Estate Planning Under Illinois Trust Code and the Federal SECURE Act
Welcome to 2020, the year we are reminded that the only constant is change.
If you are an estate planning attorney or other professional, or if you happen to know one, you know that I am talking about the long-awaited Illinois Trust Code (ITC), 760 ILCS 3/101, et seq., and the “hot off the presses” Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, Pub.L. No. 116-94 (What a great surprise holiday gift that was!), both of which became effective beginning this year. Both the ITC and the SECURE Act helped jump-start our decade with some of the biggest changes to Illinois trust law and the retirement system, respectively, in, well, decades.
Illinois Trust Code
Illinois Estate planners have been aware of the impending ITC for some time and many of us have been anticipating the impact of its eventual implementation. The drafters engaged in a valiant effort to modernize the Illinois Trusts and Trustees Act and codify some of our common law, all while preserving Illinois’ historical character as a state that favors “grantor intent.” The ITC was signed into law on July 12, 2019, and became effective on January 1, 2020. It would be impossible to cover the incredible breadth of the ITC in this edition of FLASHPOINTS, but I will try and focus on some of the highlights. I encourage you to review the IICLE® course materials from The NEW Illinois Trust Code: A Generation in the Making, produced in large part by those who drafted the actual statute.
The ITC replaces the Illinois Trusts and Trustees Act and several other statutes, including (1) the Trusts and Dissolutions of Marriage Act, (2) the Uniform Powers of Appointment Act, (3) the Statute Concerning Perpetuities, (4) the Perpetuities Vesting Act, and (5) the Trust Accumulation Act. It does not replace (1) the Principal and Income Act (760 ILCS 15/1, et seq.), (2) Charitable Trust Act (760 ILCS 55/1, et seq.), or (3) Corporate Fiduciary Act (205 ILCS 620/1-1, et seq.).
The ITC applies to all trusts, no matter when they were established with certain exceptions. One such exception is with respect to court actions involving trusts initiated prior to the effective date. Section 1506 of the ITC provides that “unless the court finds that application of a particular provision of [the] Code would substantially interfere with the effective conduct of the judicial proceedings or prejudice the rights of the parties,” the ITC applies to the proceeding. 760 ILCS 3/1506.
The other exception sets forth substantially different rules regarding a trustee’s “Duty to Inform and Account” for trusts. The ITC imposes new affirmative duties on the trustee, including some mandatory duties that were previously either non-existent or allowed to be modified via the trust instrument. Under §813.1, trustees have a new “laundry list” of obligations with respect to providing information and accounting to different “classes” of beneficiaries. 760 ILCS 3/813.1. The ITC clarified and codified these classes with definitions. The ITC provides for a “beneficiary,” “qualified beneficiary,” “presumptive remainder beneficiary,” and “current beneficiary.” 760 ILCS 3/103. The Trusts and Trustees Act previously afforded most benefits to “income beneficiaries,” but it was not clearly defined in the statute, and is not part of the ITC.
The duties enumerated in §813.1 of the ITC apply to all irrevocable trusts established after the effective date, and to revocable trusts when a new trustee takes office after the effective date. Section 813.2 of the ITC, which contains most of the provisions of the “old” 760 ILCS 5/11 (Accounts), applies to irrevocable trusts established before the effective date, and to revocable trusts that were established before the effective date while the same trustee remains acting.
One of the key differences between the Trusts and Trustees Act and the ITC is the inability to “draft around” any provision unilaterally. The Trusts and Trustees Act was a “default” statute but specifically allowed a trust instrument to exclude or modify any provision of the Act. The ITC, on the other hand, has a list of specific provisions that are denoted as “mandatory” and apply to each and every trust instrument, whether an attempt is made to “draft around” them or not. These mandatory provisions are found in §105(b) of the ITC. Not surprisingly, certain obligations of a trustee to inform and account to qualified beneficiaries under §813.1 are on the list of provisions that cannot be “drafted around.” These are the obligations to beneficiaries under §813.1(b)(1) (requirement to provide notice to qualified beneficiaries of the existence of the trust and right to request a copy of the trust), §813.1(b)(2) (requirement to provide an annual accounting — to current beneficiaries), and §8.13.1(b)(4) (requirement to send accounting upon trust termination to those entitled to residue). Aside from the mandatory provisions, the ITC does permit the trust instrument to allow for the trustee to opt out of the other obligations imposed under §813.1.
