Some significant changes affecting trusts have come to Illinois with the New Year. Effective January 1, 2020, the Illinois Trust Code replaced the Illinois Trusts and Trustees Act. One of the biggest areas of change involves the duty of a trustee to provide an accounting.
One of the hallmarks of the fiduciary duty that applies to the trustees of a trust (and to other fiduciaries) is the duty to provide an accounting. This has always been the case. The new Illinois Trust Code changes the scope of that duty, however, in a number of significant ways. The changes include: 1) Who is entitled to receive the accounting; 2) What the accounting must include; 3) When and on what conditions an accounting can be waived.
To Whom a Trust Accounting is Required
Under the current Illinois law, which lapsed at the end of 2019, trustees were required to provide an accounting only 1) to beneficiaries currently entitled to receive or receiving the income from the trust or; 2) if none, then to those beneficiaries eligible to receive the benefit of income from the trust. This rule will continue in effect for all revocable trusts (living trusts) created prior to January 1, 2020, and for all trusts that became irrevocable (provided the trustee accepts the appointment) prior to January 1, 2020.
To understand this, a little explanation might be necessary. People create “living trusts” (also known as revocable trusts) for estate planning purposes during their lives and transfer property into those trusts in order to pass that property along after death subject to the provisions of the trust. These are “grantor” trusts: they are trusts set up and operated by the person who creates the trust and funds them.
Most people don’t create irrevocable trusts (trusts that can’t be changed). Most people create revocable trusts – trusts than can be changed and even revoked during their lives – but a revocable trust becomes irrevocable when the person who created it, funded it and controlled it loses the legal capacity to act as the trustee or dies.
Thus, the date a trust becomes irrevocable matters. A trust that became irrevocable before January 1, 2020, is generally not governed by the new law, but trusts that were created after January 1, 2020 or became irrevocable after January 1, 2020, is governed by the new law, and the new accounting rules apply.
Under the new law, the persons to whom a trustee must provide an accounting is expanded. An accounting must be provided to all persons to whom a principal is required to distribute income as well as all persons for which the trustee may provide a distribution of income in the trustee’s discretion. In addition, the trustee must provide an accounting to “presumptive remainder beneficiaries” unless the trust document provides otherwise.
Presumptive remainder beneficiaries are those people who are not presently beneficiaries but will become beneficiaries after the happening of an event. Usually the event is the passing of a primary beneficiary, but trusts can also provide that trust assets will be distributed to remainder beneficiaries upon the happening of other events.
The new accounting standard, in effect, requires the trustee to provide accountings to all present and future beneficiaries.
One key exception to the broader accounting standard is when the trust document provides that an accounting is not required for presumptive remainder beneficiaries. Anyone who has established a revocable (living) trust, and anyone who is creating a new trust, should think about amending the trust or creating the trust so that there is no present accounting requirement for remainder beneficiaries. Otherwise, every person will be required to provide an accounting for his or her children and/or grandchildren, or whoever are the remainder beneficiaries of the trust.
What the Accounting Must Include
In addition to changes in the standard for whom the accounting must be provided, the new Illinois Trust Code expands what a trustee must include in the accounting. Under the past law, trustees had to provide annual accountings that included the receipts, disbursements and inventory of the trust estate. For trusts that became irrevocable after January 1, 2020, and revocable trusts created after that date, trustees must also provide the following information: 1) a description of the trustee’s compensation, if any; 2) the value of the assets on hand at the close of the accounting period and; 3) all other material facts related to the administration of the trust.
When Accountings Can be Waived
Under the old law, a settlor (the person who established the trust) can waive the duty to account. Under the new law, the duty to account cannot be waived.
The new law does provide, however, that a settlor may direct that accountings be provided to a designated representative for certain beneficiaries until each represented beneficiary turns 30. Thus, for younger beneficiaries, the person creating the trust can direct the trustee to provide an accounting to a representative of the beneficiary, but only until that beneficiary reaches the age of 30. This provision is not a waiver of the accounting requirement; it simply allows the accounting to be provided to someone other than the beneficiary.
The change to the accounting rules in the New Illinois Trust Code require more robust accounting. These rules put a little more tooth into the rights of a beneficiary to receive. This change is good news to trust beneficiaries who might otherwise remain in the dark. It should provide more accountability by trustees to beneficiaries and foster more transparency in the administration of trusts.
At the same time, people creating trusts as part of their own estate planning should give some thought to whether they want to provide that kind transparency to their own children and/or other beneficiaries during their own lives. Many people would not want to be that transparent with their children about their own estates. For that reason, people doing estate planning after January 1, 2020, should be careful to consider the new accounting requirements when creating a trust.