© 2016 by Joan E. Emery
A trustee’s three key duties are the duty of loyalty, the duty of care/prudence, and the duty of disclosure. These three duties and some other duties were initially common law duties, because these duties arose as a result of cases decided by the judiciary. These and other trustee duties arose because when a trustee administers property which is not his or her own property and administers that property for the benefit of a person or persons other than himself, the trustee must act according to the high standards imposed on fiduciaries. I will discuss each of these Illinois common law duties separately and then discuss some duties imposed by the Illinois Trusts and Trustees Act.
In the example from my prior blog post, you have named your brother Tom as successor trustee of your revocable trust if you become incompetent during your lifetime. If you do not become incompetent during your lifetime, then your brother Tom is designated to become successor trustee when you pass away. Tom’s obligations to the beneficiaries of your trust are referred to as Tom’s duties as trustee. What are Tom’s duties?
The common law duty of loyalty requires a trustee to put the interests of the beneficiaries before the trustee’s own interests. This means that the trustee must avoid situations where the trustee’s interests conflict with the beneficiaries’ interests. The duty of loyalty also requires the trustee to be impartial in his or her dealings with all the beneficiaries and to not favor one beneficiary or group of beneficiaries over others.
The common law duty of care/prudence requires a trustee to use reasonable care, skill, and caution when acting as trustee. This duty of care/prudence generally means that the trustee must exercise significant competence in carrying out his or her responsibilities as trustee. This requirement is often described as requiring that the trustee exercise the competence of a prudent person with ordinary intelligence. If the trustee has greater skill or expertise, then the trustee must use that greater ability.
The common law duty to disclose is often said to arise from the duty of loyalty. In other words, the duty to disclose arises because a beneficiary needs to know if the trustee is administering the trust property in accordance with the terms of the trust, is being loyal to the beneficiaries, and is acting with care and prudence. Interestingly, the flip side of the duty of disclosure is the duty of confidentiality. Although the trustee generally must disclose certain information to the beneficiaries, the trustee must refrain from disclosing information about the trust and its beneficiaries to anyone who is outside the “need to know circle.”
The Illinois Trusts and Trustees Act (“Act”), 760 ILCS 5/1 et seq., contains at least 3 provisions which specify duties of a trustee. Those provisions are the Prudent Investor Rule, 760 ILCS 5/5, the Duty Not to Delegate, 760 ILCS 5/5.1, and the Duty to Account, 760 ILCS 5/11. Each of these statutory provisions will be discussed separately.
The Illinois statutory Prudent Investor Rule states, in part, that “a trustee administering a trust has a duty to invest and manage trust assets as a prudent investor would considering the purposes, terms, distribution requirements, and other circumstances of the trust.” This statutory provision contains numerous additional sub-parts which explain and expand on the general language quoted above.
The Illinois statutory Duty Not to Delegate provides that “the trustee has a duty not to delegate to others the performance of any acts involving the exercise of judgment and discretion, except acts constituting investment functions that a prudent investor of comparable skills might delegate…” This provision also contains additional language which explains how a trustee can delegate investment functions. Outside the scope of this discussion is the Illinois Directed Trusts statute, 760 ILCS 5/16.3, which permits the governing instrument (usually the trust agreement) to allocate certain trust functions among various persons or entities.
The Illinois statutory Duty to Account specifies that “every trustee at least annually shall furnish to the beneficiaries then entitled to receive or receiving the income from the trust estate, or if none, then those beneficiaries eligible to have the benefit of the income from the trust estate a current account showing the receipts, disbursements, and inventory of the trust estate.” This statute also discusses the effect of producing such a current account and also specifies the trustee’s duty to furnish a final account when the trust terminates.
Your brother Tom now knows that there are certain Illinois common law trustee duties and certain Illinois statutory trustee duties. In addition, the Illinois trust agreement you created may contain trustee duties which are in addition to or which conflict with these common law or statutory duties. How does Tom know which duties apply to him as trustee and which duties do not apply? That will be the subject of my next blog post.
© 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.