Sen. John J. Cullerton

Filed: 5/12/2004

 

 


 

 


 
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1
AMENDMENT TO HOUSE BILL 1080

2     AMENDMENT NO. ______. Amend House Bill 1080, AS AMENDED, by
3 replacing the introductory clause of Section 5 with the
4 following:
 
5     "Section 5. The Trusts and Trustees Act is amended by
6 changing Section 5.3 and adding Section 5.5 as follows:
 
7     (760 ILCS 5/5.3)
8     Sec. 5.3. Total return trusts.
9     (a) Conversion by trustee. A trustee may convert a trust to
10 a total return trust as described in this Section if all of the
11 following apply:
12         (1) The trust describes the amount that may or must be
13     distributed to a beneficiary by referring to the trust's
14     income, and the trustee determines that conversion to a
15     total return trust will enable the trustee to better carry
16     out the purposes of the trust and the conversion is in the
17     best interests of the beneficiaries;
18         (2) conversion to a total return trust means the
19     trustee will invest and manage trust assets seeking a total
20     return without regard to whether that return is from income
21     or appreciation of principal, and will make distributions
22     in accordance with this Section (such a trust is called a
23     "total return trust" in this Section);
24         (3) the trustee sends a written notice of the trustee's

 

 

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1     decision to convert the trust to a total return trust,
2     specifying a prospective effective date for the conversion
3     and including a copy of this Section, to the following
4     beneficiaries, determined as of the date the notice is sent
5     and assuming nonexercise of all powers of appointment:
6             (A) all of the legally competent beneficiaries who
7         are currently receiving or eligible to receive income
8         from the trust; and
9             (B) all of the legally competent beneficiaries who
10         would receive or be eligible to receive a distribution
11         of principal or income if the current interests of
12         beneficiaries currently receiving or eligible to
13         receive income ended;
14         (4) there are one or more legally competent income
15     beneficiaries under subdivision (3)(A) of this subsection
16     (a) and one or more legally competent remainder
17     beneficiaries under subdivision (3)(B) of this subsection
18     (a), determined as of the date of sending the notice;
19         (5) no beneficiary objects to the conversion to a total
20     return trust in a writing delivered to the trustee within
21     60 days after the notice is sent; and
22         (6) the trustee has signed acknowledgments of receipt
23     confirming that notice was received by each beneficiary
24     required to be sent notice under subdivision (3) of this
25     subsection (a).
26     (b) Conversion by agreement. Conversion to a total return
27 trust may be made by agreement between a trustee and all the
28 primary beneficiaries of the trust under the virtual
29 representation provisions of Section 16.1 of this Act if those
30 provisions otherwise apply. The agreement may include any
31 actions a court could properly order under subsection (g) of
32 this Section; however, any distribution percentage determined
33 by the agreement may not be less than 3% nor greater than 5%.
34     (c) Conversion or reconversion by court.

 

 

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1         (1) The trustee may for any reason elect to petition
2     the court to order conversion to a total return trust,
3     including without limitation the reason that conversion
4     under subsection (a) is unavailable because:
5             (A) a beneficiary timely objects to the conversion
6         to a total return trust;
7             (B) there are no legally competent beneficiaries
8         described in subdivision (3)(A) of subsection (a); or
9             (C) there are no legally competent beneficiaries
10         described in subdivision (3)(B) of subsection (a).
11         (2) A beneficiary may request the trustee to convert to
12     a total return trust or adjust the distribution percentage.
13     If the trustee declines or fails to act within 6 months
14     after receiving a written request to do so, the beneficiary
15     may petition the court to order the conversion or
16     adjustment.
17         (3) The trustee may petition the court prospectively to
18     reconvert from a total return trust or adjust the
19     distribution percentage if the trustee determines that the
20     reconversion or adjustment will enable the trustee to
21     better carry out the purposes of the trust. A beneficiary
22     may request the trustee to petition the court prospectively
23     to reconvert from a total return trust or adjust the
24     distribution percentage. If the trustee declines or fails
25     to act within 6 months after receiving a written request to
26     do so, the beneficiary may petition the court to order the
27     reconversion or adjustment.
28         (4) In a judicial proceeding under this subsection (c),
29     the trustee may, but need not, present the trustee's
30     opinions and reasons (A) for supporting or opposing
31     conversion to (or reconversion from or adjustment of the
32     distribution percentage of) a total return trust,
33     including whether the trustee believes conversion (or
34     reconversion or adjustment of the distribution percentage)

