Decant?  Now You Can:
 
New Illinois Law Allows Illinois Trusts an Alternative for
 
Changing Trust Terms
 
Written by Brian R. Tunis
As published in the Califf & Harper March 2013 Newsletter
 
 
 
Trust decanting is a term used to describe the distribution of trust property to another trust through the trustee’s discretionary authority to make distributions for the benefit of trust beneficiaries. Decanting is generally deemed permissible because the trustee has the discretionary power to distribute property for the benefit of trust beneficiaries, therefore the trustee should be able to exercise that discretionary power in favor of another trust for the benefit of the trust beneficiaries. Trust decanting was first recognized in Florida in 1940 and has steadily gained interest since then with at least 13 states (including Illinois) enacting decanting statutes. Trust decanting is often used to distribute the property of trust with unfavorable terms, to another trust with terms that better satisfy the goals of the trust settlor and the needs of the trust beneficiaries.
 
Illinois House Bill 4662, signed in to law on August 10, 2012, modernizes Illinois trust law by providing for trust decanting. The bill is designed to give trustees the ability to adapt to changing circumstances without the need for extensive court involvement. The bill amends the Illinois Trusts and Trustees Act to grant trustees of certain trusts the power to "decant” the trust and appoint the principal of the trust to the trustee of a second trust. The statute became effective on January 1, 2013, and applies to any trust governed by or administered under Illinois law unless the trust specifically disallows the use of the decanting power by specific reference to the new statute.
 
The new law distinguishes between trusts in which the trustee has the absolute discretion to distribute the principal of a trust (meaning the right to distribute principal that is not limited or modified in any manner to or for the benefit of one or more beneficiaries of the trust) and trusts in which the trustee does not have the absolute discretion to distribute the principal of the trust, but does have discretionary rights subject to some standards. If the trustee has the absolute discretion to distribute the principal of the trust, it may distribute part or all of the principal of the trust in favor of a trustee of a second trust for the benefit of any number of current beneficiaries of the first trust (as few as one and as many as all of the beneficiaries). The trustee may also grant the current beneficiaries of the first trust a power of appointment in the second trust. Due to this power of appointment, the beneficiaries of this power of appointment can be broader than, or otherwise different from, the beneficiaries of the first trust.
 
If the trustee does not have the absolute discretion to distribute the principal of the trust, the trustee may still distribute part or all of the principal of the first trust in favor of a trustee of a second trust. However the current and successor beneficiaries of the second trust must be the same as in the first trust. The beneficiaries’ power of appointment distribution standards remains the same for both the first and second trust. Furthermore, the term of the second trust, regardless of whether the trustee has the absolute discretion to distribute the principal of the trust, may have a longer term than that of the first trust. This term can be measured by the lifetime of a current beneficiary.
 
The new statute presents a few limitations on the trustee’s power to exercise the new decanting power. The primary limitation states that the trustee may not exercise the decanting power to "reduce, limit or modify any beneficiary’s current right to a mandatory distribution of income or principal.” Note that this only prevents the trustee from limiting mandatory distributions. This provision does not provide any limitation on the reduction or other modification of discretionary distributions. In addition to this primary limitation, there are other limitations that will arise in specific situations.
 
The trustee may exercise the decanting power without the consent of the settlor or the beneficiaries of the first trust and without court approval if the trustee provides notice of the trustee’s intent to exercise the decanting power to the current and presumptive beneficiaries and none of the beneficiaries objects within 60 days after the notice is sent. Furthermore, for any reason, including if a beneficiary objects during the notice time period, the trustee may petition an Illinois court to order the exercise of the decanting power permitted by the new statute.
 
For more information on this topic please contact Califf & Harper, P.C. by calling 309-764-8300 or 1-888-764-4999. This article is intended to provide general information regarding the topic discussed herein but is not intended to constitute individual legal advice.