Illinois General Assembly

Previous General Assemblies

Full Text of HB4662  97th General Assembly

HB4662enr 97TH GENERAL ASSEMBLY

  
  
  

 


 
HB4662 EnrolledLRB097 14569 AJO 59425 b

1    AN ACT concerning civil law.
 
2    Be it enacted by the People of the State of Illinois,
3represented in the General Assembly:
 
4    Section 5. The Trust and Trustees Act is amended by adding
5Section 16.4 as follows:
 
6    (760 ILCS 5/16.4 new)
7    Sec. 16.4. Distribution of trust principal in further
8trust.
9    (a) Definitions. In this Section:
10    "Absolute discretion" means the right to distribute
11principal that is not limited or modified in any manner to or
12for the benefit of one or more beneficiaries of the trust,
13whether or not the term "absolute" is used. A power to
14distribute principal that includes purposes such as best
15interests, welfare, or happiness shall constitute absolute
16discretion.
17    "Authorized trustee" means an entity or individual, other
18than the settlor, who has authority under the terms of the
19first trust to distribute the principal of the trust for the
20benefit of one or more current beneficiaries.
21    "Code" means the United States Internal Revenue Code of
221986, as amended from time to time, including corresponding
23provisions of subsequent internal revenue laws and

 

 

HB4662 Enrolled- 2 -LRB097 14569 AJO 59425 b

1corresponding provisions of State law.
2    "Current beneficiary" means a person who is currently
3receiving or eligible to receive a distribution of principal or
4income from the trustee on the date of the exercise of the
5power.
6    "Distribute" means the power to pay directly to the
7beneficiary of a trust or make application for the benefit of
8the beneficiary.
9    "First trust" means an existing irrevocable inter vivos or
10testamentary trust part or all of the principal of which is
11distributed in further trust under subsection (c) or (d).
12    "Presumptive remainder beneficiary" means a beneficiary of
13a trust, as of the date of determination and assuming
14non-exercise of all powers of appointment, who either (i) would
15be eligible to receive a distribution of income or principal if
16the trust terminated on that date, or (ii) would be eligible to
17receive a distribution of income or principal if the interests
18of all beneficiaries currently eligible to receive income or
19principal from the trust ended on that date without causing the
20trust to terminate.
21    "Principal" includes the income of the trust at the time of
22the exercise of the power that is not currently required to be
23distributed, including accrued and accumulated income.
24    "Second trust" means any irrevocable trust to which
25principal is distributed in accordance with subsection (c) or
26(d).

 

 

HB4662 Enrolled- 3 -LRB097 14569 AJO 59425 b

1    "Successor beneficiary" means any beneficiary other than
2the current and presumptive remainder beneficiaries, but does
3not include a potential appointee of a power of appointment
4held by a beneficiary.
5    (b) Purpose. An independent trustee who has discretion to
6make distributions to the beneficiaries shall exercise that
7discretion in the trustee's fiduciary capacity, whether the
8trustee's discretion is absolute or limited to ascertainable
9standards, in furtherance of the purposes of the trust.
10    (c) Distribution to second trust if absolute discretion. An
11authorized trustee who has the absolute discretion to
12distribute the principal of a trust may distribute part or all
13of the principal of the trust in favor of a trustee of a second
14trust for the benefit of one, more than one, or all of the
15current beneficiaries of the first trust and for the benefit of
16one, more than one, or all of the successor and remainder
17beneficiaries of the first trust.
18        (1) If the authorized trustee exercises the power under
19    this subsection, the authorized trustee may grant a power
20    of appointment (including a presently exercisable power of
21    appointment) in the second trust to one or more of the
22    current beneficiaries of the first trust, provided that the
23    beneficiary granted a power to appoint could receive the
24    principal outright under the terms of the first trust.
25        (2) If the authorized trustee grants a power of
26    appointment, the class of permissible appointees in favor

 

 

HB4662 Enrolled- 4 -LRB097 14569 AJO 59425 b

1    of whom a beneficiary may exercise the power of appointment
2    granted in the second trust may be broader than or
3    otherwise different from the current, successor, and
4    presumptive remainder beneficiaries of the first trust.
5        (3) If the beneficiary or beneficiaries of the first
6    trust are described as a class of persons, the beneficiary
7    or beneficiaries of the second trust may include one or
8    more persons of such class who become includible in the
9    class after the distribution to the second trust.
10    (d) Distribution to second trust if no absolute discretion.
11An authorized trustee who has the power to distribute the
12principal of a trust but does not have the absolute discretion
13to distribute the principal of the trust may distribute part or
14all of the principal of the first trust in favor of a trustee
15of a second trust, provided that the current beneficiaries of
16the second trust shall be the same as the current beneficiaries
17of the first trust and the successor and remainder
18beneficiaries of the second trust shall be the same as the
19successor and remainder beneficiaries of the first trust.
20        (1) If the authorized trustee exercises the power under
21    this subsection (d), the second trust shall include the
22    same language authorizing the trustee to distribute the
23    income or principal of a trust as set forth in the first
24    trust.
25        (2) If the beneficiary or beneficiaries of the first
26    trust are described as a class of persons, the beneficiary

