New Developments: Small Trust Termination

Illinois has a pretty shameful history of not requiring attorneys to take continuing legal education classes. That's now changed, with some new CLE requirements. One good thing about the change is that more CLE classes, and different types of CLE classes, are being offered. Yesterday I listened in on a teleconference about new developments in Illinois probate law. I might spend the next few posts talking about some of these developments. Thanks to yesterday's speaker, Robert Hamilton, for drawing my attention to these topics.

First up is a change to the Illinois Trusts and Trustees Act. But note that this change doesn't take effect until mid-2008. Here's the provision that's been changed -- it comes in an area of the Act that lists the powers a trustee is given:

(760 ILCS 5/4.26)
(This Section may contain text from a Public Act with a delayed effective date)

Sec. 4.26. Small trust termination. To terminate the trust and distribute the trust estate, including principal and accrued and undistributed income, if the trustee determines, in the trustee's sole discretion with the consent of the recipients, that the market value of a trust is less than $100,000 and that the costs of continuing the trust will substantially impair accomplishment of the purpose of the trust.

Distribution shall be made to the persons then entitled to receive or eligible to have the benefit of the income from the trust in the proportions in which they are entitled thereto, or if their interests are indefinite, to those persons per stirpes if they have a common ancestor, or if not, then in equal shares. The trustee shall give notice to the persons at least 30 days prior to the effective date of the termination.

If a particular trustee is an income beneficiary of the trust or is legally obligated to an income beneficiary, then that particular trustee may not participate as a trustee in the exercise of this termination power; provided, however, that if the trust has one or more co‑trustees who are not so disqualified from participating, the co‑trustee or co‑trustees may exercise this power.

This Section shall not apply to the extent that it would cause a trust otherwise qualifying for a federal or State tax benefit or other benefit not to so qualify, nor shall it apply to trusts for domestic or pet animals.

The provisions of this amendatory Act of the 95th General Assembly apply to all trusts created before, on, or after its effective date.

(Source: P.A. 95‑605, eff. 6‑1‑08.)

A couple of comments:

1. I don't write much about the Trusts and Trustees Act because I don't use the Act very often. The Probate Act has provisions that apply to almost every probate estate. The Trusts and Trustees Act mostly covers problem areas -- it gives default provisions in cases where the trust instrument doesn't address an issue. But most trust well-drafted trust instruments handle these issues, and probably do so better than the Act does.

2. What's small trust termination and why is it important? Small trust termination provisions are important in cases where a trust is so small that the administration of it no longer makes much sense. Note the requirement above that "the costs of continuing the trust will substantially impair accomplishment of the purpose of the trust." If I leave property to a trustee, with my daughter as beneficiary, that's great. But what if the trust has $60,000, but it's costing $15,000 per year to administer? That probably wasn't what I intended, so this provision allows the trustee to terminate the trust and distribute it to the beneficiary or beneficiaries immediately.

Again, the key is viewing the Act as a default provision. I can set different terms for the termination of a small trust in my trust instrument, if I desire.