Public Act 097-0920

HB4662 Enrolled LRB097 14569 AJO 59425 b

AN ACT concerning civil law.

Be it enacted by the People of the State of Illinois,

represented in the General Assembly:

Section 5. The Trust and Trustees Act is amended by adding

Section 16.4 as follows:

(760 ILCS 5/16.4 new)

Sec. 16.4. Distribution of trust principal in further

trust.

(a) Definitions. In this Section:

"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,

whether or not the term "absolute" is used. A power to

distribute principal that includes purposes such as best

interests, welfare, or happiness shall constitute absolute

discretion.

"Authorized trustee" means an entity or individual, other

than the settlor, who has authority under the terms of the

first trust to distribute the principal of the trust for the

benefit of one or more current beneficiaries.

"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.

"Current beneficiary" means a person who is currently

receiving or eligible to receive a distribution of principal or

income from the trustee on the date of the exercise of the

power.

"Distribute" means the power to pay directly to the

beneficiary of a trust or make application for the benefit of

the beneficiary.

"First trust" means an existing irrevocable inter vivos or

testamentary trust part or all of the principal of which is

distributed in further trust under subsection (c) or (d).

"Presumptive remainder beneficiary" means a beneficiary of

a trust, as of the date of determination and assuming

non-exercise of all powers of appointment, who either (i) would

be eligible to receive a distribution of income or principal if

the trust terminated on that date, or (ii) would be eligible to

receive a distribution of income or principal if the interests

of all beneficiaries currently eligible to receive income or

principal from the trust ended on that date without causing the

trust to terminate.

"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.

"Second trust" means any irrevocable trust to which

principal is distributed in accordance with subsection (c) or

(d).

"Successor beneficiary" means any beneficiary other than

the current and presumptive remainder beneficiaries, but does

not include a potential appointee of a power of appointment

held by a beneficiary.

(b) Purpose. An independent trustee who has discretion to

make distributions to the beneficiaries shall exercise that

discretion in the trustee's fiduciary capacity, whether the

trustee's discretion is absolute or limited to ascertainable

standards, in furtherance of the purposes of the trust.

(c) Distribution to second trust if absolute discretion. An

authorized trustee who has the absolute discretion to

distribute the principal of a trust may distribute part or all

of the principal of the trust in favor of a trustee of a second

trust for the benefit of one, more than one, or all of the

current beneficiaries of the first trust and for the benefit of

one, more than one, or all of the successor and remainder

beneficiaries of the first trust.

(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 second trust to one or more of the

current beneficiaries of the first trust, provided that the

beneficiary granted a power to appoint could receive the

principal outright under the terms of the first 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 second trust may be broader than or

otherwise different from the current, successor, and

presumptive remainder beneficiaries of the first trust.

(3) If the beneficiary or beneficiaries of the first

trust are described as a class of persons, the beneficiary

or beneficiaries of the second trust may include one or

more persons of such class who become includible in the

class after the distribution to the second trust.

(d) Distribution to second trust if no absolute discretion.

An authorized trustee who has the power to distribute the

principal of a trust but does not have the absolute discretion

to distribute the principal of the trust may distribute part or

all of the principal of the first trust in favor of a trustee

of a second trust, provided that the current beneficiaries of

the second trust shall be the same as the current beneficiaries

of the first trust and the successor and remainder

beneficiaries of the second trust shall be the same as the

successor and remainder beneficiaries of the first trust.

(1) If the authorized trustee exercises the power under

this subsection (d), the second trust shall include the

same language authorizing the trustee to distribute the

income or principal of a trust as set forth in the first

trust.

(2) If the beneficiary or beneficiaries of the first

trust are described as a class of persons, the beneficiary

or beneficiaries of the second trust shall include all

persons who become includible in the class after the

distribution to the second trust.

(3) If the authorized trustee exercises the power under

this subsection (d) and if the first trust grants a power

of appointment to a beneficiary of the trust, the second

trust shall grant such power of appointment in the second

trust and the class of permissible appointees shall be the

same as in the first trust.

(4) Supplemental Needs Trusts.

