Amending Irrevocable Trusts Through Illinois Virtual Representation Statute

Question:  I am the beneficiary of an Illinois irrevocable trust which holds assets for me.  The existing trustee wishes to resign but I am uncomfortable with the named successor trustee. Is there an alternative to changing Trustees without going to court?

 Answer:  Before pursuing any course of action, you should closely examine the trust agreement.  Many times a trust agreement will permit beneficiaries to remove a trustee and appoint successor trustees of their choosing.  Alternatively, the trust agreement may give the existing trustee the right to designate successor trustees. The trust agreement may also grant you, as beneficiary, the right to withdraw some or all of the trust assets which can enable you to contribute the withdrawn funds to another trust with a trustee of your liking. 

Assuming the trust agreement does not provide the flexibility necessary to change the trustees, you may be able to accomplish your objectives through the Illinois Virtual Representation Statute.  The Illinois statute permits interested persons to enter into written agreements outside of court regarding certain provisions involving a trust instrument. Agreements effectuated under the Illinois Virtual Representation Statute will be binding upon the beneficiaries as if ordered by a court.

Interested persons include the trust’s primary beneficiaries who are the persons currently eligible to receive income or principal from the trust.  Any person who would be entitled to receive trust assets upon the termination of the trust will also be deemed to be an interested person.  The Illinois Virtual Representation Statute does not require all potential trust beneficiaries to be parties to the written agreement. Primary trust beneficiaries who enter into virtual representation agreements can act on behalf of beneficiaries who have interests substantially similar to the primary beneficiaries.  Interested persons also include the acting trustee who must be part of any written agreement under the statute. 

Not every aspect of a trust agreement can be modified by the Illinois Virtual Representation Statute.  Dispositive provisions of the trust agreement, for example, generally cannot be modified under the Illinois Virtual Representation Law.  The statute does permit modifications regarding the interpretation or construction of the trust terms, the approval of trustee reports and accountings, the determination of trustee compensation and other matters.  The statute also permits trust modifications which pertain to the appointment of new successor trustees which should permit you to accomplish your objective.

Drafters of trust instruments are generally well advised to create flexibility in the trust provisions to accommodate changes in circumstances which cannot be anticipated at the time the trust instrument is created.  Where the trust agreement does not provide the desired flexibility, other avenues can be sought to accomplish the change in the trust instrument.  The Illinois Virtual Representation Statute is one such tool which very likely will help persons in your circumstance alter the trust provisions to your liking.

 

The Tax Corner addresses various tax, estate, asset protection and other business matters.  Should you have any questions regarding the subject matter or if you have questions you want to be answered, you may contact Bruce at (312) 648-2300 or send an e-mail to bruce.bell@sfnr.com.

Related Articles

Tax Strategies with Incentives Stock Option Plans

Tax Strategies with Incentives Stock Option Plans

Question:        I hold incentive stock options which I received from my employer. Since the stock is trading above the option exercise price, should I exercise the options and acquire shares of employer stock or do a cashless exercise?

Avoiding the Tax Trap in Transferring Installment Sale Obligations

Avoiding the Tax Trap in Transferring Installment Sale Obligations

Question: I just sold stock in my corporation to a third party and received a cash payment upfront with the balance of the sale proceeds to be paid to me in the future. Since I do not need the additional funds, can I make a gift to my children of the right to the future payments?

Obstacles in Establishing Non-Qualified Deferred Compensation Plans

Obstacles in Establishing Non-Qualified Deferred Compensation Plans

Question: I want to create a deferred compensation plan for certain highly paid employees of my company to provide additional benefits for them, separate and apart from the company profit sharing and 401(k) plan. Can you advise what obstacles I must be concerned with?