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92_SB1697enr SB1697 Enrolled LRB9213119WHcs 1 AN ACT in relation to trusts. 2 Be it enacted by the People of the State of Illinois, 3 represented in the General Assembly: 4 Section 5. The Trusts and Trustees Act is amended by 5 adding Section 5.3 as follows: 6 (760 ILCS 5/5.3 new) 7 Sec. 5.3. Total return trusts. 8 (a) Conversion by trustee. A trustee may convert a trust 9 to a total return trust as described in this Section if all 10 of the following apply: 11 (1) The trust describes the amount that may or must 12 be distributed to a beneficiary by referring to the 13 trust's income, and the trustee determines that 14 conversion to a total return trust will enable the 15 trustee to better carry out the purposes of the trust and 16 the conversion is in the best interests of the 17 beneficiaries; 18 (2) conversion to a total return trust means the 19 trustee will invest and manage trust assets seeking a 20 total return without regard to whether that return is 21 from income or appreciation of principal, and will make 22 distributions in accordance with this Section (such a 23 trust is called a "total return trust" in this Section); 24 (3) the trustee sends a written notice of the 25 trustee's decision to convert the trust to a total return 26 trust, specifying a prospective effective date for the 27 conversion and including a copy of this Section, to the 28 following beneficiaries, determined as of the date the 29 notice is sent and assuming nonexercise of all powers of 30 appointment: 31 (A) all of the legally competent beneficiaries SB1697 Enrolled -2- LRB9213119WHcs 1 who are currently receiving or eligible to receive 2 income from the trust; and 3 (B) all of the legally competent beneficiaries 4 who would receive or be eligible to receive a 5 distribution of principal or income if the current 6 interests of beneficiaries currently receiving or 7 eligible to receive income ended; 8 (4) there are one or more legally competent income 9 beneficiaries under subdivision (3)(A) of this subsection 10 (a) and one or more legally competent remainder 11 beneficiaries under subdivision (3)(B) of this subsection 12 (a), determined as of the date of sending the notice; 13 (5) no beneficiary objects to the conversion to a 14 total return trust in a writing delivered to the trustee 15 within 60 days after the notice is sent; and 16 (6) the trustee has signed acknowledgments of 17 receipt confirming that notice was received by each 18 beneficiary required to be sent notice under subdivision 19 (3) of this subsection (a). 20 (b) Conversion by agreement. Conversion to a total 21 return trust may be made by agreement between a trustee and 22 all the primary beneficiaries of the trust under the virtual 23 representation provisions of Section 16.1 of this Act if 24 those provisions otherwise apply. The agreement may include 25 any actions a court could properly order under subsection (g) 26 of this Section; however, any distribution percentage 27 determined by the agreement may not be less than 3% nor 28 greater than 5%. 29 (c) Conversion or reconversion by court. 30 (1) The trustee may for any reason elect to 31 petition the court to order conversion to a total return 32 trust, including without limitation the reason that 33 conversion under subsection (a) is unavailable because: 34 (A) a beneficiary timely objects to the SB1697 Enrolled -3- LRB9213119WHcs 1 conversion to a total return trust; 2 (B) there are no legally competent 3 beneficiaries described in subdivision (3)(A) of 4 subsection (a); or 5 (C) there are no legally competent 6 beneficiaries described in subdivision (3)(B) of 7 subsection (a). 8 (2) A beneficiary may request the trustee to 9 convert to a total return trust or adjust the 10 distribution percentage. If the trustee declines or fails 11 to act within 6 months after receiving a written request 12 to do so, the beneficiary may petition the court to order 13 the conversion or adjustment. 14 (3) The trustee may petition the court 15 prospectively to reconvert from a total return trust or 16 adjust the distribution percentage if the trustee 17 determines that the reconversion or adjustment will 18 enable the trustee to better carry out the purposes of 19 the trust. A beneficiary may request the trustee to 20 petition the court prospectively to reconvert from a 21 total return trust or adjust the distribution percentage. 