August 31, 2020

On January 1, decades' worth of Illinois trust law was replaced overnight by the new "Illinois Trust Code." To most clients and advisors, the most significant change brought on by the new law is the expanded rights granted to remainder beneficiaries of irrevocable trusts (i.e., beneficiaries who will only receive assets following the death of the current beneficiary). Under prior law, remainder beneficiaries had very few rights to notices and accountings, but under the new law, the rights of remainder beneficiaries have been expanded substantially. (Additional background on the rights of remainder beneficiaries under the Illinois Trust Code is available here.)

However, the Illinois Trust Code also provides avenues for other individuals to represent and bind remainder beneficiaries under certain circumstances, so that, for example, trust accountings need not be given to remainder beneficiaries directly. Representation of remainder beneficiaries by others is of interest to many clients. For example, if upon the death of one spouse, a trust is created for the benefit of the surviving spouse, with the remainder beneficiaries being the couple's children, the couple may wish to avoid providing information to their children until the survivor's death. Or, if a trust is created for a child, with the child's own children (the grantor's grandchildren) as remainder beneficiaries, the grantor of the trust may wish to avoid providing information to the grandchildren prior to the child's death.

Much of the attention on this topic has focused on the "Designated Representative" provisions of Section 307 of the Illinois Trust Code. Section 307 allows a person specifically nominated in the trust document (a "Designated Representative") to represent and bind others. Section 307 has several limitations, however, one of which is that a Designated Representative may not represent a beneficiary while the Designated Representative is also acting as a trustee. (760 ILCS 3/307(b)(2).) This greatly limits the utility of Designated Representatives, as many clients desire for their spouse or their children to act as trustees of the trusts created for their benefit in order to provide them with a greater degree of flexibility and control over the trust assets.

Enter representation by holders of powers of appointment under Section 302 of the Illinois Trust Code, which provides:

Sec. 302. Representation by holders of certain powers.

(a) The holder of a testamentary or a presently exercisable power of appointment that is: (1) a general power of appointment; or (2) exercisable in favor of all persons other than the powerholder, the powerholder's estate, a creditor of the powerholder, or a creditor of the powerholder's estate, may represent and bind all persons, including permissible appointees and takers in default, whose interests may be eliminated by the exercise or nonexercise of the power.

(b) To the extent there is no conflict of interest between a holder and the persons represented with respect to the particular question or dispute, the holder of a testamentary or presently exercisable power of appointment, other than a power described in subsection (a), may represent and bind all persons, including permissible appointees and takers in default, whose interests may be eliminated by the exercise or nonexercise of the power.

Representation by a holder of a power of appointment is divided (a) between holders of general powers of appointment or "broad limited" powers of appointment (under subsection (a)) and (b) holders of narrower powers of appointment (under subsection (b)). The holder of a general or broad limited power of appointment can represent and bind any remainder beneficiary of a trust with respect to any issue, including receiving accountings and entering into nonjudicial settlement agreements. (760 ILCS 3/301(a).) The holder of a narrower power of appointment can also represent and bind remainder beneficiaries, but only if he or she has no conflict of interest with respect to the issue in question.

Significantly, under Section 302 of the Illinois Trust Code, the holder of a power of appointment may represent a remainder beneficiary even if the holder is acting as a trustee of the trust. Thus, for example, a surviving spouse could represent and bind the couple's children under Section 302, even if the spouse is acting as trustee of the trust. Or, with respect to a trust created for a child, the child could represent the child's own children (the grantor's grandchildren), even if the child is also acting as trustee. This makes representation by a holder of a power of appointment potentially much more useful than representation by a Designated Representative.

Furthermore, unlike representation by a Designated Representative, representation by a holder of a power of appointment does not require any "magic language" to be written into the trust document. A Designated Representative must be "specifically nominated in the trust instrument" in order to act. (760 ILCS 3/307(a).) This makes Designated Representatives of little use for trust documents that were executed before the Illinois Trust Code came into effect. Representation by a holder of a power of appointment, by contrast, is available even for trusts that were created before January 1, 2020, as long as the trust document grants a power of appointment (which many trust documents do).

In summary, while the new Illinois Trust Code greatly expands the notices and information that need to be given to remainder beneficiaries, representation by a holder of a power of appointment is a powerful tool for clients to consider, both for existing irrevocable trusts and for new estate plans going forward.

This article contains material of general interest and should not be construed as legal advice or a legal opinion on any specific facts or circumstances. Under applicable rules of professional conduct, this content may be regarded as attorney advertising.