New Illinois Directed Trusts Statute
A trustee typically has broad powers and duties that include, but are not limited to, investing trust assets, distributing trust income and principal to beneficiaries, and fulfilling the compliance requirements of the trust, including preparing accountings and filing tax returns. Frequently, the grantors of trusts direct the trustee to follow the orders or directions of a non-trustee—commonly referred to as a “directed trustee”—regarding one or more of the specified powers and duties of the trustee. For example, grantors may direct trustees to follow third-party directions regarding the investment of a portfolio, the voting of shares in closely-held business interests, or the retention of residential real estate. This type of arrangement raises issues concerning directed trustees’ responsibilities including whether the directed trustee has the duty to monitor the third party’s actions and whether the directed trustee is responsible for any breaches of fiduciary duty committed by the third party.
The directed trustee’s quandary was substantially resolved when Governor Quinn signed the new Illinois Directed Trusts Statute into law on August 10, 2012, which will become effective on January 1, 2013. The Directed Trusts Statute (760 ILCS 16.3 and 16.7) refers to the directed trustee as the "excluded fiduciary" and identifies three types of directing parties:
- Investment Trust Advisor. The investment trust advisor, as you might expect, is "given authority by the governing instrument to direct, consent to, veto, or otherwise exercise all or any portion of the investment powers of the trust. An expected use of the investment trust advisor would be in situations where the trust owns interests in a closely-held business, commercial or residential real estate, or other investments that may not be desirable for a corporate trustee or other individual trustee to manage. The grantor may wish to designate one or more persons who would be responsible, for instance, for voting the stock of a closely-held company or making decisions regarding the retention of residential real estate in the trust.
- The Distribution Trust Advisor. A distribution trust advisor is "given authority by the governing instrument to direct, consent to, veto, or otherwise exercise all or any portion of the distribution powers and discretions of the trust, including, but not limited to, authority to make discretionary distributions of income and principal." A distribution trust advisor may be appropriate in situations where the grantor wishes to have a sophisticated party, such as a corporate trustee, manage the trust portfolio and fulfill the compliance obligations of the trust, but would prefer a family member to make distribution decisions; and
- The Trust Protector. The trust protector has a long list of powers that would allow the trust protector to modify the trust at a later date in ways that would be most appropriate for the situation. For example, the trust protector could be allowed to modify or amend the trust instrument to achieve favorable tax status or to be transferred to a jurisdiction where all the trust beneficiaries reside. In addition, the trust protector could be empowered to remove and/or appoint a trustee or to terminate the trust.
Directing Party's Duties and Liabilities
The law provides that the three types of directing parties are fiduciaries of the trust, subject to the same duties and standards applicable to a trustee of a trust. A duly-appointed directing party's duties and liabilities are limited to what is specified in the trust instrument. In contrast, if a trust instrument appoints multiple co-trustees and the co-trustees divide the responsibility among themselves, each co-trustee would still be responsible and liable for all aspects of the trust administration regardless of whether he/she participated in a particular aspect of trust administration.
The directing party is required to keep the excluded fiduciary “reasonably informed” regarding the administration of the trust with respect to any specific duty or function being performed by the directing party. In addition, the directing party shall provide information to the excluded fiduciary as is necessary for the excluded fiduciary to perform his/her duties, and “the directing party shall provide such information as reasonably requested by the excluded fiduciary.”
Excluded Fiduciary's Duties and Liabilities
The excluded fiduciary is directed to act in accordance with the exercise of the specified powers by the directing party. Accordingly, the specified powers are deemed to be granted to the directing party, and the excluded fiduciary is precluded from exercising the specified powers.
Unless otherwise provided in the governing instrument, an excluded fiduciary has no duty to monitor, review, inquire, investigate, recommend, evaluate, or warn with respect to a directing party's exercise or failure to exercise any power granted to the directing party by the governing instrument, including, but not limited to, any power related to the acquisition, disposition, retention, management, or valuation of any asset or investment. Except in cases where the excluded fiduciary engages in willful misconduct in complying with the direction of the directing party, the excluded fiduciary is not liable either individually or as a fiduciary for any action, inaction, consent, or failure to consent by a directing party. The excluded fiduciary may obtain and rely on the opinion of counsel on the excluded fiduciary's modified duties pursuant to the new act.
In light of these substantial limitations on the trustee’s liability and the directing party’s duty to provide only information that is “reasonably requested” by the trustee, the directing party’s obligation to provide information to the trustee regarding the directing party’s exercise of the powers assigned under the governing document is quite limited. For example, if a governing document appoints a directing party to act as an investment trust advisor for a series of LLCs, the directing party reasonably would be expected to provide the trustee with the LLCs tax returns and, possibly, financial statements to enable the trustee to prepare accountings and to prepare the trust’s tax returns. The directing party, however, would not be required to provide more because the trustee would have neither the obligation nor the power to evaluate or otherwise second-guess the directing party’s exercise of the assigned powers.
The Directed Trusts Statute applies to all trusts in existence or created after January 1, 2013 which appoint a directing party, or which is modified to appoint a directing party. The grantor may opt out of the Directed Trusts Statute by including express language in the trust instrument indicating that the statute’s provisions do not apply.
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