State of Illinois
92nd General Assembly
Legislation

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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.

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