Great Facts and Experts Can’t Survive Summary

An unpublished opinion today that looks at the question of when expert opinions are sufficient to create a question of fact, versus when they remain mere speculation; in the context of a motion for summary disposition.

In In Re Jeannine A. Palazzo Irrevocable Trust (click on the name to read the case), the attorney/trustee failed to inform beneficiaries of his activities in relation to an irrevocable life insurance trust (an “ILIT”) established for their benefit by an aunt. During the years leading up to the aunt/settlor’s death, the liquidity in the ILIT was depleted to the point of near insolvency.  This prompted the attorney/trustee to liquidate the policy for $36,000 and by doing so give up the $500,000 death benefit. As it turns out, he did this just days before the death of the aunt/settlor.

The successor trustee sued attorney/trustee for breach, and presented testimony of an expert estate planning lawyer and an accountant, both of whom opined that had the attorney/trustee performed his fiduciary duties with respect to informing the beneficiaries, the beneficiaries could have taken steps to protect their interests and potentially preserved the policy so as to receive some or all of the death benefit.

An Interesting Question

The trustee/attorney moved for summary disposition in the trial court and prevailed on the argument that merely speculating that the beneficiaries could have or might have taken steps to alter the outcome is insufficient, if you don’t explain what they would have done and when.

The Court of Appeals affirmed the trial court, adopting the proposition that merely speculating that something could have been done is insufficient to create a question of fact sufficient to survive summary disposition.

An Uncomfortable Result

A central premise to trust law is that beneficiaries are empowered to protect their interests by being provided information. A trustee protects itself by providing that information.  When a trustee fails to provide the required information, the law holds the trustee liable for the resulting damages and does not allow the trustee the protection of time barriers to claims that would otherwise arise.

For a court to conclude that although a trustee breached its duties by failing to provide the required information, but that the trustee is nonetheless absolved of liability on summary disposition even where experts have opined that something could have been done had the information been provided, just feels wrong.

Conclusion

Bottom line is the beneficiaries lost on summary because they did not specifically state what could have been done to alter the outcome had the missing information been provided. While that seems like a fine line to draw; that is the line that worked in this case, and a line litigators will want to remember when they need to make the same distinction in future matters.

They say it is an ill-wind that blows no one good, and no doubt there is one trustee/attorney who will be full of Thanksgiving today.

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The Next BIG Thing in Michigan Trust Law

Legislation currently moving through Michigan’s House and Senate will, if passed, dramatically impact the world of trust law in Michigan, and especially the drafting of discretionary trusts. Indications are that there is a good chance this legislation will become law before the year end. And so …. it’s probably time to start thinking about it.

The new law alters the way that trusts agreements can be crafted with respect to the roles of trustees and other fiduciary and non-fiduciary parties involved in the administration of a trust. While the proposed law is Michigan’s adoption of the Uniform Directed Trust Act, it goes well beyond the Uniform Act, particularly with respect to the provisions related to separate trustees.  In fact, it is probably best to understand this new development as two distinct changes to the law: (1) Rules relating to use of separate trustees when drafting discretionary trusts, and (2) the elimination of the Trust Protector, and replacement of that office with the Trust Director.

Separate Trustees

The new law defines several new types of roles and relationships that can be used in drafting trusts.

The law uses the term “Separate Trustee” to identify one of three types of separate trustees that have discrete powers and duties. They are:

* Investment Trustee. A Trustee exclusively responsible for investing the trust assets.

* Distributions Trustee. A Trustee exclusively responsible for making discretionary distributions of trust assets.  Note: There is no provision for a distributions trustee with respect to non-discretionary interests.

* Resultant Trustee. The Trustee responsible for all actions not otherwise allocated to an investment or distribution trustee.

