SB1294 97TH GENERAL ASSEMBLY

LRB097 00144 AJO 47196 b

97TH GENERAL ASSEMBLY
State of Illinois
2011 and 2012
SB1294

Introduced 2/8/2011, by Sen. Kirk W. Dillard

SYNOPSIS AS INTRODUCED:

760 ILCS 5/16.3 new
760 ILCS 5/16.4 new
760 ILCS 5/16.5 new
760 ILCS 5/16.6 new
760 ILCS 5/16.7 new

Amends the Trusts and Trustees Act. Adds provisions authorizing an investment trust advisor, distribution trust advisor, and trust protector to be designated in the governing instrument of a trust. Adds provisions concerning the powers of an authorized trustee who has the absolute discretion to invade the principal of a trust. Adds provisions authorizing establishment of a Domestic Asset Protection Trust. Adds provisions concerning the modification or termination of an irrevocable trust. Contains provisions concerning definitions, conditions and requirements, applicability, and other matters. Effective immediately.

A BILL FOR

AN ACT concerning civil law.

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 Sections 16.3, 16.4, 16.5, 16.6, and 16.7 as follows:

(760 ILCS 5/16.3 new)

Sec. 16.3. Directed trusts.

(a) Definitions. In this Section:

(1) "Directing party" means any investment trust advisor, distribution trust advisor, or trust protector as provided in this Section.

(2) "Distribution trust advisor" means any one or more persons given authority by the governing instrument to direct, consent to, veto, or otherwise exercise all or any portion of the distribution powers and discretions of the trust, including but not limited to authority to make discretionary distribution of income or principal.

(3) "Excluded fiduciary" means any fiduciary that by the governing instrument is directed to act in accordance with the exercise of specified powers by a directing party, in which case such specified powers shall be deemed granted not to the fiduciary but to the directing party and such fiduciary shall be deemed excluded from exercising such specified powers. If a governing instrument provides that a fiduciary as to one or more specified matters is to act, omit action, or make decisions only with the consent of a directing party, then such fiduciary is an excluded fiduciary with respect to such matters.

(4) "Fiduciary" means any person expressly given one or more fiduciary duties by the governing instrument, including but not limited to a trustee.

(5) "Governing instrument" refers to the instrument stating the terms of a trust, including but not limited to any court order or nonjudicial settlement agreement establishing, construing, or modifying the terms of the trust in accordance with Section 16.1, 16.4, or 16.6 or other applicable law.

(6) "Investment trust advisor" means any one or more persons given authority by the governing instrument to direct, consent to, veto, or otherwise exercise all or any portion of the investment powers of the trust.

(7) "Power" means authority to take or withhold an action or decision, including but not limited to an expressly specified power, the implied power necessary to exercise a specified power, and authority inherent in a general grant of discretion.

(8) "Trust protector" means any one or more persons given any one or more of the powers specified in subsection (d), whether or not designated with the title of trust protector by the governing instrument.

(b) Powers of investment trust advisor. An investment trust advisor may be designated in the governing instrument of a trust. The powers of an investment trust advisor may be exercised or not exercised in the sole and absolute discretion of the investment trust advisor, and are binding on all other persons, including but not limited to each beneficiary, fiduciary, excluded fiduciary, and any other party having an interest in the trust. The governing instrument may use the title "investment trust advisor" or any similar name or description demonstrating the intent to provide for the office and function of an investment trust advisor. Unless the terms of the governing instrument provide otherwise, the investment trust advisor has the authority to:

(1) direct the trustee with respect to the retention, purchase, transfer, assignment, sale, or encumbrance of trust property and the investment and reinvestment of principal and income of the trust;

(2) direct the trustee with respect to all management, control, and voting powers related directly or indirectly to trust assets, including but not limited to voting proxies for securities held in trust;

(3) select and determine reasonable compensation of one or more advisors, managers, consultants, or counselors, including the trustee, and to delegate to them any of the powers of the investment trust advisor in accordance with subsection (b) of Section 5.1; and

(4) determine the frequency and methodology for valuing any asset for which there is no readily available market value.

(c) Powers of distribution trust advisor. A distribution trust advisor may be designated in the governing instrument of a trust. The powers of a distribution trust advisor may be exercised or not exercised in the sole and absolute discretion of the distribution trust advisor, and are binding on all other persons, including but not limited to each beneficiary, fiduciary, excluded fiduciary, and any other party having an interest in the trust. The governing instrument may use the title "distribution trust advisor" or any similar name or description demonstrating the intent to provide for the office and function of a distribution trust advisor. Unless the terms of the governing instrument provide otherwise, the distribution trust advisor has authority to direct the trustee with regard to all decisions relating directly or indirectly to discretionary distributions to or for one or more beneficiaries.

