HOW DO YOU ADVISE THE TRUSTEE CLIENT?
One of your favorite clients calls you in a panic. His best friend has just died, and he discovers he’s been named the trustee of his friend’s trust. Determined to do the right thing, he calls you to find out what he’s supposed to do as trustee, and how he can make the most of the trust assets for the benefit of his friend’s children. What do you tell him?
Keeping track of statutes, rules and regulations that govern the responsibilities and duties of trustees is a challenge. This article will act as a reference for the Illinois legal practitioner who is either a trustee him/herself or who is assisting clients acting as trustees under the Trusts and Trustees Act (the "Act")1.
HOW DO YOU DETERMINE THE TRUSTEE’S DUTIES?
The first place to search to determine a trustee’s duties is in the trust instrument itself. When ascertaining the duties of a trustee, the trust instrument is the governing document; the rules of the Act apply only insofar as they are not in conflict with the trust instrument.2 The courts in Illinois have said, "the authorities are as one in holding that a trust itself constitutes the charter of the trustee’s powers and duties. ‘From it he derives the rule of his conduct, and it not only prescribes the extent and limit of his authority but also furnishes the measure of his obligations. . . .’ ‘A trustee . . . must look to the terms of the instrument itself for a determination of his duties and is entitled to act only within the scope of the powers granted; he has no right to perform any acts extraneous to his trust or beyond his authority as granted therein.’"3 The principle is simple. Do what the trust says.
The Act governs not only individuals, but corporations qualified to administer trusts, as well.4 However, the rules set forth in the Act are inapplicable to land trusts, voting trusts, security instruments (trust deeds or mortgages), liquidation trusts, escrow, instruments under which a receiving agent is appointed, Totten trusts, or Grain Indemnity Trust Accounts.5
THE STATUTORY POWERS OF A TRUSTEE
A trustee is invested with these specific powers under the Act:
to sell or exchange trust property;
to enter into leases;
to borrow money and mortgage the estate;
to grant, with regard to real estate, easements, to subdivide, to improve, etc.;
to appoint trustees in other jurisdictions;
to enter into agreements with banks on behalf of the trust;
to act as an individual owner with regard stocks, bonds or other securities in the trust estate;
to pay taxes and reasonable expenses incurred in administration of the estate;
to appoint advisers, such as attorneys, auditors, etc., and to pay reasonable compensation to them;
to delegate any or all trustee duties to a co-trustee for any period of time (with reservation; see Duty Not to Delegate, following);
to deal with claims that arise with regard to the estate;
to execute contracts, notes, conveyances and other instruments;
to receive and administer additional trust property;
to invest in or hold undivided interests in property;
to deal with the executor, trustee, or other representative of any other trust or estate in which the beneficiary of the trust has an interest;
to make equitable distribution or division of property whether cash or in kind or both, and make valuations of that property;
to rely upon affidavits, certificates, letters or other evidence believed to be genuine to make payments or distribution without incurring liability;
to retain the powers and abilities bestowed upon the trustee by law and by the trust instrument during the period between termination of the trust and distribution of the trust to the beneficiary, as well as during any period of litigation that might result in the invalidation of the trust;
to acquire insurance for the protection of the trust estate;
to distribute income and principal;
to engage in farm activity, as appropriate;
to engage in mining activity, as appropriate;
to continue an unincorporated business and participate in its management;
to continue a partnership and participate in its management; and
to sever or consolidate trusts as necessary.6
It is important to note as well what powers are NOT expressly conferred upon the trustee in the Act. They are: 1) the power to retain original investments unsuitable under the prudent investor rule; 2) the power to acquire investments that are unsuitable under the prudent investor rule; 3) the power to retain investments originally suitable under the prudent investor rule, but which have become unsuitable; 4) the power to acquire real estate; 5) the power to accumulate income; 6) the power to sprinkle or spray income among the income beneficiaries; and 7) the power to determine which members, among a class, shall be entitled to the principal of the trust.7
THE DUTIES OF A TRUSTEE
The duties of the trustee, for breach of which that trustee may be removed or his/her compensation lost, include the following:
to comply with the terms of the trust;
to know and understand those terms;
to act in good faith, using care, skill, and diligence;
to take, keep and control trust property, and to preserve it;
to keep sufficient insurance in force;
to keep the trust property in reasonable repair;
to enforce claims due the trust and to defend against claims against the trust;
to refrain from self-dealing and from commingling the trust property with the property of him/herself or others;
to invest the trust property with a high degree of skill and to keep the trust invested in productive property;
to keep adequate books and records, to provide periodic statements of account to the beneficiaries, to distribute to beneficiaries their proper shares of the trust income/principal, according to the trust provisions; and
to provide beneficiaries with essential information, deal fairly with them, not show partiality among them unless directed to do so by the trust instrument or other applicable writing.8
Some of these duties have been litigated, and highlights of that litigation follows.