(i) Notwithstanding the other provisions of this

subsection (d), the authorized trustee may distribute

part or all of the principal of a disabled

beneficiary's interest in the first trust in favor of a

trustee of a second trust which is a supplemental needs

trust if the authorized trustee determines that to do

so would be in the best interests of the disabled

beneficiary.

(ii) Definitions. For purposes of this subsection

(d):

"Best interests" of a disabled beneficiary

include, without limitation, consideration of the

financial impact to the disabled beneficiary's

family.

"Disabled beneficiary" means a current

beneficiary, presumptive remainder beneficiary, or

successor beneficiary of the first trust who the

authorized trustee determines has a disability

that substantially impairs the beneficiary's

ability to provide for his or her own care or

custody and that constitutes a substantial

handicap, whether or not the beneficiary has been

adjudicated a "disabled person".

"Governmental benefits" means financial aid or

services from any State, Federal, or other public

agency.

"Supplemental needs second trust" means a

trust that complies with paragraph (iii) of this

paragraph (4) and that relative to the first trust

contains either lesser or greater restrictions on

the trustee's power to distribute trust income or

principal and which the trustee believes would, if

implemented, allow the disabled beneficiary to

receive a greater degree of governmental benefits

than the disabled beneficiary will receive if no

distribution is made.

(iii) Remainder beneficiaries. A supplemental

needs second trust may name remainder and successor

beneficiaries other than the disabled beneficiary's

estate, provided that the second trust names the same

presumptive remainder beneficiaries and successor

beneficiaries to the disabled beneficiary's interest,

and in the same proportions, as exist in the first

trust. In addition to the foregoing, where the first

trust was created by the disabled beneficiary or the

trust property has been distributed directly to or is

otherwise under the control of the disabled

beneficiary, the authorized trustee may distribute to

a "pooled trust" as defined by federal Medicaid law for

the benefit of the disabled beneficiary or the

supplemental needs second trust must contain pay back

provisions complying with Medicaid reimbursement

requirements of federal law.

(iv) Reimbursement. A supplemental needs second

trust shall not be liable to pay or reimburse the State

or any public agency for financial aid or services to

the disabled beneficiary except as provided in the

supplemental needs second trust.

(e) Notice. An authorized trustee may exercise the power to

distribute in favor of a second trust under subsections (c) and

(d) without the consent of the settlor or the beneficiaries of

the first trust and without court approval if:

(1) there are one or more legally competent current

beneficiaries and one or more legally competent

presumptive remainder beneficiaries and the authorized

trustee sends written notice of the trustee's decision,

specifying the manner in which the trustee intends to

exercise the power and the prospective effective date for

the distribution, to all of the legally competent current

beneficiaries and presumptive remainder beneficiaries,

determined as of the date the notice is sent and assuming

non-exercise of all powers of appointment; and

(2) no beneficiary to whom notice was sent objects to

the distribution in writing delivered to the trustee within

60 days after the notice is sent ("notice period").

A trustee is not required to provide a copy of the notice

to a beneficiary who is known to the trustee but who cannot be

located by the trustee after reasonable diligence or who is not

known to the trustee.

If a charity is a current beneficiary or presumptive

remainder beneficiary of the trust, the notice shall also be

given to the Attorney General's Charitable Trust Bureau.

(f) Court involvement.

(1) The trustee may for any reason elect to petition

the court to order the distribution, including, without

limitation, the reason that the trustee's exercise of the

power to distribute under this Section is unavailable, such

as:

(a) a beneficiary timely objects to the

distribution in a writing delivered to the trustee

within the time period specified in the notice; or

(b) there are no legally competent current

beneficiaries or legally competent presumptive

remainder beneficiaries.

(2) If the trustee receives a written objection within

the notice period, either the trustee or the beneficiary

may petition the court to approve, modify, or deny the

exercise of the trustee's powers. The trustee has the

burden of proving the proposed exercise of the power

furthers the purposes of the trust.

(3) In a judicial proceeding under this subsection (f),

the trustee may, but need not, present the trustee's

opinions and reasons for supporting or opposing the

proposed distribution, including whether the trustee

believes it would enable the trustee to better carry out

the purposes of the trust. A trustee's actions in

accordance with this Section shall not be deemed improper

or inconsistent with the trustee's duty of impartiality

unless the court finds from all the evidence that the

trustee acted in bad faith.