22 If the trustee declines or fails to act within 6 months 23 after receiving a written request to do so, the 24 beneficiary may petition the court to order the 25 reconversion or adjustment. 26 (4) In a judicial proceeding under this subsection 27 (c), the trustee may, but need not, present the trustee's 28 opinions and reasons (A) for supporting or opposing 29 conversion to (or reconversion from or adjustment of the 30 distribution percentage of) a total return trust, 31 including whether the trustee believes conversion (or 32 reconversion or adjustment of the distribution 33 percentage) would enable the trustee to better carry out 34 the purposes of the trust, and (B) about any other SB1697 Enrolled -4- LRB9213119WHcs 1 matters relevant to the proposed conversion (or 2 reconversion or adjustment of the distribution 3 percentage). A trustee's actions in accordance with this 4 subsection (c) shall not be deemed improper or 5 inconsistent with the trustee's duty of impartiality 6 unless the court finds from all the evidence that the 7 trustee acted in bad faith. 8 (5) The court shall order conversion to (or 9 reconversion prospectively from or adjustment of the 10 distribution percentage of) a total return trust if the 11 court determines that the conversion (or reconversion or 12 adjustment of the distribution percentage) will enable 13 the trustee to better carry out the purposes of the trust 14 and the conversion (or reconversion or adjustment of the 15 distribution percentage) is in the best interests of the 16 beneficiaries. 17 (6) Notwithstanding any other provision of this 18 Section, a trustee has no duty to inform beneficiaries 19 about the availability of this Section and has no duty to 20 review the trust to determine whether any action should 21 be taken under this Section unless requested to do so in 22 writing by a beneficiary described in subdivision (3) of 23 subsection (a). 24 (d) Post conversion. While a trust is a total return 25 trust, all of the following shall apply to the trust: 26 (1) the trustee shall make income distributions in 27 accordance with the governing instrument subject to the 28 provisions of this Section; 29 (2) the term "income" in the governing instrument 30 means an annual amount (the "distribution amount") equal 31 to a percentage (the "distribution percentage") of the 32 net fair market value of the trust's assets, whether the 33 assets are considered income or principal under the 34 Principal and Income Act, averaged over the lesser of: SB1697 Enrolled -5- LRB9213119WHcs 1 (i) the 3 preceding years; or 2 (ii) the period during which the trust has 3 been in existence; 4 (3) the distribution percentage for any trust 5 converted to a total return trust by a trustee in 6 accordance with subsection (a) shall be 4%; and 7 (4) the trustee shall pay to a beneficiary (in the 8 case of an underpayment) and shall recover from a 9 beneficiary (in the case of an overpayment) an amount 10 equal to the difference between the amount properly 11 payable and the amount actually paid, plus interest 12 compounded annually at a rate per annum equal to the 13 distribution percentage in the year or years while the 14 underpayment or overpayment exists. 15 (e) Administration. The trustee, in the trustee's 16 discretion, may determine any of the following matters in 17 administering a total return trust as the trustee from time 18 to time determines necessary or helpful for the proper 19 functioning of the trust: 20 (1) the effective date of a conversion to a total 21 return trust; 22 (2) the manner of prorating the distribution amount 23 for a short year in which a beneficiary's interest 24 commences or ceases; 25 (3) whether distributions are made in cash or in 26 kind; 27 (4) the manner of adjusting valuations and 28 calculations of the distribution amount to account for 29 other payments from or contributions to the trust; 30 (5) whether to value the trust's assets annually or 31 more frequently; 32 (6) what valuation dates and how many valuation 33 dates to use; 34 (7) valuation decisions about any asset for which SB1697 Enrolled -6- LRB9213119WHcs 1 there is no readily available market value, including: 2 (A) how frequently to value such an asset; 3 (B) whether and how often to engage a 4 professional appraiser to value such an asset; and 5 (C) whether to exclude the value of such an 6 asset from the net fair market value of the trust's 7 assets under subdivision (d)(2) for purposes of 8 