 

 

HB4662 Enrolled- 5 -LRB097 14569 AJO 59425 b

1    or beneficiaries of the second trust shall include all
2    persons who become includible in the class after the
3    distribution to the second trust.
4        (3) If the authorized trustee exercises the power under
5    this subsection (d) and if the first trust grants a power
6    of appointment to a beneficiary of the trust, the second
7    trust shall grant such power of appointment in the second
8    trust and the class of permissible appointees shall be the
9    same as in the first trust.
10        (4) Supplemental Needs Trusts.
11            (i) Notwithstanding the other provisions of this
12        subsection (d), the authorized trustee may distribute
13        part or all of the principal of a disabled
14        beneficiary's interest in the first trust in favor of a
15        trustee of a second trust which is a supplemental needs
16        trust if the authorized trustee determines that to do
17        so would be in the best interests of the disabled
18        beneficiary.
19            (ii) Definitions. For purposes of this subsection
20        (d):
21                "Best interests" of a disabled beneficiary
22            include, without limitation, consideration of the
23            financial impact to the disabled beneficiary's
24            family.
25                "Disabled beneficiary" means a current
26            beneficiary, presumptive remainder beneficiary, or

 

 

HB4662 Enrolled- 6 -LRB097 14569 AJO 59425 b

1            successor beneficiary of the first trust who the
2            authorized trustee determines has a disability
3            that substantially impairs the beneficiary's
4            ability to provide for his or her own care or
5            custody and that constitutes a substantial
6            handicap, whether or not the beneficiary has been
7            adjudicated a "disabled person".
8                "Governmental benefits" means financial aid or
9            services from any State, Federal, or other public
10            agency.
11                "Supplemental needs second trust" means a
12            trust that complies with paragraph (iii) of this
13            paragraph (4) and that relative to the first trust
14            contains either lesser or greater restrictions on
15            the trustee's power to distribute trust income or
16            principal and which the trustee believes would, if
17            implemented, allow the disabled beneficiary to
18            receive a greater degree of governmental benefits
19            than the disabled beneficiary will receive if no
20            distribution is made.
21            (iii) Remainder beneficiaries. A supplemental
22        needs second trust may name remainder and successor
23        beneficiaries other than the disabled beneficiary's
24        estate, provided that the second trust names the same
25        presumptive remainder beneficiaries and successor
26        beneficiaries to the disabled beneficiary's interest,

 

 

HB4662 Enrolled- 7 -LRB097 14569 AJO 59425 b

1        and in the same proportions, as exist in the first
2        trust. In addition to the foregoing, where the first
3        trust was created by the disabled beneficiary or the
4        trust property has been distributed directly to or is
5        otherwise under the control of the disabled
6        beneficiary, the authorized trustee may distribute to
7        a "pooled trust" as defined by federal Medicaid law for
8        the benefit of the disabled beneficiary or the
9        supplemental needs second trust must contain pay back
10        provisions complying with Medicaid reimbursement
11        requirements of federal law.
12            (iv) Reimbursement. A supplemental needs second
13        trust shall not be liable to pay or reimburse the State
14        or any public agency for financial aid or services to
15        the disabled beneficiary except as provided in the
16        supplemental needs second trust.
17    (e) Notice. An authorized trustee may exercise the power to
18distribute in favor of a second trust under subsections (c) and
19(d) without the consent of the settlor or the beneficiaries of
20the first trust and without court approval if:
21        (1) there are one or more legally competent current
22    beneficiaries and one or more legally competent
23    presumptive remainder beneficiaries and the authorized
24    trustee sends written notice of the trustee's decision,
25    specifying the manner in which the trustee intends to
26    exercise the power and the prospective effective date for

 

 

