Bill Text: IL SB0188 | 2009-2010 | 96th General Assembly | Enrolled

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Bill Title: Amends the Trusts and Trustees Act. Provides that a trust may be converted to a total return trust by an agreement of the trustee and all primary beneficiaries or all beneficiaries receiving income or principal and presumptive trust remaindermen (instead of all primary beneficiaries under the applicable virtual representation provisions of the Act). Provides that if there is no conflict of interest, a represented person, including a primary beneficiary or presumptive remainder beneficiary, and a minor, disabled, or unborn or unknown persons may be represented and bound by a party with a substantially identical interest. Provides that a total return trust conversion may be made between the trustee and all primary beneficiaries or other beneficiaries and presumptive remaindermen. Provides that a trust that provides a beneficial interest to a charity or charitable purpose not specifically named in the trust shall be known as a charitable interest and the Attorney General may represent and act on behalf of the charitable interest as to any dispute, including a nonjudicial settlement or a total return trust conversion. Provides that a nonjudicial settlement agreement between a trustee and all interested parties whose consent or joinder would be required for court approval is valid as to the matters of a trustee's appointment, compensation, liability, or indemnification (instead of if all primary beneficiaries of a trust are adults any written agreement, other than a trust termination agreement, construing trust provisions regarding the trustee, between a trustee and all of the primary beneficiaries of a trust shall be final and binding on the trustee and all beneficiaries of the trust, both current and future, as if ordered by a court). These provisions apply to all existing and future trusts, court proceedings, and agreements entered into under this Section on or after the effective date (instead of these provisions apply to all existing and future trusts, but only as to agreements made on or after the effective date). Includes other provisions.

Spectrum: Partisan Bill (Republican 1-0)

Status: (Passed) 2009-08-14 - Public Act . . . . . . . . . 96-0479 [SB0188 Detail]

Download: Illinois-2009-SB0188-Enrolled.html

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AN ACT concerning civil law.
Be it enacted by the People of the State of Illinois,
represented in the General Assembly:
Section 5. The Trusts and Trustees Act is amended by
changing Sections 5.3 and 16.1 as follows:
(760 ILCS 5/5.3)
Sec. 5.3. Total return trusts.
(a) Conversion by trustee. A trustee may convert a trust to
a total return trust as described in this Section if all of the
following apply:
(1) The trust describes the amount that may or must be
distributed to a beneficiary by referring to the trust's
income, and the trustee determines that conversion to a
total return trust will enable the trustee to better carry
out the purposes of the trust and the conversion is in the
best interests of the beneficiaries;
(2) conversion to a total return trust means the
trustee will invest and manage trust assets seeking a total
return without regard to whether that return is from income
or appreciation of principal, and will make distributions
in accordance with this Section (such a trust is called a
"total return trust" in this Section);
(3) the trustee sends a written notice of the trustee's

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decision to convert the trust to a total return trust,
specifying a prospective effective date for the conversion
and including a copy of this Section, to the following
beneficiaries, determined as of the date the notice is sent
and assuming nonexercise of all powers of appointment:
(A) all of the legally competent beneficiaries who
are currently receiving or eligible to receive income
from the trust; and
(B) all of the legally competent beneficiaries who
would receive or be eligible to receive a distribution
of principal or income if the current interests of
beneficiaries currently receiving or eligible to
receive income ended;
(4) there are one or more legally competent income
beneficiaries under subdivision (3)(A) of this subsection
(a) and one or more legally competent remainder
beneficiaries under subdivision (3)(B) of this subsection
(a), determined as of the date of sending the notice;
(5) no beneficiary objects to the conversion to a total
return trust in a writing delivered to the trustee within
60 days after the notice is sent; and
(6) the trustee has signed acknowledgments of receipt
confirming that notice was received by each beneficiary
required to be sent notice under subdivision (3) of this
subsection (a).
(b) Conversion by agreement. Conversion to a total return

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trust may be made by agreement between a trustee and (i) all
primary beneficiaries, either individually or by their
respective representatives in accordance with subsection
16.1(a)(2) of this Act, or (ii) all beneficiaries currently
eligible to receive income or principal from the trust and all
beneficiaries who are presumptive remaindermen, either
individually or by their respective representatives in
accordance with subsection 16.1(a)(3) of this Act all the
primary beneficiaries of the trust under the virtual
representation provisions of Section 16.1 of this Act if those
provisions otherwise apply. The agreement may include any
actions a court could properly order under subsection (g) of
this Section; however, any distribution percentage determined
by the agreement may not be less than 3% nor greater than 5%.
(c) Conversion or reconversion by court.
(1) The trustee may for any reason elect to petition
the court to order conversion to a total return trust,
including without limitation the reason that conversion
under subsection (a) is unavailable because:
(A) a beneficiary timely objects to the conversion
to a total return trust;
(B) there are no legally competent beneficiaries
described in subdivision (3)(A) of subsection (a); or
(C) there are no legally competent beneficiaries
described in subdivision (3)(B) of subsection (a).
(2) A beneficiary may request the trustee to convert to

