Full Text of HB4662 97th General Assembly
HB4662enr 97TH GENERAL ASSEMBLY |
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| 1 | | AN ACT concerning civil law.
| 2 | | Be it enacted by the People of the State of Illinois,
| 3 | | represented in the General Assembly:
| 4 | | Section 5. The Trust and Trustees Act is amended by adding | 5 | | Section 16.4 as follows: | 6 | | (760 ILCS 5/16.4 new) | 7 | | Sec. 16.4. Distribution of trust principal in further | 8 | | trust. | 9 | | (a) Definitions. In this Section: | 10 | | "Absolute discretion" means the right to distribute | 11 | | principal that is not limited or modified in any manner to or | 12 | | for the benefit of one or more beneficiaries of the trust, | 13 | | whether or not the term "absolute" is used. A power to | 14 | | distribute principal that includes purposes such as best | 15 | | interests, welfare, or happiness shall constitute absolute | 16 | | discretion. | 17 | | "Authorized trustee" means an entity or individual, other | 18 | | than the settlor, who has authority under the terms of the | 19 | | first trust to distribute the principal of the trust for the | 20 | | benefit of one or more current beneficiaries. | 21 | | "Code" means the United States Internal Revenue Code of | 22 | | 1986, as amended from time to time, including corresponding | 23 | | provisions of subsequent internal revenue laws and |
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| 1 | | corresponding provisions of State law. | 2 | | "Current beneficiary" means a person who is currently | 3 | | receiving or eligible to receive a distribution of principal or | 4 | | income from the trustee on the date of the exercise of the | 5 | | power. | 6 | | "Distribute" means the power to pay directly to the | 7 | | beneficiary of a trust or make application for the benefit of | 8 | | the beneficiary. | 9 | | "First trust" means an existing irrevocable inter vivos or | 10 | | testamentary trust part or all of the principal of which is | 11 | | distributed in further trust under subsection (c) or (d). | 12 | | "Presumptive remainder beneficiary" means a beneficiary of | 13 | | a trust, as of the date of determination and assuming | 14 | | non-exercise of all powers of appointment, who either (i) would | 15 | | be eligible to receive a distribution of income or principal if | 16 | | the trust terminated on that date, or (ii) would be eligible to | 17 | | receive a distribution of income or principal if the interests | 18 | | of all beneficiaries currently eligible to receive income or | 19 | | principal from the trust ended on that date without causing the | 20 | | trust to terminate. | 21 | | "Principal" includes the income of the trust at the time of | 22 | | the exercise of the power that is not currently required to be | 23 | | distributed, including accrued and accumulated income. | 24 | | "Second trust" means any irrevocable trust to which | 25 | | principal is distributed in accordance with subsection (c) or | 26 | | (d). |
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| 1 | | "Successor beneficiary" means any beneficiary other than | 2 | | the current and presumptive remainder beneficiaries, but does | 3 | | not include a potential appointee of a power of appointment | 4 | | held by a beneficiary. | 5 | | (b) Purpose. An independent trustee who has discretion to | 6 | | make distributions to the beneficiaries shall exercise that | 7 | | discretion in the trustee's fiduciary capacity, whether the | 8 | | trustee's discretion is absolute or limited to ascertainable | 9 | | standards, in furtherance of the purposes of the trust. | 10 | | (c) Distribution to second trust if absolute discretion. An | 11 | | authorized trustee who has the absolute discretion to | 12 | | distribute the principal of a trust may distribute part or all | 13 | | of the principal of the trust in favor of a trustee of a second | 14 | | trust for the benefit of one, more than one, or all of the | 15 | | current beneficiaries of the first trust and for the benefit of | 16 | | one, more than one, or all of the successor and remainder | 17 | | beneficiaries of the first trust. | 18 | | (1) If the authorized trustee exercises the power under | 19 | | this subsection, the authorized trustee may grant a power | 20 | | of appointment (including a presently exercisable power of | 21 | | appointment) in the second trust to one or more of the | 22 | | current beneficiaries of the first trust, provided that the | 23 | | beneficiary granted a power to appoint could receive the | 24 | | principal outright under the terms of the first trust. | 25 | | (2) If the authorized trustee grants a power of | 26 | | appointment, the class of permissible appointees in favor |