 

 

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1     would enable the trustee to better carry out the purposes
2     of the trust, and (B) about any other matters relevant to
3     the proposed conversion (or reconversion or adjustment of
4     the distribution percentage). A trustee's actions in
5     accordance with this subsection (c) shall not be deemed
6     improper or inconsistent with the trustee's duty of
7     impartiality unless the court finds from all the evidence
8     that the trustee acted in bad faith.
9         (5) The court shall order conversion to (or
10     reconversion prospectively from or adjustment of the
11     distribution percentage of) a total return trust if the
12     court determines that the conversion (or reconversion or
13     adjustment of the distribution percentage) will enable the
14     trustee to better carry out the purposes of the trust and
15     the conversion (or reconversion or adjustment of the
16     distribution percentage) is in the best interests of the
17     beneficiaries.
18         (6) Notwithstanding any other provision of this
19     Section, a trustee has no duty to inform beneficiaries
20     about the availability of this Section and has no duty to
21     review the trust to determine whether any action should be
22     taken under this Section unless requested to do so in
23     writing by a beneficiary described in subdivision (3) of
24     subsection (a).
25     (d) Post conversion. While a trust is a total return trust,
26 all of the following shall apply to the trust:
27         (1) the trustee shall make income distributions in
28     accordance with the governing instrument subject to the
29     provisions of this Section;
30         (2) the term "income" in the governing instrument means
31     an annual amount (the "distribution amount") equal to a
32     percentage (the "distribution percentage") of the net fair
33     market value of the trust's assets, whether the assets are
34     considered income or principal under the Principal and

 

 

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1     Income Act, averaged over the lesser of:
2             (i) the 3 preceding years; or
3             (ii) the period during which the trust has been in
4         existence;
5         (3) the distribution percentage for any trust
6     converted to a total return trust by a trustee in
7     accordance with subsection (a) shall be 4%; and
8         (4) the trustee shall pay to a beneficiary (in the case
9     of an underpayment) and shall recover from a beneficiary
10     (in the case of an overpayment) an amount equal to the
11     difference between the amount properly payable and the
12     amount actually paid, plus interest compounded annually at
13     a rate per annum equal to the distribution percentage in
14     the year or years while the underpayment or overpayment
15     exists; and .
16         (5) a change in the method of determining a reasonable
17     current return by converting to a total return trust in
18     accordance with this Section and substituting the
19     distribution amount for net trust accounting income is a
20     proper change in the definition of trust income
21     notwithstanding any contrary provision of the Principal
22     and Income Act, and the distribution amount shall be deemed
23     a reasonable current return that fairly apportions the
24     total return of a total return trust.
25     (e) Administration. The trustee, in the trustee's
26 discretion, may determine any of the following matters in
27 administering a total return trust as the trustee from time to
28 time determines necessary or helpful for the proper functioning
29 of the trust:
30         (1) the effective date of a conversion to a total
31     return trust;
32         (2) the manner of prorating the distribution amount for
33     a short year in which a beneficiary's interest commences or
34     ceases;

 

 