(d) Powers of trust protector. A trust protector may be designated in the governing instrument of a trust. The powers of a trust protector may be exercised or not exercised in the sole and absolute discretion of the trust protector, and are binding on all other persons, including but not limited to each beneficiary, investment trust advisor, distribution trust advisor, fiduciary, excluded fiduciary, and any other party having an interest in the trust. The governing instrument may use the title "trust protector" or any similar name or description demonstrating the intent to provide for the office and function of a trust protector. The powers granted to a trust protector by the governing instrument may include but are not limited to authority to do any one or more of the following:

(1) modify or amend the trust instrument to achieve favorable tax status or respond to changes in the Internal Revenue Code, federal laws, State law, or the rulings and regulations under such laws;

(2) increase, decrease, or modify the interests of any beneficiary or beneficiaries of the trust;

(3) modify the terms of any power of appointment granted by the trust; provided, however, such modification or amendment may not grant a beneficial interest to any individual, class of individuals, or other parties not specifically provided for under the trust instrument;

(4) remove, appoint, or remove and appoint, a trustee, investment trust advisor, distribution trust advisor, another directing party, investment committee member, or distribution committee member, including designation of a plan of succession for future holders of any such office;

(5) terminate the trust, including determination of how the trustee shall distribute the trust property to be consistent with the purposes of the trust;

(6) change the situs of the trust, the governing law of the trust, or both;

(7) appoint one or more successor trust protectors, including designation of a plan of succession for future trust protectors;

(8) interpret terms of the trust instrument at the request of the trustee;

(9) advise the trustee on matters concerning a beneficiary; or

(10) amend or modify the trust instrument to take advantage of laws governing restraints on alienation, distribution of trust property, or to improve the administration of the trust.

(e) Duty and liability of directing party. Each directing party is a fiduciary of the trust unless the governing instrument provides otherwise; provided, however, the governing instrument may not exonerate a directing party from the duty to act or withhold acting as the directing party in good faith reasonably believes is in the best interests of the trust. A directing party who the governing instrument specifies is a fiduciary is subject to the same duties and standards that are applicable to a trustee of a trust as provided by applicable law, except to the extent the governing instrument provides otherwise.

(f) Duty and liability of excluded fiduciary. The excluded fiduciary shall act in accordance with the governing instrument and comply with the directing party's exercise of the powers granted to the directing party by the governing instrument. Unless otherwise provided in the governing instrument, an excluded fiduciary has no duty to monitor, review, inquire, investigate, recommend, evaluate, or warn with respect to a directing party's exercise or failure to exercise any power granted to the directing party by the governing instrument, including but not limited to any power related to the acquisition, disposition, retention, management, or valuation of any asset or investment. Except as otherwise provided in this Section or the governing instrument, an excluded fiduciary is not liable, either individually or as a fiduciary, for any action, inaction, consent, or failure to consent by a directing party, including but not limited to any of the following:

(1) if a governing instrument provides that an excluded fiduciary is to follow the direction of a directing party, and such excluded fiduciary acts in accordance with such a direction, then except in cases of willful misconduct on the part of the excluded fiduciary in complying with the direction of the directing party, the excluded fiduciary is not liable for any loss resulting directly or indirectly from following any such direction, including but not limited to compliance regarding the valuation of assets for which there is no readily available market value;

(2) if a governing instrument provides that an excluded fiduciary is to act or omit to act only with the consent of a directing party, then except in cases of willful misconduct on the part of the excluded fiduciary, the excluded fiduciary is not liable for any loss resulting directly or indirectly from any act taken or omitted as a result of such directing party's failure to provide such consent after having been asked to do so by the excluded fiduciary; or

(3) if a governing instrument provides that, or for any other reason, an excluded fiduciary is required to assume the role or responsibilities of a directing party, then except in cases of willful misconduct, the excluded fiduciary is not liable for any loss resulting directly or indirectly from any act taken or omitted in complying with that requirement.

(g) Submission to court jurisdiction; effect on directing party. By accepting an appointment to serve as a directing party of a trust that is subject to the laws of this State, the directing party submits to the jurisdiction of the courts of this State even if investment advisory agreements or other related agreements provide otherwise, and the directing party may be made a party to any action or proceeding if issues relate to a decision or action of the directing party.

(h) Duty to inform excluded fiduciary. Each directing party shall keep the excluded fiduciary and any other directing party reasonably informed regarding the administration of the trust with respect to any specific duty or function being performed by the directing party to the extent that the duty or function would normally be performed by the excluded fiduciary or to the extent that providing such information to the excluded fiduciary or other directing party is reasonably necessary for the excluded fiduciary or other directing party to perform its duties, and the directing party shall provide such information as reasonably requested by the excluded fiduciary or other directing party. Neither the performance nor the failure to perform of a directing party's duty to inform as provided in this subsection affects whatsoever the limitation on the liability of the excluded fiduciary as provided in this Section.

(i) Reliance on counsel. An excluded fiduciary may, but is not required to, obtain and rely upon an opinion of counsel on any matter relevant to this Section.

