Estate Planning - Quick Hits

This articles spotlights three recent developments in the estate planning arena that we think you’ll not only find of interesting, but might also make you consider whether there are some planning changes you need to consider.

1. Changing the Unchangeable Trust: Illinois Adds Flexibility.

We often meet with clients who have previously established irrevocable trusts, or who are present beneficiaries of irrevocable trusts established by others, and who are now unhappy with the terms of the trust for one reason or another. For example, sometimes beneficiaries complain that the trusts are too stringent when it comes to distributions (to them), or in the case of grantors of irrevocable trusts, there may be evolving family circumstances that suggest that the treatment of one or more beneficiaries, or a class of beneficiaries, should be revisited.

The conventional legal advice has always been, “the trust is irrevocable and there’s not much we can do.” Often this has to be coupled with a more robust explanation of the hard meaning of irrevocable. Recently a couple of new tools have been added to the Illinois estate planner’s toolbox that enables planners to reconsider these problem situations anew.

A couple years ago, the legislature amended the Illinois “Virtual Representation” statute. This amendment allows for modification of existing irrevocable trusts by the agreement of all interested parties. The concept of “virtual representation” means that one class of beneficiaries of a trust can represent the interests of another in entering into such a modifying agreement. For example, a mother who is a beneficiary of a trust can represent the interests of her children (born or as yet unborn) when entering into such an agreement.

This type of trust modification can be achieved by the consent and agreement of all interested parties - namely, the current trustees, and all present and future beneficiaries. Lack of agreement among all interested parties can be an impediment to the successful use of this statute to implement desirable changes.

More recently, the Illinois Trusts and Trustees Act was revised (effective January 1, 2013) to allow the trustee of an irrevocable trust to transfer assets from that trust to another irrevocable trust with similar but modified terms. There are restrictions on the trustee’s authority in this regard - it works best when the trustee’s authority to distribute assets from the existing trust is “absolute,” that is, solely within the trustee’s discretion.

This so-called “decanting” statute provides significant latitude to trustees to accomplish trust changes, provided that that changes are “in furtherance of the trust purposes” - that is, the grantor’s apparent intent in establishing the trust in the first place.

These new legislative tools provide a refreshing dose of flexibility to allow a family - under the right circumstances - to modify otherwise irrevocable trusts to react to family changes or legal changes that were not foreseen when the trust was originally established or when it became irrevocable.

2. Random Thoughts Regarding Digital Assets

Traditionally estate planners design wills and trusts that address the disposition of their clients’ assets. Those documents often segment the disposition of “tangible personal property” on one hand from the disposition of “everything else” on the other. In most cases, understanding what constitutes “tangible personal property” is fairly obvious – your furniture, jewelry, golf clubs, musical instruments, artwork - basically, your stuff.

These days your stuff will likely include one or more computers, tablets, smartphones and other electronic devices. In recent times there has been some disquieting concern in the estate planning community that while these electronic devices are comfortably covered by the tangible personal property clauses in wills or trusts, “digital assets” are often not being treated with clarity or consistency.

To flesh this out, consider: how do you properly bequeath your on-line blog with years of archived entries? Or your trove of professional or personal photographs on your Shutterfly or Flickr account? Or your unfinished manuscript for the next Great American Novel that resides on your laptop? And what if all these digital treasures are stored somewhere in the “cloud”? While the laptop certainly counts as “tangible personal property” - what do we do about those digital assets for which the laptop or other device serves as nothing but the plastic and metal portal?

Further complicating the issues surrounding these amorphous digital assets are those pesky EULAs. These are the end-user license agreements - you know, those click-through “I-agree” contracts you entered into when you opened your blog, or your Shutterfly account, or your word processing program. Most, if not all, of those EULAs provide that you have only signed up for a license to use the program, the site, the cloud; the license expires with the licensee -- and in any case access by anyone other than the licensee is typically prohibited.

Some states - Oklahoma (in 2010) and Idaho (in 2011), for example -- have enacted statutes to address the issue of access to such on-line accounts. These statutes generally authorize executors, trustees and other personal representatives to access electronic accounts and override the terms of the EULAs.

Illinois has yet to craft such a statute, and the treatment of digital assets is currently left to the drafter of the planning documents. If you want ownership of, or access to, your digital assets to be separated from the disposition of the tangible asset itself (the laptop, the tablet, the smartphone), consider specifying it in your documents (including in your power of attorney for property, in the case of your disability.

