Yes, we believe you may include language in a guaranty agreement allowing your bank a right of setoff in the guarantor’s deposits at your bank and that a trustee may pledge trust property to guarantee loans made to the trustee — provided that both activities are within the trustee’s powers, as confirmed by a certification of trust document. However, we recommend caution in participating in a transaction in which a fiduciary (the trustee) is using trust property for their personal benefit (to obtain a personal loan). 

In Illinois, a right of setoff can arise either contractually (when an agreement provides for a right of setoff) or under common law (when there is “mutuality” of parties — the funds are owned by the same party that owes the matured debt to the bank). A contractual right of setoff can provide for a broader right of setoff than the common law right of setoff, and we believe that a trustee may agree to a contractual right of setoff as part of a consumer guaranty agreement.

Your bank should confirm that the trustee has the authority to agree to the guaranty agreement and right of setoff. Under the Illinois Trust Code, a trustee may exercise powers “conferred by the trust instrument” and “all powers over the trust property that an unmarried owner with legal capacity has over individually owned property,” except as limited by the trust instrument. Trustees also may “pledge or otherwise encumber trust property for a period within or extending beyond the duration of the trust.” Consequently, we believe a trustee may pledge trust property to guarantee loans, as long as this is not prohibited by the trust instrument.

To verify that the trustee has the power to pledge trust property to guarantee personal loans made to the trustee, we recommend requesting a certification of trust, which provides protection for those acting in reliance on the trustee’s certification. A person acting in good faith reliance on a certification of trust is entitled to act as if the representations in the certification are true and is not liable to any person for actions with respect to the trust. In addition, any transaction that is entered into based on a certification of trust is enforceable as if the representations in the certification were correct. But again, we recommend caution in this transaction, in which the trustee appears to be using trust property to gain a benefit in their individual capacity.

You also may wish to consider the effect that revocation of the trust may have on the guaranty agreement if the trust is revocable. According to the Illinois Trust Code, “upon revocation of a revocable trust, the trustee shall deliver the trust property to the settlor or as the settlor directs.” Such a revocation may impede your ability to collect on the guaranty, if the trust is revoked before the loan is paid off.

For resources related to our guidance, please see:

• Symanski v. First Nat. Bank of Danville, 242 Ill.App.3d 391, 396–397 (4th Dist. 1993) (“There are two bases on which defendant could assert a right of setoff . . . . Under common law, a bank has the power to apply the deposit to the payment of such depositor’s indebtedness only when there are mutual demands and debts between the parties, and this right of setoff arises at the time the depositor’s indebtedness to the bank has matured. . . . As evidenced by our previous discussion, parties can contractually agree to a right to set off.”)

• Fisher v. State Bank of Annawan, 163 Ill.2d 177, 181 (1994) (“Plaintiff argues . . . that the bank could not set off Robert’s indebtedness against the CDs because no mutuality existed. However, this inquiry into equitable setoff is irrelevant where a contractual basis for a setoff exists. The contract between plaintiff, his sons, and the defendant bank provides an independent basis for a setoff.”)

• Illinois Trust Code, 760 ILCS 3/105(a) (“The trust instrument may specify the rights, powers, duties, limitations, and immunities applicable to the trustee, beneficiary, and others and those terms, if not otherwise contrary to law, shall control, except to the extent specifically provided otherwise in this Section. The provisions of this Code apply to the trust to the extent that they are not inconsistent with the terms of the trust.”)

• Illinois Trust Code, 760 ILCS 3/815(a) (“A trustee, without authorization by the court, may exercise:

(1) powers conferred by the trust instrument; or

(2) except as limited by the trust instrument:

(A) all powers over the trust property that an unmarried owner with legal capacity has over individually owned property;

     (B) any other powers appropriate to achieve the proper investment, management, and distribution of the trust property; and

     (C) any other powers conferred by this Code.”)

• Illinois Trust Code, 760 ILCS 3/816 (“Without limiting the authority conferred by Section 815, a trustee may: . . . (5) borrow money, with or without security, and mortgage or pledge or otherwise encumber trust property for a period within or extending beyond the duration of the trust.”)

• Illinois Trust Code, 760 ILCS 3/1013(a) (“Instead of furnishing a copy of the trust instrument to a person other than a beneficiary, the trustee may furnish to the person a certification of trust containing the following information: . . . (4) the powers of the trustee.”)

• Illinois Trust Code, 760 ILCS 3/1013(f) (“A person who acts in reliance upon a certification of trust without actual knowledge that the representations contained therein are incorrect is not liable to any person for so acting and may assume without inquiry the existence of the facts contained in the certification. Knowledge of the trust instrument may not be inferred solely from the fact that a copy of all or part of the trust instrument is held by the person relying upon the certification.”)

• Illinois Trust Code, 760 ILCS 3/1013(g) (“A person who in good faith enters into a transaction in reliance upon a certification of trust may enforce the transaction against the trust property as if the representations contained in the certification were correct.”)

• Illinois Trust Code, 760 ILCS 3/602(c) (“The settlor may revoke or amend a revocable trust instrument:

(1) by substantially complying with a method provided in the trust instrument; or

(2) if the trust instrument does not provide a method or the method provided in the terms is not expressly made exclusive, by a later instrument in writing other than a will, signed by the settlor and specifically referring to the trust.”)

• Illinois Trust Code, 760 ILCS 3/602(d) (“Upon revocation of a revocable trust, the trustee shall deliver the trust property to the settlor or as the settlor directs.”)