Proposed Illinois Law Guarantees Your Trust a Flat Tire

Call a tow truck and an ambulance: The proposed Illinois adaptation of the Uniform Trust Code is dangerous at any speed.

 

Proposed IL Law Guarantees Your Trust a Flat Tire

Imagine this: Trusts no longer need to benefit their beneficiaries!

 

Executive Summary: The proposed adoption of the Uniform Trust Code to Illinois deletes that Code’s provision that “A trust and its terms must be for the benefit of the beneficiaries.” This provision is simply foundational. It should be restored to the proposed act for any one or more of the following reasons:

First, providing a benefit to the beneficiary is a basic premise of trusts. That’s why they call the person a “beneficiary”! If the beneficiary doesn’t benefit, you no longer have a trust.

Second, in conjunction with manifesting the grantor’s intent, the provision is an indispensible factor for decision-making. In other words, the core telos of trusts is to enhance the beneficiary through the vision of the grantor.

Third, without it, other provisions of the Code become unworkable. Specifically, Section 412 relies on this basic premise to guide modification of the trust because of either impracticality or unanticipated changes in circumstances. Changes to the trust must necessarily heed the benefits for the beneficiary.

Fourth, without this provision, the proposed statute grossly over-defers to old Illinois policy to favor the grantor where in dispute with the beneficiary. Better to acknowledge that both are factors. If the stale policy continues, simply add that the wishes of the grantor should be preferred.

Fifth, the proposal is likely to strengthen trustees’ ability to ignore beneficiaries’ interests with impunity. If beneficiaries don’t matter, they will be abused.

 

In other words, when driving this new statute, trusts are likely to crash and injure the parties they’re supposed to care for.

 

This series of articles addresses one of the proposed changes out of the pending legislation for Illinois to adopt the Uniform Trust Code. This author has no objection to that Code. In fact, the focus here is on the proposed deletion from the Code of the provision that a trust must benefit the beneficiary. That provision articulates an idea and mechanism fundamental to all trust law, including both Illinois prior law as well as the Code.

My opinion is shaped by my 30 plus years of service as an independent individual professional trustee. Trained as and having practiced extensively as an attorney, I now help families in a wide variety of circumstances around their trusts, including helping them to fix broken trusts.

Trusts stop working for many reasons. Oftentimes they fall apart because of their trustees are indifferent, and sometimes even hostile, to the beneficiaries.

Like other professional trustees, I stand to gain from this change in the law because the law makes it harder for beneficiaries to challenge their trustees. Contrary to that financial incentive, I find the proposed change abhorrent because it works against the basic premise that a trust should be administered for the good of the family, not the good of the trustee.

In this article, I detail the relevant parts of the proposed legislation, and how it deviates from the model Code – and from basic trust principles of impartiality and fair play.

Specifically, the proposed legislation deletes the consideration of the benefit to the beneficiaries from four fundamental areas of trust administration, namely:

  • Trust Purposes. Section 404
  • How the Trustee is to Administer the Trust. Section 801: “Duty To Administer Trust.”
  • Duty of Loyalty. Section 802.
  • Changes & Impracticality. Section 412: “Modification Or Termination Because Of Unanticipated Circumstances Or Inability To Administer Trust Effectively.”

Let’s detail these four areas in order.

 

  1. Trust Purposes. Section 404

 

According to the Code, the purpose of a trust is about benefitting the beneficiary:

SECTION 404. TRUST PURPOSES. A trust may be created only to the extent its purposes are lawful, not contrary to public policy, and possible to achieve. A trust and its terms must be for the benefit of its beneficiaries. (emphasis added).

Contrary to that ideal, the proposed legislations deletes the highlighted sentence.

The proponents of the legislation through their published comparison maintain that the deletion was made to preserve Illinois policy:

“This Section was modified slightly from the UTC, removing the statement that “A trust and its terms must be for the benefit of the beneficiaries,” in order to make clear and preserve the state of the law in Illinois that the settlors’ intent is paramount.” (underline added)

Contrary to the legislation’s advocates, this is no slight modification.

This modification destroys the basic purpose of a trust: which is to care for the beneficiary at a time when the grantor cannot.

To that end, the primary measure of success in the trustee’s application of the grantor’s wishes is how the trust benefits the beneficiary.

And it’s no easy task as it is. Reportedly some 80% of beneficiaries already experience their trust as a burden! Removing the standard that there must be some benefit can only make matters worse for beneficiaries.

The deletion also imposes an Orwellian nightmare. Calling that person a “beneficiary” while at the same time decreeing that person doesn’t benefit from the trust is an exercise in newspeak.

Or to make the discussion more current, that person is a fake beneficiary, because by definition a beneficiary MUST benefit. Otherwise, the person is not a beneficiary!

It’s that simple – which is why this proposed change is so perversely wrong!

This wrong-headedness extends into the express duties of how a trustee is to administer a trust. And how a court is to consider the trustee’s administration.

 

  1. How the Trustee is to administer the Trust. Section 801: “Duty To Administer Trust.”

 

In administering a trust, the Code demands the trustee pay heed to the interests of the beneficiaries:

SECTION 801. DUTY TO ADMINISTER TRUST. Upon acceptance of a trusteeship, the trustee shall administer the trust in good faith, in accordance with its terms and purposes and the interests of the beneficiaries, and in accordance with this [Code]. [emphasis added]

The proposed legislation deletes the italicized phrase. In other words, the proposed legislation allows the trustee to ignore the interests of the beneficiaries!

