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NWSBA: New Illinois Trust Code: It's Here
20
Illinois Trust Code: It's Here
Definitions
Overview
Why, What and How
Why did the law change?
Why?
- Retains most of the preexisting Illinois law on trusts
- Codifies case law, Restatements and other secondary sources
- Consolidates numerous statutes
- Fills in gaps where there was no preexisting Illinois law
- Adopts a uniform set of definitions
- Increase the efficiency of the trial process
- Expedite the resolution of cases on trial for the benefit of the practicing bar, the judiciary, and the litigants involved.
- Preserves Illinois as a "grantor intent" state
What do I need to know?
Effective Date - January 1, 2020
What?
Section 1506. Application to existing relationships
Except as otherwise provided, the Code applies to all trusts created before, on, or after its effective date.
Application
Judicial Proceedings
- The Code applies to all judicial proceedings concerning trusts commended on or after its effective date.
- Applies to judicial proceedings concerning trusts commenced before its effective date unless the court finds that application of a particular provision would substantially interfere with the effective conduct of the judicial proceedings or prejudice the rights of the parties.
Example: Court proceeding to terminate a trust in 2019
Nonjudicial Proceedings
This Code applies to all nonjudicial matters concerning trusts commenced before, on, or after its effective date.
This includes nonjudicial settlement agreements and the grant of any consent, release, ratification, or indemnification.
How do I change my practice?
How?
Educate yourself
- Read the ITC;
- Attend seminars;
- Read ISBA newsletters and other publications;
- Join the ISBA Trusts and Estates listserve;
- Review the Uniform Law Commission website, Uniform Act and comments
Estate Planning
- Review your existing trusts to determine how the new act affects your trusts;
- Verify that your accounting provision indicates that the trustee only needs to account to the current beneficiary or beneficiaries;
- Do you want a Designated Representative provision in your trusts for beneficiaries under age 30?
- Should the trust provide a current beneficiary a GPOA or a broad LPOA?
- Should the trust limit the ability of beneficiaries to change the trust?
- Make sure you are not trying to modify a provision that you can not modify;
Trust Estate Administration
- Review Section 604, Statute of Limitations and Notice provisions;
- Review trustee duties and powers under Article 8;
- Fiduciary duties;
- Duties to inform and account under Section 813.1 and 813.2
- Other required notices
- Review trustee liability under Article 10
Overview Highlights
- The ITC keeps most of the existing Illinois Trust Code provisions that we are familiar with:
- Nonjudicial settlement agreements;
- Anti-lapse provisions;
- Unitrust conversion;
- Decanting;
- Uniform power of appointment act provisions;
- And adds additional provisions:
- Representative provisions;
- Creation, Modification and Termination provisions;
- Creditors' claims
- Does not change the Illinois Principal and Income Act
Definitions
Current Beneficiary
Current Beneficiary
- On date of qualification is a distributee or permissible distributee of trust income or principal
- Includes the holder of a presently exercisable general power of appointment
Interested Persons
- trustee
- all beneficiaries or their representatives
- trust advisor
- trust protector
- other holder of fiduciary or nonfiduciary material powers (references NJSA Sec. 111)
Interested Persons
Presumptive Remainder Beneficiary
Presumptive Remainder Beneficiary
A beneficiary of a trust, as of the date of determination and assuming nonexercise of all powers of appointment, who either: (A) would be eligible to receive a distribution of income or principal if the trust terminated on that date; or (B) 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.
Qualified Beneficiary
A beneficiary who on the date the beneficiary's qualification is determined:
(A) is a distributee or permissible distributee of trust income or principal
(B) would be a distributee or permissible distributee of trust income or principal if the interests of the distributees described in (A) terminated on that date without causing the trust to terminate; or
Qualified Beneficiary
(C) would be a distributee or permissible distributee of trust income or principal if the trust terminated on that date.
See also 760 ILCS 3/110 relating to pet trusts, purpose trusts or charitable trusts.
