The recently enacted Illinois Trust Code (ITC) has many important provisions which will enable estate planning attorneys to better serve clients.(1) The ITC is largely based on the Uniform Trust Code, but differs in some important respects, in order to preserve well-established prior Illinois case law. The ITC also introduces some new concepts and makes significant and positive changes to the Illinois trust decanting laws. At over 100 pages, the ITC is a lot to digest. And there are certain mandatory and default provisions of the ITC which cannot be over-ridden by trust terms.(2) This article provides a brief overview of the ITC provisions, which may have the most impact on aspects of estate planning relating to elder law and special needs planning. Most importantly, practitioners will welcome the various provisions of the new ITC which facilitate amending and decanting irrevocable trusts, the new concept of a “Designated Representative,” and the provision which allows a representative to consider “general potential benefits to the living family members” of an incapacitated person.
Definitions – Terms of the Trust. Section 103 (36).
Unlike some other Uniform Trust Code States, Illinois is a “grantor’s intent” state. This means that the grantor’s intent is prioritized over the beneficiary’s wishes. At the same time, the new ITC states that a grantor’s intent is not limited to the four corners of the trust document. This Section specifically allows “other evidence” outside of the trust to determine the grantor’s intent. This explicit broader definition of intent may invite litigation by disappointed beneficiaries. In the elder law context, the grantor’s choices for trust distribution may be impacted by various family dynamics, such as whether one child spent significantly more time caring for a sick, elderly parent. A parent may or may not choose to provide a larger share to a caretaker child. No matter how “fair” the parent tries to be, it is often impossible to please everyone. To reinforce the client’s intent, the attorney’s notes of client meetings should contain a detailed account of the client’s wishes. The client should also be advised that any prior record of her intentions, such as emails to family members, letters, or conversations may be used as evidence contrary to the wishes reflected in her trust. If the client has made past promises to family members regarding specific bequests and distributive shares, the client should considering writing a current letter explaining their reasons for the distribution plan in their trust, and specifically explaining any change of plan which had previously been expressed, even if communicated informally. In addition, an attorney’s notes describing the client’s capacity are especially important when working with older adults who may be in physical pain or mental impairment. Intense physical pain, alone, can sometimes diminish mental capacity. So, it is important to be cautious when establishing capacity, even if there is no obvious evidence of dementia or significant mental decline. A doctor’s written evaluation of legal capacity should be obtained, if there is any doubt of capacity, or if there is a good chance conflict or ill-will among the beneficiaries.
Agent Under Powers of Attorney. Section 602(e).
The ITC codifies prior Illinois case law, which requires that an Illinois Power of Attorney for Property specifically name any trust for which the agent is granted power to revoke or amend. In addition, the ITC requires that such powers of an agent are not prohibited by the trust document. Therefore, the best practice may be to include language in the trust document specifically allowing the agent acting under a valid power of attorney to amend or revoke the trust on behalf of the principal, if permitted in the power of attorney. Providing an explicit statement that the agent has the power to amend, in both the trust instrument and the power of attorney, should provide clarity (and thereby avoid conflict) for those acting on the principal’s behalf, either as agent, co-trustee or successor trustee. Elder law attorneys frequently recommend and use expanded and immediately effective powers of attorney, so that asset protection and Medicaid planning can be more easily accomplished for a disabled or elderly principal who still has capacity. The ability of an agent to amend or revoke existing trusts is often critical to achieve the client’s goals for Medicaid and long-term care planning, especially if the client is mentally competent but physically too weak to handle their own financial affairs.
Representation. Section 301.
This Section establishes an ordering priority or hierarchy of who may represent the interests of an incapacitated trust beneficiary. At the top of the hierarchy is an uber-representative or guardian ad litem appointed by the court, over and above any other type of representative, such as an agent acting under a power of attorney, or even a guardian of the estate or of the person appointed under Section 11 of the Illinois Probate Act. This Section provides a valuable mechanism to protect vulnerable trust beneficiaries, especially if the agent acting under a power of attorney or the court-appointed guardian is not acting in the beneficiary’s best interests or has engaged in misconduct.
Representation by Holders of Certain Powers. Section 302.