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1         (3) whether distributions are made in cash or in kind;
2         (4) the manner of adjusting valuations and
3     calculations of the distribution amount to account for
4     other payments from or contributions to the trust;
5         (5) whether to value the trust's assets annually or
6     more frequently;
7         (6) what valuation dates and how many valuation dates
8     to use;
9         (7) valuation decisions about any asset for which there
10     is no readily available market value, including:
11             (A) how frequently to value such an asset;
12             (B) whether and how often to engage a professional
13         appraiser to value such an asset; and
14             (C) whether to exclude the value of such an asset
15         from the net fair market value of the trust's assets
16         under subdivision (d)(2) for purposes of determining
17         the distribution amount. Any such asset so excluded is
18         referred to as an "excluded asset" in this subsection
19         (e), and the trustee shall distribute any net income
20         received from the excluded asset as provided for in the
21         governing instrument, subject to the following
22         principles:
23                 (i) unless the trustee determines there are
24             compelling reasons to the contrary considering all
25             relevant factors including the best interests of
26             the beneficiaries, the trustee shall treat each
27             asset for which there is no readily available
28             market value as an excluded asset;
29                 (ii) if tangible personal property or real
30             property is possessed or occupied by a
31             beneficiary, the trustee shall not limit or
32             restrict any right of the beneficiary to use the
33             property in accordance with the governing
34             instrument whether or not the trustee treats the

 

 

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1             property as an excluded asset;
2                 (iii) examples of assets for which there is a
3             readily available market value include: cash and
4             cash equivalents; stocks, bonds, and other
5             securities and instruments for which there is an
6             established market on a stock exchange, in an
7             over-the-counter market, or otherwise; and any
8             other property that can reasonably be expected to
9             be sold within one week of the decision to sell
10             without extraordinary efforts by the seller;
11                 (iv) examples of assets for which there is no
12             readily available market value include: stocks,
13             bonds, and other securities and instruments for
14             which there is no established market on a stock
15             exchange, in an over-the-counter market, or
16             otherwise; real property; tangible personal
17             property; and artwork and other collectibles; and
18         (8) any other administrative matters as the trustee
19     determines necessary or helpful for the proper functioning
20     of the total return trust.
21     (f) Allocations.
22         (1) Expenses, taxes, and other charges that would be
23     deducted from income if the trust were not a total return
24     trust shall not be deducted from the distribution amount.
25         (2) Unless otherwise provided by the governing
26     instrument, the trustee shall fund the distribution amount
27     each year from the following sources for that year in the
28     order listed: first from net income (as the term would be
29     determined if the trust were not a total return trust),
30     then from other ordinary income as determined for federal
31     income tax purposes, then from net realized short-term
32     capital gains as determined for federal income tax
33     purposes, then from net realized long-term capital gains as
34     determined for federal income tax purposes, then from trust

 

 

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1     principal comprised of assets for which there is a readily
2     available market value, and then from other trust
3     principal.
4     (g) Court orders. The court may order any of the following
5 actions in a proceeding brought by a trustee or a beneficiary
6 in accordance with subdivision (c)(1), (c)(2), or (c)(3):
7         (1) select a distribution percentage other than 4%;
8         (2) average the valuation of the trust's net assets
9     over a period other than 3 years;
10         (3) reconvert prospectively from or adjust the
11     distribution percentage of a total return trust;
12         (4) direct the distribution of net income (determined
13     as if the trust were not a total return trust) in excess of
14     the distribution amount as to any or all trust assets if
15     the distribution is necessary to preserve a tax benefit; or
16         (5) change or direct any administrative procedure as
17     the court determines necessary or helpful for the proper
18     functioning of the total return trust.
19     Nothing in this subsection (g) limits the equitable powers
20 of the court to grant other relief.
21     (h) Restrictions. The distribution amount may not be less
22 than the net income of the trust, determined without regard to
23 the provisions of this Section, for either a trust for which an
24 estate tax or a gift tax marital deduction was or may be
25 claimed in whole or in part (but only during the lifetime of
26 the spouse for whom the trust was created), or a trust that was
27 exempt in whole or in part from generation-skipping transfer
28 tax on the effective date of this amendatory Act of the 92nd
29 General Assembly by reason of any effective date or transition
30 rule. Conversion to a total return trust does not affect any
31 provision in the governing instrument:
32         (1) directing or authorizing the trustee to distribute
33     principal;
34         (2) directing or authorizing the trustee to distribute

