On January 1, 2020, there will be major changes to the law governing trusts in Illinois as it becomes the 39th state to adopt most of the Uniform Trust Code (UTC), an effort to harmonize state law on trusts. Each of these 39 states have adopted some version of the UTC; Illinois calls its version the Illinois Trust Code.
I’m sure that most of our readers really don’t care about this background. Just as I’m sure that most of you don’t care that I suffered for five hours stuck in a middle airplane seat reading the technical details of this 108-page beast of a law or that I spent two days at a continuing legal education seminar to translate the legalese into English. What you care about is how this law will affect you, your family and any trusts you have after the new year comes.
This article summarizes the major details and issues regarding the law. Later articles will go more in depth on each topic.
The crux of it is this: The law contains some new default rules that your own trust cannot change and many default rules that your trust can change. This is where your estate planning attorney can be a real asset, helping you tweak the language in your trust so you can avoid the default rules you don’t like. I suspect most people will want to change these to save a lot of pain and suffering later.
Here are some of the default rules that your trust cannot change:
- The requirement that a trustee must act in good faith. (I can’t imagine why you would want to change this one anyway.)
- The requirement that a trust have a lawful purpose and not be contrary to public policy.
- Rules related to “designated representatives.” These rules govern who can receive notice on behalf of trust beneficiaries, who can decide on behalf of them and for how long. For example, if a trust beneficiary is a “bad boy” and it would cause problems if the bad boy became aware, the trust could designate someone to receive trust accountings until, at the latest, the bad boy turns age 30.
- A court’s ability to change or end a trust.
- The effect of spendthrift provisions and the ability of certain creditors to reach a trust.
- A clarification that an agent under a power of attorney can have the power to amend, revoke, or distribute assets under a trust only if the power of attorney documents specifically authorize it.
- The power of a court to change a trustee’s compensation if the court finds the compensation unreasonably low or high (despite any provision that says otherwise).
- For trusts that become irrevocable (for example, a trust that cannot be amended after someone dies), the requirement:
- to notify each “qualified beneficiary” of the trust’s existence, the beneficiary’s right to request a complete copy of the trust document and whether the beneficiary has a right to receive or request trust accountings
- for the trustee to send trust accountings to all current beneficiaries at least annually
- to give a trust accounting to all beneficiaries entitled to receive a distribution of what is left in a trust when a trust terminates and all assets are distributed
- A trust cannot contain a provision that relieves a trustee of liability if the trustee breaches his/her fiduciary duty in bad faith.
While some of these provisions seem benign, the term “qualified beneficiary” includes more people than you might think. It includes an entity that or a person who, under the language of the trust:
- is eligible to receive distributions of income or principal from the trust
- would be eligible to receive distributions of income and principal from the trust if that entity or person’s interest in the trust ends but the trust continues
- has any present or future beneficial interest in the trust
The last bullet point may be particularly unpopular with many clients. Beyond that, clients may also take issue with the requirement that a trustee notify each qualified beneficiary of a trust once it becomes irrevocable and provide accountings to each qualified beneficiary. There are many circumstances I can think of where it may not be desirable to notify certain people of a trust and give them accountings.
For example, many estate plans between married couples have tax planning trusts, one for each spouse. Upon the death of the first spouse, his/her trust creates several irrevocable sub-trusts to shelter monies from estate taxes. Under these sub-trusts, the surviving spouse is the trustee. The primary beneficiary of these trusts is the surviving spouse. The contingent beneficiaries are the children. The new law requires the surviving spouse to notify his or her own children of the sub-trusts’ existence and to give accountings to the children. Under the default rules, this means that the surviving spouse must disclose not only the trusts’ existence to the children, but give them accountings on how he or she spends money in the trust. The situation gets worse if this is a second marriage. Luckily, there are ways to tweak the trust language to cut off some of these disclosures. Stay tuned to next month’s newsletter for details on how to changes trusts to avoid this uncomfortable situation.