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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.

Henry Ford Village Refund Policy Upheld by COA

Henry Ford Village is a large senior housing provider in the metro Detroit area. At least some of their residents enter into continuing care contracts that require an up front entrance fee, some or all of which fee can later be refunded in accordance with the terms of the admissions contract.

In the case of Reginald Smith, he paid $152,000 when he entered. When he died, the trustee of his trust and the personal representative of his estate recovered only about $127,000.  The Trustee/P.R. did not dispute that the refund would appropriately be reduced by about $10,000, but did contest the reduction of the other approximately $15,000.  That difference arose because of a provision in the contract that said that the refund would be contingent on the admission of a new replacement resident, and the payment by the new resident of a new entrance fee.  After Mr. Smith died and some time passed during which no new resident was found who was willing to pay the full entrance fee, the Trustee/P.R. entered into a modification of the contract to allow the space to be filled by a new resident who paid a reduced entrance fee – reduced by the disputed $15,000.

The Trustee/P.R. sued Henry Ford Village and various related entities for the $15,000 difference, and lost in the trial court level on summary disposition. The appeal followed from that decision.

In the second paragraph of the COA opinion, the panel notes that: “At oral argument, plaintiff conceded that HFV violated none of the terms of its contract with the decedent or agreement with plaintiff, as those documents are actually written.”

And, for Plaintiff/Appellant, it goes downhill from there. Downhill even to the point of the COA becoming insulting toward the work of Appellant’s legal counsel.  Among other things, the COA characterizes the Appellant’s brief as “exceedingly loquacious and difficult to comprehend.”   Loquacious means wordy.  The COA affirmed the trial court’s dismissal of the lawsuit.

I report on the opinion because it is published (although I don’t know why), and many people who practice in this area of law no doubt intersect with Henry Ford Village and advise clients about continuing care community contracts. If there’s a lesson here (and I’m not sure that there is), I believe the lesson might be that continuing care community contracts are complicated and are likely drafted in a way that favors the financial interests of the people managing the facility.

Click here to read Smith Living Trust and Estate of Reginald Smith v Henry Ford Village, et al.

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.

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.

Policy Tweaks Scare Medicaid Geeks

When it comes to Medicaid planning, truly the devil is in the details; and the “details” are found in the Michigan Department of Health and Human Services (MDHHS) policy manuals, most often the Bridges Eligibility Manual (the “BEM”). MDHHS has announced several language revisions to a variety of BEM items, all taking effect October 1.  Folks that have been in this game long enough know that such revisions often mean mischief and that, especially during this haunted season, odds are high that there will be more tricks than treats in this bag of goodies.

Waiver Rewrite (BEM 106)

The Medicaid Waiver program (aka “the MI Choice Program”) allows persons qualified for long term care Medicaid benefits to receive services in their homes. Waiver benefits have been around awhile now, but the way the eligibility rules apply to Waiver have remained uncertain.  As of October 1, the Waiver eligibility rules will be much better organized and laid out in much more detail in the new BEM 106.  That’s a treat.

Among the clarifications are the rules for how an initial asset assessment (the “IAA”) is triggered for Waiver applicants, and how a divestment penalty is triggered. These clarifications raise concerns.

The IAA is important because it provides the date which is used for a married person to calculate their protected spousal amount (aka “community spouse resource allowance”). For traditional Medicaid long term care programs, the IAA is triggered when someone enters the hospital or a long term care facility for at least 30 days.  Now, for Waiver applicants, the IAA can also be triggered when the Medicaid applicant has begun:

Receiving appropriate home and community based services specified under the approved state waiver; see Exhibit I in this item. They do not have to receive these services from a waiver agent listed below, but the services must be received from a person or entity certified (or licensed) by the state to provide the services. See below for verification of services received.

So, it seems that a person can now trigger their own Medicaid Waiver IAA date by hiring in-home caregivers (or perhaps it will have to be nurses) that are licensed by the State. That seems to give people, and perhaps planners, more control over the IAA trigger date and may be a treat.  We’ll see.  Cautious optimism here.

Of greater concern in the new BEM 106 is the language that relates to the trigger for the divestment penalty and the way that intersects with the language defining “approved for waiver.” What is says is that the divestment penalty begins “on the date which all criteria listed under the approved for waiver section in this item has been confirmed.”  The “Approved for Waiver” section provides the following:

Approved for the waiver means:

  • The agent conducted the assessment, and
  • There is an available wavier slot for the individual’s placement and
  • A person-centered plan of service has been developed and
  • The participant received, or expects to receive, supports coordination services from the agent with appropriate waiver services for at least 30 consecutive days.

The agent determines the waiver approval date and termination date. The agent is responsible for advising the appropriate local Michigan Department of Health and Human Services (MDHHS) office of these dates. The agent is responsible for advising the appropriate local MDHHS office the dates of enrollment and disenrollment information in CHAMPS.