Planning Consideration: We routinely advise clients that thorough estate planning in our current digital environment requires authorizing your executors and trustees to have access to your personal cache of usernames and passwords. Inserting a provision in your Will or Trust that bequeaths your digital assets to a specific beneficiary will be of no value if your executor or trustee can’t get at them!

3. Rush v. Sessions: The Problem of the Insolvent Estate

In September, 2012, the Illinois Supreme Court handed down a ruling in a case of interest to estate planners. We’ll tell you about the Court’s decision first, and then circle back to help you understand the problem that the Sessions case resolved.

Robert W. Sessions was wealthy, and he generously pledged $1.5 million to Rush University Medical Center in Chicago to assist with the building of a residence for the President of the University. The construction was completed and the University named the building the Robert W.Sessions House to honor his generosity. Sessions subsequently contracted cancer, eventually came to blame Rush for a late diagnosis, and reneged on his pledge.

Substantially all of Sessions’s assets were held in an irrevocable trust in the Cook Islands designed to avoid probate when he died, and, we infer from the structure of the trust, to assist in protecting his assets from creditors. After his death Rush filed a claim against Sessions’s probate estate to collect on the unpaid pledge, but his probate estate was insolvent – that is, there were insufficient assets to satisfy the claim.

Rush then sued the trustees of the trust asserting that the unsatisfied pledge should be paid from the trust. The trustees asserted a variety of defenses, including that the trust was either irrevocable or became irrevocable at Sessions’s death and couldn’t be used for this purpose, and that the trust contained a spendthrift clause that prohibited the transfer of trust assets to pay the pledge. The trustees also asserted that Rush would have to prove that the transfer of assets by Sessions to his trust was a “fraudulent conveyance” under Illinois law. This would have imposed an insurmountable burden of proof on Rush.

Despite the seemingly solid arguments of trust counsel, the Illinois Supreme Court found in favor of Rush. Their logic was grounded on a basic premise of trust law that says that a grantor can’t transfer assets into a trust for his own benefit and by so doing put those assets beyond the reach of his own creditors – past or future creditors. Invoking the old maxim that “one must be just before one is generous,” the Court held that the assets of Sessions’s trust could have been used to satisfy his debts while he was alive, and that fact was not changed as a result of the inconvenient occurrence of his death.

Estate planners have not been uniform in Illinois in their advice to clients about the ability of creditors to enforce claims against so-called insolvent estates. Some have asserted that once a trust becomes irrevocable at its grantor’s death, its assets are shielded from the claims of the grantor’s creditors. The logic has been that creditors could only attach those assets to the same extent that the grantor could, and that access must end at the grantor’s death.

Other counsel advise that trust assets can be reached by creditors after death - which is the legal result dictated by statute in other States. This lack of consistency in Illinois has been driven in part by conflicting decisions in our lower courts, and the inconvenient fact that neither the Illinois Trust and Trustees Act nor the Probate Act speak to this issue directly.

As a result, some planners’ trust documents prohibit paying claims against a decedent’s probate estate from trust assets; some trust documents authorize such payments; still others allow distributions from the trust to pay claims against a decedent’s probate estate but only to the extent they are “legally enforceable” against the estate - i.e., filed within the 6-month statutory creditor claim period. There are probably other variations out there as well.

Rush v. Sessions now seems to resolve that a decedent’s creditor whose claim is unsatisfied because the probate estate is insolvent can proceed to have that claim satisfied from assets held in trusts established by the decedent where the decedent was a beneficiary.

Planning Consideration I: When clients create revocable trusts, one of the customary goals is probate avoidance, and this long-standing principle is not affected by Rush v. Sessions. But to the extent that a grantor creates a trust as a tool to avoid his or her creditors at death, revisiting those planning goals may be in order.

Planning Consideration II: Some jurisdictions – Delaware, Alaska and Nevada, for example – have enacted legislation enabling “domestic asset protection trusts.” These are designed to produce a debtor-creditor result the opposite of Sessions. For people who may have created Sessions-style irrevocable trusts in the past under Illinois law, perhaps the Virtual Representation statute or the trust decanted statute discussed above could be used to change the governing law of the trust to a domestic asset protection trust friendly jurisdiction.

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Nothing contained in this article should be taken as legal advice for your specific situation. Consultation with competent counsel prior to implementing any legal strategy is highly recommended.

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