(g) Term of the second trust. The second trust to which an

authorized trustee distributes the assets of the first trust

may have a term that is longer than the term set forth in the

first trust, including, but not limited to, a term measured by

the lifetime of a current beneficiary; provided, however, that

the second trust shall be limited to the same permissible

period of the rule against perpetuities that applied to the

first trust, unless the first trust expressly permits the

trustee to extend or lengthen its perpetuities period.

(h) Divided discretion. If an authorized trustee has

absolute discretion to distribute the principal of a trust and

the same trustee or another trustee has the power to distribute

principal under the trust instrument which power is not

absolute discretion, such authorized trustee having absolute

discretion may exercise the power to distribute under

subsection (c).

(i) Later discovered assets. To the extent the authorized

trustee does not provide otherwise:

(1) The distribution of all of the assets comprising

the principal of the first trust in favor of a second trust

shall be deemed to include subsequently discovered assets

otherwise belonging to the first trust and undistributed

principal paid to or acquired by the first trust subsequent

to the distribution in favor of the second trust.

(2) The distribution of part but not all of the assets

comprising the principal of the first trust in favor of a

second trust shall not include subsequently discovered

assets belonging to the first trust and principal paid to

or acquired by the first trust subsequent to the

distribution in favor of a second trust; such assets shall

remain the assets of the first trust.

(j) Other authority to distribute in further trust. This

Section shall not be construed to abridge the right of any

trustee to distribute property in further trust that arises

under the terms of the governing instrument of a trust, any

provision of applicable law, or a court order. In addition,

distribution of trust principal to a second trust may be made

by agreement between a trustee and all primary beneficiaries of

a first trust, acting either individually or by their

respective representatives in accordance with Section 16.1 of

this Act.

(k) Need to distribute not required. An authorized trustee

may exercise the power to distribute in favor of a second trust

under subsections (c) and (d) whether or not there is a current

need to distribute principal under the terms of the first

trust.

(l) No duty to distribute. Nothing in this Section is

intended to create or imply a duty to exercise a power to

distribute principal, and no inference of impropriety shall be

made as a result of an authorized trustee not exercising the

power conferred under subsection (c) or (d). Notwithstanding

any other provision of this Section, a trustee has no duty to

inform beneficiaries about the availability of this Section and

no duty to review the trust to determine whether any action

should be taken under this Section.

(m) Express prohibition. A power authorized by subsection

(c) or (d) 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 first trust or a provision

that constitutes a spendthrift clause shall not preclude the

exercise of a power under subsection (c) or (d).

(n) Restrictions. An authorized trustee may not exercise a

power authorized by subsection (c) or (d) to affect 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, except with respect to a second trust

which is a supplemental needs trust;

(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;

except to indemnify or exonerate one party from liability

for actions of another party with respect to distribution

that unbundles the governance structure of a trust to

divide and separate fiduciary and nonfiduciary

responsibilities among several parties, including without

limitation one or more trustees, distribution advisors,

investment advisors, trust protectors, or other parties,

provided however that such modified governance structure

may reallocate fiduciary responsibilities from one party

to another but may not reduce them;

(3) to eliminate a provision granting another person

the right to remove or replace the authorized trustee

exercising the power under subsection (c) or (d); provided,

however, such person's right to remove or replace the

authorized trustee may be eliminated if a separate

independent, non-subservient individual or entity, such as

a trust protector, acting in a nonfiduciary capacity has

the right to remove or replace the authorized trustee;

(4) to reduce, limit or modify the perpetuities

provision specified in the first trust in the second trust,

unless the first trust expressly permits the trustee to do

so.

(o) Exception. Notwithstanding the provisions of paragraph

(1) of subsection (n) but subject to the other limitations in

this Section, an authorized trustee may exercise a power

authorized by subsection (c) or (d) to distribute to a second

trust; provided, however, that the exercise of such power does

not subject the second trust to claims of reimbursement by any

private or governmental body and does not at any time interfere

with, reduce the amount of, or jeopardize an individual's

entitlement to government benefits.