(j) Applicability. On and after its effective date, this Section applies to:

(1) all existing and future trusts that appoint or provide for a directing party, including but not limited to a party granted power or authority effectively comparable in substance to that of a directing party as provided in this Section; or

(2) any existing or future trust that:

(A) is modified in accordance with applicable law or the terms of the governing instrument to appoint or provide for a directing party; or

(B) is modified to appoint or provide for a directing party, including but not limited to a party granted power or authority effectively comparable in substance to that of a directing party, in accordance with (i) a court order, or (ii) a nonjudicial settlement agreement made in accordance with Section 16.1, whether or not such order or agreement specifies that this Section governs the responsibilities, actions, and liabilities of persons designated as a directing party or excluded fiduciary.

(760 ILCS 5/16.4 new)

Sec. 16.4. Trustee's power to invade principal in trust.

(a) Definitions. In this Section:

(1) "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. A power to invade principal that includes purposes such as best interests, welfare, comfort, or happiness shall constitute absolute discretion.

(2) "Appointed trust" means any irrevocable trust to which principal is appointed in accordance with subsection (b) or (c).

(3) "Authorized trustee" means an entity or individual, other than the settlor, who has authority under the terms of an invaded trust to invade the principal of the trust for the benefit of one or more current beneficiaries.

(4) "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.

(5) "Current beneficiary" or "current beneficiaries" means the person or persons who are currently receiving or eligible to receive distributions of principal or income from the trustee on the date of the exercise of the power.

(6) "Invade" means the power to pay directly to the beneficiary of a trust or make application for the benefit of the beneficiary.

(7) "Invaded trust" means an existing irrevocable inter vivos or testamentary trust part or all of the principal of which is appointed under subsection (b) or (c).

(8) "Limited power of appointment" means the power to appoint the principal or income of the trust to a person or entity other than the trustee, the trustee's creditors, the trustee's estate or the creditors of the trustee's estate.

(9) "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.

(10) "Successor beneficiary" means any beneficiary other than the current and remainder beneficiaries, but does not include a potential appointee of a power of appointment held by a beneficiary.

(b) Appointment to appointed trust if absolute discretion. An authorized trustee who has the absolute discretion to invade the principal of a trust may appoint part or all of the principal of the trust in favor of a trustee of an appointed trust for the benefit of one, more than one, or all of the current beneficiaries of the invaded trust (to the exclusion of any one or more of such beneficiaries) and for the benefit of one, more than one, or all of the remainder and successor beneficiaries of the invaded trust (to the exclusion of any one or more of such beneficiaries).

(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 appointed trust to one or more of the current beneficiaries of the invaded trust, provided that the beneficiary granted a power to appoint could receive the principal outright under the terms of the invaded 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 appointed trust may be broader than or otherwise different from the current, successor, and remainder beneficiaries of the invaded trust.

(3) If the beneficiary or beneficiaries of the invaded trust are described as a class of persons, the beneficiary or beneficiaries of the appointed trust may include one or more persons of such class who become includible in the class after the appointment to the appointed trust.

(c) Appointment to appointed trust if no absolute discretion. An authorized trustee who has the power to invade the principal of a trust, but who does not have the absolute discretion to invade the principal of the trust, may appoint part or all of the principal of the trust in favor of a trustee of an appointed trust, provided that the current beneficiaries of the appointed trust shall be the same as the current beneficiaries of the invaded trust and the remainder and successor beneficiaries of the appointed trust shall be the same as the remainder and successor beneficiaries of the invaded trust.

(1) If the authorized trustee exercises the power under this subsection, the appointed trust shall include the same language authorizing the trustee to invade the income or principal of a trust as specified in the invaded trust.

(2) If the beneficiary or beneficiaries of the invaded trust are described as a class of persons, the beneficiary or beneficiaries of the appointed trust shall include all persons who become includible in the class after the appointment to the appointed trust.

(3) If the authorized trustee exercises the power under this subsection and if the invaded trust grants a power of appointment to a beneficiary of the trust, the appointed trust shall grant such power of appointment in the appointed trust and the class of permissible appointees shall be the same as in the invaded trust.

(d) Limited power of appointment. An authorized trustee's exercise of the power to invade the principal of a trust under subsections (b) and (c) shall be considered the exercise of a limited power of appointment.

(e) Term of appointed trust. The appointed trust to which an authorized trustee appoints the assets of the invaded trust may have a term that is longer than the term specified in the invaded trust, including but not limited to a term measured by the lifetime of a current beneficiary; provided, however, that the appointed trust shall be limited to the same permissible period of the rule against perpetuities that applied to the invaded trust.

(f) Divided discretion. If an authorized trustee has absolute discretion to invade the principal of a trust and the same trustee or another trustee has the power to invade principal under the trust instrument which power does not constitute absolute discretion, such authorized trustee having absolute discretion may exercise the power of appointment under subsection (b).