Terms of the Trust
(A) The manifestation of the settlor's intent regarding a trusts provisions as
(i) expressed in the trust instrument; or
(ii) established by other evidence that would be admissible in a judicial proceeding; or
(B) the trust's provisions as established, determined, or modified by:
(i) a trustee or other person in accordance with applicable law;
(ii) a court order; or
(iii) a nonjudicial settlement agreement
Terms of the Trust
Default and Mandatory Rules
Section 105. Trust terms prevail over any provision of this Code except:
Default and Mandatory Rules
Section 105. Mandatory Requirements
Specific terms of the trust prevail over any provision of this Code except:
1) Requirements for creating a trust;
2) Duty of a trustee to act in good faith;
3) Trust must have a purpose that is lawful and not contrary to public policy;
4) Rules governing designated representatives;
5) 21-year limitation contained in subsection (a) of Section 409;
6) the power of the court to modify or terminate a trust under Section 411 through 417;
7) the effect of a spendthrift provision and the rights of certain creditors and assignees to reach a trust as provided in Article 5;
Mandatory
Rules
(4) Designated Representative under Section 307
Designated Representative
If specifically nominated in the trust, one or more individuals may be designated to represent and bind an individual who is a qualified beneficiary
(1) Current Beneficiary must not be age 30 or older and not incapacitated.
(2) Designated Representative may not represent and bind a qualified beneficiary while serving as trustee.
(3) If the Designated Representative is also a qualified beneficiary then the DR may only bind a qualified beneficiary if (a) specifically nominated in the trust and (b) the DR is a spouse or grandparent or descendant of a grandparent of the qualified beneficiary or of the qualified beneficiary's spouse.
* Designated Representative is a fiduciary and must act in good faith and in the best interest of the represented qualified beneficiary. Can designated representative receive notice under a Crummey Trust or a 2503(c) trust?
(5) 21-Year Limitation Under Section 409(a)
21-Year Limitation
Noncharitable trust without an ascertainable beneficiary
A trust may be created for a noncharitable purpose without a definite or definitely ascertainable beneficiary or for a noncharitable but otherwise valid purpose to be selected by the trustee, however, the trust may not be enforced for more than 21 years.
(6) Modification/Termination
Modification/Termination
411 - Modification or termination of noncharitable irrevocable trust by consent
412 - Modification or termination because of unanticipated circumstances or inability to administer trust effectively
413 - Cy pres
414 - Modification or termination of uneconomic trust
415 - Reformation to correct mistakes
416 - Modification to achieve settlor's tax objectives
417 - Combination and division of trusts
* Note that the catch-all provision allowing a nonjudicial settlement agreement for any matter that a court would have approved is no longer listed as a matter.
(7) Spendthrift Provisions
Article 5
If a beneficiary's interest is subject to a spendthrift provision, a creditor or assignee of the beneficiary may not reach the interest or a distribution before its receipt by the beneficiary.
Spendthrift/
Creditors
Spendthrift Provision
Is valid only if it prohibits both voluntary and involuntary transfer of a beneficiary's interest and the trust provides that the interest of a beneficiary is held subject to a "spendthrift trust"
Section 503. Exceptions to Spendthrift Provision.
Exceptions
(1) beneficiary's child, spouse, or former spouse who has a judgment or court order for child support;
(2) judgment creditor who has provided services for the protection of a beneficiary's interest in the trust; and
(3) claim of Illinois or the United States to the extent an Illinois statute or federal law provides
Section 504. Discretionary Distributions
Discretionary Distributions
Distribution subject to the trustee's discretion regardless of standard or abuse of the discretion
Even if beneficiary is trustee, creditor may not
(1) compel a distribution subject to discretion; or
(2) obtain a court order attaching present or future distributions to or for the benefit of the beneficiary (except Sec. 2-1403 IL Code of Civil Procedure relating to child support)
Section 505. Creditor's claim against settlor.