So Long Trust Protectors

In addition to the creating laws to support the use of separate trustees (discussed above), the new law introduces the term “Trust Director” which equates roughly to what many would have heretofore defined as a Trust Protector. The scope of powers that can be given to a Trust Director are broad and it is not necessary for the trust agreement to have appointed separate trustees for the agreement to implement the use of a Trust Director.  The MTC defined the term “Trust Protectors” when it came into being in 2010, which was an important development associated with that legislation.  But with these changes, that term is removed and no longer defined.  [It is unclear (to me) how Courts will construe this term going forward, and what rules will apply to trust protectors appointed in documents.  In many instances, the powers typically allocated to a trust protector would seemingly result in those persons falling within the scope of what is now defined as a “Trust Director.”]

The law also then introduces the term “directed trustee” to refer to a trustee who takes direction from a trust director.

It’s All About Liability

With respect to the separate trustee provisions of the law, the idea is that without collusion, a separate trustee is not responsible for the acts of another separate trustee. And this is really the central legal development that makes this aspect of the new law click.  Heretofore, you could draft trusts with co-trustees and give them each a discrete role in the administration of a trust – but you could not, thereby, allow one trustee to be non-liable for the breach of their fellow co-trustee.  Now, by using this approach, you can.

In the simplest example, what that means is that you can appoint a bank as the investment trustee, and appoint the trust beneficiary’s sibling as the distributions trustee, and neither will be responsible for the other’s foibles. That is true even if the bank knew or should have known that the sibling was engaged in a breach, and vice versa.  Again, the exception would be if the separate trustees were colluding with each other with respect to the inappropriate conduct.  This development will make it much easier to have professional investment companies assume trusteeships over the investments, where others are making decisions about discretionary distributions.

When a power is exercised in a fiduciary capacity and when it is not; when a trustee or trust director is subject to liability and when they are not; are all addressed in detail in the legislation.

Special Needs Planning and Discretionary Trusts

In no area of trust planning will these changes be more relevant than in the drafting of discretionary trusts. And while there are many discretionary trusts that are not special needs trusts, all special needs trusts are discretionary trusts. The complexity of discretionary trust drafting will increase significantly with the passage of these laws, as will the opportunities to be more creative in the drafting of such trusts.

“Keep it simple” has long been the mantra of drafting SNTs. It is well recognized that the more detailed an SNT, the more likely the document is to be reviewed and perhaps challenged by the government entities which provide benefits to the SNT beneficiary.  For “high end” SNT planners, this opportunity might be an exception to that rule. The ability to work with institutional investors may mandate the adoption of separate trustee provisions.

The idea that you will soon have new tools to allow financial institutions to manage the money in the SNT, while having the family members (or family lawyer) make the decisions about how resources are used to improve the quality of life of the beneficiary is huge, and a big reason SNT planners will need to carefully consider how this legislation will change their practices. As everyone in the SNT world knows, banks and other financial institutions have attempted to gain entry into the world of special needs planning, but they are inevitably ill-suited to mange the distribution decisions associated with taking on the role of trustee. This legislation provides a safe harbor approach which allows them to manage the money while taking them off the hook of doing the dirty work of special needs trust administration.

These new laws offer SNT planners an opportunity that in many instances will be too hard to pass up, but they come with requirement that special needs trust drafters elevate their games.  Dabblers in SNT drafting beware.

IF You Decide To Go There

The good news for some no doubt, is you don’t have to use separate trustees or trust directors or otherwise incorporate these options into your trust agreements. And in fact, most simple “will substitute” trusts wouldn’t need or benefit from such provisions.

But if you draft inter vivos irrevocable trusts, or draft any trusts that continue after death, you will want to consider the possible benefits of these new tools. If you do, you need to read the statute carefully, because there are a whole host of requirements that spell out what has to be express in the trust agreement, and a handful of rules that cannot be altered or negated by your drafting.

If you have used Trust Protectors in your documents in the past, or want to use the concept in the future, you will need to understand the term Trust Director, how it differs from a Trust Protector and what the rules are in terms of appointment, exculpation and scope of authority.

