On July 12, 2019, Illinois became the 34th state (along with the District of Columbia) to adopt a version of the Uniform Trust Code (UTC). The new statute, known as the Illinois Trust Code (ITC), has replaced the Illinois Trust and Trustees Act (Act) and other Illinois statutes related to trusts, effective as of January 1, 2020. In addition to adopting the UTC, the ITC codifies numerous concepts of Illinois common law on trusts, including those with respect to fiduciary duties of trustees, creditors’ rights, capacity to create a trust, and remedies for breach of trust. By codifying portions of Illinois common law, the ITC makes these codified concepts easier to plead for practitioners and will hopefully lead to more consistent judicial rulings in such areas.
The most important portions of the ITC for practitioners, however, are those that constitute a material change to Illinois law. Below is an overview of the most significant changes to Illinois law under the ITC.
Silent Trusts and Other Notice and Accounting Changes
For the foreseeable future, Illinois practitioners will need to be familiar with both the Act and the ITC with respect to a trustee’s duties to inform and account as the ITC applies the new rules in these areas prospectively only. 760 ILCS 3/813.1(a). Under the Act, a trustee is required to furnish an annual accounting to all beneficiaries “entitled to receive or receiving the income from the trust estate, or if none, then” to all permissible income beneficiaries. 760 ILCS 5/11(a). This requirement may be waived by the settlor in the trust instrument. This rule has been incorporated into the ITC and continues unchanged for trusts that became irrevocable before January 1, 2020, and for revocable trusts with trustees who accepted their trusteeship before that date (collectively, pre-ITC trusts). 760 ILCS 3/813.2(a), (b).
For trusts that became irrevocable on or after January 1, 2020 and revocable trusts with trustees who accept the trusteeship on or after that date (collectively, post-ITC trusts), the ITC expands the class of beneficiaries to whom a trustee must provide an annual accounting to include all current beneficiaries, whether mandatory or permissible beneficiaries of income or principal, and all presumptive remainder beneficiaries of a trust. See 760 ILCS 3/103(9); 760 ILCS 3/813.1(b)(2), (3). Although a trust instrument may eliminate mandatory annual accountings with respect to presumptive remainder beneficiaries, it can no longer do so with respect to current beneficiaries. 760 ILCS 3/105(b)(11). The ITC also imposes new notice and information requirements on trustees of post-ITC trusts that cannot be waived under the trust instrument. 760 ILCS 3/105(b)(10); 760 ILCS 3/813.1(d). With respect to both revocable pre-ITC trusts and revocable post-ITC trusts, a trustee’s duties to inform and account are owed solely to the settlor thereof so long as the settlor personally has capacity to revoke the trust and to the settlor and the current beneficiaries of the trust during any period when the settlor is incapacitated. 760 ILCS 3/603(b), (c). These new trustee duties will necessitate updates to trust form documents to comply with the mandatory aspects of these rules, to opt out of default rules, and to take advantage of the representation provisions discussed below. They will also require changes to the processes for notice and accounting for corporate fiduciaries.
Practitioners may wish to create a default provision in their trust instruments to eliminate the requirement to provide annual accountings to presumptive remainder beneficiaries, but they should consider whether accountings should be provided to presumptive remainder beneficiaries during periods when the trustee is also the sole current beneficiary of the trust, when children from a first marriage are presumptive remainder beneficiaries of a trust for the benefit of a second spouse, and under other circumstances.
Although the ITC imposes more burdensome notice and accounting provisions on trustees than the Act, it also provides greater flexibility to settlors and trustees with respect to the representation of beneficiaries for such purposes. Under the Act, information, notices, and accountings must be provided directly to those beneficiaries entitled thereto unless the beneficiary is under a legal disability or the trust instrument eliminates the requirement. See 760 ILCS 5/11(e). The ITC dramatically expands these representation provisions by further permitting beneficiaries to be represented by a court-appointed representative, the holder of a power of appointment, or a designated representative. 760 ILCS 3/301(a); 760 ILCS 3/302; 760 ILCS 3/305; and 760 ILCS 3/307. All notices, information, and accountings provided to the representative of a beneficiary and all actions taken by the representative on behalf of the beneficiary, including the execution of consents, releases, and agreements, are given the same effect as if provided to or taken by the beneficiary. Id. Therefore, in cases in which it is not desirable to provide notice, information, or accountings to a beneficiary, good drafting can effectively eliminate these requirements by creating a silent trust with respect to such beneficiary. These new silent trust provisions are a powerful tool for Illinois practitioners and eliminate the need for Illinois residents to incur the costs of creating trusts in other jurisdictions solely for the silent trust attribute.
Under the ITC, a trust instrument may designate one or more individuals known as “designated representatives,” acting in a fiduciary capacity, to represent and bind a current beneficiary or presumptive remainder beneficiary who is under the age of 30 years old and may include designated representative appointment provisions. 760 ILCS 3/307(a), (b)(1), and (c). A designated representative may not bind a beneficiary while she is also serving as trustee and may not be a current or presumptive remainder beneficiary of the trust unless she is specifically nominated under the trust instrument or is a close family member of the beneficiary. 760 ILCS 307(b)(2), (3).
