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Many critical provisions in the newly adopted Illinois Trust Code (ITC) could help estate planning lawyers better represent their clients.  The ITC is primarily based on the Uniform Trust Code, although it varies in a few key ways to uphold well-established prior Illinois case law. The ITC also presents several new ideas and updates the Illinois trust decanting laws in a major and constructive way. The ITC is over 100 pages long, so it's a lot to take in.  

This article discusses recent changes to Illinois elder law and Medicaid planning that may affect you in 2021, including:

  • Changes to definitions regarding Medicaid;
  • Powers of Attorney;
  • Representation;
  • Appointment of Representatives;  
  • Designated Representatives;
  • Undue Influence;
  • Non-charitable Trusts with No Known Beneficiaries;  
  • Consent to Modify or Terminate Noncharitable Irrevocable Trusts;  
  • Modification or Termination;
  • Trusts for Beneficiaries with Disabilities;  
  • Duty to Inform and Account; and
  • Decanting

Many critical provisions in the newly adopted Illinois Trust Code (ITC) could help estate planning lawyers better represent their clients.  The ITC is primarily based on the Uniform Trust Code, although it varies in a few key ways to uphold well-established prior Illinois case law. The ITC also presents several new ideas and updates the Illinois trust decanting laws in a major and constructive way. The ITC is over 100 pages long, so it's a lot to take in.  

Furthermore, the ITC contains some obligatory and default clauses that cannot be overridden by trust terms.  This article provides a high-level summary of the ITC provisions, which could have the greatest effect on elder law and special needs planning in estate planning. Most notably, practitioners may appreciate the new ITC's numerous clauses that make amending and decanting irrevocable trusts easier, as well as the new definition of a "Designated Representative" and the clause that requires a representative to recognize "general potential benefits to an incapacitated person's living family members."  

Changes to definitions regarding Medicaid;

Illinois is a “grantor's intent” state, unlike some other Uniform Trust Code states. This means that the grantor's intent takes precedence over the wishes of the recipient. At the same time, the new ITC clarifies that a grantor's intent is not limited to the trust document's four corners. This section allows “other evidence” from beyond the trust to be used to assess the grantor's intent. Dissatisfied beneficiaries may file a lawsuit as a result of this explicit broader concept of purpose. In the sense of elder law, different family dynamics, such as when one child spent substantially more time caring for a sick, elderly parent, could influence the grantor's trust distribution decisions. A parent may or may not want to give a caretaker child a greater share. It is always difficult to please everyone, no matter how “fair” a parent wants to be. The attorney's notes of client meetings should provide a clear description of the client's desires to reinforce the client's purpose.  

The client should also be informed that any previous record of her intentions, such as emails to family members, letters, or conversations, may be used against her trust's wishes. If the client has previously made commitments to family members about particular bequests and distributive shares, the client should consider writing a current letter outlining their reasoning for the distribution plan in their trust, as well as any changes to the plan that have been conveyed, even if informally. Additionally, when dealing with older people who may be in physical distress or have mental illness, an attorney's notes explaining the client's ability are particularly important.  

Even if there is no apparent evidence of dementia or serious mental deterioration, it is vital to exercise caution when determining capacity. If there is some question about legal capacity, or if there is a reasonable risk of dispute or ill-will among the beneficiaries, a doctor's written assessment of legal capacity should be obtained.  

Powers of Attorney.

The ITC codifies prior Illinois case law that requires the principal under an Illinois Power of Attorney for Property to expressly designate any trust for which the agent has power to revoke or amend power. Furthermore, the ITC stipulates that such powers must not be limited by the trust document.  As a result, the best practice would be to include wording in the trust agreement that expressly allows an individual operating under a legal power of attorney to modify or revoke the trust on behalf of the principal, if the power of attorney permits it.  