So for many, keeping it simple may be best. For others, the possibilities will be too intriguing.  At times, perhaps, the objectives of the client may demand separate trustee provisions, and it may be malpractice to draft agreements that are not sufficiently attentive to these new rules.

Conclusion

It’s been a wild ride since Michigan adopted the Michigan Trust Code in 2010. In the eight years since, we’ve seen dramatic additional developments to Michigan trust law, including domestic self-settled asset protection trusts and liberalized decanting rules. This is the next big thing.

Michigan’s own Jim Spica is a member of the Uniform Directed Trust Act Committee, and the primary author of Michigan’s proposed law. As with everything Jim touches, this legislation is thorough and thoughtful.  To read the legislation in its present form click on the following House Bill links:

HB 6129 (Relating to the provisions for Separate Trustees)

HB 6130 (Relating to the Provisions for Trust Directors)

HB 6131 (Corresponding changes to other provisions of EPIC and the MTC)

And if f you are really in love with this topic, click here to read the Uniform Act, which includes commentary. If you look you will see that Michigan’s law varies significantly in many substantive ways from the Uniform Act.

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Opinion puts Fees of Former PR’s (and their Attorneys) at Risk

If you are a lawyer who handles probate estate administration, you will want to take note of this unpublished Court of Appeals opinion. The gravamen of this decision is that a claim for fees by a personal representative who has been removed or who resigns, will be barred unless it is filed within four months of their removal or resignation; and the same would be true of the fees for legal services or other professional services provided to the former PR.

In In Re Estate of Jack Edward Busselle (click on name to read the case), the Court of Appeals construes the provisions of MCL 700.3803 (click here to read the statute) that address time limits to claims that arise after the decedent’s death.

MCL 700.3803(2) says that such claims must be filed within 4 months, but MCL 700.3803(3)(c) says that time limit does not apply to:

(c) Collection of compensation for services rendered and reimbursement of expenses advanced by the personal representative or by an attorney, auditor, investment adviser, or other specialized agent or assistant for the personal representative of the estate.

What this case holds is that the term “the personal representative” as used in MCL 700.3803(3)(c) does not include a former personal representative, and therefore a former personal representative has four months from the date of their removal or resignation to file a claim for services. This statutory construction would then impose the same time limit on claims from professionals, including lawyers, who did work for the former PR.

This case should probably be published since it appears to be an issue of first impression and relies on no prior authority for this interpretation of the law. The COA’s interpretation seems to present a malpractice trap for lawyers who have clients who resign or are removed as PR and who take more than four months to file a claim  for their client’s fees.  The law as construed in this case also would present a time bar for lawyers who represent clients who resign or are removed and PR, and who do not file a claim for their own fees within the four month window.

In any event, it has been a while since I have seen my old friend Tom Trainer who acted as successor PR in this matter, and who prevailed as Appellee in this case. Nice to know Tom is still out there stirring things up.

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PR Appointment for Estate with No Assets

Here’s a case that’s worth filing away for those who do probate litigation and estate administration. It’s unpublished, but addresses an issue that comes up not infrequently.  The holding is that a probate court cannot deny a petition to appoint a personal representative on the grounds that the estate has no assets.

In In Re Estate of Janet Kapp (click on name to read case), the trial court denied a petition to appoint a personal representative on the grounds that there were no known assets to be administered. The COA reversed and remanded, holding that there is no basis in EPIC to support the trial court’s decision.  The COA says:

Instead, the court concluded that the appointment of a personal representative was unnecessary because there were no assets in the estate to probate.  In doing so, however, the probate court did not cite statutory authority that allows a court to deny the appointment of a nominated personal representative on those grounds.  To the contrary, a court rule provides that personal representatives do not need to provide notice to creditors when “[t]he estate has no assets[.]” MCR 5.208(D)(3)(a). It follows that personal representatives can be appointed even when the estate has no assets.

There are many reasons to open an estate which have nothing to do with distribution of assets. This is a good decision, and although unpublished, should provide an outline for the argument when attorneys are faced with this misunderstanding in their cases.