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| 1 | | of whom a beneficiary may exercise the power of appointment | 2 | | granted in the second trust may be broader than or | 3 | | otherwise different from the current, successor, and | 4 | | presumptive remainder beneficiaries of the first trust. | 5 | | (3) If the beneficiary or beneficiaries of the first | 6 | | trust are described as a class of persons, the beneficiary | 7 | | or beneficiaries of the second trust may include one or | 8 | | more persons of such class who become includible in the | 9 | | class after the distribution to the second trust. | 10 | | (d) Distribution to second trust if no absolute discretion. | 11 | | An authorized trustee who has the power to distribute the | 12 | | principal of a trust but does not have the absolute discretion | 13 | | to distribute the principal of the trust may distribute part or | 14 | | all of the principal of the first trust in favor of a trustee | 15 | | of a second trust, provided that the current beneficiaries of | 16 | | the second trust shall be the same as the current beneficiaries | 17 | | of the first trust and the successor and remainder | 18 | | beneficiaries of the second trust shall be the same as the | 19 | | successor and remainder beneficiaries of the first trust. | 20 | | (1) If the authorized trustee exercises the power under | 21 | | this subsection (d), the second trust shall include the | 22 | | same language authorizing the trustee to distribute the | 23 | | income or principal of a trust as set forth in the first | 24 | | trust. | 25 | | (2) If the beneficiary or beneficiaries of the first | 26 | | trust are described as a class of persons, the beneficiary |
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| 1 | | or beneficiaries of the second trust shall include all | 2 | | persons who become includible in the class after the | 3 | | distribution to the second trust. | 4 | | (3) If the authorized trustee exercises the power under | 5 | | this subsection (d) and if the first trust grants a power | 6 | | of appointment to a beneficiary of the trust, the second | 7 | | trust shall grant such power of appointment in the second | 8 | | trust and the class of permissible appointees shall be the | 9 | | same as in the first trust. | 10 | | (4) Supplemental Needs Trusts. | 11 | | (i) Notwithstanding the other provisions of this | 12 | | subsection (d), the authorized trustee may distribute | 13 | | part or all of the principal of a disabled | 14 | | beneficiary's interest in the first trust in favor of a | 15 | | trustee of a second trust which is a supplemental needs | 16 | | trust if the authorized trustee determines that to do | 17 | | so would be in the best interests of the disabled | 18 | | beneficiary. | 19 | | (ii) Definitions. For purposes of this subsection | 20 | | (d): | 21 | | "Best interests" of a disabled beneficiary | 22 | | include, without limitation, consideration of the | 23 | | financial impact to the disabled beneficiary's | 24 | | family. | 25 | | "Disabled beneficiary" means a current | 26 | | beneficiary, presumptive remainder beneficiary, or |
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| 1 | | successor beneficiary of the first trust who the | 2 | | authorized trustee determines has a disability | 3 | | that substantially impairs the beneficiary's | 4 | | ability to provide for his or her own care or | 5 | | custody and that constitutes a substantial | 6 | | handicap, whether or not the beneficiary has been | 7 | | adjudicated a "disabled person". | 8 | | "Governmental benefits" means financial aid or | 9 | | services from any State, Federal, or other public | 10 | | agency. | 11 | | "Supplemental needs second trust" means a | 12 | | trust that complies with paragraph (iii) of this | 13 | | paragraph (4) and that relative to the first trust | 14 | | contains either lesser or greater restrictions on | 15 | | the trustee's power to distribute trust income or | 16 | | principal and which the trustee believes would, if | 17 | | implemented, allow the disabled beneficiary to | 18 | | receive a greater degree of governmental benefits | 19 | | than the disabled beneficiary will receive if no | 20 | | distribution is made. | 21 | | (iii) Remainder beneficiaries. A supplemental | 22 | | needs second trust may name remainder and successor | 23 | | beneficiaries other than the disabled beneficiary's | 24 | | estate, provided that the second trust names the same | 25 | | presumptive remainder beneficiaries and successor | 26 | | beneficiaries to the disabled beneficiary's interest, |