Including a clear statement in both the trust instrument and the power of attorney that the agent has the power to amend could provide clarification (and thus prevent conflict) for those working on behalf of the principal, whether as agent, co-trustee, or successor trustee. Elder law lawyers also propose and use extended and instantly usable powers of attorney so that asset security and Medicaid planning for a disabled or elderly principal who still has capacity can be done more easily.  

The ability of an agent to amend or revoke established trusts is often vital to achieving a client's Medicaid and long-term care planning goals, especially if the client is mentally competent but physically incapable of managing their own finances.  

Representation.  

The new ITC creates a preference or hierarchy for who can represent an incapacitated trust beneficiary's interests. Over and above any other form of representative, such as an agent working under a power of attorney, or even a guardian of the estate or of the individual named under Section 11 of the Illinois Probate Act, the court appoints a guardian ad litem. This provides an important safeguard for trust beneficiaries who are vulnerable, especially if the person acting under a power of attorney or the court-appointed guardian is not acting in the beneficiary's best interests or has committed misconduct.  

In general, the holder of certain powers of appointment may represent and bind potential future beneficiaries.  Since only the approval of the current power holder is required if these powers of appointment are used, trust decanting and judicial settlement agreements may be much easier to achieve. Relevant criteria for different forms of powers of appointment can be found in the ITC. Decanting and amending irrevocable trusts are useful resources for elder law lawyers since they enable trust assets to be converted from "countable" assets for Medicaid purposes to "non-countable" assets that do not affect Medicaid eligibility.  

Appointment of Representatives.  

The new ITC establishes a legal framework for an Illinois court to nominate a powerful "uber-representative" (other than a guardian ad litem) to collect notices, accountings, and reports on behalf of, as well as bind and represent an incapacitated, unborn, or unascertainable trust beneficiary in nonjudicial matters. Importantly, this Section requires a delegate or guardian ad litem to consider not only the needs of the beneficiary, but also the “general potential benefits to the living family members” of the represented individual when giving consent or approval.  

This new provision may be useful for Medicaid and asset protection planning because it allows an incapacitated person's representative to take steps or enter into contracts and agreements in order to retain trust assets for the benefit of the incapacitated person's current living family members, such as a spouse or children. This section also clarifies that even if no judicial action is pending, the delegate or guardian ad litem may act on behalf of the beneficiary.  

Designated Representatives.  

This is a brand-new idea in Illinois trust law that isn't covered by the Uniform Trust Code. It is focused on Florida law to some extent. A trust instrument may name a designated representative to bind and represent a "qualified beneficiary" under this section. The appointed delegate is a fiduciary and must follow all trustee fiduciary principles. Unless he is incapacitated, the "qualified beneficiary" cannot be older than 30. This provision would be particularly beneficial to special needs trusts and beneficiaries that are spendthrift or have other personal or emotional issues.  

In the context of a special needs trust, appointing a designated representative for the disabled beneficiary creates a fiduciary who is separate and apart from the trustee (and thus may have impartial oversight), but who is still subject to the new ITC's comprehensive fiduciary criteria. Consider allowing the trust protector to name a designated representative in the future instead of naming one when the trust is signed, if the grantor is having difficulty grasping the idea or cannot settle on a suitable Designated Representative at that time.  

Undue Influence.  

Prior Illinois case law is codified in this section. It specifies that any part of a trust (or the entire trust, if applicable) formed, changed, or revoked as a result of fraud, duress, or undue influence is null and void. Elderly clients may struggle to fully comprehend that they have complete control over their finances and legacy, and may feel pressured to satisfy adult children or other family members.  

When a child who spends a considerable amount of time “caring” for a parent has ulterior motives and is not offering the treatment selflessly, the burden may be severe. When clients discover that a trust clause established under duress or undue coercion is actually invalid and unenforceable, they can feel encouraged to make their own independent estate planning decisions.

