragraph (c) or (d) to | ||
distribute part or all of the S corporation stock to a | ||
second trust that is not a permitted shareholder under | ||
Section 1361(c)(2) of the Code. |
(3) During any period when the first trust owns an | ||
interest in property subject to the minimum distribution | ||
rules of Section 401(a)(9) of the Code, an authorized | ||
trustee may not exercise a power authorized by subsection | ||
(c) or (d) to distribute part or all of the interest in | ||
such property to a second trust that would result in the | ||
shortening of the minimum distribution period to which the | ||
property is subject in the first trust. | ||
(q) Limits on compensation of trustee. | ||
(1) Unless the court upon application of the trustee | ||
directs otherwise, an authorized trustee may not exercise a | ||
power authorized by subsection (c) or (d) solely to change | ||
the provisions regarding the determination of the | ||
compensation of any trustee; provided, however, an | ||
authorized trustee may exercise the power authorized in | ||
subsection (c) or (d) in conjunction with other valid and | ||
reasonable purposes to bring the trustee's compensation | ||
into accord with reasonable limits in accord with Illinois | ||
law in effect at the time of the exercise. | ||
(2) The compensation payable to the trustee or trustees | ||
of the first trust may continue to be paid to the trustees | ||
of the second trust during the terms of the second trust | ||
and may be determined in the same manner as otherwise would | ||
have applied in the first trust; provided, however, that no | ||
trustee shall receive any commission or other compensation | ||
imposed upon assets distributed due to the distribution of |
property from the first trust to a second trust pursuant to | ||
subsection (c) or (d). | ||
(r) Written instrument. The exercise of a power to | ||
distribute principal under subsection (c) or (d) must be made | ||
by an instrument in writing, signed and acknowledged by the | ||
trustee, and filed with the records of the first trust and the | ||
second trust. | ||
(s) Terms of second trust. Any reference to the governing | ||
instrument or terms of the governing instrument in this Act | ||
includes the terms of a second trust established in accordance | ||
with this Section. | ||
(t) Settlor. The settlor of a first trust is considered for | ||
all purposes to be the settlor of any second trust established | ||
in accordance with this Section. If the settlor of a first | ||
trust is not also the settlor of a second trust, then the | ||
settlor of the first trust shall be considered the settlor of | ||
the second trust, but only with respect to the portion of | ||
second trust distributed from the first trust in accordance | ||
with this Section. | ||
(u) Remedies. A trustee who reasonably and in good faith | ||
takes or omits to take any action under this Section is not | ||
liable to any person interested in the trust. An act or | ||
omission by a trustee under this Section is presumed taken or | ||
omitted reasonably and in good faith unless it is determined by | ||
the court to have been an abuse of discretion. If a trustee | ||
reasonably and in good faith takes or omits to take any action |
under this Section and a person interested in the trust opposes | ||
the act or omission, the person's exclusive remedy is to obtain | ||
an order of the court directing the trustee to exercise | ||
authority in accordance with this Section in such manner as the | ||
court determines necessary or helpful for the proper | ||
functioning of the trust, including without limitation | ||
prospectively to modify or reverse a prior exercise of such | ||
authority. Any claim by any person interested in the trust that | ||
an act or omission by a trustee under this Section was an abuse | ||
of discretion is barred if not asserted in a proceeding | ||
commenced by or on behalf of the person within 2 years after | ||
the trustee has sent to the person or the person's personal | ||
representative a notice or report in writing sufficiently | ||
disclosing facts fundamental to the claim such that the person | ||
knew or reasonably should have known of the claim. Except for a | ||
distribution of trust principal from a first trust to a second | ||
trust made by agreement in accordance with Section 16.1 of this | ||
Act, the preceding sentence shall not apply to a person who was | ||
under a legal disability at the time the notice or report was | ||
sent and who then had no personal representative. For purposes | ||
of this subsection (u), a personal representative refers to a | ||
court appointed guardian or conservator of the estate of a | ||
person. | ||
(v) Application. This Section is available to trusts in | ||
existence on the effective date of this amendatory Act of the | ||
97th General Assembly or created on or after the effective date |
of this amendatory Act of the 97th General Assembly. This | ||
Section shall be construed as pertaining to the administration | ||
of a trust and shall be available to any trust that is | ||
administered in Illinois under Illinois law or that is governed | ||
by Illinois law with respect to the meaning and effect of its | ||
terms, including a trust whose governing law has been changed | ||
to the laws of this State, unless the governing instrument | ||
expressly prohibits use of this Section by specific reference | ||
to this Section. A provision in the governing instrument in the | ||
form: "Neither the provisions of Section 16.4 of the Trusts and | ||
Trustees Act nor any corresponding provision of future law may | ||
be used in the administration of this trust" or a similar | ||
provision demonstrating that intent is sufficient to preclude | ||
the use of this Section.
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