Given the age and other limitations on the use of a designated representative, the ability of the holder of a power of appointment to represent and bind beneficiaries under the ITC may be even more important for drafters. The holder of a testamentary or inter vivos general or broad special power of appointment (i.e., a power of appointment exercisable in favor of all persons other than the powerholder, the powerholder’s estate, or the creditors of either) “may represent and bind all persons, including permissible appointees and takers in default, whose interests may be eliminated by the exercise or nonexercise of the power,” regardless of a beneficiary’s age or capacity. 769 ILC 3/302(a). Unless otherwise waived in the trust instrument, the holder of a more limited testamentary or inter vivos power of appointment may only represent and bind such interested persons if there is no conflict of interest between the interested person and the power holder. 760 ILCS 3/303(b).
For post-ITC trusts with spray provisions, practitioners should consider whether settlors would prefer to avoid providing accountings, notices, and information to certain current beneficiaries such as the settlor’s children during the lifetime of the settlor’s surviving spouse or the descendants of a primary beneficiary. To avoid these accounting requirements, the trust could name a designated representative for current beneficiaries who are incapacitated or under the age of 30 years old or confer a testamentary or inter vivos general or broad special power of appointment of appointment on a surviving spouse, primary beneficiary, trust protector, or other person so that the required notice may be provided to a representative of the current beneficiary instead of directly to the current beneficiary. Alternatively, the trust instrument could remove the spray provision altogether in favor of an inter vivos limited power of appointment under which the eliminated beneficiaries are permissible appointees. Practitioners need to pay close attention to the representation provisions under Article 3 of the ITC in drafting provisions necessary to achieve the desired notice, information, and accounting results.
Modification of Trust
The ITC expands the power of Illinois courts to modify irrevocable trusts beyond situations involving unanticipated circumstances or the inability to administer a trust effectively. Under the new law, Illinois courts have the authority to modify an irrevocable trust for any reason with the consent of all beneficiaries (or their representatives) so long as the modification is not inconsistent with any material purpose of the trust. 760 ILCS 3/411(b). Beneficiaries may particularly seek out this method for trust modification when a nonjudicial settlement agreement is unavailable either because the trustee refuses to (or would prefer not to) provide consent or the subject matter of the modification is outside of the scope of what is permitted by a nonjudicial settlement agreement (which scope was reduced in the ITC by the elimination of the catch-all provision under the Act). See 760 ILCS 3/111(b); 760 ILCS 5/16.1(d)(4)(M).
Both the Act and the ITC impose a duty on a trustee “not to delegate to others the performance of any acts involving the exercise of judgment and discretion.” 760 ILCS 3/807(a); 760 ILCS 5/5.1(a). Under current Illinois law, the only exception to this general rule is a trustee’s ability to delegate with respect to investment functions. 760 ILCS 5/5.1(a). The ITC expands the ability of trustees to delegate acts involving the exercise of judgment and discretion to any type of delegated function so long as “a prudent trustee of comparable skills could properly delegate under the circumstances,” and the trustee exercises reasonable care, skill, and caution in selecting the agent, monitoring the agent’s actions, and establishing the scope and terms of the delegation. 760 ILCS 3/807(b). This change will be particularly important for unsophisticated trustees.
The ITC provides savings clauses to prevent the unintentional creation of general powers of appointment by limiting discretionary distributions to an ascertainable standard for any beneficiary (other than the settlor) who is also acting as trustee and for any beneficiary who removed a fiduciary and appointed (without the consent of an adverse party) a related or subordinate fiduciary to act in its place. 760 ILCS 3/814(b)(1), (c). When a general power of appointment or broader discretionary standard is intended, practitioners need to expressly opt out of the savings clauses. 760 ILCS 3/814(b).
Shorter Statutes of Limitations
The ITC shortens the statute of limitations for breach of trust actions with respect to post-ITC trusts to two years from the date the information or accounting is provided but retains the current three-year period for any such actions with respect to pre-ITC trusts. See 760 ILCS 5/11(a); 760 ILCS 3/1005(a)(1), (2).
The ITC also provides a mechanism for shortening the statute of limitations with respect to trust contests of revocable trusts. Prior Illinois law allowed only interested persons to shorten the statute of limitations for contests of revocable trusts “to which a legacy is provided by the settlor’s will which is admitted to probate…” 755 ILCS 5/8-1(f). The ITC shortens the statute of limitations for all revocable trusts to two years after the settlor’s death and allows a trustee to further shorten this period to six months if the settlor’s will is admitted to probate or if the trustee sends all beneficiaries (or their representatives) “a copy of the trust instrument and a notice informing the person of the trust’s existence, the trustee’s name and address, and of the 6-month period” for contesting the trust. 760 ILCS 3/604(a). This change eliminates the need to open a probate estate for a deceased Illinois domiciliary solely to start the clock running on actions to contest the decedent’s revocable trust.
The ITC retains much of the Act and settled Illinois common law while providing more advanced administrative techniques for settlors and trustees. Practitioners will want to learn these new rules not only to take advantage of them but also to avoid unintended consequences caused by mandatory provisions that contradict the trust instrument and default provisions that are not explicitly waived thereby.