First and foremost, the provisions of the relevant trust agreements might determine whether your institution may place the trust funds in a commingled account, whether your institution may place those commingled funds in a third party depository institution, and whether collateralization requirements might apply to those funds. The trust agreements very well may be silent on one or more or all of these issues, but each trust agreement must be individually checked for them.
Otherwise, we are not aware of any specific collateralization requirements in Illinois law for commingled trust funds that are held by a third party (importantly, though, there are specific collateralization requirements that apply to trust funds which are commingled with your institution’s funds or that are used in the conduct of your institution’s business). Under the Trusts and Trustees Act, a trustee’s powers include the power to “enter into agreements for bank or other deposit accounts . . . custodian, agency or depositary arrangements for all or any part of the trust estate.” 760 ILCS 5/4.06. The Act also states that the “prudent person” rule applies to any depository arrangements. The prudent person rule requires that trustees use their “reasonable business judgment” in making investment decisions, among other duties. 760 ILCS 5/5.
The Corporate Fiduciary Act imposes more specific responsibilities for corporate trustees, particularly as to collateralizing fiduciary assets. That law requires that “all funds . . . awaiting investment or distribution . . . shall to the extent reasonable under existing circumstances, be prudently invested for the beneficiaries at a rate of return commensurate with that available on trust quality investments.” 205 ILCS 620/2-8(a). If trust funds are commingled with a corporate fiduciary’s own funds or used in the conduct of its business, the law requires 100% collateralization of the commingled trust funds, and also imposes other requirements. See 205 ILCS 620/2-8(b). However, if the trust funds are not commingled with your institution’s funds or used in the conduct or your institution’s business, those requirements would not apply; instead, your institution must ensure that the funds are “prudently invested for the beneficiaries at a rate of return commensurate with that available on trust quality investments,” 205 ILCS 620/2-8(a), and that the funds are not held in the account “any longer than is reasonable under existing circumstances.” 205 ILCS 620/2-8(d). Again, your institution also must comply with any collateralization requirements in each trust agreement.
The FDIC’s Trust Examination Manual (which covers state nonmember banks) provides some guidance on how commingled trust funds should be treated (although the FDIC focuses on funds deposited in your own institution, a situation that raises conflicts of interest and other issues):
“N.1. Master Deposit Accounts
A master deposit account is a single interest-bearing deposit account in which the temporary funds of individual trust accounts are commingled. The master deposit account is often a money market deposit account of the fiduciary institution. Only deposits are involved; no other types of assets are held in a master deposit account. The number of trust accounts invested in and the balance of the master deposit account may vary from day-to-day. This is not a common or collective investment fund. The concerns with a master deposit account include management’s ability to:
- identify the amount of funds attributable to each trust account invested in the master deposit account,
- ensure that the funds of each trust account is not left in the master deposit account as a long term investment,
- determine how FDIC insurance applies to the trust account invested in the master deposit account, and
- identify conflicts of interest.”