Another notable difference involves nonjudicial settlement agreements (NJSA). The provisions under the Trusts and Trustees Act governing NJSAs were brought into the ITC under §111. Section 111 looks almost the same as it did under its “old” citation (760 ILCS 5/16.1) with one significant difference: subparagraph (d)(4)(M), which was the catch-all provision that permitted an NJSA to cover basically any topic, was eliminated.
The ITC brought us perhaps the most significant overhaul of Illinois trust law since its inception. Ready or not, it’s here, and we all have to adjust to our new normal. Soon it will be as easy as writing “2020” on my checks (yes, I still write checks).
The SECURE Act
The new decade also brought us the SECURE Act. Signed into law on December 20, 2019, as part of H.R. 1865, 116th Cong., 1st Sess. (2019), and taking effect on January 1, 2019, the SECURE Act introduced significant changes to federal retirement plan laws. Some of the changes are purportedly intended to help employers and employees by increasing access to plans or certain types of investments within plans.
Other changes include (1) the increase in age from 70½ to 72 for the required beginning date to take minimum distributions (§114), (2) the ability to withdraw up to $5,000 penalty-free from a retirement plan for the birth or adoption of a child (§113), and (3) the expansion of the use of §529 Plans to include registered apprenticeship programs and limited student loan repayments (§302).
However, notwithstanding some of the potential touted benefits, the SECURE Act is unfortunately making many of us feel just the opposite. In one fell swoop, §401 of the SECURE Act forever changed the beloved “Stretch IRA” for all but a few select class of beneficiaries. Even worse, the use of trusts as beneficiaries of IRA’s (or other retirement plans), especially the popular “conduit trusts,” may need to be revisited if not abandoned in many cases because the new rules under the SECURE Act take away the life expectancy payout in the majority of cases where these trusts are used.
Section 401 of the SECURE Act modifies §401(a)(9) of the Internal Revenue Code of 1986. It modifies the payout period for a designated beneficiary (DB), regardless of the age of the retirement plan participant upon death, to ten years. The old “five-year rule” for non-designated beneficiaries (such as a participant’s estate) does still exist.
Under the IRS Treasury Regulations, see-through trusts (either “conduit” or “accumulation”) can be considered DBs and, under prior law, trust beneficiaries could be eligible for life expectancy payouts. Conduit trusts are trusts with a single beneficiary in which all distributions are required to be immediately paid out to the beneficiary, but the trustee controls the rest of the account. Accumulation trusts do not require the trustee to pay out distributions and can have multiple beneficiaries. Conduit trusts, under the prior law, could offer significant benefits by allowing the maximum “stretch” for beneficiaries of different ages and the security that the trustee could hold on to the “principal” of the account. However, based on the provisions of the SECURE Act and existing regulations, it would appear that conduit trusts are now less desirable because, assuming they are still DBs, the entire account must be paid to the conduit trust and then, directly out to the beneficiary, within ten years of the participant’s death. For clients who carefully named separate trusts for their children to receive large retirement accounts in order to prevent accelerated withdrawal, this new result, as a result of the SECURE Act is contrary to their goals and could be disastrous.
But wait, there’s more. the SECURE Act also introduced the eligible designated beneficiary (EDB). An EDB can still get a life expectancy or “stretch” payout upon the death of the participant. The following individuals qualify as EDBs: (1) a spouse of the participant; (2) a minor child of the participant (while child is a minor); (3) disabled individuals; (4) chronically ill individuals; and (5) individuals who are not more than ten years younger than the participant. With respect to minor children, life expectancy payouts occur while they are minors, and the ten-year rule applies once they reach majority (which in some cases can be up to age 26).
Right now, especially with respect to trusts as beneficiaries of retirement plans, the SECURE Act has left us with more questions than answers. I hope to be able to report back in the near future with more information. In the meantime, while you are busy reviewing and revising your trusts to conform to the ITC, don’t forget to take a look at your retirement plan provisions in light of the SECURE Act.
For more information about estate planning and probate, see ASSET PROTECTION PLANNING — 2018 EDITION. Online Library subscribers can view it for free by clicking here. If you don’t currently subscribe to the Online Library, visit www.iicle.com/subscriptions.