In general, this Section allows the holder of certain powers of appointment to represent and bind potential future beneficiaries. If these powers of appointment are used, the practical effect is that trust decanting and judicial settlement agreements will be much easier to accomplish, because consent of only the current power holder is necessary. See the ITC for specific requirements for various types of powers of appointment. The notice requirements are also streamlined by this Section. Amending irrevocable trusts and decanting are important tools for elder law attorneys, because they allow trust assets to be transformed from being considering “countable” assets for purposes of Medicaid benefits to “non-countable” assets, which do not impact Medicaid eligibility.
Appointment of Representative. Section 305.
This Section creates a statutory basis for an Illinois court to appoint a powerful uber-representative (other than a guardian ad litem) to receive notices, accountings and reports on behalf of and to bind and represent an incapacitated, unborn or unascertainable trust beneficiary in nonjudicial matters. Importantly, this Section specifically allows a representative or guardian ad litem, when giving consent or agreement, to consider not only the interests of the beneficiary, but also to more broadly consider the “general potential benefits to the living family members” of the represented person. This new provision may be helpful for Medicaid planning and asset protection planning, because it will potentially allow the representative of an incapacitated person to take actions or enter into transactions and agreements in order to preserve trust assets for the benefit of the incapacitated person’s current living family members, such as a spouse or children. This Section also clarifies that the representative or guardian ad litem may act on behalf of the beneficiary, even if no judicial proceeding is pending.
Designated Representative. Section 307.
This is a new concept in Illinois trust law and is not also a part of the Uniform Trust Code. It is loosely based on Florida law. This Section allows a trust instrument to nominate a designated representative to bind and represent a “qualified beneficiary.” The designated representative is a fiduciary, subject to all fiduciary standards of a trustee. The “qualified beneficiary” cannot be older than age 30, unless he is incapacitated. This provision will be especially useful for special needs trusts, and for beneficiaries who are spendthrifts, or may have other personal or emotional difficulties. In the special needs trust context, naming a designated representative for the disabled beneficiary puts a fiduciary in place, who is separate and apart from the trustee (and can therefore provide independent oversight), but who will also be subject to the detailed fiduciary requirements of the new ITC. Instead of naming a designated beneficiary when the trust is signed, consider permitting the trust protector to name a designated representative in the future, if the grantor is having trouble with the concept or cannot decide upon choice of an appropriate Designated Representative at that time.
Undue Influence. Section 406.
This Section codifies prior Illinois case law. It makes clear that any portion of a trust (or the entire trust, if applicable) which was created, amended, or revoked as a result of fraud, duress, or undue influence is void. Elderly clients sometimes have trouble truly understanding that they have every right to control their own money and their own legacy and feel pressure to please adult children or other family members. This pressure can be intense when a child who spends significant time “caring” for the parent, actually has ulterior motives and is not providing the care selflessly. The clarity provided by this Section is important. Clients may be empowered to make their own independent estate planning choices, when they learn that a trust provision created as a result of duress or undue influence is actually void and unenforceable.
Noncharitable Trust Without Ascertainable Beneficiary. Section 409.
This Section, which is based upon the Uniform Trust Code, allows for the creation of a trust for a noncharitable purpose, and with no ascertainable beneficiary. Such a trust could be well-suited to set aside funds for funeral, burial and memorial expenses, including non-standard costs, such as for the travel expenses of family members to and from funeral services, but would not be useful for perpetual gravesite care, since the term of the trust is limited to 21 years. This could be a useful tool to help clients create written directives for their own funerals and memorials, and to ensure that sufficient funds are set-aside and available to pay for more elaborate services or remembrance events. Interestingly, Section 409(c) permits a person to be named in the trust instrument to “enforce” the provisions of the trust, otherwise the court can name an enforcer. The grantor may wish to name an enforcer, who is different from the trustee, if there is a certain person or family member who has particular sensitivity or capability to ensure the grantor’s wishes for burial and memorial services are properly carried out. This could provide a meaningful role for a family member who was not selected as trustee. If the trust grantor may be applying for Medicaid, it is important to be mindful of the five-year look back, and also keeping in mind that the trust could be considered a countable resource under the very complicated federal rules for trusts and Medicaid. At this time Illinois Medicaid rules limit the amount of funds that can be set aside for burial expenses in a bank account to a mere $1,500. There are other mechanisms under Illinois law to allocate larger sums for funeral and burial expenses.(3)
Modification or Termination of Noncharitable Irrevocable Trust by Consent. Section 411.