Non-charitable Trusts with No Known Beneficiaries  

The new ITC allows for the establishment of a trust with no ascertainable beneficiary for a non-charitable reason. I t would be ideal for setting aside funds for funeral, burial, and remembrance expenses, including non-standard costs like family members' travel expenses to and from funeral services. But, since the trust's term is limited to 21 years, it would not be suitable for permanent gravesite maintenance.  

This may be a valuable tool for assisting clients in creating formal directives for their own funerals and memorials, as well as ensuring that enough funds are set aside and available to pay for more elaborate services or remembrance activities. Section 409(c) allows an individual to be named in the trust instrument to "enforce" the trust's provisions; otherwise, the court may appoint an enforcer. If there is a specific individual or family member who has special sensitivity or capacity to ensure the grantor's wishes for burial and memorial services are properly carried out, the grantor may wish to appoint an enforcer, who is different from the trustee.  

This could give a family member who was not chosen as a trustee a meaningful position. If the trust grantor is considering applying for Medicaid, it's important to remember the five-year lookback period, as well as the fact that the trust may be considered a countable property under the complex federal laws that govern trusts and Medicaid. Currently, Illinois Medicaid laws restrict the amount of money that can be set aside in a bank account for funeral expenses to only $1,500. Under Illinois statute, there are other methods for allocating greater amounts for funeral and burial expenses.  

Consent to Modify or Terminate Non-charitable Irrevocable Trusts  

This section gives trust beneficiaries more power to alter or cancel irrevocable trusts without the involvement or approval of trustees. However, the approval of the court is necessary. Even if all of the beneficiaries are in disagreement, the court can still sanction the trust's alteration or dissolution if certain conditions are met. We often work with older trusts, older trustees, and older beneficiaries in our elder law practice, who may not be able or willing to act due to infirmity or long-held personal feelings. When getting cooperation or action from different parties is difficult, it should now be easier to achieve positive outcomes through court involvement in order to address trust issues.  

Modification or Termination  

The new ITC allows a court to amend or terminate a trust, but it also allows the beneficiaries to consent on final trust transfers that are not in accordance with the trust's distribution provisions. After the onset of a severe illness or injury, this versatility can be particularly useful in long-term care and Medicaid planning. This section should permit the termination of a trust established by or benefiting a person applying for Medicaid, as well as trust distributions to an elderly spouse residing in the community (the "community spouse"), a disabled child, or another individual.  

Trusts for Beneficiaries with Disabilities  

Current Illinois legislation relating to third-party discretionary trusts and self-settled trusts for people with disabilities is incorporated into the new ITC.  As a reminder, federal legislation is an integral aspect of special needs planning that must be taken into account in addition to Illinois law.  

Duty to Inform and Account

Only trusts that become irrevocable after January 1, 2020 are covered by this update which broadens the trustee's notice obligations and the class of beneficiaries entitled to annual accountings. Changes in trustees, notification of the death, disability, or resignation of a co-trustee, and notice of changes in the amount or method of calculating trustee compensation both require 90 days' notice to qualified beneficiaries.  

Decanting

The name of the ITC's new decanting provision, the "Trust Decanting Law," is perhaps its best feature. The name of the previous law didn't reveal its purpose: "Distribution of Trust Principal in Further Trust." The new rule, true to its new name, does not require the creation of a second trust for decanting, but rather enables the first trust to be amended. It also has a broader understanding of the first trust's intention, including the grantor's "probable intent." The notice requirements are much more lenient, and the other requirements are usually more flexible, making decanting much simpler. Since decanting is such a valuable tool for Medicaid eligibility and special needs preparation when the client is the recipient of an irrevocable trust, which may be considered a countable asset under the Medicaid eligibility rules, the new Trust Decanting Law should be reviewed carefully. 

Since decanting is such a valuable tool for Medicaid eligibility and special needs preparation when the client is the recipient of an irrevocable trust, which may be considered a countable asset under the Medicaid eligibility rules, the new Trust Decanting Law should be reviewed carefully.  

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