determining the distribution amount. Any such asset 9 so excluded is referred to as an "excluded asset" in 10 this subsection (e), and the trustee shall 11 distribute any net income received from the excluded 12 asset as provided for in the governing instrument, 13 subject to the following principles: 14 (i) unless the trustee determines there 15 are compelling reasons to the contrary 16 considering all relevant factors including the 17 best interests of the beneficiaries, the 18 trustee shall treat each asset for which there 19 is no readily available market value as an 20 excluded asset; 21 (ii) if tangible personal property or 22 real property is possessed or occupied by a 23 beneficiary, the trustee shall not limit or 24 restrict any right of the beneficiary to use 25 the property in accordance with the governing 26 instrument whether or not the trustee treats 27 the property as an excluded asset; 28 (iii) examples of assets for which there 29 is a readily available market value include: 30 cash and cash equivalents; stocks, bonds, and 31 other securities and instruments for which 32 there is an established market on a stock 33 exchange, in an over-the-counter market, or 34 otherwise; and any other property that can SB1697 Enrolled -7- LRB9213119WHcs 1 reasonably be expected to be sold within one 2 week of the decision to sell without 3 extraordinary efforts by the seller; 4 (iv) examples of assets for which there 5 is no readily available market value include: 6 stocks, bonds, and other securities and 7 instruments for which there is no established 8 market on a stock exchange, in an 9 over-the-counter market, or otherwise; real 10 property; tangible personal property; and 11 artwork and other collectibles; and 12 (8) any other administrative matters as the trustee 13 determines necessary or helpful for the proper 14 functioning of the total return trust. 15 (f) Allocations. 16 (1) Expenses, taxes, and other charges that would 17 be deducted from income if the trust were not a total 18 return trust shall not be deducted from the distribution 19 amount. 20 (2) Unless otherwise provided by the governing 21 instrument, the trustee shall fund the distribution 22 amount each year from the following sources for that year 23 in the order listed: first from net income (as the term 24 would be determined if the trust were not a total return 25 trust), then from other ordinary income as determined for 26 federal income tax purposes, then from net realized 27 short-term capital gains as determined for federal income 28 tax purposes, then from net realized long-term capital 29 gains as determined for federal income tax purposes, then 30 from trust principal comprised of assets for which there 31 is a readily available market value, and then from other 32 trust principal. 33 (g) Court orders. The court may order any of the 34 following actions in a proceeding brought by a trustee or a SB1697 Enrolled -8- LRB9213119WHcs 1 beneficiary in accordance with subdivision (c)(1), (c)(2), or 2 (c)(3): 3 (1) select a distribution percentage other than 4%; 4 (2) average the valuation of the trust's net assets 5 over a period other than 3 years; 6 (3) reconvert prospectively from or adjust the 7 distribution percentage of a total return trust; 8 (4) direct the distribution of net income 9 (determined as if the trust were not a total return 10 trust) in excess of the distribution amount as to any or 11 all trust assets if the distribution is necessary to 12 preserve a tax benefit; or 13 (5) change or direct any administrative procedure 14 as the court determines necessary or helpful for the 15 proper functioning of the total return trust. 16 Nothing in this subsection (g) limits the equitable 17 powers of the court to grant other relief. 18 (h) Restrictions. The distribution amount may not be 19 less than the net income of the trust, determined without 20 regard to the provisions of this Section, for either a trust 21 for which an estate tax or a gift tax marital deduction was 22 or may be claimed in whole or in part (but only during the 23 lifetime of the spouse for whom the trust was created), or a 24 trust that was exempt in whole or in part from 25 generation-skipping transfer tax on the effective date of 26 this amendatory Act of the 92nd General Assembly by reason of 27 any effective date or transition rule. Conversion to a total 28 return trust does not affect any provision in the governing 29 instrument: 30 (1) directing or authorizing the trustee to 31 distribute principal; 32 (2) directing or authorizing the trustee to 33 distribute a fixed annuity or a fixed fraction of the 34 value of trust assets; SB1697 Enrolled -9- LRB9213119WHcs 1 (3) authorizing a beneficiary to withdraw a portion 2 or all of the principal; or 3 (4) in any manner that would diminish an amount 4 permanently set aside for charitable purposes under the 5 governing instrument unless both income and principal are 6 so set aside. 