(g) Need to invade not required. An authorized trustee may exercise the power to appoint in favor of an appointed trust under subsections (b) and (c) whether or not there is a current need to invade principal under the terms of the invaded trust.

(h) Later discovered assets. To the extent the authorized trustee does not provide otherwise:

(1) the appointment of all of the assets comprising the principal of the invaded trust in favor of an appointed trust is deemed to include subsequently discovered assets otherwise belonging to the invaded trust and undistributed principal paid to or acquired by the invaded trust subsequent to the appointment in favor of the appointed trust.

(2) the appointment of part but not all of the assets comprising the principal of the invaded trust in favor of an appointed trust does not include subsequently discovered assets belonging to the invaded trust and principal paid to or acquired by the invaded trust subsequent to the appointment in favor of the appointed trust; such assets remain the assets of the invaded trust.

(i) Other authority to appoint in further trust. This Section shall not be construed to abridge the right of any trustee to appoint property in further trust that arises in accordance with the terms of the governing instrument of a trust, any provision of applicable law, a court order, or a nonjudicial settlement agreement in accordance with Section 16.1.

(j) No duty to invade. Nothing in this Section is intended to create or imply a duty to exercise a power to invade principal, and no inference of impropriety whatsoever is to be made as a result of an authorized trustee not exercising the power conferred under subsection (b) or (c).

(k) Express prohibition. A power authorized by subsection (b) or (c) 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 invaded trust or a provision that constitutes a spendthrift clause does not prohibit or limit the exercise of a power under subsection (b) or (c).

(l) Restrictions. An authorized trustee may not exercise a power authorized by subsection (b) or (c) to effect 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;

(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;

(3) to eliminate a provision granting another person the right to remove or replace the authorized trustee exercising the power under subsection (b) or (c);

(4) to make a binding and conclusive determination of the value of any asset for purposes of distribution, allocation or otherwise; or

(5) to reduce, limit or modify the perpetuities provision specified in the invaded trust in the appointed trust, unless the invaded trust expressly permits the trustee to do so.

(m) Exception. Notwithstanding the provisions of paragraph (1) of subsection (l) but subject to the other limitations in this Section, an authorized trustee may exercise a power authorized by subsection (b) or (c) to appoint to an appointed trust; provided, however, that the exercise of such power does not subject the appointed trust to claims of reimbursement by any private or government body and does not at any time interfere with, reduce the amount of, or jeopardize an individual's entitlement to government benefits, including but not limited to Supplemental Security Income and Medicaid.

(n) Tax limitations. If any contribution to the invaded 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 (b) or (c) for income, gift, estate, or generation-skipping transfer tax purposes under the Code, then the authorized trustee shall not have the power to appoint the principal of a trust in accordance with subsection (b) or (c) in a manner that would prevent the contribution to the invaded 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 other provisions of this subsection (n), the authorized trustee may exercise the power to appoint part or all of the invaded trust to a trust as to which the settlor of the invaded 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 invaded trust. Nothing in this Section shall be construed as preventing the authorized trustee from appointing part or all of the invaded trust to an appointed trust that is a trust as to which the settlor of the invaded 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 invaded trust owns subchapter S corporation stock, an authorized trustee may not exercise a power authorized by subsection (b) or (c) to appoint part or all of the S corporation stock to an appointed trust that is not a permitted shareholder under Section 1361(c)(2) of the Code.

(3) During any period when the invaded 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 (b) or (c) to appoint part or all of the interest in such property to an appointed trust that would result in the shortening of the minimum distribution period to which the property is subject in the invaded trust.

(o) Limits on compensation of trustee.

(1) Unless a court upon application of the trustee directs otherwise, an authorized trustee may not exercise a power authorized by subsection (b) or (c) to change the provisions regarding the determination of the compensation of any trustee.

(2) The compensation payable to the trustee or trustees of the invaded trust may continue to be paid to the trustees of the appointed trust during the term of the appointed trust and may be determined in the same manner as otherwise would have applied in the invaded trust; provided, however, that no trustee may receive any termination fee or other compensation imposed upon assets distributed due to the appointment of property from the invaded trust to an appointed trust pursuant to subsection (b) or (c).

(p) Written instrument. The exercise of a power to invade principal under subsection (b) or (c) must be made by an instrument in writing, signed and acknowledged by the trustee, and filed with the records of the invaded trust and the appointed trust.

(q) Terms of appointed trust. Any reference to the governing instrument or terms of the governing instrument in this Act includes the terms of an appointed trust established in accordance with this Section.

(r) Grantor. The grantor of an invaded trust is considered for all purposes to be the grantor of any appointed trust established in accordance with this Section.

