© 2016 by Joan E. Emery
You create a revocable trust (sometimes called a “living trust”) and transfer various assets into that trust. In the trust agreement, you are the initial trustee and you name your brother Tom as the first successor trustee in case you cannot or do not want to act as trustee at some point during your life. If you continue to act as trustee throughout your life, Tom is named as the successor trustee when you pass away (or you may have created a trust under your will and named Tom as trustee of that testamentary trust). While you are the trustee of your revocable trust, you have the authority to deal with the trust property as you determine. But what happens if Tom becomes trustee during your life or at your death?
Tom, if he becomes successor trustee, will be a fiduciary. You wonder, “Great, but what does that mean? And, what are Tom’s rights and responsibilities regarding the property in my trust and the beneficiaries of my trust?” The word “fiduciary” comes from the Latin word “fiducia” which means trust or confidence. When acting as a fiduciary, a person or business (e.g. a bank trust company) must act for another with the upmost trustworthiness, good faith, and honesty. There are various types of fiduciary relationships, such as guardian/disabled person, principal/agent, executor/beneficiaries, and trustee/beneficiaries. This blog post and several subsequent posts will focus on the trustee/beneficiaries fiduciary relationship.
When acting as trustee of your trust, Tom has certain rights. These rights are generally referred to as the trustee’s powers. Tom, as trustee, also has certain responsibilities. These responsibilities are generally referred to as the trustee’s duties. Where do Tom’s powers and duties come from? Most often, the trustee’s powers and duties are specified in the trust agreement. For example, many trust agreements contain a list of the powers and duties of the trustee. Some powers which are frequently included in a trust agreement are the powers of sale, retention of assets, investment of assets, and payment of expenses and taxes. Some duties which are often included in a trust agreement are the duty of loyalty, the duty of prudence, and the duty to account.
There are limits on the powers and duties which the person creating the trust (often referred to as the “settlor” or “grantor”) can include in a trust agreement. These limits take two forms – specific statutes and relevant case law. For example, the Illinois Trusts and Trustees Act (“Act”) permits the settlor to specify the rights, powers, duties, limitations, and immunities applicable to the trustee, beneficiaries, and others, and specifies that those provisions in the trust agreement will control so long as those provisions are not contrary to law. 760 ILCS 5/3(1). This means that the language of the trust agreement controls unless the trust agreement contains an illegal or improper purpose, power, or duty.
How is it determined whether the language in a trust agreement is contrary to law? I will use Illinois law as an example. First, if an Illinois statute prohibits a certain trust provision, then that trust provision is obviously contrary to law. Second, Illinois has a body of common law which also describes various duties and powers of a trustee. Illinois common law is generally defined as the rules established by cases decided by the judicial branch of our state government. The relevant Illinois statues and case law are said to embody the public policy of our state. Language in a trust agreement specifying the trustee’s powers or duties in a manner which conflicts with the public policy of Illinois will not be enforced by Illinois courts.
So how will you and Tom know what is expected of him if he becomes the successor trustee of your trust? Next time I will discuss some key powers and duties of a trustee and the interrelationship among the trust instrument, the Act, and Illinois common law.
I am an attorney practicing in the Chicago area.