How is an Illinois Trust Now Like a Fine Wine? It Can Be Decanted: A Summary of the New Illinois Decanting Statute
Steve Dawson
Other Posts by Steve
Authored by: Stephanie Moll and Steve Dawson
Effective January 1, 2013, Illinois statute authorizes "decanting" of irrevocable trusts. What is decanting, you ask? Isn't that something you do with a bottle of wine? Yes, it is, and just like you decant wine from one bottle into a new container to remove sediment and to allow the wine to breathe, when you decant a trust, you pour the trust assets from one trust into another trust, allowing flexibility in the terms of an otherwise irrevocable trust.
Illinois recently enacted a new Section 16.4 of the Trust and Trustees Act, entitled "Distribution of trust principal in further trust" (the "Decanting Statute"). The Decanting Statute allows the trustees of an irrevocable trust (the first trust), acting pursuant to their fiduciary duty (and assuming certain conditions are met), to distribute all or part of the existing trust to a different trust (the second trust).
Decanting When a Trustee Has Absolute Discretion
If the trustees have "absolute discretion" over the first trust, they are given broad discretion over the distribution to the new trust. These trustees 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." In this case, if the beneficiary of the first trust could otherwise receive the principal of the first trust outright, the trustees can grant the beneficiary a power of appointment (including a presently exercisable power of appointment) in the second trust to appoint the trust property among a class of permissible appointees that is broader or otherwise different from the beneficiaries of the first trust.
Decanting When a Trustee Does Not Have Absolute Discretion
If the Trustees do not have "absolute discretion" over the principal of the existing trust, they can still decant the trust into a new one, but with more limitations. They 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." In addition, (i) the new trust must include the same distribution language as the first trust; (ii) if the first trust includes a class of beneficiaries, the same class of beneficiaries must be included in the second trust; and (iii) if a beneficiary has a power of appointment over the first trust, the beneficiary must have the same power of appointment over the second trust. An exception to these rules applies if the trustees of the first trust distribute all or a part of the principal of a disabled beneficiary's interest in the first trust to the trustees of a second trust which is a supplemental needs trust for the benefit of the disabled beneficiary.
Procedural Requirements
The trustees do not need the consent of the settlor of the trust, any of the beneficiaries of the trust, or the court if (1) the trustees and one legally competent current beneficiary gives notice to all of the legally competent current beneficiaries and presumptive remainder beneficiaries, and (2) no beneficiary objects within 60 days of the notice. If a charity is a current beneficiary or presumptive remainder beneficiary, notice must also be given to the Illinois Attorney General.
The exercise of the decanting power is made in writing, signed and acknowledged by the trustee and filed with the records of the first and second trusts.
Trust Term
The second trust can have a term that is longer than the term of the first trust. Unless the first trust expressly permits an extension, the second trust must be limited to the same permissible perpetuities period that applies to the first trust.
WARNING: If the first trust does expressly permit an extension of the trust term to a new perpetuities period, be sure to review the federal tax consequences of any such extension.
The Decanting Statute provides that the Trustees cannot exercise the power to decant for any of the following purposes:
1. To reduce, limit, or modify mandatory distributions or any withdrawal rights that have already come into effect (except with respect to the creation of a new 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;
3. To eliminate a provision granting another person the right to remove or replace the trustee, unless another independent individual entity, acting in a non-fiduciary capacity, has the ability to remove or replace the trustee; or
4. To change the perpetuities provision in the first trust, unless the first trust expressly permits the trustee to do so.
The Decanting Statute applies to all trusts in existence or created after the effective date of the new Act, January 1, 2013.