HB4662 Enrolled- 8 -LRB097 14569 AJO 59425 b

1    the distribution, to all of the legally competent current
2    beneficiaries and presumptive remainder beneficiaries,
3    determined as of the date the notice is sent and assuming
4    non-exercise of all powers of appointment; and
5        (2) no beneficiary to whom notice was sent objects to
6    the distribution in writing delivered to the trustee within
7    60 days after the notice is sent ("notice period").
8    A trustee is not required to provide a copy of the notice
9to a beneficiary who is known to the trustee but who cannot be
10located by the trustee after reasonable diligence or who is not
11known to the trustee.
12    If a charity is a current beneficiary or presumptive
13remainder beneficiary of the trust, the notice shall also be
14given to the Attorney General's Charitable Trust Bureau.
15    (f) Court involvement.
16        (1) The trustee may for any reason elect to petition
17    the court to order the distribution, including, without
18    limitation, the reason that the trustee's exercise of the
19    power to distribute under this Section is unavailable, such
20    as:
21            (a) a beneficiary timely objects to the
22        distribution in a writing delivered to the trustee
23        within the time period specified in the notice; or
24            (b) there are no legally competent current
25        beneficiaries or legally competent presumptive
26        remainder beneficiaries.

 

 

HB4662 Enrolled- 9 -LRB097 14569 AJO 59425 b

1        (2) If the trustee receives a written objection within
2    the notice period, either the trustee or the beneficiary
3    may petition the court to approve, modify, or deny the
4    exercise of the trustee's powers. The trustee has the
5    burden of proving the proposed exercise of the power
6    furthers the purposes of the trust.
7        (3) In a judicial proceeding under this subsection (f),
8    the trustee may, but need not, present the trustee's
9    opinions and reasons for supporting or opposing the
10    proposed distribution, including whether the trustee
11    believes it would enable the trustee to better carry out
12    the purposes of the trust. A trustee's actions in
13    accordance with this Section shall not be deemed improper
14    or inconsistent with the trustee's duty of impartiality
15    unless the court finds from all the evidence that the
16    trustee acted in bad faith.
17    (g) Term of the second trust. The second trust to which an
18authorized trustee distributes the assets of the first trust
19may have a term that is longer than the term set forth in the
20first trust, including, but not limited to, a term measured by
21the lifetime of a current beneficiary; provided, however, that
22the second trust shall be limited to the same permissible
23period of the rule against perpetuities that applied to the
24first trust, unless the first trust expressly permits the
25trustee to extend or lengthen its perpetuities period.
26    (h) Divided discretion. If an authorized trustee has

 

 

HB4662 Enrolled- 10 -LRB097 14569 AJO 59425 b

1absolute discretion to distribute the principal of a trust and
2the same trustee or another trustee has the power to distribute
3principal under the trust instrument which power is not
4absolute discretion, such authorized trustee having absolute
5discretion may exercise the power to distribute under
6subsection (c).
7    (i) Later discovered assets. To the extent the authorized
8trustee does not provide otherwise:
9        (1) The distribution of all of the assets comprising
10    the principal of the first trust in favor of a second trust
11    shall be deemed to include subsequently discovered assets
12    otherwise belonging to the first trust and undistributed
13    principal paid to or acquired by the first trust subsequent
14    to the distribution in favor of the second trust.
15        (2) The distribution of part but not all of the assets
16    comprising the principal of the first trust in favor of a
17    second trust shall not include subsequently discovered
18    assets belonging to the first trust and principal paid to
19    or acquired by the first trust subsequent to the
20    distribution in favor of a second trust; such assets shall
21    remain the assets of the first trust.
22    (j) Other authority to distribute in further trust. This
23Section shall not be construed to abridge the right of any
24trustee to distribute property in further trust that arises
25under the terms of the governing instrument of a trust, any
26provision of applicable law, or a court order. In addition,

 

 

HB4662 Enrolled- 11 -LRB097 14569 AJO 59425 b

1distribution of trust principal to a second trust may be made
2by agreement between a trustee and all primary beneficiaries of
3a first trust, acting either individually or by their
4respective representatives in accordance with Section 16.1 of
5this Act.
6    (k) Need to distribute not required. An authorized trustee
7may exercise the power to distribute in favor of a second trust
8under subsections (c) and (d) whether or not there is a current
9need to distribute principal under the terms of the first
10trust.
11    (l) No duty to distribute. Nothing in this Section is
12intended to create or imply a duty to exercise a power to
13distribute principal, and no inference of impropriety shall be
14made as a result of an authorized trustee not exercising the
15power conferred under subsection (c) or (d). Notwithstanding
16any other provision of this Section, a trustee has no duty to
17inform beneficiaries about the availability of this Section and
18no duty to review the trust to determine whether any action
19should be taken under this Section.
20    (m) Express prohibition. A power authorized by subsection
21(c) or (d) may not be exercised if expressly prohibited by the
22terms of the governing instrument, but a general prohibition of
23the amendment or revocation of the first trust or a provision
24that constitutes a spendthrift clause shall not preclude the
25exercise of a power under subsection (c) or (d).
26    (n) Restrictions. An authorized trustee may not exercise a