Creditor's Claim Against Settlor
During Life
- Revocable Trust is subject to claims of the settlor's creditors
- Irrevocable Trust is subject to claims of settlor's creditors to the extent settlor may receive distributions (exception for first party special needs trusts)
After Death
- Revocable Trust is subject to claims of settlor's creditors, costs of administration, funeral expenses and disposition of remains and statutory allowances of surviving spouse and children to the extent the probate estate is inadequate
- Sections 755 ILCS 18-10 and 755 ILCS 18-13 classification and priority of claims apply to revocable trusts
Trustee Release
After death a trustee of a trust that was revocable at the settlor's death is released from liability under Section 505 for any assets distributed to the trust's beneficiaries if:
(A) Distribution is made 6 months or later after death; and
(B) Trustee did not receive written notice that the probate estate was insufficient to pay claims or if received notice, the notice was withdrawn or revoked by the court
Section 105. Mandatory Requirements
Specific terms of the trust prevail over any provision of this Code except:
8) Agent under a power of attorney for property must have express authorization to exercise a settlor's powers over a revocable trust;
9) The power of the court to adjust a trustee's compensation specified in the trust that is unreasonably low or high;
10) Trustee's duty under 813.1(b)(1) to provide information to the qualified beneficiaries;
11) Trustee's duty under 813.1 (b)(2) to provide accountings to the current beneficiaries;
12) Trustee's duty under 813.1 (b)(4) to provide accountings to beneficiaries receiving a distribution of the residue of the trust upon a trust's termination;
13) The effect of an exculpatory term under Section 1008;
14) The rights of a person other than a trustee or beneficiary under Sections 1010 through 1013; and
15) The power of the court to take such action and exercise such jurisdiction as may be necessary in the interests of equity.
Mandatory
Rules
Article 10. Liability of Trustees and Rights of Persons Dealing with Trustee
Liability of Trustees and Rights of Persons Dealing with Trustee
Remedies and Damages for breach of trust
A violation by a trustee of a duty the trustee owes to a beneficiary is a breach of trust.
Remedies and Damages for breach of trust
Article 10: Remedies for breach of trust
Remedies
The court may:
(1) compel the trustee to perform the trustee's duties;
(2) enjoin the trustee from committing a breach of trust;
(3) compel the trustee to redress a breach of trust by paying money, restoring property, or other means;
(4) order a trustee to account;
(5) appoint a special fiduciary to take possession of the trust property and administer the trust;
(6) suspend the trustee;
(7) remove the trustee as provided in Section 706;
(8) reduce or deny compensation to the trustee; or
(9) subject to Section 1012, void an act of the trustee, impose a lien or constructive trust on trust property, or trace trust property wrongfully disposed of and recover the property or its proceeds.
Section 1002. Damages for breach of trust
Damages
A trustee who commits a breach is liable to the beneficiaries affected for the greater of:
(1) the amount required to restore the value of the trust property and trust distributions to what they would have been had the breach not occurred; or
(2) the value of any benefit received by the trustee by reason of the breach.
A trustee trustee not acting in bad faith, with reckless indifference and not benefiting from the breach may be entitled to contribution from another trustee liable for the breach.
Section 1003. No damages in absence of breach
No damages in absence of breach
Absent a breach of trust, a trustee is not liable to a beneficiary for a loss or depreciation in the value of trust property...
Section 1004. The court may award costs and expenses, including reasonable attorney's fees, to any party, to be paid by another party or from the trust.
Limitation on action against trustee
A beneficiary may not commence a proceeding against a trustee for breach of trust for any matter adequately disclosed in writing by a trust accounting.
Limitation on action against trustee
Any claim not otherwise barred must be filed within 5 Years of the first to occur of:
- Resignation/removal/death of trustee
- Termination of B's interest
- Trust termination
Trust irrevocable before 1/1/1988
- 5 years or
- 10 years after accounting
Trust irrevocable after 1/1/2020
- 2 Years
Trust irrevocable before 1/1/2020 - 3 Years
Reliance, Events and Exculpation
Reliance, Events and Exculpation
Reliance. A trustee who acts in reasonable reliance on the trust is not liable for a breach.
