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Public Act 92-0838
SB1697 Enrolled LRB9213119WHcs
AN ACT in relation to trusts.
Be it enacted by the People of the State of Illinois,
represented in the General Assembly:
Section 5. The Trusts and Trustees Act is amended by
adding Section 5.3 as follows:
(760 ILCS 5/5.3 new)
Sec. 5.3. Total return trusts.
(a) Conversion by trustee. A trustee may convert a trust
to a total return trust as described in this Section if all
of the following apply:
(1) The trust describes the amount that may or must
be distributed to a beneficiary by referring to the
trust's income, and the trustee determines that
conversion to a total return trust will enable the
trustee to better carry out the purposes of the trust and
the conversion is in the best interests of the
beneficiaries;
(2) conversion to a total return trust means the
trustee will invest and manage trust assets seeking a
total return without regard to whether that return is
from income or appreciation of principal, and will make
distributions in accordance with this Section (such a
trust is called a "total return trust" in this Section);
(3) the trustee sends a written notice of the
trustee's decision to convert the trust to a total return
trust, specifying a prospective effective date for the
conversion and including a copy of this Section, to the
following beneficiaries, determined as of the date the
notice is sent and assuming nonexercise of all powers of
appointment:
(A) all of the legally competent beneficiaries
who are currently receiving or eligible to receive
income from the trust; and
(B) all of the legally competent beneficiaries
who would receive or be eligible to receive a
distribution of principal or income if the current
interests of beneficiaries currently receiving or
eligible to receive income ended;
(4) there are one or more legally competent income
beneficiaries under subdivision (3)(A) of this subsection
(a) and one or more legally competent remainder
beneficiaries under subdivision (3)(B) of this subsection
(a), determined as of the date of sending the notice;
(5) no beneficiary objects to the conversion to a
total return trust in a writing delivered to the trustee
within 60 days after the notice is sent; and
(6) the trustee has signed acknowledgments of
receipt confirming that notice was received by each
beneficiary required to be sent notice under subdivision
(3) of this subsection (a).
(b) Conversion by agreement. Conversion to a total
return trust may be made by agreement between a trustee and
all the primary beneficiaries of the trust under the virtual
representation provisions of Section 16.1 of this Act if
those provisions otherwise apply. The agreement may include
any actions a court could properly order under subsection (g)
of this Section; however, any distribution percentage
determined by the agreement may not be less than 3% nor
greater than 5%.
(c) Conversion or reconversion by court.
(1) The trustee may for any reason elect to
petition the court to order conversion to a total return
trust, including without limitation the reason that
conversion under subsection (a) is unavailable because:
(A) a beneficiary timely objects to the
conversion to a total return trust;
(B) there are no legally competent
beneficiaries described in subdivision (3)(A) of
subsection (a); or
(C) there are no legally competent
beneficiaries described in subdivision (3)(B) of
subsection (a).
(2) A beneficiary may request the trustee to
convert to a total return trust or adjust the
distribution percentage. If the trustee declines or fails
to act within 6 months after receiving a written request
to do so, the beneficiary may petition the court to order
the conversion or adjustment.
(3) The trustee may petition the court
prospectively to reconvert from a total return trust or
adjust the distribution percentage if the trustee
determines that the reconversion or adjustment will
enable the trustee to better carry out the purposes of
the trust. A beneficiary may request the trustee to
petition the court prospectively to reconvert from a
total return trust or adjust the distribution percentage.
If the trustee declines or fails to act within 6 months
after receiving a written request to do so, the
beneficiary may petition the court to order the
reconversion or adjustment.
(4) In a judicial proceeding under this subsection
(c), the trustee may, but need not, present the trustee's
opinions and reasons (A) for supporting or opposing
conversion to (or reconversion from or adjustment of the
distribution percentage of) a total return trust,
including whether the trustee believes conversion (or
reconversion or adjustment of the distribution
percentage) would enable the trustee to better carry out
the purposes of the trust, and (B) about any other
matters relevant to the proposed conversion (or
reconversion or adjustment of the distribution
percentage). A trustee's actions in accordance with this
subsection (c) 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.