 

 

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1     a fixed annuity or a fixed fraction of the value of trust
2     assets;
3         (3) authorizing a beneficiary to withdraw a portion or
4     all of the principal; or
5         (4) in any manner that would diminish an amount
6     permanently set aside for charitable purposes under the
7     governing instrument unless both income and principal are
8     so set aside.
9     (i) Tax limitations. If a particular trustee is a
10 beneficiary of the trust and conversion or failure to convert
11 would enhance or diminish the beneficial interest of the
12 trustee, or if possession or exercise of the conversion power
13 by a particular trustee would alone cause any individual to be
14 treated as owner of a part of the trust for income tax purposes
15 or cause a part of the trust to be included in the gross estate
16 of any individual for estate tax purposes, then that particular
17 trustee may not participate as a trustee in the exercise of the
18 conversion power; however:
19         (1) the trustee may petition the court under
20     subdivision (c)(1) to order conversion in accordance with
21     this Section; and
22         (2) if the trustee has one or more co-trustees to whom
23     this subsection (i) does not apply, the co-trustee or
24     co-trustees may convert the trust to a total return trust
25     in accordance with this Section.
26     (j) Releases. A trustee may irrevocably release the power
27 granted by this Section if the trustee reasonably believes the
28 release is in the best interests of the trust and its
29 beneficiaries. The release may be personal to the releasing
30 trustee or may apply generally to some or all subsequent
31 trustees, and the release may be for any specified period,
32 including a period measured by the life of an individual.
33     (k) Remedies. A trustee who reasonably and in good faith
34 takes or omits to take any action under this Section is not

 

 

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1 liable to any person interested in the trust. If a trustee
2 reasonably and in good faith takes or omits to take any action
3 under this Section and a person interested in the trust opposes
4 the act or omission, the person's exclusive remedy is to obtain
5 an order of the court directing the trustee to convert the
6 trust to a total return trust, to reconvert from a total return
7 trust, to change the distribution percentage, or to order any
8 administrative procedures the court determines necessary or
9 helpful for the proper functioning of the trust. An act or
10 omission by a trustee under this Section is presumed taken or
11 omitted reasonably and in good faith unless it is determined by
12 the court to have been an abuse of discretion. Any claim by any
13 person interested in the trust that an act or omission by a
14 trustee under this Section was an abuse of discretion is barred
15 if not asserted in a proceeding commenced by or on behalf of
16 the person within 2 years after the trustee has sent to the
17 person or the person's personal representative a notice or
18 report in writing sufficiently disclosing facts fundamental to
19 the claim such that the person knew or reasonably should have
20 known of the claim. The preceding sentence shall not apply to a
21 person who was under a legal disability at the time the notice
22 or report was sent and who then had no personal representative.
23 For purposes of this subsection (k), a personal representative
24 refers to a court appointed guardian or conservator of the
25 estate of a person.
26     (l) Application. This Section is available to trusts in
27 existence on the effective date of this amendatory Act of the
28 92nd General Assembly or created after that date. This Section
29 shall be construed as pertaining to the administration of a
30 trust and shall be available to any trust that is administered
31 in Illinois under Illinois law or that is governed by Illinois
32 law with respect to the meaning and effect of its terms unless:
33         (1) the trust is a trust described in Internal Revenue
34     Code Section 642(c)(5), 170(f)(2)(B), 664(d), 1361(d),

 

 