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a total return trust or adjust the distribution percentage.
If the trustee declines or fails to act within 6 months
after receiving a written request to do so, the beneficiary
may petition the court to order the conversion or
adjustment.
(3) The trustee may petition the court prospectively to
reconvert from a total return trust or adjust the
distribution percentage if the trustee determines that the
reconversion or adjustment will enable the trustee to
better carry out the purposes of the trust. A beneficiary
may request the trustee to petition the court prospectively
to reconvert from a total return trust or adjust the
distribution percentage. If the trustee declines or fails
to act within 6 months after receiving a written request to
do so, the beneficiary may petition the court to order the
reconversion or adjustment.
(4) In a judicial proceeding under this subsection (c),
the trustee may, but need not, present the trustee's
opinions and reasons (A) for supporting or opposing
conversion to (or reconversion from or adjustment of the
distribution percentage of) a total return trust,
including whether the trustee believes conversion (or
reconversion or adjustment of the distribution percentage)
would enable the trustee to better carry out the purposes
of the trust, and (B) about any other matters relevant to
the proposed conversion (or reconversion or adjustment of

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the distribution percentage). A trustee's actions in
accordance with this subsection (c) 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.
(5) The court shall order conversion to (or
reconversion prospectively from or adjustment of the
distribution percentage of) a total return trust if the
court determines that the conversion (or reconversion or
adjustment of the distribution percentage) will enable the
trustee to better carry out the purposes of the trust and
the conversion (or reconversion or adjustment of the
distribution percentage) is in the best interests of the
beneficiaries.
(6) Notwithstanding any other provision of this
Section, a trustee has no duty to inform beneficiaries
about the availability of this Section and has no duty to
review the trust to determine whether any action should be
taken under this Section unless requested to do so in
writing by a beneficiary described in subdivision (3) of
subsection (a).
(d) Post conversion. While a trust is a total return trust,
all of the following shall apply to the trust:
(1) the trustee shall make income distributions in
accordance with the governing instrument subject to the
provisions of this Section;

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(2) the term "income" in the governing instrument means
an annual amount (the "distribution amount") equal to a
percentage (the "distribution percentage") of the net fair
market value of the trust's assets, whether the assets are
considered income or principal under the Principal and
Income Act, averaged over the lesser of:
(i) the 3 preceding years; or
(ii) the period during which the trust has been in
existence;
(3) the distribution percentage for any trust
converted to a total return trust by a trustee in
accordance with subsection (a) shall be 4%;
(4) the trustee shall pay to a beneficiary (in the case
of an underpayment) and shall recover from a beneficiary
(in the case of an overpayment) an amount equal to the
difference between the amount properly payable and the
amount actually paid, plus interest compounded annually at
a rate per annum equal to the distribution percentage in
the year or years while the underpayment or overpayment
exists; and
(5) a change in the method of determining a reasonable
current return by converting to a total return trust in
accordance with this Section and substituting the
distribution amount for net trust accounting income is a
proper change in the definition of trust income
notwithstanding any contrary provision of the Principal

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and Income Act, and the distribution amount shall be deemed
a reasonable current return that fairly apportions the
total return of a total return trust.
(e) Administration. The trustee, in the trustee's
discretion, may determine any of the following matters in
administering a total return trust as the trustee from time to
time determines necessary or helpful for the proper functioning
of the trust:
(1) the effective date of a conversion to a total
return trust;
(2) the manner of prorating the distribution amount for
a short year in which a beneficiary's interest commences or
ceases;
(3) whether distributions are made in cash or in kind;
(4) the manner of adjusting valuations and
calculations of the distribution amount to account for
other payments from or contributions to the trust;
(5) whether to value the trust's assets annually or
more frequently;
(6) what valuation dates and how many valuation dates
to use;
(7) valuation decisions about any asset for which there
is no readily available market value, including:
(A) how frequently to value such an asset;
(B) whether and how often to engage a professional
appraiser to value such an asset; and