(s) Application. Unless the invaded trust expressly provides otherwise, this Section applies to the following trusts:

(1) an inter vivos or testamentary trust governed by the laws of this State, including a trust whose governing law has been changed to the laws of this State; and

(2) an inter vivos or testamentary trust that has a trustee who is an individual domiciled in this State or a trustee which is an entity having an office in this State, provided that a majority of the trustees select this State as the location for the principal place of administration of the trust by an instrument in writing, signed and acknowledged by a majority of the trustees, and the instrument exercising this selection is maintained with the records of the invaded trust and the appointed trust.

(760 ILCS 5/16.5 new)

Sec. 16.5. Qualified dispositions in trust.

(a) Purpose. The purpose of this Section is to provide a means for establishing a Domestic Asset Protection Trust, which is a self-settled irrevocable spendthrift trust, whereby the assets held in the trust will be protected from creditor's claims, as long as the transfers are not fraudulent and are completed at a time that the transferor has no need of asset protection as determined under this Section and applicable law of this State.

(b) Definitions. In this Section:

(1) "Claim" means a right to payment, whether or not the right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured.

(2) "Code" means the United States Internal Revenue Code of 1986, as amended from time to time, including corresponding provisions of subsequent internal revenue laws.

(3) "Creditor" means, with respect to a transferor, a person who has a claim.

(4) "Debt" means liability on a claim.

(5) "Disposition" means a transfer, conveyance or assignment of property (including a change in the legal ownership of property occurring upon the substitution of one trustee for another or the addition of one or more new trustees), or the exercise of a power so as to cause a transfer of property, to a trustee or trustees, but shall not include the release or relinquishment of an interest in property that was the subject of a qualified disposition.

(6) "Person" means an individual, a corporation, a company, an association, a firm, a partnership, a society, a joint-stock company, business trust, estate, trust, limited liability company, limited liability partnership, joint venture, government, or any other legal or commercial entity.

(7) "Property" means real property, personal property, and any interests in real, personal, or other property.

(8) "Qualified disposition" means a disposition by or from a transferor to a qualified trustee or qualified trustees, with or without consideration by means of a trust instrument.

(9) "Qualified trustee" means a person who:

(A) in the case of a natural person, is a resident of this State other than the transferor or, in all other cases, is authorized by the law of this State to act as a trustee and whose activities are subject to supervision by the Federal Deposit Insurance Corporation, the Director of the Division of Banking of the Department of Financial and Professional Regulation, the Comptroller of the Currency, the Office of Thrift Supervision, or any successor to such an agency;

(B) maintains or arranges for custody in this State of some or all of the property that is the subject of the qualified disposition, maintains records for the trust on an exclusive or nonexclusive basis, prepares or arranges for the preparation of fiduciary income tax returns for the trust or otherwise materially participates in the administration of the trust; and

(C) is not the transferor nor a natural person who is a nonresident of this State nor an entity that is not authorized by the law of this State to act as a trustee or whose activities are not subject to supervision as provided in subparagraph (b)(9)(A).

(10) "Spouse" and "former spouse" mean only persons to whom the transferor was married at, or before, the time the qualified disposition is made.

(11) "Transferor" means a person who, directly or indirectly, makes a disposition or causes a disposition to be made as an owner of property, as a trustee, or as a holder of a power of appointment that authorizes the holder to appoint in favor of any one or more of the holder, the holder's creditors, the holder's estate or the creditors of the holder's estate.

(12) "Trust instrument" means an instrument appointing a qualified trustee for the property that is the subject of a disposition, which instrument:

(A) expressly incorporates the law of this State to govern the validity and construction of the trust, or permits, whether expressly or otherwise, the transfer of the situs of a trust having a non-Illinois trustee to a qualified trustee who has an office in this State for the administration of the trust and who makes this State the principal place of administration of the trust;

(B) is irrevocable, but a trust instrument shall not be deemed revocable on account of its inclusion of one or more of the following:

(i) a transferor's power to veto a distribution from the trust;

(ii) an inter vivos power of appointment, other than an inter vivos power to appoint to the transferor, the transferor's creditors, the transferor's estate or the creditors of the transferor's estate, exercisable by will or other written instrument of the transferor effective only upon the transferor's death;

(iii) a testamentary power of appointment;

(iv) the transferor's potential or actual receipt of income, including rights to such income retained in the trust instrument;

(v) the transferor's potential or actual receipt of income or principal from a charitable remainder unitrust or charitable remainder annuity trust as such terms are defined in Section 664 of the Code; and the transferor's right, at any time and from time to time by written instrument delivered to the trustee, to release such transferor's retained interest in such a trust, in whole or in part, in favor of a charitable organization that has or charitable organizations that have a succeeding beneficial interest in such trust;

(vi) the transferor's receipt each year of a percentage (not to exceed 5%) specified in the trust instrument of the initial value of the trust assets or the value determined from time to time pursuant to the trust instrument or of a fixed amount that on an annual basis does not exceed 5% of the initial value of the trust assets or of the current value of the trust assets as determined from time to time in average of multiple years or otherwise;