THE TRUSTEE IS SUBJECT TO THE PRUDENT INVESTOR RULE
A trustee has a duty to invest and manage trust assets under the "prudent investor" standard.9 In Giagnorio v. Torkelson10, the trustee sold the trust property (a business) to one of the beneficiaries at a price well below the appraised value of the business and the land on which it was conducted. The Appellate Court reversed the trial court’s dismissal of the complaint, holding that the sale of the property at a low price and a number of other features of the sale called the trustee’s actions into serious question. The court also saw fit to outline a trustee’s duty regarding investing and managing the trust assets by directly quoting from the statute:
(1) The trustee 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 standard requires the exercise of reasonable care, skill, and caution and is to be applied to investments not in isolation, but in the context of the trust portfolio as a whole and as a part of an overall investment strategy that should incorporate risk and return objectives reasonably suitable to the trust. (2) No specific investment or course of action is, taken alone, prudent or imprudent. The trustee may invest in every kind of property and type of investment, subject to this Section. The trustee’s investment decisions and actions are to be judged in terms of the trustee’s reasonable business judgment regarding the anticipated effect on the trust portfolio as a whole under the facts and circumstances prevailing at the time of the decision or action. The prudent investor rule is a test of conduct and not of resulting performance.11
The court in Giagnorio applied a standard of "reasonable care, skill and caution." What happens when a trustee holds itself out to have greater than average expertise? This point was litigated in the context of a corporate trustee that acted until the trust estate was closed. The court had to decide whether the corporate trustee would be held to a higher standard of expertise than an individual trustee. The court reiterated that the actions of an executor must be judged in the context in which he acted,12 and that in Illinois, a corporate executor is held to no higher standard than an individual executor.13
CONFLICTS OF INTEREST BETWEEN THE TRUSTEE AND THE TRUST BENEFICIARIES
Most lawyers hear sirens and see flashing lights when they hear the words "conflict of interest." This reaction may not always be the right one in a trust situation. In one case the will and trust actually established the circumstances that produced the conflict. The documents specifically made clear the wishes of the testator that the trustee act in her own best interest, even to the detriment of the remainder beneficiaries. The court held that under these circumstances the trustee was within her rights to do so.14
Be careful, though! The lawyer’s common sense reaction is usually the right one. In one case, a decedent left shares of bank stock that he had owned in the care of an affiliate of that same bank as executor. This produced a clear conflict of interest between the trust beneficiaries and the corporate executor acting as trustee. The court held that the trustee had the duty to administer the estate solely in the interests of the beneficiaries. The bank had held the stock for 28 months and failed to make a reasonable attempt to sell it. The court found that this was not in the best interests of the beneficiaries under the circumstances.15
Under normal circumstances, the rule of undivided loyalty applies. There can be exceptions. For example the creator of the trust may waive the rule by expressly conferring upon the trustee the power to act in a dual capacity. The power to act in a dual capacity may also be created by implication, as when the creator of the trust knowingly places the trustee in a position that might create a conflict with the beneficiaries’ interests.16 In such a case, the trustee will not be held liable unless he has acted in bad faith, abused his discretion, or acted dishonestly.17
THE TRUSTEE’S DUTY NOT TO DELEGATE
The Act imposes a duty not to delegate to others the performance of any acts involving the exercise of judgment and discretion, EXCEPT those investment acts that may be accomplished by a competent investment agent. In order to delegate to an investment agent, the trustee must "exercise reasonable care, skill and caution"18 in the selection of the agent, as well as in determining the scope and specific terms of the duties being delegated to that agent. The trustee must also review the agent’s action periodically to monitor his/her performance and compliance with the scope of the delegation. In exercising his/her care in delegating investment duties, the trustee must do several things. Most importantly, he/she must investigate the experience, performance history, professional licensing or registration and financial stability of the investment agent. The trustee is also required by the Act to send written notice to any income beneficiaries that he/she intends to delegate investment functions at least thirty days before the delegation occurs. These rules apply to all funded trusts, but only to actions taken after 7/1/92.19
In a case where a trust beneficiary filed suit against his trustees for, among other things, delegating judgmental and discretionary functions, the court held that, when there is language in the trust instrument expressly empowering the trustees to engage in such delegation (in this case, "to employ agents and counsel, including investment counsel, and delegate to them any powers of the trustees" (emphasis added in the case)20, no cause of action existed.21 This is one more example of the grantor’s power to structure the trust as he wishes. As stated at the beginning of this article, always look first to the trust document to determine the powers and duties of the trustee.