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(C) whether to exclude the value of such an asset
from the net fair market value of the trust's assets
under subdivision (d)(2) for purposes of determining
the distribution amount. Any such asset so excluded is
referred to as an "excluded asset" in this subsection
(e), and the trustee shall distribute any net income
received from the excluded asset as provided for in the
governing instrument, subject to the following
principles:
(i) unless the trustee determines there are
compelling reasons to the contrary considering all
relevant factors including the best interests of
the beneficiaries, the trustee shall treat each
asset for which there is no readily available
market value as an excluded asset;
(ii) if tangible personal property or real
property is possessed or occupied by a
beneficiary, the trustee shall not limit or
restrict any right of the beneficiary to use the
property in accordance with the governing
instrument whether or not the trustee treats the
property as an excluded asset;
(iii) examples of assets for which there is a
readily available market value include: cash and
cash equivalents; stocks, bonds, and other
securities and instruments for which there is an

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established market on a stock exchange, in an
over-the-counter market, or otherwise; and any
other property that can reasonably be expected to
be sold within one week of the decision to sell
without extraordinary efforts by the seller;
(iv) examples of assets for which there is no
readily available market value include: stocks,
bonds, and other securities and instruments for
which there is no established market on a stock
exchange, in an over-the-counter market, or
otherwise; real property; tangible personal
property; and artwork and other collectibles; and
(8) any other administrative matters as the trustee
determines necessary or helpful for the proper functioning
of the total return trust.
(f) Allocations.
(1) Expenses, taxes, and other charges that would be
deducted from income if the trust were not a total return
trust shall not be deducted from the distribution amount.
(2) Unless otherwise provided by the governing
instrument, the trustee shall fund the distribution amount
each year from the following sources for that year in the
order listed: first from net income (as the term would be
determined if the trust were not a total return trust),
then from other ordinary income as determined for federal
income tax purposes, then from net realized short-term

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capital gains as determined for federal income tax
purposes, then from net realized long-term capital gains as
determined for federal income tax purposes, then from trust
principal comprised of assets for which there is a readily
available market value, and then from other trust
principal.
(g) Court orders. The court may order any of the following
actions in a proceeding brought by a trustee or a beneficiary
in accordance with subdivision (c)(1), (c)(2), or (c)(3):
(1) select a distribution percentage other than 4%;
(2) average the valuation of the trust's net assets
over a period other than 3 years;
(3) reconvert prospectively from or adjust the
distribution percentage of a total return trust;
(4) direct the distribution of net income (determined
as if the trust were not a total return trust) in excess of
the distribution amount as to any or all trust assets if
the distribution is necessary to preserve a tax benefit; or
(5) change or direct any administrative procedure as
the court determines necessary or helpful for the proper
functioning of the total return trust.
Nothing in this subsection (g) limits the equitable powers
of the court to grant other relief.
(h) Restrictions. Conversion to a total return trust does
not affect any provision in the governing instrument:
(1) directing or authorizing the trustee to distribute

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principal;
(2) directing or authorizing the trustee to distribute
a fixed annuity or a fixed fraction of the value of trust
assets;
(3) authorizing a beneficiary to withdraw a portion or
all of the principal; or
(4) in any manner that would diminish an amount
permanently set aside for charitable purposes under the
governing instrument unless both income and principal are
so set aside.
(i) Tax limitations. If a particular trustee is a
beneficiary of the trust and conversion or failure to convert
would enhance or diminish the beneficial interest of the
trustee, or if possession or exercise of the conversion power
by a particular trustee would alone cause any individual to be
treated as owner of a part of the trust for income tax purposes
or cause a part of the trust to be included in the gross estate
of any individual for estate tax purposes, then that particular
trustee may not participate as a trustee in the exercise of the
conversion power; however:
(1) the trustee may petition the court under
subdivision (c)(1) to order conversion in accordance with
this Section; and
(2) if the trustee has one or more co-trustees to whom
this subsection (i) does not apply, the co-trustee or
co-trustees may convert the trust to a total return trust

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in accordance with this Section.
(j) Releases. A trustee may irrevocably release the power
granted by this Section if the trustee reasonably believes the
release is in the best interests of the trust and its
beneficiaries. The release may be personal to the releasing
trustee or may apply generally to some or all subsequent
trustees, and the release may be for any specified period,
including a period measured by the life of an individual.
(k) 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. 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 convert the
trust to a total return trust, to reconvert from a total return
trust, to change the distribution percentage, or to order any
administrative procedures the court determines necessary or
helpful for the proper functioning of 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. 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

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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. 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 (k), a personal representative
refers to a court appointed guardian or conservator of the
estate of a person.
(l) Application. This Section is available to trusts in
existence on the effective date of this amendatory Act of the
92nd General Assembly or created after that date. 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 unless:
(1) the trust is a trust described in Internal Revenue
Code Section 642(c)(5), 664(d), 2702(a)(3), or 2702(b); or
(2) 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 5.3 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.

