Illinois Enacts Directed Trusts Statute

August 28, 2012

On August 10, 2012, Illinois Governor Quinn signed into law House Bill 4663, which amends the Illinois Trusts and Trustees Act to provide protection for a trustee when acting or not acting pursuant to the directions of a directing party. The statute takes effect on January 1, 2013, and its provisions will apply to trusts when specifically incorporated by the settlor or by court order. Additionally, the provisions of the directed trusts statute may be incorporated into existing trusts by using Illinois’ virtual representation and nonjudicial settlement agreement statutes.

Settlors of trusts are becoming more interested in giving third parties certain powers to direct the actions of a trustee as trust administration has become more complicated. For instance, a settlor may desire to name a family member as trustee, but empower a professional investment advisor to direct trust investments. Or, a settlor may wish to name a professional fiduciary to administer the trust, but give a specific family member the power to make distributions to other family members. A settlor may also desire to name a trust protector to amend or modify the trust instrument in certain limited situations.

Currently, Illinois’ Trusts and Trustees Act prohibits trustees from delegating any acts that involve the exercise of judgment and discretion, other than investment functions. Where a trustee chooses to delegate investment functions under existing law, the trustee must comply with a list of statutory requirements before being protected from liability for the delegated agent’s investment decisions.

The new law adds subsection 5/16.3 to the Trusts and Trustees Act and permits the investment and distribution decisions to be separated from other functions performed by trustees.

The statute defines the roles of “directing parties” generally, which include “investment trust advisors,” “trust protectors,” and “distribution trust advisors.” The statute enumerates a list of powers for each type of directing party and confirms that directing parties are fiduciaries of the trust and are subject to the duties and standards applicable to trustees.

Where the statute applies to separate the roles and responsibilities of the trustee and one or more directing parties, then the trustee (an “excluded fiduciary”) will have no liability to the beneficiaries of the trust for the actions or inactions of a directing party. Unless expressly required by the trust instrument, the excluded fiduciary has no duty to “monitor, review, inquire, investigate, recommend, evaluate, or warn” of a directing party’s exercise or nonexercise of any power held by the directing party.

This statute confirms that in most circumstances the directing party will be solely responsible to the beneficiaries for the consequences of the directing party’s actions. It is a welcome modernization in Illinois’ trust law and one that should prove useful to estate planners, trustees and directing parties.

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