Effective January 1, 2020, the new Illinois Trust Code (ITC) will replace the Illinois Trusts and Trustees Act, ushering in several changes of note for fiduciaries. In light of the ITC, fiduciaries and estate planners should review existing revocable and irrevocable trusts and revisit their regular trust administration procedures to ensure that they conform to the new standards when applicable.
Silent Trusts and the Designated Representative
Under the Trusts and Trustees Act, the default rule is that all trustees must account directly to all current income beneficiaries not under a legal disability. For a beneficiary under a legal disability, accountings are to be provided to the representative of the estate of the beneficiary or, if none, to the beneficiary’s spouse, parent, adult child or guardian. 760 ILCS 5/11(e). With the ITC, Illinois joins the growing number of states that have enacted statutes that allow a settlor to waive the duty to account to certain beneficiaries for a period of time, during which the trustee need not disclose the existence, terms or assets of a trust to the beneficiary. This was recently discussed by our lawyers in an article published by Bloomberg, available here.
The ITC offers Illinois settlors the opportunity to create a so-called “silent trust,” by permitting a settlor, directly in the trust instrument, to (1) waive the trustee’s duty to account or provide information about the trust to beneficiaries under age 30, and (2) nominate or authorize any one or more persons to nominate a “designated representative,” a fiduciary to whom the trustee must account and provide required trust information on behalf of the represented beneficiary during the trust’s silent period. The silent period must end, as to each represented beneficiary, when the represented beneficiary attains age 30. The actions of the designated representative bind the represented beneficiary so long as the designated representative does not serve concurrently as trustee.
If no designated representative is acting (or once a designated representative ceases to act), the trustee must notify qualified beneficiaries of (1) the trust’s existence, (2) the beneficiary’s right to request a complete copy of the trust instrument, and (3) whether the beneficiary has the right to receive or request trust accounts. The settlor cannot waive this duty.
Dueling Accounting Standards
The ITC also creates two different trust accounting standards. Which standard the trustee must follow depends on the date a trust is created, whether the trust is revocable or irrevocable, and the date upon which the trust became irrevocable.
For trusts that are irrevocable prior to January 1, 2020, or for trustees who accept their appointments prior to the effective date of the ITC, the ITC incorporates the standard for furnishing accounts currently set forth in Section 5/11 of the act. For these pre-2020 trusts, a trustee is required to account only to beneficiaries then entitled to receive or receiving the income from the trust estate, or if none, then to those beneficiaries eligible to have the benefit of income from the trust estate. The annual account must set forth the receipts, disbursements and inventory of the trust estate. The trustee has no duty to account to remainder beneficiaries. The key difference between the rules applicable to pre-ITC trusts and trustees and post-ITC trusts and trustees is that the ITC will give effect to a settlor’s waiver of the duty to provide annual accountings in a pre-ITC trust instrument.
For revocable trusts created prior to January 1, 2020, this standard applies until the trustee then acting ceases to act, at which time the successor trustee thereafter must follow the new ITC standard.
For irrevocable trusts created on or after January 1, 2020, the trustee must account annually to all current mandatory and permissible distributees of income or principal. The trustee may not waive this duty, although as discussed above, the settlor may direct that accountings be provided to a designated representative for certain beneficiaries until each represented beneficiary turns 30. The trustee also must account to presumptive remainder beneficiaries unless the trust instrument provides otherwise. Under this new standard, the trustee must disclose more information in the account than currently required under the Act. In addition to disclosing the inventory, receipts and disbursements of the trust, the trustee must disclose:
A description of the trustee’s compensation
The value of the trust assets on hand at the close of the accounting period
All other material facts related to the administration of the trust
New Considerations for the Prudent Investor Rule
Under the ITC, a trustee must follow the prudent investor rule in making investment decisions on behalf of the trust. The ITC permits the trustee to consider environmental, social and governance considerations when making investment decisions. The ITC also permits a trustee to consider whether a trust asset has a special relationship to the purpose of the trust, or to one or more of the beneficiaries, in determining whether to retain or dispose of the asset.
Fewer Restrictions on Delegation
The ITC also makes it easier for a trustee to delegate discretionary powers. A trustee may avoid liability for the actions of an agent to whom discretionary powers are delegated, so long as the trustee exercises reasonable care, skill and caution in (1) selecting the agent; (2) establishing the scope and terms of the delegation, consistent with the purposes of the trust and trust instrument; and (3) periodically reviewing the agent’s actions to ensure compliance with the delegation.
Invalidity of Exculpatory Clauses in Certain Situations
The ITC creates a rebuttable presumption that an exculpatory provision in a trust instrument is invalid where the trustee either drafted the trust instrument or otherwise procured the inclusion of the exculpatory provision. To rebut this presumption in these cases, the trustee must show the exculpatory clause is fair to the beneficiaries under the circumstances. This fairness showing may require the trustee to show that the settlor was represented by independent counsel when the exculpatory provision was added to the trust instrument.
Shortened Limitations Periods
Finally, the ITC shortens limitations periods for claims against trustees in certain instances. With respect to trusts that become irrevocable on or after January 1, 2020, or trustees who accept their appointments after that date, the ITC shortens the limitations period for a beneficiary to bring a claim for breach of trust from three years to two years after the date on which the information disclosing the existence of a potential claim is furnished to the person entitled to receive the information.
The ITC also creates a new limitations period for actions to contest the validity of a trust that is revocable upon the settlor’s death. The contest must be commenced within the earlier of two years after the settlor’s death, or six months from the date the trustee sends notice of the trust to the beneficiaries.