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(m) Application to express trusts.
(1) This subsection (m) does not apply to a charitable
remainder unitrust as defined by Section 664(d), Internal
Revenue Code of 1986 (26 U.S.C. Section 664), as amended.
(2) In this subsection (m):
(A) "Unitrust" means a trust the terms of which
require distribution of a unitrust amount, without
regard to whether the trust has been converted to a
total return trust in accordance with this Section or
whether the trust is established by express terms of
the governing instrument.
(B) "Unitrust amount" means an amount equal to a
percentage of a trust's assets that may or must be
distributed to one or more beneficiaries annually in
accordance with the terms of the trust. The unitrust
amount may be determined by reference to the net fair
market value of the trust's assets as of a particular
date or as an average determined on a multiple year
basis.
(3) A unitrust changes the definition of income by
substituting the unitrust amount for net trust accounting
income as the method of determining current return and
shall be given effect notwithstanding any contrary
provision of the Principal and Income Act. By way of
example and not limitation, a unitrust amount determined by
a percentage of not less than 3% nor greater than 5% is

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conclusively presumed a reasonable current return that
fairly apportions the total return of a unitrust.
(4) The allocations provision of subdivision (2) of
subsection (f) of Section 5.3 applies to a unitrust except
to the extent its governing instrument expressly provides
otherwise.
(Source: P.A. 92-838, eff. 8-22-02; 93-991, eff. 8-23-04.)
(760 ILCS 5/16.1)
Sec. 16.1. Virtual representation.
(a) Representation by person having substantially
identical interest; contingent remainder beneficiaries.
(1) To the extent there is no conflict of interest
between the representative and the person represented, a
minor, disabled, or unborn person, or a person whose
identity or location is unknown and not reasonably
ascertainable, may be represented by and bound by another
individual having a substantially identical interest with
respect to the particular question or dispute; provided,
however, that such person is not otherwise represented by a
court appointed guardian as provided in the next sentence.
If a person is represented by a court appointed guardian of
the estate or, if none, by a court appointed guardian of
the person, the actions of such guardian shall represent
and bind that person for purposes of this subsection
(a)(1).

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(2) If all primary beneficiaries of a trust either are
adults and not disabled, or have representatives in
accordance with subsection (a)(1) who are adults and not
disabled, the actions of such primary beneficiaries, or
their respective representatives, shall represent and bind
all other persons who have a successor, contingent, future,
or other interest in the trust and who would become primary
beneficiaries only by reason of surviving a primary
beneficiary.
For purposes of this Section, "primary beneficiary"
means a beneficiary who is either: (i) currently eligible
to receive income or principal from the trust or (ii)
assuming nonexercise of all powers of appointment, will be
eligible to receive a distribution of principal from the
trust if the beneficiary survives to the final date of
distribution with respect to the beneficiary's share.
(3) If all presumptive remainder beneficiaries either
are adults and not disabled, or have representatives in
accordance with subsection (a)(1) who are adults and not
disabled, the actions of such presumptive remainder
beneficiaries, or their respective representatives, shall
represent and bind all other beneficiaries who have a
successor, contingent, or other future interest in the
trust. For purposes of this Section, "presumptive
remainder beneficiaries" means, as of the date of
determination and assuming nonexercise of all powers of

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appointment, all beneficiaries who either (A) would be
eligible to receive a distribution of income or principal
if the trust terminated on that date, or (B) 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 without
causing the trust to terminate.
(4) The consent of a person who may represent and bind
another person in accordance with this Section is binding
on the person represented, and notice to a person who may
represent and bind another person in accordance with this
Section has the same effect as if notice were given
directly to the other person.
(b) Total return trusts. This Section shall apply to enable
conversion to a total return trust by agreement in accordance
with subsection 5.3(b) of the total return trust provisions of
Section 5.3 of this Act, whether such agreement is made between
the trustee and (A) all primary beneficiaries, either
individually or by their respective representatives in
accordance with subsection (a)(1), or (B) all beneficiaries
currently eligible to receive income or principal from the
trust and all beneficiaries who are presumptive remaindermen of
the trust, in each case either individually or by their
respective representatives in accordance with subsection
(a)(1).
(c) Representation of charity. If a trust provides a