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1     2702(a)(3), or 2702(b); or
2         (2) the governing instrument expressly prohibits use
3     of this Section by specific reference to this Section. A
4     provision in the governing instrument in the form: "Neither
5     the provisions of Section 5.3 of the Trusts and Trustees
6     Act nor any corresponding provision of future law may be
7     used in the administration of this trust" or a similar
8     provision demonstrating that intent is sufficient to
9     preclude the use of this Section.
10     (m) Application to express trusts.
11         (1) This subsection (m) does not apply to a charitable
12     remainder unitrust as defined by Section 664(d), Internal
13     Revenue Code of 1986 (26 U.S.C. Section 664), as amended.
14         (2) In this subsection (m):
15             (A) "Unitrust" means a trust the terms of which
16         require distribution of a unitrust amount, without
17         regard to whether the trust has been converted to a
18         total return trust in accordance with this Section or
19         whether the trust is established by express terms of
20         the governing instrument.
21             (B) "Unitrust amount" means an amount equal to a
22         percentage of a trust's assets that may or must be
23         distributed to one or more beneficiaries annually in
24         accordance with the terms of the trust. The unitrust
25         amount may be determined by reference to the net fair
26         market value of the trust's assets as of a particular
27         date or as an average determined on a multiple year
28         basis.
29         (3) A unitrust changes the definition of income by
30     substituting the unitrust amount for net trust accounting
31     income as the method of determining current return and
32     shall be given effect notwithstanding any contrary
33     provision of the Principal and Income Act. By way of
34     example and not limitation, a unitrust amount determined by

 

 

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1     a percentage of not less than 3% nor greater than 5% is
2     conclusively presumed a reasonable current return that
3     fairly apportions the total return of a unitrust.
4         (4) The allocations provision of subdivision (2) of
5     subsection (f) of Section 5.3 applies to a unitrust except
6     to the extent its governing instrument expressly provides
7     otherwise.
8 (Source: P.A. 92-838, eff. 8-22-02.)
 
9     (760 ILCS 5/5.5 new)
10     Sec. 5.5. Gift to a deceased beneficiary under an inter
11 vivos trust. Unless the settlor expressly provides otherwise in
12 his or her trust:
13         (1) if a gift of a present or future interest is to a
14     descendant of the settlor who dies before or after the
15     settlor, the descendants of the deceased beneficiary
16     living when the gift is to take effect in possession or
17     enjoyment take per stirpes the gift so bequeathed;
18         (2) if a gift of a present or future interest is to a
19     class and any member of the class dies before or after the
20     settlor, the members of the class living when the gift is
21     to take effect in possession or enjoyment take the share or
22     shares that the deceased member would have taken if he or
23     she were then living, except that, if the deceased member
24     of the class is a descendant of the settlor, the
25     descendants of the deceased member then living shall take
26     per stirpes the share or shares that the deceased member
27     would have taken if he or she were then living; and
28         (3) except as above provided in items (1) and (2), if
29     the gift is not to a descendant of the settlor or is not to
30     a class as provided in items (1) and (2) and if the
31     beneficiary dies either before or after the settlor and
32     before the gift is to take effect in possession or
33     enjoyment, then the gift shall lapse. If the gift lapses by

 

 

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1     reason of the death of the beneficiary before the gift is
2     to take possession or enjoyment, then the gift so given
3     shall be included in and pass as part of the residue of the
4     trust under the trust. If the gift is or becomes part of
5     the residue, the gift so bequeathed shall pass to and be
6     taken by the beneficiaries remaining, if any, of the
7     residue in proportions and upon trusts corresponding to
8     their respective interests in the residue of the trust.
9     The provisions of items (1) and (2) do not apply to a
10 future interest that is or becomes indefeasibly vested at the
11 settlor's death or at any time thereafter before it takes
12 effect in possession or enjoyment.
13     The provisions of this Section apply on and after January
14 1, 2005 for any gifts to a deceased beneficiary under an inter
15 vivos trust where the deceased beneficiary dies after January
16 1, 2005 and before the gift is to take effect in possession or
17 enjoyment.
 
18     Section 10. The Uniform TOD Security Registration Act is
19 amended by changing Section 1 as follows:".