(vii) the transferor's potential or actual receipt or use of principal if such potential or actual receipt or use of principal would be the result of a qualified trustee acting:

(aa) in the discretion of such qualified trustee or qualified trustees;

(bb) pursuant to a standard that governs the distribution of principal and does not confer upon the transferor a substantially unfettered right to the receipt or use of the principal;

(cc) at the discretion of an advisor who is acting in such advisor's discretion; or pursuant to a standard that governs the distribution of principal and does not confer upon the transferor a substantially unfettered right to the receipt of or use of principal;

(viii) the transferor's right to remove a trustee or advisor and to appoint a new trustee or advisor;

(ix) the transferor's potential or actual use of real property held under a qualified personal residence trust with the meaning of such term as described in Section 2702(c) of the Code or the transferor's possession and enjoyment of a qualified annuity interest within the meaning of such term as described in Treasury Regulation Section 25.2702-5(c)(8) and any successor provision;

(x) the transferor's potential or actual receipt of income or principal to pay, in whole or in part, income taxes due on income of the trust if such potential or actual receipt of income or principal is pursuant to a provision in the trust instrument that expressly provides for the payment of such taxes and if such potential or actual receipt of trust property or income from trust property would be the result of a qualified trustee or qualified trustees acting:

(aa) in such qualified trustee's discretion or pursuant to a mandatory direction in the trust instrument; or

(bb) at the direction of an advisor who is acting in accordance with authority granted such advisor by the terms of the trust;

(xi) The ability, whether pursuant to discretion, direction, or the grantor's exercise of a testamentary power of appointment, of a qualified trustee to pay, after the death of the transferor, all or any part of the debts of the transferor outstanding at the time of the transferor's death, the expenses of administering the transferor's estate, or any estate or inheritance tax imposed on or with respect to the transferor's estate; and

(C) Provides that the interest of the transferor or other beneficiary in trust property and income from trust property may not be transferred, assigned, pledged, or mortgaged, whether voluntarily or involuntarily, before the qualified trustee actually distributes such trust property or income to the beneficiary, or provides a comparable spendthrift provision having substantially the same effect, and such provision of the trust instrument shall be deemed to be a restriction on the transfer of the transferor's beneficial interest in the trust that is enforceable under applicable nonbankruptcy law within the meaning of Section 541(c)(2) of the Bankruptcy Code (11 U.S.C. Section 541(c)(2)) or any successor provision.

(c) Retained interests of transferor. A qualified disposition shall be subject to subsection (d) notwithstanding a transferor's retention of any or all of the powers and rights described in subdivision (b)(12)(B) or the transferor's service as investment trust advisor in accordance with subdivision (b)(9)(D). Except as permitted by subdivisions (b)(9)(D) and (b)(12)(B), a transferor shall have no rights or authority with respect to the property that is the subject of a qualified disposition or income from such property, and any agreement or understanding purporting to grant or permit the retention of any greater rights or authority shall be void.

(d) Avoidance of qualified dispositions.

(1) The courts of this State have exclusive jurisdiction over any action brought with respect to a qualified disposition. Notwithstanding any other applicable law of this State, no action of any kind, including but not limited to an action to enforce a judgment entered by a court or other body having adjudicative authority, may be brought for an attachment or other provisional remedy against property that is the subject of a qualified disposition or for avoidance of a qualified disposition unless (A) such action is brought pursuant to the provisions of Section 5 or 6 of the Uniform Fraudulent Transfer Act and (B) in the case of a creditor whose claim arose after a qualified disposition, the qualified disposition was made with intent to defraud such creditor.

(2) In any action brought to avoid a qualified disposition, the creditor's claim under subsection (c) is extinguished unless:

(A) The creditor's claim arose before the qualified disposition was made, and the action is brought within the limitations of Section 10 of the Uniform Fraudulent Transfer Act as in effect on the later of the date of the qualified disposition or the effective date of this amendatory Act of the 97th General Assembly; and

(B) Notwithstanding the provisions of Section 10 of the Uniform Fraudulent Transfer Act, the creditor's claim arose concurrent with or subsequent to the qualified disposition and the action is brought within 4 years after the qualified disposition is made.

(3) For the purposes of this Section, a qualified disposition that is made by means of a disposition by a transferor who is a trustee is deemed to have been made as of the time (whether before, on, or after the effective date of this amendatory Act of the 97th General Assembly) the property that is the subject of the qualified disposition was originally transferred to the transferor (or any predecessor trustee) if the qualified disposition is made in a form that otherwise meets the requirements of subdivisions (b)(12)(B) and (C).