This seems to leave all control in the hands of the Waiver Agent, and will also depend on slot availability. This will make divestment planning strategies for Waiver clients much less predictable.  Definitely room for mischief here. Call this a trick.

Assets (BEM 400)

As of October 1, the language in BEM 400 that allows real estate to be considered unavailable during periods in which the property is listed for sale has been tweaked in three respects.

First, the policy has been modified by the addition of the following sentence: “If after a length of time has passed without a sale, the sale price may need to be evaluated against the definition of fair market value.”

Second, it now says “The asset becomes countable when a reasonable offer is received.”

Third, the non-salable exemption will not be applied to the initial asset assessment (IAA).

While none of these changes seem particularly egregious, one always wonders why DHHS would go through the trouble to include them if there isn’t some hidden agenda. But then maybe I’ve become too cynical.

The October 1 changes to BEM 400 also include beefed up language to clarify that assets remains an available resources during periods in which the applicant is waiting for a conservator (or guardian) to be appointed. So even though you may have no power of attorney or other legal ability to spend down or otherwise qualify for Medicaid, the fact that the assets exist is all that matters.  The cost of the delay of obtaining court authority falls on the applicant.  That has always been the rule. So, again, one is curious about the need for these clarifications.

Divestment (BEM 405)

BEM 405 now includes an eerily vague and portentous provision that says: “purchasing an asset which decreases the group’s net worth and is not in the group’s financial interest” is a transfer of assets, and apparently also per se “divestment.” Definitely an invitation to mischief and definitely a trick.

Divestment policy will now define “putting assets or income into a Limited Liability Company (LLC)” as a transfer of assets which presumably means it can be analyzed as possible divestment. A trick.

BEM 405 policy has been clarified to address situations where past divestment activity is subsequently discovered and reported. The new language provides that the penalty period starts on the “first day after timely notice is given.”  Maybe not a treat, but I’m ok with this.

Conclusion

There are other tweaks to the aforementioned BEMs and tweaks to other BEMs not discussed above, but these seem to me the most curious. To read the entire bulletin with links to the policy, click here.  Happy Halloween.

Judge Brennan’s Passing

I read about Judge Tom Brennan’s passing with sadness. I met him once under very unusual circumstances. He was more than gracious.

I am a Cooley grad. I know many fine lawyers who are as well.

Yes, Michael Cohen, is a Cooley grad; but so is Judge Aqualina.

Read more here:

https://www.cooley.edu/news/law-school-community-mourns-passing-its-founder-hon-thomas-e-brennan

 

 

 

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.

 

VA Program Adds Divestment Rules and More

The so-called “Aid and Attendance” pension has become an important source of income for older adults needing long term care services, and an important source of business for some elder law attorneys. The program is offered through the Veterans Administration.  Eligibility requires military service during a period of conflict, or being the spouse or surviving spouse of a veteran that meets that requirement. In addition, there are asset and income eligibility rules. Those income and asset rules will change dramatically with the implementation of new regulations formally adopted today (but taking effect in 30 days).

There are several changes. Some of the more notable changes are outlined below. Before I get into those, I think it would be helpful to acknowledge the context of these changes and the overriding themes that tie them together.

First, it seems evident that these new rules are a reaction to the role of lawyers and financial planners who, for the past ten years or so, have become increasingly involved in “helping” veterans qualify for these benefits. The VA clearly perceives this development as harmful to the program and perhaps even exploitative towards the veterans.

Second, this VA benefit is often considered by older adults who need help with aging issues, as something available either in addition to, or as an alternative to, applying for long term care benefits through Medicaid. For historical reasons, these two programs have had very different financial (asset and income) eligibility rules.  These changes make the VA benefit rules more like the Medicaid eligibility rules.

 

Divestment. Divestment means giving away your assets (or taking other steps to artificially reduce their availability) in order to qualify for the benefit. Heretofore, there was no penalty if an applicant gave away resources in order to qualify for this VA benefit.  Now there will be.  Most Medicaid long term care programs have had divestment rules for at least 20 years.

Like the Medicaid long term care programs, penalties for asset transfers will result in periods of ineligibility the duration of which will be a function of the amount sheltered. Whereas the so-called “look back period” for Medicaid is five years, the look-back for this program will be three years.

Use of trusts and annuities in planning can result in divestment analysis under these new rules.

There are exceptions, and interestingly there is an exception for elders who were taken advantage of by an advisor who was marketing services purportedly designed to allow them to qualify for this benefit. Or, in other words, if an attorney told you to put your assets in an irrevocable trust or annuity, and now, as a result, you are ineligible for benefits, you merely have to assert that the lawyer was a charlatan to avoid the penalty (at least that how I read it).