(p) Tax limitations. If any contribution to the first 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 (c) or (d) for income, gift, estate, or

generation-skipping transfer tax purposes under the Code, then

the authorized trustee shall not have the power to distribute

the principal of a trust pursuant to subsection (c) or (d) in a

manner that would prevent the contribution to the first 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 provisions of this subsection

(p), the authorized trustee may exercise the power to pay

the first trust to a trust as to which the settlor of the

first 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

first trust. Nothing in this Section shall be construed as

preventing the authorized trustee from distributing part

or all of the first trust to a second trust that is a trust

as to which the settlor of the first 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 first trust owns

subchapter S corporation stock, an authorized trustee may

not exercise a power authorized by paragraph (c) or (d) to

distribute part or all of the S corporation stock to a

second trust that is not a permitted shareholder under

Section 1361(c)(2) of the Code.

(3) During any period when the first 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

(c) or (d) to distribute part or all of the interest in

such property to a second trust that would result in the

shortening of the minimum distribution period to which the

property is subject in the first trust.

(q) Limits on compensation of trustee.

(1) Unless the court upon application of the trustee

directs otherwise, an authorized trustee may not exercise a

power authorized by subsection (c) or (d) solely to change

the provisions regarding the determination of the

compensation of any trustee; provided, however, an

authorized trustee may exercise the power authorized in

subsection (c) or (d) in conjunction with other valid and

reasonable purposes to bring the trustee's compensation

into accord with reasonable limits in accord with Illinois

law in effect at the time of the exercise.

(2) The compensation payable to the trustee or trustees

of the first trust may continue to be paid to the trustees

of the second trust during the terms of the second trust

and may be determined in the same manner as otherwise would

have applied in the first trust; provided, however, that no

trustee shall receive any commission or other compensation

imposed upon assets distributed due to the distribution of

property from the first trust to a second trust pursuant to

subsection (c) or (d).

(r) Written instrument. The exercise of a power to

distribute principal under subsection (c) or (d) must be made

by an instrument in writing, signed and acknowledged by the

trustee, and filed with the records of the first trust and the

second trust.

(s) Terms of second trust. Any reference to the governing

instrument or terms of the governing instrument in this Act

includes the terms of a second trust established in accordance

with this Section.

(t) Settlor. The settlor of a first trust is considered for

all purposes to be the settlor of any second trust established

in accordance with this Section. If the settlor of a first

trust is not also the settlor of a second trust, then the

settlor of the first trust shall be considered the settlor of

the second trust, but only with respect to the portion of

second trust distributed from the first trust in accordance

with this Section.

(u) Remedies. A trustee who reasonably and in good faith

takes or omits to take any action under this Section is not

liable to any person interested in the trust. An act or

omission by a trustee under this Section is presumed taken or

omitted reasonably and in good faith unless it is determined by

the court to have been an abuse of discretion. If a trustee

reasonably and in good faith takes or omits to take any action

under this Section and a person interested in the trust opposes

the act or omission, the person's exclusive remedy is to obtain

an order of the court directing the trustee to exercise

authority in accordance with this Section in such manner as the

court determines necessary or helpful for the proper

functioning of the trust, including without limitation

prospectively to modify or reverse a prior exercise of such

authority. Any claim by any person interested in the trust that

an act or omission by a trustee under this Section was an abuse

of discretion is barred if not asserted in a proceeding

commenced by or on behalf of the person within 2 years after

the trustee has sent to the person or the person's personal

representative a notice or report in writing sufficiently

disclosing facts fundamental to the claim such that the person

knew or reasonably should have known of the claim. Except for a

distribution of trust principal from a first trust to a second

trust made by agreement in accordance with Section 16.1 of this

Act, the preceding sentence shall not apply to a person who was

under a legal disability at the time the notice or report was

sent and who then had no personal representative. For purposes

of this subsection (u), a personal representative refers to a

court appointed guardian or conservator of the estate of a

person.

(v) Application. This Section is available to trusts in

existence on the effective date of this amendatory Act of the

97th General Assembly or created on or after the effective date

of this amendatory Act of the 97th General Assembly. This

Section shall be construed as pertaining to the 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, including a trust whose governing law has been changed

to the laws of this State, unless the governing instrument

expressly prohibits use of this Section by specific reference

to this Section. A provision in the governing instrument in the

form: "Neither the provisions of Section 16.4 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 this Section.