(5) The court shall order conversion to (or
reconversion prospectively from or adjustment of the
distribution percentage of) a total return trust if the
court determines that the conversion (or reconversion or
adjustment of the distribution percentage) will enable
the trustee to better carry out the purposes of the trust
and the conversion (or reconversion or adjustment of the
distribution percentage) is in the best interests of the
beneficiaries.
(6) Notwithstanding any other provision of this
Section, a trustee has no duty to inform beneficiaries
about the availability of this Section and has no duty to
review the trust to determine whether any action should
be taken under this Section unless requested to do so in
writing by a beneficiary described in subdivision (3) of
subsection (a).
(d) Post conversion. While a trust is a total return
trust, all of the following shall apply to the trust:
(1) the trustee shall make income distributions in
accordance with the governing instrument subject to the
provisions of this Section;
(2) the term "income" in the governing instrument
means an annual amount (the "distribution amount") equal
to a percentage (the "distribution percentage") of the
net fair market value of the trust's assets, whether the
assets are considered income or principal under the
Principal and Income Act, averaged over the lesser of:
(i) the 3 preceding years; or
(ii) the period during which the trust has
been in existence;
(3) the distribution percentage for any trust
converted to a total return trust by a trustee in
accordance with subsection (a) shall be 4%; and
(4) the trustee shall pay to a beneficiary (in the
case of an underpayment) and shall recover from a
beneficiary (in the case of an overpayment) an amount
equal to the difference between the amount properly
payable and the amount actually paid, plus interest
compounded annually at a rate per annum equal to the
distribution percentage in the year or years while the
underpayment or overpayment exists.
(e) Administration. The trustee, in the trustee's
discretion, may determine any of the following matters in
administering a total return trust as the trustee from time
to time determines necessary or helpful for the proper
functioning of the trust:
(1) the effective date of a conversion to a total
return trust;
(2) the manner of prorating the distribution amount
for a short year in which a beneficiary's interest
commences or ceases;
(3) whether distributions are made in cash or in
kind;
(4) the manner of adjusting valuations and
calculations of the distribution amount to account for
other payments from or contributions to the trust;
(5) whether to value the trust's assets annually or
more frequently;
(6) what valuation dates and how many valuation
dates to use;
(7) valuation decisions about any asset for which
there is no readily available market value, including:
(A) how frequently to value such an asset;
(B) whether and how often to engage a
professional appraiser to value such an asset; and
(C) whether to exclude the value of such an
asset from the net fair market value of the trust's
assets under subdivision (d)(2) for purposes of
determining the distribution amount. Any such asset
so excluded is referred to as an "excluded asset" in
this subsection (e), and the trustee shall
distribute any net income received from the excluded
asset as provided for in the governing instrument,
subject to the following principles:
(i) unless the trustee determines there
are compelling reasons to the contrary
considering all relevant factors including the
best interests of the beneficiaries, the
trustee shall treat each asset for which there
is no readily available market value as an
excluded asset;
(ii) if tangible personal property or
real property is possessed or occupied by a
beneficiary, the trustee shall not limit or
restrict any right of the beneficiary to use
the property in accordance with the governing
instrument whether or not the trustee treats
the property as an excluded asset;
(iii) examples of assets for which there
is a readily available market value include:
cash and cash equivalents; stocks, bonds, and
other securities and instruments for which
there is an established market on a stock
exchange, in an over-the-counter market, or
otherwise; and any other property that can
reasonably be expected to be sold within one
week of the decision to sell without
extraordinary efforts by the seller;
(iv) examples of assets for which there
is no readily available market value include:
stocks, bonds, and other securities and
instruments for which there is no established
market on a stock exchange, in an
over-the-counter market, or otherwise; real
property; tangible personal property; and
artwork and other collectibles; and
(8) any other administrative matters as the trustee
determines necessary or helpful for the proper
functioning of the total return trust.
(f) Allocations.