7 (i) Tax limitations. If a particular trustee is a 8 beneficiary of the trust and conversion or failure to convert 9 would enhance or diminish the beneficial interest of the 10 trustee, or if possession or exercise of the conversion power 11 by a particular trustee would alone cause any individual to 12 be treated as owner of a part of the trust for income tax 13 purposes or cause a part of the trust to be included in the 14 gross estate of any individual for estate tax purposes, then 15 that particular trustee may not participate as a trustee in 16 the exercise of the conversion power; however: 17 (1) the trustee may petition the court under 18 subdivision (c)(1) to order conversion in accordance with 19 this Section; and 20 (2) if the trustee has one or more co-trustees to 21 whom this subsection (i) does not apply, the co-trustee 22 or co-trustees may convert the trust to a total return 23 trust in accordance with this Section. 24 (j) Releases. A trustee may irrevocably release the 25 power granted by this Section if the trustee reasonably 26 believes the release is in the best interests of the trust 27 and its beneficiaries. The release may be personal to the 28 releasing trustee or may apply generally to some or all 29 subsequent trustees, and the release may be for any specified 30 period, including a period measured by the life of an 31 individual. 32 (k) Remedies. A trustee who reasonably and in good faith 33 takes or omits to take any action under this Section is not 34 liable to any person interested in the trust. If a trustee SB1697 Enrolled -10- LRB9213119WHcs 1 reasonably and in good faith takes or omits to take any 2 action under this Section and a person interested in the 3 trust opposes the act or omission, the person's exclusive 4 remedy is to obtain an order of the court directing the 5 trustee to convert the trust to a total return trust, to 6 reconvert from a total return trust, to change the 7 distribution percentage, or to order any administrative 8 procedures the court determines necessary or helpful for the 9 proper functioning of the trust. An act or omission by a 10 trustee under this Section is presumed taken or omitted 11 reasonably and in good faith unless it is determined by the 12 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 15 barred if not asserted in a proceeding commenced by or on 16 behalf of the person within 2 years after the trustee has 17 sent to the person or the person's personal representative a 18 notice or report in writing sufficiently disclosing facts 19 fundamental to the claim such that the person knew or 20 reasonably should have known of the claim. The preceding 21 sentence shall not apply to a person who was under a legal 22 disability at the time the notice or report was sent and who 23 then had no personal representative. For purposes of this 24 subsection (k), a personal representative refers to a court 25 appointed guardian or conservator of the 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 29 Section shall be construed as pertaining to the 30 administration of a trust and shall be available to any trust 31 that is administered in Illinois under Illinois law or that 32 is governed by Illinois law with respect to the meaning and 33 effect of its terms unless: 34 (1) the trust is a trust described in Internal SB1697 Enrolled -11- LRB9213119WHcs 1 Revenue Code Section 170(f)(2)(B), 664(d), 1361(d), 2 2702(a)(3), or 2702(b); or 3 (2) the governing instrument expressly prohibits 4 use of this Section by specific reference to this 5 Section. A provision in the governing instrument in the 6 form: "Neither the provisions of Section 5.3 of the 7 Trusts and Trustees Act nor any corresponding provision 8 of future law may be used in the administration of this 9 trust" or a similar provision demonstrating that intent 10 is sufficient to preclude the use of this Section. 11 Section 99. Effective date. This Act takes effect upon 12 becoming law.