(4) Notwithstanding any applicable Illinois law to the contrary, a creditor, including a creditor whose claim arose before or after a qualified disposition, or any other person may have only such rights with respect to a qualified disposition as are provided in this Section, and no such creditor nor any other person may have any claim or cause of action against the trustee or any advisor of a trust that is the subject of a qualified disposition, or against any person involved in the counseling, drafting, preparation, execution, or funding of a trust that is the subject of a qualified disposition.

(5) Notwithstanding any other provision of applicable law of this State, no action of any kind, including but not limited to an action to enforce a judgment entered by a court or other body having adjudicative authority, may be brought at law or in equity against the trustee or any advisor of a trust that is the subject of a qualified disposition, if as of the date such action is brought an action by a creditor with respect to such qualified disposition would be barred in accordance with this Section.

(6) In circumstances where more than one qualified disposition is made by means of the same trust instrument, then:

(A) the making of a subsequent qualified disposition is disregarded in determining whether a creditor's claim with respect to a prior qualified disposition is extinguished as provided in this Section; and

(B) any distribution to a beneficiary is deemed to have been made from the latest such qualified disposition.

(7) If, in any action brought against a corporate trustee or a fiduciary of a trust that is the result of a qualified disposition, a court takes any action by which such court declines to apply the law of this State in determining the validity, construction or administration of such trust, or the effect of a spendthrift provision of such trust, such trustee must immediately upon such court's action and without the further order of any court, cease in all respects to be trustee of such trust and a successor trustee must immediately succeed as trustee in accordance with the terms of the trust instrument or, if the trust instrument does not provide for a successor trustee and the trust would otherwise be without a trustee upon the application by petition to a court of this State by any beneficiary of such trust, the court shall appoint a successor trustee upon such terms and conditions as it determines to be consistent with the purposes of such trust and this Section. Upon such trustee ceasing to be trustee, such trustee shall have no power or authority other than to convey the trust property to the successor trustee named in the trust instrument or appointed by the court in accordance with this Section.

(e) Limitations on qualified dispositions. With respect to the limitations imposed by this Section on actions by creditors of a transferor to avoid a qualified disposition, such limitations do not apply to certain debts and claims as follows: indebtedness, and only to the extent of such debt, to any person on account of an agreement or order of court for the payment of support, including but not limited to child support or maintenance in favor of such transferor's spouse, former spouse or children, or for a division or distribution of property in favor of such transferor's spouse or former spouse, but not including any claim for renunciation, spouse's award, or child's award under the Probate Act of 1975.

(f) Effect of avoidance of qualified dispositions.

(1) A qualified disposition may be avoided only to the extent necessary to satisfy the transferor's debt to the creditor at whose instance the disposition had been avoided, together with such costs, including attorney fees, as the court may allow.

(2) In the event any qualified disposition is avoided in accordance with this Section, then:

(A) if the court is satisfied that a trustee has not acted in bad faith in accepting or administering the property that is the subject of the qualified disposition:

(i) such trustee has a first and paramount lien against the property that is the subject of the qualified disposition in an amount equal to the entire cost, including attorney fees, incurred by such trustee in the reasonable and necessary defense of the action or proceedings to avoid the qualified disposition; and

(ii) for purposes of subdivision (f)(2)(A)(i), it is presumed that such trustee did not act in bad faith merely by accepting such property.

(B) If the court is satisfied that a beneficiary of a trust has not acted in bad faith, the avoidance of the qualified disposition is subject to the right of such beneficiary to retain any distribution made prior to the creditor's commencement of an action to avoid the qualified disposition.

(C) A creditor has the burden of proving that a trustee or beneficiary acted in bad faith by clear and convincing evidence except that, in the case of a beneficiary who is also the transferor, the burden on the creditor is to prove that the transferor-beneficiary acted in bad faith by a preponderance of the evidence. The preceding sentence provides a substantive and not a procedural right.

(3) Notwithstanding any other applicable law of this State, a creditor has no right against the interest of a beneficiary in a trust solely because such beneficiary has the right to authorize or direct the trustee to pay all or part of the trust property in satisfaction of estate or inheritance taxes imposed upon or with respect to the beneficiary's estate, or the debts of the beneficiary's estate, unless such beneficiary actually directs the payment of such taxes, debts, or expenses and then only to the extent of such direction.

(g) Advisors.

(1) For purposes of this Section, the term "advisor" includes a trust investment advisor, a trust distribution advisor, a trust protector or any other person or persons who, in addition to or to the exclusion of a qualified trustee, holds one or more trust powers.

(2) Nothing in this Section shall preclude a transferor from appointing one or more advisors, including but not limited to:

(A) an advisor who has authority under the terms of the trust instrument to remove and appoint qualified trustees or trust advisors;

(B) an advisor who has authority under the terms of the trust instrument to direct, consent to or disapprove distributions from the trust; or

(C) an advisor who is a directing party as described in Section 16.3.