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| 1 | | and in the same proportions, as exist in the first | 2 | | trust. In addition to the foregoing, where the first | 3 | | trust was created by the disabled beneficiary or the | 4 | | trust property has been distributed directly to or is | 5 | | otherwise under the control of the disabled | 6 | | beneficiary, the authorized trustee may distribute to | 7 | | a "pooled trust" as defined by federal Medicaid law for | 8 | | the benefit of the disabled beneficiary or the | 9 | | supplemental needs second trust must contain pay back | 10 | | provisions complying with Medicaid reimbursement | 11 | | requirements of federal law. | 12 | | (iv) Reimbursement. A supplemental needs second | 13 | | trust shall not be liable to pay or reimburse the State | 14 | | or any public agency for financial aid or services to | 15 | | the disabled beneficiary except as provided in the | 16 | | supplemental needs second trust. | 17 | | (e) Notice. An authorized trustee may exercise the power to | 18 | | distribute in favor of a second trust under subsections (c) and | 19 | | (d) without the consent of the settlor or the beneficiaries of | 20 | | the first trust and without court approval if: | 21 | | (1) there are one or more legally competent current | 22 | | beneficiaries and one or more legally competent | 23 | | presumptive remainder beneficiaries and the authorized | 24 | | trustee sends written notice of the trustee's decision, | 25 | | specifying the manner in which the trustee intends to | 26 | | exercise the power and the prospective effective date for |
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| 1 | | the distribution, to all of the legally competent current | 2 | | beneficiaries and presumptive remainder beneficiaries, | 3 | | determined as of the date the notice is sent and assuming | 4 | | non-exercise of all powers of appointment; and | 5 | | (2) no beneficiary to whom notice was sent objects to | 6 | | the distribution in writing delivered to the trustee within | 7 | | 60 days after the notice is sent ("notice period"). | 8 | | A trustee is not required to provide a copy of the notice | 9 | | to a beneficiary who is known to the trustee but who cannot be | 10 | | located by the trustee after reasonable diligence or who is not | 11 | | known to the trustee. | 12 | | If a charity is a current beneficiary or presumptive | 13 | | remainder beneficiary of the trust, the notice shall also be | 14 | | given to the Attorney General's Charitable Trust Bureau. | 15 | | (f) Court involvement. | 16 | | (1) The trustee may for any reason elect to petition | 17 | | the court to order the distribution, including, without | 18 | | limitation, the reason that the trustee's exercise of the | 19 | | power to distribute under this Section is unavailable, such | 20 | | as: | 21 | | (a) a beneficiary timely objects to the | 22 | | distribution in a writing delivered to the trustee | 23 | | within the time period specified in the notice; or | 24 | | (b) there are no legally competent current | 25 | | beneficiaries or legally competent presumptive | 26 | | remainder beneficiaries. |
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| 1 | | (2) If the trustee receives a written objection within | 2 | | the notice period, either the trustee or the beneficiary | 3 | | may petition the court to approve, modify, or deny the | 4 | | exercise of the trustee's powers. The trustee has the | 5 | | burden of proving the proposed exercise of the power | 6 | | furthers the purposes of the trust. | 7 | | (3) In a judicial proceeding under this subsection (f), | 8 | | the trustee may, but need not, present the trustee's | 9 | | opinions and reasons for supporting or opposing the | 10 | | proposed distribution, including whether the trustee | 11 | | believes it would enable the trustee to better carry out | 12 | | the purposes of the trust. A trustee's actions in | 13 | | accordance with this Section shall not be deemed improper | 14 | | or inconsistent with the trustee's duty of impartiality | 15 | | unless the court finds from all the evidence that the | 16 | | trustee acted in bad faith. | 17 | | (g) Term of the second trust. The second trust to which an | 18 | | authorized trustee distributes the assets of the first trust | 19 | | may have a term that is longer than the term set forth in the | 20 | | first trust, including, but not limited to, a term measured by | 21 | | the lifetime of a current beneficiary; provided, however, that | 22 | | the second trust shall be limited to the same permissible | 23 | | period of the rule against perpetuities that applied to the | 24 | | first trust, unless the first trust expressly permits the | 25 | | trustee to extend or lengthen its perpetuities period. | 26 | | (h) Divided discretion. If an authorized trustee has |