Event. A trustee who has exercised reasonable care to ascertain the happening of an event is not liable for a loss resulting from the trustee's lack of knowledge
Exculpation (Mandatory). Unenforceable if it relieves trustee of liability for bad faith or with reckless indifference to the purpose of the trust.
Beneficiary Consent
Beneficiary Consent
A trustee is not liable to a beneficiary for breach of trust if the beneficiary consented to the conduct, released the trustee from liability or ratified the transaction unless the consent, release or ratification was induced by improper conduct or the beneficiary did not know of the beneficiary's rights or of the material facts relating to the breach.
If the consent, release or ratification involves self-dealing, then the transaction must have been fair and reasonable and the beneficiary must be represented by independent counsel.
Section 105. Mandatory Requirements
Specific terms of the trust prevail over any provision of this Code except:
8) Agent under a power of attorney for property must have express authorization to exercise a settlor's powers over a revocable trust;
9) The power of the court to adjust a trustee's compensation specified in the trust that is unreasonably low or high;
10) Trustee's duty under 813.1(b)(1) to provide information to the qualified beneficiaries;
11) Trustee's duty under 813.1 (b)(2) to provide accountings to the current beneficiaries;
12) Trustee's duty under 813.1 (b)(4) to provide accountings to beneficiaries receiving a distribution of the residue of the trust upon a trust's termination;
13) The effect of an exculpatory term under Section 1008;
14) The rights of a person other than a trustee or beneficiary under Sections 1010 through 1013; and
15) The power of the court to take such action and exercise such jurisdiction as may be necessary in the interests of equity.
Mandatory
Rules
(14) Rights under Section 1010 through 1013 of a person other than a trustee or beneficiary
Rights of other persons
Section 1010. Limitation on personal liability of trustee.
Section 1011. Interest as general partner.
Section 1012. Protection of person dealing with trustee.
Section 1013. Certification of trust.
Revocable Trusts
Article 6
Revocable Trusts
Capacity Issues
Capacity
Issues
Testamentary Capacity
The capacity required to create, amend, or revoke a trust is the same as required to make a will.
Generally, this requires the following:
1. Settlor had the ability to know the nature and extent of his property;
2. Settlor had the ability to know the natural objects of his bounty; and
3. Settlor had the ability to make a disposition of his property in accordance with some sort of plan formed in his mind.
Revocable/Amendable
A trust is revocable only if trust expressly provides that the trust is revocable or that the settlor has an unrestricted power of amendment.
(Mandatory) An agent under a power of attorney for property may only amend a trust if the power of attorney specifically authorizes the power and it's not prohibited by the trust.
A guardian may not amend a trust unless ordered by the guardianship court.
Section 604. Trust Contest - Statute of Limitations
Trust Contest
A person may commence a judicial proceeding to contest a trust that was revocable at the settlor's death at the earlier of:
(1) Two years after settlor's date of death; or
(2)(A) If there is a will admitted to probate that flows into the trust, then the time to contest the settlor's will (generally 6 months after publication of notice); or
(B) If a trust other than a trust described in section (A) then six months after
- trustee sends a copy of the trust
- notice informing of the trust's existence
- trustee's name and address
- notice of the six month period for commencing a proceeding
Nine months after death, trustee may distribute without liability unless:
- trustee knows of pending judicial proceeding or
- a potential contestant has notified trustee of a possible judicial
proceeding to contest the trust and a proceeding is commenced within
60 days of the notice
Divorce/Annulment
Divorce/Annulment
Unless the trust or the judgment of marital dissolution provides otherwise:
Divorce revokes all revocable provisions in the trust pertaining to the former spouse
Provisions may be revived by remarriage to former spouse
Powers and Duties of Trustee
Duties and Powers of Trustee
Duty of Loyalty
Outlines specific conflicts with transactions and investments.
Duty of Loyalty
Duty of Impartiality
Trustee must treat the beneficiaries equitably in light of the purposes and terms of the trust.
