Suppose a married couple provides in their estate plan that on the first of their deaths, the predeceasing spouse’s assets will be held in a trust. The surviving spouse is the beneficiary and trustee of the trust during his lifetime, and on the surviving spouse’s death, the remaining trust assets will pass to the couple’s children. Under prior Illinois law, the surviving spouse, as trustee, wasn’t required to give any notice or accounting to the couple’s children during the surviving spouse’s lifetime. And, if asked about the trust by the children, many surviving spouses would have responded with some variation of, “It’s none of your business.” But on Jan. 1, 2020, that changed.
The Illinois Trust Code
Effective Jan. 1, 2020, the new Illinois Trust Code (ITC) replaced the prior Illinois Trusts and Trustees Act. The ITC is Illinois’ version of the Uniform Trust Code, which has been adopted by 33 other states. The most radical changes involve the rights of remainder beneficiaries to notices and accountings. However, the ITC also gives proactive clients new tools to customize trusts to modify and avoid some (but not all) of the new notice and accounting requirements.
Notices and Accountings
The ITC adds a mandatory rule that requires a trustee to send to each “qualified beneficiary” (a category that includes both current and presumptive remainder beneficiaries) of a trust, within 90 days after the trust becomes irrevocable, of the trust’s existence, the beneficiary’s right to request a copy of the trust instrument, and whether the beneficiary has a right to trust accountings. (760 ILCS Section 3/813.1(b)(1).) (Note that every provision of the Illinois Trust Code is either a “default rule,” which a grantor can override by the terms of the trust instrument, or a “mandatory rule,” which the grantor can’t override. In other words, a default rule applies only when the terms of the trust instrument are silent, while a mandatory rule supersedes the terms of the trust instrument.)
This is a significant change from prior Illinois law, under which remainder beneficiaries have no right to information about the trust unless provided in the trust instrument. Applied to the example above, the surviving spouse would be required to send a notice to the children within 90 days after the trust is created.
The ITC also adds a default rule that equires a trustee to send an annual trust accounting not only to all current beneficiaries, but also to all presumptive remainder beneficiaries. (760 ILCS Section 3/813(b)(4).) A trust accounting must describe the assets, receipts and disbursements of the trust. (760 ILCS § 3/103(38).) This is a significant change from prior Illinois law, under which remainder beneficiaries had no rights to trust accountings until the current beneficiary’s interest ended. In the above example, the surviving spouse, as trustee, would be required to provide an accounting of the trust’s assets, receipts and disbursements to the couple’s children at least annually.
The ITC gives the creator of a trust the opportunity to “opt out” of the new default rules regarding accountings and notices to remainder beneficiaries. However, availing oneself of this opportunity requires foresight and proactive action. In the example above, if the married couple doesn’t wish for their children to have the right to receive trust accountings while one of them is still alive, they can amend their estate plan to affirmatively state that their children will have no such right. However, if no such action is taken and one member of the couple dies, it may be too late for the surviving spouse to make this change.
Other changes are possible as well. For example, the ITC provides that a beneficiary has a 3-year period after receiving a trust accounting to sue the trustee; after that time, any lawsuit is barred. Some clients may wish to shorten this period to reduce the window for potential lawsuits.
The requirement to provide notice to all trust beneficiaries 90 days after a trust becomes irrevocable and the other mandatory provisions of the ITC can’t be changed by amending the trust instrument. However, the ITC creates a new concept under Illinois law called a “designated representative.” (760 ILCS Section 3073.) A designated representative is a person with the authority “to represent and bind” a beneficiary of a trust. Presumably, notices or accountings that would otherwise be required to be sent to the beneficiary may instead be sent to the beneficiary’s designated representative. Several restrictions apply, including, for example, that the same individual may not act as both a designated representative and as a trustee and that no designated representative may act for a current beneficiary who’s reached age 30. Furthermore, a designated representative must be specifically provided for in the trust document, so availing oneself of this provision requires affirmative action before a trust becomes irrevocable. Despite these limitations, the designated representative position offers clients considerable flexibility in designing trusts and should be considered in every estate plan.