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| 1 | | absolute discretion to distribute the principal of a trust and | 2 | | the same trustee or another trustee has the power to distribute | 3 | | principal under the trust instrument which power is not | 4 | | absolute discretion, such authorized trustee having absolute | 5 | | discretion may exercise the power to distribute under | 6 | | subsection (c). | 7 | | (i) Later discovered assets. To the extent the authorized | 8 | | trustee does not provide otherwise: | 9 | | (1) The distribution of all of the assets comprising | 10 | | the principal of the first trust in favor of a second trust | 11 | | shall be deemed to include subsequently discovered assets | 12 | | otherwise belonging to the first trust and undistributed | 13 | | principal paid to or acquired by the first trust subsequent | 14 | | to the distribution in favor of the second trust. | 15 | | (2) The distribution of part but not all of the assets | 16 | | comprising the principal of the first trust in favor of a | 17 | | second trust shall not include subsequently discovered | 18 | | assets belonging to the first trust and principal paid to | 19 | | or acquired by the first trust subsequent to the | 20 | | distribution in favor of a second trust; such assets shall | 21 | | remain the assets of the first trust. | 22 | | (j) Other authority to distribute in further trust. This | 23 | | Section shall not be construed to abridge the right of any | 24 | | trustee to distribute property in further trust that arises | 25 | | under the terms of the governing instrument of a trust, any | 26 | | provision of applicable law, or a court order. In addition, |
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| 1 | | distribution of trust principal to a second trust may be made | 2 | | by agreement between a trustee and all primary beneficiaries of | 3 | | a first trust, acting either individually or by their | 4 | | respective representatives in accordance with Section 16.1 of | 5 | | this Act. | 6 | | (k) Need to distribute not required. An authorized trustee | 7 | | may exercise the power to distribute in favor of a second trust | 8 | | under subsections (c) and (d) whether or not there is a current | 9 | | need to distribute principal under the terms of the first | 10 | | trust. | 11 | | (l) No duty to distribute. Nothing in this Section is | 12 | | intended to create or imply a duty to exercise a power to | 13 | | distribute principal, and no inference of impropriety shall be | 14 | | made as a result of an authorized trustee not exercising the | 15 | | power conferred under subsection (c) or (d). Notwithstanding | 16 | | any other provision of this Section, a trustee has no duty to | 17 | | inform beneficiaries about the availability of this Section and | 18 | | no duty to review the trust to determine whether any action | 19 | | should be taken under this Section. | 20 | | (m) Express prohibition. A power authorized by subsection | 21 | | (c) or (d) may not be exercised if expressly prohibited by the | 22 | | terms of the governing instrument, but a general prohibition of | 23 | | the amendment or revocation of the first trust or a provision | 24 | | that constitutes a spendthrift clause shall not preclude the | 25 | | exercise of a power under subsection (c) or (d). | 26 | | (n) Restrictions. An authorized trustee may not exercise a |
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| 1 | | power authorized by subsection (c) or (d) to affect any of the | 2 | | following: | 3 | | (1) to reduce, limit or modify any beneficiary's | 4 | | current right to a mandatory distribution of income or | 5 | | principal, a mandatory annuity or unitrust interest, a | 6 | | right to withdraw a percentage of the value of the trust or | 7 | | a right to withdraw a specified dollar amount provided that | 8 | | such mandatory right has come into effect with respect to | 9 | | the beneficiary, except with respect to a second trust | 10 | | which is a supplemental needs trust; | 11 | | (2) to decrease or indemnify against a trustee's | 12 | | liability or exonerate a trustee from liability for failure | 13 | | to exercise reasonable care, diligence, and prudence; | 14 | | except to indemnify or exonerate one party from liability | 15 | | for actions of another party with respect to distribution | 16 | | that unbundles the governance structure of a trust to | 17 | | divide and separate fiduciary and nonfiduciary | 18 | | responsibilities among several parties, including without | 19 | | limitation one or more trustees, distribution advisors, | 20 | | investment advisors, trust protectors, or other parties, | 21 | | provided however that such modified governance structure | 22 | | may reallocate fiduciary responsibilities from one party | 23 | | to another but may not reduce them; | 24 | | (3) to eliminate a provision granting another person | 25 | | the right to remove or replace the authorized trustee | 26 | | exercising the power under subsection (c) or (d); provided, |