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Unpublished Decision Demonstrates Difficulties Inherent in Setting Aside Settlements

The process by which this issue arises is somewhat confusing, but basically the facts are that:

Parent has two children. Original trust leaves residue to his children 50-50; and if either child predeceases, the share of predeceased child goes to the descendants of the deceased child.

One child dies and then the parent becomes demented, subject to guardianship and conservatorship. Conservator petitions the trial court for instruction on the validity of a trust amendment which may or may not have been signed. No signed copy is found. The purported amendment was made after the death of the child, and if valid, would leave the entire residue to the surviving child and nothing to the descendants of the deceased child.

Matter is mediated and the surviving child and descendants of the deceased child reach an agreement regarding the division of the residue, which agreement is approved by the trial court.

Subsequently, the child who would have received everything under the purported trust amendment announces that he has found the signed amendment, and seeks to set aside the order approving the settlement pursuant to MCR 2.612(C)(1).

The trial court denies the motion to set aside the order, and the Court of Appeals affirms.

In Re Frank M. Lambrecht, Jr. Trust (click on name to read the case) is unpublished, but I think it does a reasonably good job looking at what it takes to set aside a settlement agreement, and probably gets the right result in what is no doubt a very close case.

There are several grounds on which the agreement (or more accurately, the court order adopting the agreement) is challenged, all of which come under MCR 2.612(C)(1).

MCR 2.612(C)(1)(a) – Mutual Mistake.  Court of Appeals holds that while it may well have been a mutual mistake of a material fact that no signed amendment existed, the parties all knew that it was possible that one might subsequently be found, and that possibility was presumably factored into the value they placed on the case when they settled.  So, unlike some other types of orders, an order approving a settlement agreement has already factored in the possibility of this type of mistake = no relief here.

MCR 2.612(C)(1)(b) – After Discovered Material Evidence.  The Court of Appeals says that the child challenging the settlement agreement is correct that the discovery of the signed amendment would meet most of the requirements necessary to obtain relief under MCR 2.612(C)(1)(b), but on these facts this contesting child fails to meet the burden of showing that it could not have been found with “reasonable diligence.”   The child seeking relief says the signed amendment was found in his parent’s desk drawer, but that he chose not to look there while his parent was alive, out of respect for that parent’s privacy.  Basically, his deference on this point may have been admirable but does not obviate his obligation to use due diligence.  There is no question he had access, and presumably the desk drawer would have been an obvious place to look.  So that won’t work.

MCR 2.612(C)(1)(e) and (f) – No Longer Equitable and Other Grounds for Relief.  The Court of Appeals notes that the settlement was not solely based on the fact that a signed amendment was missing. Rather, the settlement negotiations included other issues, including whether, even if the signed amendment were found, the amendment would be set aside for lack of capacity or undue influence.  In light of the other variables in play during the settlement process, it could not be said that the resulting agreement is no longer fair.

Conclusion. This case neatly presents the issue of how and why an order approving a settlement agreement is different from other types of court orders when it comes to seeking relief under MCR 2.612(C)(1); and neatly applies the law to facts that make the decision a close call on several grounds.

 

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COA on Brody Trust Remand: We Were Both Right

In what should be the last chapter in the Rhea Brody Trust saga, the Court of Appeals has released its decision resulting from a Michigan Supreme Court Order remanding the case to the COA.  As previously discussed here, confusion was created by the first Brody Trust decision (“Brody I”) regarding whether a child/beneficiary has standing to initiate litigation involving a parent’s revocable trust regardless of whether the parent/settlor is still competent.

To read the new Brody case, click here.

To read prior posts on this case, click here and here.