Homestead Exemption. Both this VA benefit and Medicaid have historically exempted the primary residence from consideration as a countable asset.  In recent years, Medicaid has placed a limit on the value of an exempt homestead.  Now VA will limit the exempt homestead by using a different measurement – two acres.

Countable Asset Limit.  The amount of exempt assets that have historically been excluded for this VA benefit has been uncertain.  While some offices used a “rule of thumb” figure at times, the real rule required a calculation taking into account the income shortfall of the applicant, their life expectancy and their available resources.  Medicaid has long had a simple $2,000 rule for single people, and a formula for married persons, with a ceiling.  That Medicaid formula is called the Community Spouse Resource Allowance (or CSRA) (also sometimes called the “protected spousal amount”).  Each year the Medicaid program announces the maximum CSRA. In 2018, the maximum CSRA is $123,600.  VA has adopted, as their new asset limit for all applicants, the Medicaid maximum CSRA.

 

Conclusion. These are dramatic changes for lawyers who offer advice on this benefit.  There are other changes.  Above are those that I perceive as most notable.  To read more:  click here to read the rule changes as they were originally published in 2015 (yes it has been around that long); and click here to read the VA commentary that accompanied the announcement that the rule changes would finally be implemented today.

Terror Clause Canaries Don’t Fly

In this unpublished decision from the Court of Appeals, a potential litigant filed a “petition for instruction” which asked the trial judge to decide the question of: If a subsequent petition to modify the trust were filed, whether such a petition would be deemed to violate the trust’s terror clause and thereby cause petitioner to forfeit her interest in the trust?

Click here to read: In Re Robert E. Whitton Revocable Trust

Curiously, a trial judge saw fit to issue such an opinion. In this case, the trial court determined that the petition for instruction did not itself violate the terror clause, but that a subsequent petition to modify the trust would violate the clause and that the petitioner had no probable cause to bring that petition.

A terror clause (aka “no contest clause”) is a provision in a will or trust that says a beneficiary will be penalized (typically the penalty is to lose their interest in the estate) if they contest the will or trust at issue.

Michigan law on terror clauses is pretty straightforward and is spelled out in MCL 700.7113 (for trusts) an in MCL 700.2518 and 700.3905 (for wills). (click on the statutes to read them). They are generally enforceable, but will not be enforced in cases where the party had “probable cause” to initiate the proceeding.

Litigants, like the one in this case, have long attempted is to come up with a way of having a court determine whether they will be penalized if they bring an action before actually doing so. They want to know in advance whether they will be deemed to have triggered the terror clause if they file a petition being contemplated.  These efforts don’t work.  Several years ago, the Court of Appeals issued a published decision in a case handled by our firm in which it declared that trial courts lack authority to rule on such speculative matters for the reasons that the issue is non-justiciable (not ripe, as it were).  Click here to read that prior post.  Basically, the appellate courts have said that if you want to contest a document, you have to take your chances.  So, it’s no surprise that the Court of Appeals held that the trial court lacked jurisdiction to decide this case, and vacated that part of the trial court’s decision.  And it’s curious that, in light of the clear law on this point, the trial judge in this matter thought that such an action could be decided.

This case also offers the opportunity to discuss another, perhaps dicier, aspect of our terror clause statutes, which is that the imposition of a penalty is not necessarily limited to proceedings in which the validity of document at issue is being contested. Rather these statutes indicate that a terror clause can be written to impose a penalty for initiating any type of proceeding relating to the trust or will.  So, in this case, the anticipated subsequent petition was being framed as a “petition to modify” a trust to conform with an amendment that the settlor had purportedly had drafted, but never got around to signing.  The appellants in this case were hoping to escape the imposition of the terror clause penalty on the idea that the subsequent petition they were considering wouldn’t actually (per their argument) contest the validity of the trust, but would only inquire as to the validity of an unsigned amendment.  Likewise the respondents in this matter argued that the act of bringing a petition for instruction was itself a violation of the terror clause.  The point of all this is that Michigan law allows for very broad terror clause provisions, including, presumably, a provision that would penalize a litigant for bringing a petition for instruction, or that says a petition seeking to recognize an unsigned amendment is a violation. The opinion in this case indicates only that the terror clause in this trust was “lengthy.”  It is not clear what the scope of this lengthy terror clause is, but it is seems possible at least that a terror clause could have been written which would have been unambiguous on these specific issues.

So, the points here are that (1) There are no terror clause canaries – no free bites at the apple. When a terror clause is in play, you take your chances.  And (2) A terror clause may be written to impose a penalty for initiating any form of proceeding which relates to the will or trust at issue.  The scope of the terror clause itself is significant in deciding how to proceed in cases where these provisions are in play.

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.