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beneficial interest or expectancy for one or more charities or
charitable purposes that are not specifically named or
otherwise represented (the "charitable interest"), the
Illinois Attorney General may, in accordance with this Section,
represent, bind, and act on behalf of the charitable interest
with respect to any particular question or dispute, including
without limitation representing the charitable interest in a
nonjudicial settlement agreement or in an agreement to convert
a trust to a total return trust in accordance with subsection
5.3(b) of the total return trust provisions of Section 5.3 of
this Act. This subsection (c) shall be construed as being
declarative of existing law and not as a new enactment.
Notwithstanding any other provision, nothing in this Section
shall be construed to limit or affect the Illinois Attorney
General's authority to file an action or take other steps as he
or she deems advisable at any time to enforce or protect the
general public interest as to a trust that provides a
beneficial interest or expectancy for one or more charities or
charitable purposes whether or not a specific charity is named
in the trust.
(d) Nonjudicial settlement agreements.
(1) For purposes of this Section, "interested persons"
means the trustee and all other persons and parties in
interest whose consent or joinder would be required in
order to achieve a binding settlement were the settlement
to be approved by the court.

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(2) Except as otherwise provided in subsection (d)(3),
interested persons, or their respective representatives
determined after giving effect to the preceding provisions
of this Section, may enter into a binding nonjudicial
settlement agreement with respect to any matter involving a
trust.
(3) A nonjudicial settlement agreement is valid only to
the extent its terms and conditions could be properly
approved under applicable law by a court of competent
jurisdiction.
(4) Matters that may be resolved by a nonjudicial
settlement agreement include but are not limited to:
(A) interpretation or construction of the terms of
the trust;
(B) approval of a trustee's report or accounting;
(C) exercise or nonexercise of any power by a
trustee;
(D) the grant to a trustee of any necessary or
desirable administrative power;
(E) questions relating to property or an interest
in property held by the trust;
(F) resignation or appointment of a trustee;
(G) determination of a trustee's compensation;
(H) transfer of a trust's principal place of
administration;
(I) liability or indemnification of a trustee for

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an action relating to the trust;
(J) resolution of disputes or issues related to
administration, investment, distribution or other
matters;
(K) modification of terms of the trust pertaining
to administration of the trust; and
(L) termination of the trust, provided that court
approval of such termination must be obtained in
accordance with subsection (d)(5), and the court must
conclude continuance of the trust is not necessary to
achieve any material purpose of the trust; upon such
termination the court may order the trust property
distributed as agreed by the parties to the agreement
or otherwise as the court determines equitable
consistent with the purposes of the trust.
(5) Any interested person may request the court to
approve any part or all of a nonjudicial settlement
agreement, including whether any representation is
adequate and without conflict of interest, provided that
the petition for such approval must be filed before or
within 60 days after the effective date of the agreement.
(6) An agreement entered into in accordance with this
Section shall be final and binding on the trustee and all
beneficiaries of the trust, both current and future, as if
ordered by a court with competent jurisdiction over all
parties in interest.

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(7) In the trustee's sole discretion, the trustee may,
but is not required to, obtain and rely upon opinion of
counsel on any matter relevant to this Section, including
that any agreement proposed to be made in accordance with
this Section could be properly approved by the court under
applicable law, or that there is no conflict of interest
between a representative and the person represented or
among those being represented with respect to a particular
question or dispute.
(e) Application. On and after its effective date, this
Section applies to all existing and future trusts, judicial
proceedings, or agreements entered into in accordance with this
Section on or after the effective date.
(a) If all primary beneficiaries of a trust are adults and
not incapacitated, except as provided in subsection (c), any
written agreement; including, without limitation, an agreement
construing any provision of the trust or an agreement regarding
any duty, power, responsibility, or action of the trustee,
between a trustee and all of the primary beneficiaries of a
trust shall be final and binding on the trustee and all
beneficiaries of the trust, both current and future, as if
ordered by a court with competent jurisdiction over all parties
in interest, if all other persons who have a contingent,
future, or other interest in the trust would become primary
beneficiaries only by reason of surviving a primary
beneficiary.

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(b) For purposes of this Section, "primary beneficiary"
means a beneficiary who is either: (1) currently entitled or
eligible to receive any portion of the trust income or
principal, or (2) assuming nonexercise of all powers of
appointment, will receive, or be entitled to withdraw, all or a
portion of the principal of the trust, if the beneficiary
survives to the final date of distribution with respect to the
beneficiary's share.
(c) This Section shall not apply to an agreement that
accelerates the termination of a trust, in whole or in part.
(d) In the trustee's sole discretion, the trustee may
obtain opinion of counsel that any agreement proposed to be
made under this Section is not clearly contrary to the express
terms of the trust instrument. The trustee may, but is not
required to, enter into an agreement under this Section. On and
after its effective date, this Section applies to all existing
and future trusts, but only as to agreements entered into on or
after the effective date.
(Source: P.A. 88-367.)