 

 

HB4662 Enrolled- 12 -LRB097 14569 AJO 59425 b

1power authorized by subsection (c) or (d) to affect any of the
2following:
3        (1) to reduce, limit or modify any beneficiary's
4    current right to a mandatory distribution of income or
5    principal, a mandatory annuity or unitrust interest, a
6    right to withdraw a percentage of the value of the trust or
7    a right to withdraw a specified dollar amount provided that
8    such mandatory right has come into effect with respect to
9    the beneficiary, except with respect to a second trust
10    which is a supplemental needs trust;
11        (2) to decrease or indemnify against a trustee's
12    liability or exonerate a trustee from liability for failure
13    to exercise reasonable care, diligence, and prudence;
14    except to indemnify or exonerate one party from liability
15    for actions of another party with respect to distribution
16    that unbundles the governance structure of a trust to
17    divide and separate fiduciary and nonfiduciary
18    responsibilities among several parties, including without
19    limitation one or more trustees, distribution advisors,
20    investment advisors, trust protectors, or other parties,
21    provided however that such modified governance structure
22    may reallocate fiduciary responsibilities from one party
23    to another but may not reduce them;
24        (3) to eliminate a provision granting another person
25    the right to remove or replace the authorized trustee
26    exercising the power under subsection (c) or (d); provided,

 

 

HB4662 Enrolled- 13 -LRB097 14569 AJO 59425 b

1    however, such person's right to remove or replace the
2    authorized trustee may be eliminated if a separate
3    independent, non-subservient individual or entity, such as
4    a trust protector, acting in a nonfiduciary capacity has
5    the right to remove or replace the authorized trustee;
6        (4) to reduce, limit or modify the perpetuities
7    provision specified in the first trust in the second trust,
8    unless the first trust expressly permits the trustee to do
9    so.
10    (o) Exception. Notwithstanding the provisions of paragraph
11(1) of subsection (n) but subject to the other limitations in
12this Section, an authorized trustee may exercise a power
13authorized by subsection (c) or (d) to distribute to a second
14trust; provided, however, that the exercise of such power does
15not subject the second trust to claims of reimbursement by any
16private or governmental body and does not at any time interfere
17with, reduce the amount of, or jeopardize an individual's
18entitlement to government benefits.
19    (p) Tax limitations. If any contribution to the first trust
20qualified for the annual exclusion under Section 2503(b) of the
21Code, the marital deduction under Section 2056(a) or 2523(a) of
22the Code, or the charitable deduction under Section 170(a),
23642(c), 2055(a) or 2522(a) of the Code, is a direct skip
24qualifying for treatment under Section 2642(c) of the Code, or
25qualified for any other specific tax benefit that would be lost
26by the existence of the authorized trustee's authority under

 

 

HB4662 Enrolled- 14 -LRB097 14569 AJO 59425 b

1subsection (c) or (d) for income, gift, estate, or
2generation-skipping transfer tax purposes under the Code, then
3the authorized trustee shall not have the power to distribute
4the principal of a trust pursuant to subsection (c) or (d) in a
5manner that would prevent the contribution to the first trust
6from qualifying for or would reduce the exclusion, deduction,
7or other tax benefit that was originally claimed with respect
8to that contribution.
9        (1) Notwithstanding the provisions of this subsection
10    (p), the authorized trustee may exercise the power to pay
11    the first trust to a trust as to which the settlor of the
12    first trust is not considered the owner under Subpart E of
13    Part I of Subchapter J of Chapter 1 of Subtitle A of the
14    Code even if the settlor is considered such owner of the
15    first trust. Nothing in this Section shall be construed as
16    preventing the authorized trustee from distributing part
17    or all of the first trust to a second trust that is a trust
18    as to which the settlor of the first trust is considered
19    the owner under Subpart E of Part I of Subchapter J of
20    Chapter 1 of Subtitle A of the Code.
21        (2) During any period when the first trust owns
22    subchapter S corporation stock, an authorized trustee may
23    not exercise a power authorized by paragraph (c) or (d) to
24    distribute part or all of the S corporation stock to a
25    second trust that is not a permitted shareholder under
26    Section 1361(c)(2) of the Code.