In Brody Trust I, the COA held that a child who is a beneficiary of a revocable trust may have standing to initiate litigation regarding the administration of a revocable trust, regardless of whether the parent/settlor is competent. The COA relied upon the definition of an “interested person” as set forth in MCL 700.1105(c).  That decision shocked the probate community, and caused the probate section of the state bar to file an amicus brief asking the Michigan Supreme Court to reverse that holding.  [The probate section did not ask for a reversal of the outcome of Brody I, because based on the facts of the case, and specifically the fact that the settlor was in fact incompetent, and the trustee was also the settlor’s agent under a power of attorney, standing would exist under MCL 700.7603(2).]  Click on the statute to read those laws.

The MSC accepted briefs on appeal, but rather than hear and decide the case, the MSC simply vacated controversial portions of Brody I and remanded it to the COA for a new and improved opinion.

Now, the new opinion (“Brody II”) has been issued.  In it, the COA acknowledges that the probate section was correct in asserting that MCL 700.7603(2) would apply in this case and that the application of that statute would provide standing to the petitioner/child/beneficiary. But – and it’s kind of a big but – they say that they were not wrong in their application of MCL 700.1105(c).

Litigators Rejoice?

Brody II is published, so it is the law. What this means, it seems, is that under MCL 700.1105(c), depending on the facts and circumstances of the case, a probate court could find that a child or beneficiary of a revocable trust might have standing to initiate litigation regarding the administration of a revocable trust even where the settlor remains competent and could amend the trust and cut out complaining child/beneficiary.  Is this a boon for litigators?  Possibly, but I think probably not.  Probate courts have discretion under the second sentence of 700.1105(c) to determine who would be an interested person in any particular proceeding, and that decision is based on the “particular purposes of, and matter involved in” the litigation.  Presumably, it would be a rare set of circumstances where a trial court would want to exercise their discretion to allow litigation by an aggrieved child or beneficiary in cases where the settlor can speak for themselves.  Presumably also, competent settlors who are offended by having their children and/or other beneficiaries initiate litigation, will in fact amend their documents and resolve the issue that way.

Conclusion

So, the COA missed the obvious way to resolve this case in Brody I, and they acknowledge that Brody II. But they don’t just leave it at that.  By taking the “we were both right” approach, they allow for the possibility of future litigation initiated by children or beneficiaries of revocable trusts while the settlor is competent.

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Phone App “document” is a Valid Will in Michigan

It happened and it’s published.

The Michigan Court of Appeals held, in a published decision, that a paragraph posted by a decedent on his phone is a valid will under Michigan law, and specifically, MCL 700.2503.

We’ve discussed Michigan’s uniquely liberal law regarding instruments intended to be wills before. See, for instance, Section 2503 Grows Up (click on name).

In this case, Duane Horton wrote a note in his journal stating that his testamentary wishes could be found on his phone app. They looked and they found it.  The trial court admitted the electronic expression as the decedent’s will under MCL 700.2503. The Court of Appeals affirmed.

Click here to read In re Estate of Duane Francis Horton, II

It’s an important case as it further fleshes out the impact of Michigan’s cutting edge law.

First, it dismisses the number one misconception about Section 2503, which is that it is intended only to fix “minor, technical deficiencies” in documents that would otherwise be admissible as holographic wills or otherwise. The COA holds that the statute doesn’t say that, and doesn’t mean that.  Rather Section 2503 is a stand alone, separate process for admitting testamentary expressions which does not require any formality, only clear and convincing evidence of intent.

Equally important, the case stands for the proposition that an electronic document is a “document” for the purposes of this statute.

These are powerful developments in probate law, and, for better or worse, Michigan seems to be on the cutting edge. Fun issues, fun times.

 

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State Supremes Issue Split Decision on Mardigian

Relish the moment because this is as exciting as probate law gets.

We’ve written about the case before (See: This is Awkward).  Attorney prepares an estate plan (will and trust) for non-relative, leaving millions to said attorney and attorney’s family.

Trial court says: An attorney can’t do that under the rules of professional conduct, and therefore the estate plan is void – on summary disposition.

Court of Appeals reverses the trial court. COA says: While the lawyer may face discipline for the ethics violation, the validity of the trust is not implicated by the ethics rule.  That decision was 2 to 1.

