Summary Affirmed in Undue Influence Case

In Re Margaret Krum Trust is an unpublished decision of the Court of Appeals dealing with undue influence. [Click on the name to read the case.]  This is a case that was handled by our firm.  We represented the appellee.

Two sisters were cut out of their mother’s trust, and contested the validity of the document when their mother died. They originally pled undue influence and lack of capacity, but withdrew the incapacity claim after discovery was complete.  Our client, the Trustee, brought a motion for summary disposition on the remaining claim of undue influence, and prevailed.  The appeal was from that order.

In affirming the trial court, the COA addresses two points worth noting:

First, the COA says that the existence of a financial power of attorney nominating the alleged undue influencer as agent is sufficient to establish the element of a fiduciary relationship for the purpose of giving rise to the presumption of undue influence, even when there is no evidence that the nominated agent ever exercised any authority under the document.

Second, the COA holds that summary disposition can be granted in an undue influence case even when the presumption of undue influence has been established. This appears to be an accurate statement of the law, even though other panels of the COA have, at times, held otherwise.

If you read the case you will note that the COA deals with the issue of after discovered evidence in the context of a motion for reconsideration. Kind of an interesting twist in this case, if you’re looking for more.

And if you read the case you also learn that the scrivener of the contested document was our friend and colleague Danielle Streed. Thanks for your help in this matter Danielle.

Finally, our own Drummond Black did all the heavy lifting on the MSD and COA briefs. Thanks D. You’re the best!

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An unpublished opinion today that looks at the question of when expert opinions are sufficient to create a question of fact, versus when they remain mere speculation; in the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

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