(1) Expenses, taxes, and other charges that would
be deducted from income if the trust were not a total
return trust shall not be deducted from the distribution
amount.
(2) Unless otherwise provided by the governing
instrument, the trustee shall fund the distribution
amount each year from the following sources for that year
in the order listed: first from net income (as the term
would be determined if the trust were not a total return
trust), then from other ordinary income as determined for
federal income tax purposes, then from net realized
short-term capital gains as determined for federal income
tax purposes, then from net realized long-term capital
gains as determined for federal income tax purposes, then
from trust principal comprised of assets for which there
is a readily available market value, and then from other
trust principal.
(g) Court orders. The court may order any of the
following actions in a proceeding brought by a trustee or a
beneficiary in accordance with subdivision (c)(1), (c)(2), or
(c)(3):
(1) select a distribution percentage other than 4%;
(2) average the valuation of the trust's net assets
over a period other than 3 years;
(3) reconvert prospectively from or adjust the
distribution percentage of a total return trust;
(4) direct the distribution of net income
(determined as if the trust were not a total return
trust) in excess of the distribution amount as to any or
all trust assets if the distribution is necessary to
preserve a tax benefit; or
(5) change or direct any administrative procedure
as the court determines necessary or helpful for the
proper functioning of the total return trust.
Nothing in this subsection (g) limits the equitable
powers of the court to grant other relief.
(h) Restrictions. The distribution amount may not be
less than the net income of the trust, determined without
regard to the provisions of this Section, for either a trust
for which an estate tax or a gift tax marital deduction was
or may be claimed in whole or in part (but only during the
lifetime of the spouse for whom the trust was created), or a
trust that was exempt in whole or in part from
generation-skipping transfer tax on the effective date of
this amendatory Act of the 92nd General Assembly by reason of
any effective date or transition rule. Conversion to a total
return trust does not affect any provision in the governing
instrument:
(1) directing or authorizing the trustee to
distribute principal;
(2) directing or authorizing the trustee to
distribute a fixed annuity or a fixed fraction of the
value of trust assets;
(3) authorizing a beneficiary to withdraw a portion
or all of the principal; or
(4) in any manner that would diminish an amount
permanently set aside for charitable purposes under the
governing instrument unless both income and principal are
so set aside.
(i) Tax limitations. If a particular trustee is a
beneficiary of the trust and conversion or failure to convert
would enhance or diminish the beneficial interest of the
trustee, or if possession or exercise of the conversion power
by a particular trustee would alone cause any individual to
be treated as owner of a part of the trust for income tax
purposes or cause a part of the trust to be included in the
gross estate of any individual for estate tax purposes, then
that particular trustee may not participate as a trustee in
the exercise of the conversion power; however:
(1) the trustee may petition the court under
subdivision (c)(1) to order conversion in accordance with
this Section; and
(2) if the trustee has one or more co-trustees to
whom this subsection (i) does not apply, the co-trustee
or co-trustees may convert the trust to a total return
trust in accordance with this Section.
(j) Releases. A trustee may irrevocably release the
power granted by this Section if the trustee reasonably
believes the release is in the best interests of the trust
and its beneficiaries. The release may be personal to the
releasing trustee or may apply generally to some or all
subsequent trustees, and the release may be for any specified
period, including a period measured by the life of an
individual.
(k) 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. 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 convert the trust to a total return trust, to
reconvert from a total return trust, to change the
distribution percentage, or to order any administrative
procedures the court determines necessary or helpful for the
proper functioning of 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. 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. 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 (k), a personal representative refers to a court
appointed guardian or conservator of the estate of a person.
(l) Application. This Section is available to trusts in
existence on the effective date of this amendatory Act of the
92nd General Assembly or created after that date. 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 unless:
(1) the trust is a trust described in Internal
Revenue Code Section 170(f)(2)(B), 664(d), 1361(d),
2702(a)(3), or 2702(b); or
(2) 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 5.3 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.
Section 99. Effective date. This Act takes effect upon
becoming law.
Passed in the General Assembly May 31, 2002.
Approved August 22, 2002.
Effective August 22, 2002.
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