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| 1 | | however, such person's right to remove or replace the | 2 | | authorized trustee may be eliminated if a separate | 3 | | independent, non-subservient individual or entity, such as | 4 | | a trust protector, acting in a nonfiduciary capacity has | 5 | | the right to remove or replace the authorized trustee; | 6 | | (4) to reduce, limit or modify the perpetuities | 7 | | provision specified in the first trust in the second trust, | 8 | | unless the first trust expressly permits the trustee to do | 9 | | so. | 10 | | (o) Exception. Notwithstanding the provisions of paragraph | 11 | | (1) of subsection (n) but subject to the other limitations in | 12 | | this Section, an authorized trustee may exercise a power | 13 | | authorized by subsection (c) or (d) to distribute to a second | 14 | | trust; provided, however, that the exercise of such power does | 15 | | not subject the second trust to claims of reimbursement by any | 16 | | private or governmental body and does not at any time interfere | 17 | | with, reduce the amount of, or jeopardize an individual's | 18 | | entitlement to government benefits. | 19 | | (p) Tax limitations. If any contribution to the first trust | 20 | | qualified for the annual exclusion under Section 2503(b) of the | 21 | | Code, the marital deduction under Section 2056(a) or 2523(a) of | 22 | | the Code, or the charitable deduction under Section 170(a), | 23 | | 642(c), 2055(a) or 2522(a) of the Code, is a direct skip | 24 | | qualifying for treatment under Section 2642(c) of the Code, or | 25 | | qualified for any other specific tax benefit that would be lost | 26 | | by the existence of the authorized trustee's authority under |
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| 1 | | subsection (c) or (d) for income, gift, estate, or | 2 | | generation-skipping transfer tax purposes under the Code, then | 3 | | the authorized trustee shall not have the power to distribute | 4 | | the principal of a trust pursuant to subsection (c) or (d) in a | 5 | | manner that would prevent the contribution to the first trust | 6 | | from qualifying for or would reduce the exclusion, deduction, | 7 | | or other tax benefit that was originally claimed with respect | 8 | | to that contribution. | 9 | | (1) Notwithstanding the provisions of this subsection | 10 | | (p), the authorized trustee may exercise the power to pay | 11 | | the first trust to a trust as to which the settlor of the | 12 | | first trust is not considered the owner under Subpart E of | 13 | | Part I of Subchapter J of Chapter 1 of Subtitle A of the | 14 | | Code even if the settlor is considered such owner of the | 15 | | first trust. Nothing in this Section shall be construed as | 16 | | preventing the authorized trustee from distributing part | 17 | | or all of the first trust to a second trust that is a trust | 18 | | as to which the settlor of the first trust is considered | 19 | | the owner under Subpart E of Part I of Subchapter J of | 20 | | Chapter 1 of Subtitle A of the Code. | 21 | | (2) During any period when the first trust owns | 22 | | subchapter S corporation stock, an authorized trustee may | 23 | | not exercise a power authorized by paragraph (c) or (d) to | 24 | | distribute part or all of the S corporation stock to a | 25 | | second trust that is not a permitted shareholder under | 26 | | Section 1361(c)(2) of the Code. |
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| 1 | | (3) During any period when the first trust owns an | 2 | | interest in property subject to the minimum distribution | 3 | | rules of Section 401(a)(9) of the Code, an authorized | 4 | | trustee may not exercise a power authorized by subsection | 5 | | (c) or (d) to distribute part or all of the interest in | 6 | | such property to a second trust that would result in the | 7 | | shortening of the minimum distribution period to which the | 8 | | property is subject in the first trust. | 9 | | (q) Limits on compensation of trustee. | 10 | | (1) Unless the court upon application of the trustee | 11 | | directs otherwise, an authorized trustee may not exercise a | 12 | | power authorized by subsection (c) or (d) solely to change | 13 | | the provisions regarding the determination of the | 14 | | compensation of any trustee; provided, however, an | 15 | | authorized trustee may exercise the power authorized in | 16 | | subsection (c) or (d) in conjunction with other valid and | 17 | | reasonable purposes to bring the trustee's compensation | 18 | | into accord with reasonable limits in accord with Illinois | 19 | | law in effect at the time of the exercise. | 20 | | (2) The compensation payable to the trustee or trustees | 21 | | of the first trust may continue to be paid to the trustees | 22 | | of the second trust during the terms of the second trust | 23 | | and may be determined in the same manner as otherwise would | 24 | | have applied in the first trust; provided, however, that no | 25 | | trustee shall receive any commission or other compensation | 26 | | imposed upon assets distributed due to the distribution of |
