Illinois Enacts Decanting Statute

September 4, 2012

On August 10, 2012, Illinois Governor Quinn signed into law House Bill 4662, which amends the Illinois Trusts and Trustees Act to grant trustees of certain trusts a discretionary power to appoint the principal of one trust to the trustee of a second trust. Illinois has now joined at least fifteen other states with so-called “decanting” statutes that grant this power to trustees. The statute takes effect on January 1, 2013, and it will apply to any trust administered under, or governed by, Illinois law unless the decanting power is expressly prohibited by the trust’s governing instrument.

Generally, a decanting power allows a trustee, without the approval of a court or the beneficiaries, to appoint the income or principal, or both, of a trust to a second trust that may have different terms. Examples of common uses of a decanting power include appointing the assets of an older trust to a new trust with modern administrative provisions, adding a trust advisor or trust protector, changing the trust situs, or changing the trustee or trustee succession provisions.

Illinois’ decanting statute distinguishes between trusts in which the trustee has the absolute discretion to distribute trust principal (which includes distributions for a beneficiary’s best interests, welfare or happiness) and trusts in which the trustee does not have such absolute discretion. When a trustee has absolute discretion to distribute trust principal, the terms of the second trust may benefit one, more than one, or all the beneficiaries of the first trust. The trustee may also grant the second trust’s beneficiaries powers of appointment over the second trust, and the beneficiaries of the exercise of such power may be broader than, and different from, the beneficiaries of the first trust.

In contrast, if a trustee does not have absolute discretion to distribute a trust’s principal, then the current and successor beneficiaries of the second trust must be the same as the beneficiaries of the first trust. The distribution standards and a beneficiary’s power of appointment of the first trust must remain the same in the second trust.

A trustee can exercise the decanting power without the consent of the trust’s settlor or beneficiaries, and without court approval, so long as the trustee provides notice of the trustee’s intention to decant the first trust to a second trust to all the current and presumptive remainder beneficiaries and no such beneficiary objects within sixty days. For any reason, a trustee may petition an Illinois court to order the distributions permitted by the statute.

Illinois’ decanting statute also includes further provisions concerning supplemental needs trusts for disabled beneficiaries, the continued application of the Rule Against Perpetuities applicable to the first trust and certain tax limitations. The Illinois Attorney General’s Charitable Trust Bureau must be given notice if the trust being decanted has a charitable beneficiary.

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