This Section expands the ability of trust beneficiaries to modify or terminate irrevocable trusts, without the approval or participation of trustees. However, court approval is required. Even if all of the beneficiaries do not agree, the court may still approve modification or termination of the trust, so long as certain conditions are met. In elder law practice, we often deal with older trusts, older trustees and older beneficiaries, who may not be able or willing to act, sometimes due to infirmity or long-held personal grudges. It should now be easier to obtain positive results through court intervention, in order to resolve trust issues, when it is difficult to get cooperation or action from the various parties.
Modification or Termination Because of Unanticipated Circumstances or Inability to Administer Trust Effectively. Section 412.
This Section codifies prior Illinois law and mostly follows the Uniform Trust Code. It allows a court to modify or terminate a trust, but also allows the beneficiaries to agree upon final trust distributions, which do not follow the distribution provisions of the trust. This flexibility may be especially helpful in long-term care and Medicaid planning, after the onset of a serious illness or disability. This Section should allow termination of a trust created by or benefitting a person applying for Medicaid, and for trust distributions to be made for the benefit an elderly spouse, who is living in the community (i.e. the “community spouse”), or for the benefit of a disabled child or other individual.
Trust for Beneficiary with a Disability. Section 509.
This Section incorporates existing Illinois law relating to third-party discretionary trusts and self-settled trusts for persons with disabilities.4 The ITC made no changes to this Section. Keep in mind that Federal law is an important part of special needs planning which must be considered along with Illinois law.(5)
Duty to Inform and Account – Irrevocable Trusts. Section 813.1.
This Section only applies to trusts becoming irrevocable after January 1, 2020. This Section expands notice requirements of the trustee and expands the class of beneficiaries entitled to receive annual accountings. In addition, there is a new provision requiring 90 days’ notice to qualified beneficiaries of changes in trustees, notice of the death, disability or resignation of a co-trustee, and notice of changes in the amount or method of computing trustee compensation.
Trust Decanting. Article 12.
Perhaps the best aspect of the new decanting provision of the ITC is its name: the “Trust Decanting Law.” The prior law’s name shed no light on its purpose: the “Distribution of Trust Principal in Further Trust.” 6 True to its new name, the new provision does not require a second trust for decanting but, rather, allows the first trust to simply be amended. It also has a broader concept of purpose of the first trust – expanding it to include the grantor’s “probable intent.” The notice provisions are much more lenient, and the other requirements are generally much more flexible, making it far easier to decant. Elder law and special needs attorneys should study the new Trust Decanting Law carefully, since decanting is such an important tool for Medicaid eligibility and special needs planning, when the client is the beneficiary of an irrevocable trust, which could be considered a countable asset under the Medicaid eligibility rules.
The new Illinois Trust Code covers a lot of ground, provides several new concepts and many improvements, especially with respect to amending irrevocable trusts and representing incapacitated beneficiaries. This article is just a brief summary of some of the most important provisions for elder law and special needs attorneys. There is no substitute for reading and even laboring over the new statute. The small group of esteemed Illinois attorneys, who were responsible for drafting and facilitating the ITC through the legislative process, have been incredibly generous with their time and have provided much explanation and guidance on these new laws. They have prepared excellent written outlines and video-taped presentations, which are available through the Illinois State Bar Association and other continuing education venues. As you learn about and explore the new ITC, please share your insights and ideas with the legal community. This is just the start to better serving our clients with the new Illinois Trust Code.
- 760 ILCS 3/101 et seq.
- See 760 ILCS 3/105.
- See Illinois Department of Human Services Policy Manual 07-02-08.
- 760 ILCS 5/15.1.
- See generally 42 UCS 1396 and the Social Security POMS.
- See 760 ILCS 5/16.4.
Published by the Illinois State Bar Association and re-posted with permission