Duty of Impartiality
807. Delegation by Trustee
Delegation by Trustee
A trustee may delegate duties and powers that a prudent trustee of comparable skills could properly delegate under the circumstances. The trustee shall exercise reasonable care, skill and caution in
(1) selecting an agent;
(2) establishing the scope and terms; and
(3) periodically reviewing the agent's actions.
Trustee who complies with 1 - 3 is not liable to the beneficiaries for the delegated actions.
Directed Trusts
(1) Distribution Trust Advisor
(4) Investment Trust Advisor
(6) Trust Protector
Adds the requirement that the directing party provide notices to trust beneficiaries.
Section 813.1. Duty to Inform and Account
After Effective Date
Duty to Inform and Account
*Only applies to trusts becoming irrevocable 1/1/20 or later and
to trusts where the trustee accepts appointment 1/1/20 or later.
Section 105. Mandatory Requirements
Specific terms of the trust prevail over any provision of this Code except:
8) Agent under a power of attorney for property must have express authorization to exercise a settlor's powers over a revocable trust;
9) The power of the court to adjust a trustee's compensation specified in the trust that is unreasonably low or high;
10) Trustee's duty under 813.1(b)(1) to provide information to the qualified beneficiaries;
11) Trustee's duty under 813.1 (b)(2) to provide accountings to the current beneficiaries;
12) Trustee's duty under 813.1 (b)(4) to provide accountings to beneficiaries receiving a distribution of the residue of the trust upon a trust's termination;
13) The effect of an exculpatory term under Section 1008;
14) The rights of a person other than a trustee or beneficiary under Sections 1010 through 1013; and
15) The power of the court to take such action and exercise such jurisdiction as may be necessary in the interests of equity.
Mandatory
Rules
General Principals #1
(Mandatory Provision)
General Principals #1
(b)(1) the trustee shall notify each qualified beneficiary of the:
(A) trust's existence;
(B) beneficiary's right to request a copy of the trust; and
(C) whether the beneficiary has a right to receive or request trust accountings
within 90 days of trust becoming irrevocable or acceptance of trusteeship
General Principals #2
(Mandatory Provision)
General Principals #2
(2) A trustee shall send at least
annually a trust accounting to
all current beneficiaries.
(distributee or permissible distributee of trust income or principal)
General Principals #3
(3) A trustee shall send at least annually a trust accounting to all presumptive remainder beneficiaries.
Note that this is not a mandatory provision and therefore may be modified by the trust agreement. Note also that under 760 ILCS 3/302, notice to the holder of a power of appointment may be sufficient notice.
Example: Marital Trust
- principal distributions (conflict)
- accounting with only income distributions (no conflict)
General Principals #4
(Mandatory Provision)
General Principals #4
(4) Upon termination of a trust, a trustee shall send a trust accounting to all beneficiaries entitled to receive a distribution of the residue of the trust.
General Principals #5
(5) A trustee may provide notice, information, trust accountings, or reports to any beneficiary regardless of whether required.
General Principals #6
(6) Upon the reasonable request of a qualified beneficiary, the trustee shall promptly furnish to the qualified beneficiary a complete copy of the trust instrument.
Question: Does this provision entitle a specific legatee to a complete copy of the trust or is this unreasonable?
General Principals #7
(7) A trustee is deemed to have fully and completely discharged the trustee's duties if the trustee provides the notice required and accounting required under the general principals 1 through 4.
Other Required Notices
A trustee shall:
(A) within 90 days after accepting a trusteeship, notify each qualified beneficiary of the acceptance and of the trustee's name, address and telephone number;
(B) notify each qualified beneficiary of any change in rate of or method of determining the trustee's compensation; and
(C) notify each qualified beneficiary of the trustee's resignation.
(2) In the event of the incapacity, death, disqualification, or removal of any trustee, a trustee shall provide notice to the qualified beneficiary within 90 days after the event along with any change in the address, telephone number, or other contact information for the trustee.