Moreover, the courts have also found that exculpatory clauses are compatible with the prudent investor rule. In Metz v. Independent Trust Corporation,22 the trust agreement provided that the trustee would invest or reinvest at the direction of the grantor; the grantor had sole authority and discretion to direct the investments; and the trustee would not act as investment advisor. It also explicitly stated that "the Grantor agrees to hold the Trustee harmless from all liabilities and expenses incurred in connection with any actions taken or failures to act in reliance upon the Grantor’s or his authorized agent’s written instructions, designations, and representations, or in the exercise of any right, power, or duty of the Trustee in good faith and with reasonable care."23 The court held that, taken together, these provisions, along with other documents detailing the relationship between the parties (including an IRA agreement and an Investment Direction in both of which documents grantor retained all rights to decision-making and absolved the trustee of any liability), the trustee was merely a nondiscretionary trustee.24 In addition, the court reviewed Illinois public policy and determined that the prudent person rule is not to alter the express terms of a trust, including any limitations thrust upon the trustees thereof. "Although exculpatory provisions . . . do not enjoy special favor in the law, if they are inserted in a trust instrument they are generally held effective except as to breaches of trust committed in bad faith or intentionally or with reckless indifference to the interest of the beneficiary.25
Where an individual and a corporation are co-trustees, trust assets must be in the custody of the corporate trustee, unless all the trustees otherwise agree.26 If three or more trustees exist, a majority of trustees is competent to act, with written notice to any other trustees. If a trustee dissents from the majority action, he or she has no liability for the acts of the majority.27
Further, when multiple trustees are individuals, a co-trustee cannot exercise a joint power individually.28 The courts have confirmed the "practicality and fairness" of this requirement because it allows co-trustees to act without requiring unanimity, and it frees dissenting trustees from liability for actions of the majority.29 In a case where three trustees were engaged in negotiation to extend a mortgage note and the fourth trustee sued to foreclose, the fourth trustee had no standing to bring suit.30 "Courts will not generally interfere with trustees’ discretionary decisions absent proof of fraud, bad faith, or an abuse of discretion."31
Trustees are required to provide to any income beneficiaries, at least annually, accounts showing the receipts, dis-bursements, and inventory of the trust estate. When the trust terminates, the trustee must furnish to all beneficiaries entitled to a distribution from the trust a final account for the period from the previous account to the date of distribution. The final account must again show the inventory of the trust estate, the receipts, and disbursements. It must also show the distributions. A wise trustee will have procedures in place requiring the delivery of an account to the beneficiary; such procedures ensure that receipt of the account by the beneficiary is presumed.32
Additionally, a trustee will be required to give an accounting upon demand to the beneficiaries at virtually any time. "The plaintiffs need not wait until the trust is terminated and the defendants provide a final accounting before they may sue for an accounting. ‘Providing that his purpose is proper, a beneficiary has the right to inspection on demand to see that the trust is properly executed.’"33