 

 

HB4662 Enrolled- 15 -LRB097 14569 AJO 59425 b

1        (3) During any period when the first trust owns an
2    interest in property subject to the minimum distribution
3    rules of Section 401(a)(9) of the Code, an authorized
4    trustee may not exercise a power authorized by subsection
5    (c) or (d) to distribute part or all of the interest in
6    such property to a second trust that would result in the
7    shortening of the minimum distribution period to which the
8    property is subject in the first trust.
9    (q) Limits on compensation of trustee.
10        (1) Unless the court upon application of the trustee
11    directs otherwise, an authorized trustee may not exercise a
12    power authorized by subsection (c) or (d) solely to change
13    the provisions regarding the determination of the
14    compensation of any trustee; provided, however, an
15    authorized trustee may exercise the power authorized in
16    subsection (c) or (d) in conjunction with other valid and
17    reasonable purposes to bring the trustee's compensation
18    into accord with reasonable limits in accord with Illinois
19    law in effect at the time of the exercise.
20        (2) The compensation payable to the trustee or trustees
21    of the first trust may continue to be paid to the trustees
22    of the second trust during the terms of the second trust
23    and may be determined in the same manner as otherwise would
24    have applied in the first trust; provided, however, that no
25    trustee shall receive any commission or other compensation
26    imposed upon assets distributed due to the distribution of

 

 

HB4662 Enrolled- 16 -LRB097 14569 AJO 59425 b

1    property from the first trust to a second trust pursuant to
2    subsection (c) or (d).
3    (r) Written instrument. The exercise of a power to
4distribute principal under subsection (c) or (d) must be made
5by an instrument in writing, signed and acknowledged by the
6trustee, and filed with the records of the first trust and the
7second trust.
8    (s) Terms of second trust. Any reference to the governing
9instrument or terms of the governing instrument in this Act
10includes the terms of a second trust established in accordance
11with this Section.
12    (t) Settlor. The settlor of a first trust is considered for
13all purposes to be the settlor of any second trust established
14in accordance with this Section. If the settlor of a first
15trust is not also the settlor of a second trust, then the
16settlor of the first trust shall be considered the settlor of
17the second trust, but only with respect to the portion of
18second trust distributed from the first trust in accordance
19with this Section.
20    (u) Remedies. A trustee who reasonably and in good faith
21takes or omits to take any action under this Section is not
22liable to any person interested in the trust. An act or
23omission by a trustee under this Section is presumed taken or
24omitted reasonably and in good faith unless it is determined by
25the court to have been an abuse of discretion. If a trustee
26reasonably and in good faith takes or omits to take any action

 

 

HB4662 Enrolled- 17 -LRB097 14569 AJO 59425 b

1under this Section and a person interested in the trust opposes
2the act or omission, the person's exclusive remedy is to obtain
3an order of the court directing the trustee to exercise
4authority in accordance with this Section in such manner as the
5court determines necessary or helpful for the proper
6functioning of the trust, including without limitation
7prospectively to modify or reverse a prior exercise of such
8authority. Any claim by any person interested in the trust that
9an act or omission by a trustee under this Section was an abuse
10of discretion is barred if not asserted in a proceeding
11commenced by or on behalf of the person within 2 years after
12the trustee has sent to the person or the person's personal
13representative a notice or report in writing sufficiently
14disclosing facts fundamental to the claim such that the person
15knew or reasonably should have known of the claim. Except for a
16distribution of trust principal from a first trust to a second
17trust made by agreement in accordance with Section 16.1 of this
18Act, the preceding sentence shall not apply to a person who was
19under a legal disability at the time the notice or report was
20sent and who then had no personal representative. For purposes
21of this subsection (u), a personal representative refers to a
22court appointed guardian or conservator of the estate of a
23person.
24    (v) Application. This Section is available to trusts in
25existence on the effective date of this amendatory Act of the
2697th General Assembly or created on or after the effective date

 

 

HB4662 Enrolled- 18 -LRB097 14569 AJO 59425 b

1of this amendatory Act of the 97th General Assembly. This
2Section shall be construed as pertaining to the administration
3of a trust and shall be available to any trust that is
4administered in Illinois under Illinois law or that is governed
5by Illinois law with respect to the meaning and effect of its
6terms, including a trust whose governing law has been changed
7to the laws of this State, unless the governing instrument
8expressly prohibits use of this Section by specific reference
9to this Section. A provision in the governing instrument in the
10form: "Neither the provisions of Section 16.4 of the Trusts and
11Trustees Act nor any corresponding provision of future law may
12be used in the administration of this trust" or a similar
13provision demonstrating that intent is sufficient to preclude
14the use of this Section.