This article discusses topics that may impact you in 2021 regarding Illinois trust litigation and dispute laws including
- Accounting And Informing Beneficiaries Of A Trust
- Delivery To Past Beneficiaries
- Notifying Past Beneficiaries
- Trustee’s Exculpation
- Delegation Of Trustees Duties And Powers
- Discretionary Authorities In Trust Litigation
The Illinois Trust Code (“ITC”) codifies the traditional responsibilities of trustees, such as loyalty, responsible management, and accountability. These responsibilities and their extent were previously determined by court judgments and treatises. Trustees should be mindful of four significant changes that individuals or bank trust departments should keep in mind when accepting new trusteeships. These adjustments should be understood by trustmakers (the trust's creator or settlor) and their advisors.
Accounting And Informing Beneficiaries Of A Trust
The obligation to account was codified under previous Illinois legislation (the Illinois Trusts and Trustees Act), but it was simple: a trustee must give an accounting to a current income beneficiary or beneficiaries at least once a year. At the termination of the trust, the trustee must make an accounting to the remaining beneficiaries. There were no legislative obligations of notice or obligation to inform except for certain trustee acts (delegation of investment authority, investment in associated mutual funds, decanting, and transfer to total return trust). Traditionally, any duties imposed by a trustmaker (the trust's owner or settlor) had to come from the trust instrument.
For all trusts that were irrevocable before January 1, 2020, except for a trustee of a revocable trust who started operating before January 1, 2020, the ITC adopts the prior Illinois law on accountings. The ITC extends the class of beneficiaries that earn accountings and introduces notice provisions for trusts that become irrevocable after January 1, 2020. If a trust was revocable on January 1, 2020, but becomes irrevocable after that date, the current ITC accounting and notice provisions will only apply if the trustee changes.
Delivery To Past Beneficiaries
A trustee must provide accountings to (a) all existing beneficiaries, that is, any beneficiary who may obtain a distribution at that time or any beneficiary who holds a currently exercisable general power of appointment, and (b) all presumptive remainder beneficiaries, at least once a year under the ITC (which is a term defined by the ITC). The obligation to account to presumptive remainder beneficiaries can be limited or even eliminated by the trustmaker, but the duty to account to all existing beneficiaries cannot be eliminated. A beneficiary's representative may receive the accounting from the trustee.
Notifying Past Beneficiaries
A trustee must notify all existing and presumptive remainder beneficiaries in five separate situations: (a) when a trust becomes irrevocable, (b) when a new trustee or alteration in the trustee's contact details is appointed, (c) when a trustee resigns, (d) when a trustee is replaced, and (e) when the trustee's compensation is modified. Some of these notifications must be issued within a certain amount of time (usually 90 days) or, in the case of a change in compensation, prior to the change. Except for the first, a trustmaker may limit or even exclude all of these notice criteria. If a trust becomes irrevocable, the trustee must notify any of the beneficiaries within 90 days (or within 90 days of acceptance, if the trustee was not acting when the trust became irrevocable).
For large corporate trust departments that provide trust-related notices and accountings on a regular basis, these new accounting and notice standards may necessitate process changes. Each of these new provisions should be carefully examined in order to establish robust new internal processes to ensure compliance with the ITC.
Trustee’s Exculpation
Exculpation provisions are another significant shift in a trustee's responsibilities. Previously, under Illinois law, a trust's owner may exempt the trustee from personal responsibility by including an exculpatory clause in the trust (subject to the trustee's duty to act in good faith). A trustmaker can also incorporate some exculpatory clauses. However, if the trustee drafted or induced the exculpatory clause to be drafted, there is now a statutory assumption that it is invalid. The trustee must be able to show that the provision is reasonable in the circumstances and that the trustmaker was properly informed about its existence and contents. If the trustmaker was advised by independent counsel during the drafting of the trust, this standard will be met. As a result, new trustees must be cautious when requesting these exculpation clauses, lest they be deemed null.
Delegation Of Trustees Duties And Powers
Previously, Illinois law prohibited a trustee from delegating any actions requiring judgment or discretion, with the exception of investments where it was prudent to do so or where the trust instrument permitted it. A trustee can delegate any duties and powers that a responsible trustee with comparable skills may reasonably delegate under the ITC, as long as the trustee selects and monitors the delegee with due care. If a trustee decides to use this new delegating power, he or she should be aware that delegation necessitates careful selection and monitoring and should not be taken lightly.
Discretionary Authorities In Trust Litigation
In two cases, the ITC introduces additional "savings" clauses that can restrict a trustee's discretion. These "savings" clauses are intended to prevent an inadvertent general power of appointment by a beneficiary who is also trustee or has the power to remove and substitute a trustee. The savings provisions work in two ways: (a) if a beneficiary (other than a trustmaker) is the sole trustee and has broad discretion to make distributions, he or she may only make distributions to himself or herself based on an ascertainable standard and cannot make distributions to discharge personal obligations; and (b) where a beneficiary may unilaterally exclude and replace a fiduciary with another fiduciary. So long as it is clear that this was the trustmaker's goal, a trustmaker may circumvent these "savings" clauses and still grant a trustee these broad powers.
Although the ITC can necessitate changes in corporate and individual trustee processes and procedures, the best defense is a good offense. Spending time with the new regulations should enable trustees to assess the ITC's similarities and differences, as well as train them to comply with the new laws. Understanding the new laws should also aid trustmakers and their advisors in drafting new trust agreements or revising existing ones as appropriate.
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