A successor trustee has all the rights, powers and duties that were granted to his predecessor, but will not be held liable for the actions of, nor be required to conduct an inquiry into the activities of, the previous trustee. Under the Act, a successor trustee may, with the approval of a majority in interest of the beneficiaries then entitled to receive benefit from the trust, "accept the account rendered and the property received as a full and complete discharge to the predecessor trustee without incurring any liability for so doing."34 A successor trustee will be liable if he or she AND the predecessor trustee are guilty of a violation of duty to the beneficiaries. This occurs in situations where: 1) her/his predecessor improperly purchased a retained property and the new trustee continues to retain it; 2) he or she neglects to take proper steps to compel the previous trustee to surrender trust assets to her/him; or 3) he or she fails to take proper steps to compel the previous trustee to redress a breach of trust committed by the predecessor trustee.35
UNANIMOUS BENEFICIARY AGREEMENTS
If all primary beneficiaries to a trust are adults, and make an agreement in writing (except an agreement to accelerate termination of the trust), the trustee is bound by their agreement as if the agreement were ordered by a court of competent jurisdiction.36
While acting as trustee of a trust may appear to be a potential minefield to the uninitiated, with a careful eye to the duties of the trustee, some care, and attention to detail, your client will most likely execute his duties competently. With your counsel, he most certainly will.
1 760 ILCS 5/1-100/5 (LEXIS through June 15, 2000).
2 Id., 5/3(1).
3 Harris Trust & Sav. Bank v. Wanner, 326 Ill. App. 307, 61 (1945), quoted in Metz. V. Indep. Trust Corp., 994 F.2d 395, 398 (7th Cir. 1993).
4 760 ILCS 5/2(2).
5 Id., 5/3(2)-(3).
6 Id., 5/4.01-4.25.
7 3 Robert S. Hunter, Estate Planning and Admin. in Illinois,§ 217.6 (1998).
8 Id., § 218.1
9 760 ILCS 5/5.
10 292 Ill. App. 3d 318 (1997).
11 760 ILCS 5/5(a)(1), (a)(2) (West 1994), quoted in Giagnorio, 292 Ill. App. 3d at 328.
12 In re Estate of Busby, 288 Ill. App. 500, 519-22 (1937), quoted in Lindberg v. Beverly Bank, 69 Ill. App. 3d 714, 721 (1979).
13 In re Estate of Venturelli, 54 Ill. App. 3d 997, 1002 (1977), quoted in Lindberg, 69 Ill. App. 3d at 721.
14 Bracken v. Block, 204 Ill. App. 3d 23, 26 (1990).
15 Lindberg, 69 Ill. App. 3d at 722-724.
16 Dick v. Peoples Mid-Illinois Corp., 242 Ill. App. 3d 297, 304 (1993).
18 760 ILCS 5/5.1(b)(1).
19 Id., 5/5.1.
20 McCormick v McCormick, 118 Ill. App. 3d 455, 464 (1983).
22 Metz, 994 F.2d 395.
23 Id., at 398.
25 Axelrod v. Giambalvo, 129 Ill. App. 3d 512 (1984) (emphasis added), quoted in Metz, 994 F.2d at 400.
26 760 ILCS 5/9.
27 Id., 5/10.
28 Madden v. Univ. Club of Evanston, 97 Ill. App. 3d 330, 332 (1981).
31 Graham Hosp. Ass’n. v. Talley, 29 Ill. App. 3d 190 (1975), quoted in Madden, 97 Ill. App. 3d at 332.
32 760 ILCS 5/11.
33 McCormick, 118, Ill. App. 3d at 461, quoted in Corsi v. Corsi, 302 Ill. App. 3d 519, 514 (1998).
34 760 ILCS 5/14.
35 3 A. Scott, law of trusts, § 223, at 397 (4th ed. 1988), quoted in Dick, 242 Ill. App. 3d at 304.
36 760 ILCS 5/16.1.
Lynda Keever is a solo practitioner working in Naperville and Elmhurst, Illinois. She con-centrates her practice in residential real estate and estate planning/probate. Ms. Keever earned her B.A. from Millikin University in 1977 and her J.D. from Chicago-Kent College of Law in 1999.