According to the drafters of the proposed legislation, this deletion is to confirm Illinois law that the wishes of the grantor are primary:

[Section 801 has been] modified to eliminate reference to ‘interests of the beneficiaries’ in light of the requirement for the trustee to administer a trust in accordance with the trust’s terms and purposes (consistent with Illinois law in focusing on a settlor’s intent).

I’m unaware of an Illinois case in which the court requires ignoring the impact on a beneficiary of a trustee’s decision. That shouldn’t be Illinois policy, either.

 

Trustees should always consider the impact of their actions on the beneficiary, whatever their action.

 

In analyzing a trustee’s actions, a judge should always consider the impact of the trustee’s actions on the beneficiary.

It should not be the only consideration, and it may not be the primary consideration, but how a decision impacts the beneficiary should be part and parcel to judicial review.

To do otherwise is to remove standing of the beneficiary to argue the beneficiary’s interest. Beneficiaries shouldn’t be so bound and gagged.

And with their own voice, beneficiaries should be able to assert the trustee’s duty of loyalty to them, however, the new statute would puncture that duty as well.

 

  1. Duty of Loyalty. Section 802.

 

In Section 802, the Code sets out a half dozen provisions with subparts regarding trust transactions and investments establishing the trustee’s duty of loyalty.

However, the first provision expressly states that the administration shall be “solely” in the interests of the beneficiary:

SECTION 802. DUTY OF LOYALTY.

  • A trustee shall administer the trust solely in the interests of the beneficiaries.

The proposed Illinois law deletes paragraph (a) entirely.

The comment of the drafters is that this deletion follows Illinois law:

Consistent with Illinois law that requires that a trust be administered in accordance with the grantor’s intent, this provision eliminates the provision in the UTC that provides that the trust is to be administered solely in the interests of the beneficiaries.

Note especially that the Illinois drafters could have simply deleted the word “solely” if they simply wanted to provide that the interest of the beneficiary wasn’t always to be primary.

They also could have qualified that interest, so that, where there was a conflict, the trustee or court should privilege the vision of the grantor.

Instead, what the drafters did was remove the entire duty of loyalty of the trustee to the beneficiary, and remove any significance of the interests of the beneficiary.

Their proposal is an obscene overstatement of the supposed Illinois policy to prefer the grantor’s vision where it conflicts with the interests of the beneficiary.

Without owing any duty to the beneficiary, the trustee has no concern about what happens to the beneficiary while administering the grantor’s intentions.

Ironically, the grantor will likely suffer as a victim of this cold re-arrangement.

We know that the first beneficiary of the trust is often the grantor, when that grantor has lost capacity. In administering the trust in that situation under the brave new law, the trustee has no duty to inquire as to what that beneficiary may need or want, and has authority to drive the trust only as the grantor previously programmed. Given that situations change and none of us has a crystal ball to predict the future, the administration could well harm the grantor/beneficiary while the trustee is allowed to get paid for carrying out stale instructions.

 

  1. Changes & Impracticality. Section 412: “Modification Or Termination Because Of Unanticipated Circumstances Or Inability To Administer Trust Effectively.”

 

The removal of the benefit the beneficiary provision undermines the Code’s entire approach to the critical mechanism to modify or terminate a trust where the trust isn’t working as it should.

The drafters of the Code twice make clear in their comments that this Section relies on the benefit the beneficiary provision, once expressly:

Section 412(b), which allows the court to modify administrative terms that are impracticable, wasteful, or impair the trust’s administration, is a specific application of the requirement that a trust and its terms be for the benefit of the beneficiaries….

UTC Comment to Section 404. (emphasis added)

…and then again in their practical example where the only change is around what would benefit the beneficiary:

This section [that is, 412] broadens the court’s ability to apply equitable deviation to terminate or modify a trust. Subsection (a) allows a court to modify the dispositive provisions of the trust as well as its administrative terms. For example, modification of the dispositive provisions to increase support of a beneficiary might be appropriate if the beneficiary has become unable to provide for support due to poor health or serious injury….

UTC Comment to Section 412. (emphasis added)

The Code’s example serves well to illustrate the pernicious impact of the proposed law. Consider a trust drafted on the assumption that the beneficiary would be able to be self-sufficient, or assumed that the beneficiary would remain in good health and without injury. Were that beneficiary’s situation to change, that change should be enough on it’s own to cause the trustee to recalibrate distributions. The sole basis of that recalibration is around the benefit that the beneficiary is to receive. Removing that basis allows the trustee to defy the new reality with impunity.

That trustee impunity cannot and should not be allowed!

 

We may dig more deeply into Section 412 in a later article. For present purposes we simply want to connect the dots and show that the proposed Illinois revisions to the Code delete key provisions which require a trust to pay attention to the beneficiary. These are the sections of the proposed statute where that deletion is most apparent and telling.

 

The statute is sitting in committee in Springfield. It should be amended to allow for the necessary and appropriate interests of beneficiaries to their trusts in Illinois.

Or it should be voted down.

Putting this law on the road with its flat tire is dangerous.

 

© Daniel Felix, Felix Group, P.C. 2017 all rights reserved