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| 1 | | property from the first trust to a second trust pursuant to | 2 | | subsection (c) or (d). | 3 | | (r) Written instrument. The exercise of a power to | 4 | | distribute principal under subsection (c) or (d) must be made | 5 | | by an instrument in writing, signed and acknowledged by the | 6 | | trustee, and filed with the records of the first trust and the | 7 | | second trust. | 8 | | (s) Terms of second trust. Any reference to the governing | 9 | | instrument or terms of the governing instrument in this Act | 10 | | includes the terms of a second trust established in accordance | 11 | | with this Section. | 12 | | (t) Settlor. The settlor of a first trust is considered for | 13 | | all purposes to be the settlor of any second trust established | 14 | | in accordance with this Section. If the settlor of a first | 15 | | trust is not also the settlor of a second trust, then the | 16 | | settlor of the first trust shall be considered the settlor of | 17 | | the second trust, but only with respect to the portion of | 18 | | second trust distributed from the first trust in accordance | 19 | | with this Section. | 20 | | (u) Remedies. A trustee who reasonably and in good faith | 21 | | takes or omits to take any action under this Section is not | 22 | | liable to any person interested in the trust. An act or | 23 | | omission by a trustee under this Section is presumed taken or | 24 | | omitted reasonably and in good faith unless it is determined by | 25 | | the court to have been an abuse of discretion. If a trustee | 26 | | reasonably and in good faith takes or omits to take any action |
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| 1 | | under this Section and a person interested in the trust opposes | 2 | | the act or omission, the person's exclusive remedy is to obtain | 3 | | an order of the court directing the trustee to exercise | 4 | | authority in accordance with this Section in such manner as the | 5 | | court determines necessary or helpful for the proper | 6 | | functioning of the trust, including without limitation | 7 | | prospectively to modify or reverse a prior exercise of such | 8 | | authority. Any claim by any person interested in the trust that | 9 | | an act or omission by a trustee under this Section was an abuse | 10 | | of discretion is barred if not asserted in a proceeding | 11 | | commenced by or on behalf of the person within 2 years after | 12 | | the trustee has sent to the person or the person's personal | 13 | | representative a notice or report in writing sufficiently | 14 | | disclosing facts fundamental to the claim such that the person | 15 | | knew or reasonably should have known of the claim. Except for a | 16 | | distribution of trust principal from a first trust to a second | 17 | | trust made by agreement in accordance with Section 16.1 of this | 18 | | Act, the preceding sentence shall not apply to a person who was | 19 | | under a legal disability at the time the notice or report was | 20 | | sent and who then had no personal representative. For purposes | 21 | | of this subsection (u), a personal representative refers to a | 22 | | court appointed guardian or conservator of the estate of a | 23 | | person. | 24 | | (v) Application. This Section is available to trusts in | 25 | | existence on the effective date of this amendatory Act of the | 26 | | 97th General Assembly or created on or after the effective date |
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| 1 | | of this amendatory Act of the 97th General Assembly. This | 2 | | Section shall be construed as pertaining to the administration | 3 | | of a trust and shall be available to any trust that is | 4 | | administered in Illinois under Illinois law or that is governed | 5 | | by Illinois law with respect to the meaning and effect of its | 6 | | terms, including a trust whose governing law has been changed | 7 | | to the laws of this State, unless the governing instrument | 8 | | expressly prohibits use of this Section by specific reference | 9 | | to this Section. A provision in the governing instrument in the | 10 | | form: "Neither the provisions of Section 16.4 of the Trusts and | 11 | | Trustees Act nor any corresponding provision of future law may | 12 | | be used in the administration of this trust" or a similar | 13 | | provision demonstrating that intent is sufficient to preclude | 14 | | the use of this Section.
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