Now, the Michigan Supreme Court reviews the Court of Appeals, and it’s a 3 to 3 tie [The 7th Justice abstains because he was on the COA panel that decided it – and was one of the two votes on the prevailing side.]  Apparently a tie means the COA decision is affirmed.

So the issue is whether a violation of the MRPC rule 1.8(c) (which precludes an attorney from creating estate plans for non-relatives in which they receive a substantial benefit) has any role in a trial contesting the validity of the estate plan? The answer is “no, it does not.”  While everyone agrees that the attorney is a fiduciary and that, as such, the presumption of undue influence is in play, the prevailing opinion is that the ethics violation, in and of itself, is not a factor in the case.

It’s a Long Decision

As indicated, there are two opinions, each with 3 signatories. In all it’s 53 pages long.  Click here to read the case.

The three who vote to affirm the COA ultimately conclude that it’s not their role to change the law of undue influence to enforce ethical obligations of the bar. The other three see this as an opportunity to do just that.  Their approach would be to treat a violation of the ethics rule as giving rise to an per se finding of undue influence.  They assert that the law needs to catch up with changes that have taken place since the last time the MSC reviewed this question more than 50 years ago, which changes included the adoption of MRPC 1.8(c).

Each opinion includes a lengthy discussion of undue influence and the presumption. It at least attempts to clarify some of the confusion that exists about the presumption and particularly about how it is rebutted.  This case will no doubt be quoted in litigation going forward.  So if you do this kind of work, you need to read this case.

They’re Making My Point

The Supremes don’t know it, and likely won’t revisit this issue in my lifetime, but their decision demonstrates the point I was trying to make in my recent post: The Imperfect Bandage of Undue Influence (click on name to read it).  My point is that:  Undue influence isn’t cutting it.

In both opinions, but especially the opinion of the non-prevailing Justices, the Justices seem uncomfortable with how difficult it is to prove undue influence and how easy it is for the presumption to be rebutted. For me though, their distress is too narrowly focused.  Even the side that would change the law to prevent this result in this case, would only do so in situations where a lawyer is involved.  From my perspective, it is just as suspicious when a benefiting child or housekeeper prepares the will, deed, beneficiary designation, etc..

So, in conclusion, the MSC has spoken. It’s a long opinion and long awaited by many in the probate community.  The facts of the case and the evenly divided court add a dash of drama.  Required reading for probate geeks.

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MSC Fixes Brody Trust

UPDATE:  The Court of Appeals issued a new opinion on August 7, 2018.  The blog post on that opinion can be read by clicking here.

As previously discussed on this blogsite, the problem with this Rhea Brody Trust case is that the Court of Appeals misconstrued the standing provisions of the Michigan Trust Code in concluding that a child/beneficiary of the settlor has standing to initiate a trust proceeding while the parent/settlor is alive. [See Remainder Beneficiary of Revocable Trust has Standing to Sue Trustee for Breach]. Besides being wrong, the COA’s conclusion was unnecessary because under the facts of this case (including the fact that the settlor was incompetent), the offended party had standing under the Michigan Trust Code.

As with the Brody conservatorship case, the COA decision was appealed to the Michigan Supreme Court and an amicus brief was filed by the Probate Section of the State Bar. As with the Brody conservatorship matter, the MSC received the amicus brief, fixed the problem, and then denied leave as no longer necessary.  However, in this matter, the MSC actually ordered part of the COA’s decision vacated and remanded the matter to the COA to correct their analysis.  So presumably there will be another, more enlightened, COA decision forthcoming.

Click here to read the MSC Order.

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Beneficial Interest in Trust Enough for PRE

In this published decision, the Michigan Court of Appeals goes to great lengths to conclude that a person who lives in a house that is owned by an irrevocable trust, which trust provides this person with a right of occupancy, is an “owner” of the house for the purposes of qualifying for the personal residence exclusion with respect to their property taxes.

Click here to read Breakey v Department of Treasury.

 

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