(3) A person may serve as an investment trust advisor described in Section 16.3 notwithstanding that such person is the transferor of the qualified disposition, but such a person may not otherwise serve as advisor of a trust that is a qualified disposition except with respect to the retention of one or more rights permitted by subdivision (b)(12)(B).

(h) Administration.

(1) In the event that a qualified trustee of a trust ceases to meet the requirements to be a qualified trustee in accordance with this Section, and there remains no trustee that meets such requirements, such former qualified trustee is deemed to have resigned as of the time of such cessation, and the successor qualified trustee provided for in the trust instrument then becomes the qualified trustee of the trust, or in the absence of any successor qualified trustee provided for in the trust instrument, the court shall appoint a successor qualified trustee, upon application of the settlor, a trustee, or a beneficiary.

(2) In the case of a disposition to more than one trustee, a disposition that is otherwise a qualified disposition is not be treated as other than a qualified disposition solely because not all of the trustees are qualified trustees.

(3) For purposes of this Section, a qualified trustee is presumed to have discretion with respect to the distribution of principal unless such discretion is expressly denied to such trustee by the terms of the trust instrument.

(760 ILCS 5/16.6 new)

Sec. 16.6. Modification or termination of irrevocable trust.

(a) By consent of trustee and beneficiaries.

(1) An irrevocable trust may be modified upon consent of the trustee and all of the beneficiaries if the court concludes that modification is not inconsistent with a material purpose of the trust.

(2) An irrevocable trust may be terminated upon consent of the trustee and all of the beneficiaries if the court concludes that continuance of the trust is not necessary to achieve any material purpose of the trust.

(3) The court may consider spendthrift provisions as a factor in making a decision under this Section, but a spendthrift provision is not necessarily a material purpose of a trust, and the court is not precluded from modifying or terminating a trust because the trust contains spendthrift provisions.

(4) If not all of the beneficiaries consent to a proposed modification or termination of the trust in accordance with this Section, the court may approve the modification or termination if the court is satisfied that:

(A) if all of the beneficiaries had consented, the trust could have been modified or terminated under this Section; and

(B) the interests of a beneficiary who does not consent receives equitable treatment consistent with the purposes of the trust.

(b) Unanticipated circumstances.

(1) The court may modify the administrative or dispositive terms of a trust or terminate the trust if, because of circumstances not anticipated by the settlor, modification or termination will further the purposes of the trust. To the extent practicable, the modification must be made in accordance with the settlor's probable intention.

(2) The court may modify the administrative terms of a trust if the modification furthers the purposes of the trust or if continuation of the trust on its existing terms would be impracticable, wasteful, or impair the trust's administration.

(3) The court may modify or terminate a trust or remove the trustee and appoint a different trustee if such change furthers the purposes of the trust, including but not limited to a finding by the court that the value of the trust property is insufficient to justify the cost of administration.

(c) Reformation to correct mistakes. The court may reform the terms of a trust, even if unambiguous, to conform the terms to the settlor's intention if it is proved by clear and convincing evidence that both the settlor's intent and the terms of the trust instrument were affected by a mistake of fact or law, whether in expression or inducement.

(d) Modification to achieve settlor's tax objectives. To achieve the settlor's tax objectives, the court may modify the terms of a trust in a manner that is not contrary to the settlor's probable intention. The court may provide that the modification has retroactive effect.

(e) Distribution on termination. Upon termination of a trust, or modification of trust provisions regarding termination, in accordance with this Section, the court may order the trust property distributed as agreed by the parties to the agreement or otherwise as the court determines equitable consistent with the purposes of the trust.

(f) Charitable trusts. This Section does not apply to a charitable trust until the termination of all charitable interests in the trust. For this purpose, "charitable trust" means a trust that holds funds part or all of which are to be applied for the benefit of an indefinite number of people to provide them with education; religion; relief from poverty, sickness, or disease; a means of establishing themselves in life; public building or recreational facilities; or services that lessen the burden of government, including but not limited to a trust for which a charitable deduction was or is allowed or allowable under the Internal Revenue Code.

(g) Modification or termination by agreement. Any modification or termination of a trust that could be approved by a court as provided in this Section alternatively may be completed by a nonjudicial settlement agreement entered into by all interested persons, or their respective representatives, in accordance with Section 16.1 without court action, except that in the case of an agreement to terminate a trust court approval is required in accordance with subparagraph (d)(4)(L) of Section 16.1.

(760 ILCS 5/16.7 new)

Sec. 16.7. Application. Sections 16.3 through 16.6 of this Act apply to all trusts in existence on the effective date of this amendatory Act of the 97th General Assembly or created after that date. Sections 16.3 through 16.6 shall be construed as pertaining to 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, except to the extent the governing instrument expressly prohibits use of one or more such Sections by specific reference to such one or more Sections. A provision in the governing instrument in the form: "Neither the provisions of Sections 16.3 through 16.6 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 Sections 16.3 through 16.6.

Section 99. Effective date. This Act takes effect upon becoming law.