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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Lame Duck Legislature Lays Golden Egg – BIG TIME

Golden Egg

DAPT – learn it and love it. Soon it will be all the talk.  Domestic asset protection trusts.  The news is that the Michigan legislature has approved a pair of bills that would make Michigan one of fifteen states with such laws, and of those states, one of the most attractive for persons seeking this type of protection.

Specifically, there are two bills awaiting the Governor’s signature which is expected before year end. The meatier of the two, the “qualified disposition in trust act” can be read by clicking here.  A second bill modifies Michigan’s fraudulent conveyance laws so as to accommodate these trusts, to read that bill click here.

In summary, a DAPT allows people to create trusts funded with their own resources, have the resources in those trusts used for their own benefit, and yet have those trust resources unavailable to their own creditors. Nifty trick.  A complete reversal of prior law and common law.  That is, in states without these laws, and in Michigan historically, a person could not put their own assets in trust and then tell their creditors to take a hike.  In the future, they can.

There are limits. One limit is that the conveyance must be done in a manner that is not a fraud on creditors.  Specifically, the standard imposed by the new law is that the trust may not be funded with “actual intent to hinder, delay or defraud any creditor.”  Another limit is that the interest the settlor reserves is a discretionary or support interest.

Specifically the law defines this relationship as follows:

The potential or actual receipt or use of principal if the potential or actual receipt or use of principal is the result of (i) a trustee’s discretion, (ii) a trustee acting in accordance with a support provision, or a (iii) trustee acting at the direction of a trust protector who is acting in its discretion or in accordance with a support provision.

This sounds so great that the initial reaction is that everyone will want one – and expect the chicken dinner seminar crowd to echo that sentiment. In reality though, these trusts make sense for people who (1) have significant wealth, and (2) have significant risks of creditors.  Otherwise, why would anyone put their money in an irrevocable trust and limit their access to those assets to support or discretion?

This will bring trust work to Michigan. Michigan has become a favorable jurisdiction for trust planning, and now, self-settled asset protection trust planning. Michigan laid the groundwork for being a leader in this arena with the exceptional protections afforded beneficiaries of discretionary trusts when it adopted the Michigan Trust Code in 2010.  This legislation gives that work a whole new application.  Look for wealthy people in other states, both states that do not have these laws, and some states that have these laws but less favorable provisions, to look to Michigan as a place to locate their trusts.  To cloak oneself in these protections, it will be necessary to have a Michigan trustee.  Good news for the trust departments of Michigan’s banks, as well as Michigan’s estate planners.

Note, don’t confuse this change with self-settled asset protection trusts now used in the context of planning for government benefits – special needs trusts. Those rules are federal and this will not impact those rules.

These laws are a product of the Probate and Estate Planning Section of the State Bar. A committee of that group’s members has been working on this project for years, and deserves great credit for bringing this about. For ICLE partners, a good summary of the law provided was by Rob Tiplady at the May 2015 Probate Institute.  I suggest you look up his materials.

This is my first pass at discussing this important development. Expect more down the road.  This matters.

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More Terror Clause Trouble

The Court of Appeals has published another case on terror clauses.  Estate of Eugene Stan.

The facts are that A filed for formal admission of a Will which included A’s appointment as Personal Representative (PR), pursuant to the nomination in the Will.  B opposed the appointment of A, citing bad acts of A in handling affairs of the estate prior to appointment.  The Will was a pourover will (poured over to a trust).  The Will contained no terror clause, but the Trust contained a terror clause that purported to encompass challenges to the Will.  The terror clause language was standard.

The issue was whether the terror clause in the trust was violated by contesting the appointment of A as PR in a proceeding to admit the Will.

The trial court said “no.”  The Court of Appeals said: “Yes, but that the terror clause penalty was unenforceable because B had probable cause to request that A be passed over for appointment based on her bad acts.”

The case is troubling to me for a number of reasons, but mostly because it seems to equate a petition to remove a PR for cause with an attack on a trust sufficient to trigger a terror clause penalty.  That is not true.  A terror clause, such as the one in question here, penalizes an effort to contest the validity of the Trust or Will at issue.  There was no claim in this case that the Will was not valid, that is no claim that the provision of the Will pursuant to which A was appointed PR was invalid as a result of incapacity, undue influence, etc.  The only claim was that A was not suitable to serve, based on her conduct as PR prior to her appointment. 

The case says that the attorney for B conceded that the Petition to preclude A’s appointment was a contest of a provision of the Will.  That was wrong for the attorney to have made that assertion, and wrong for the Court of Appeals to have relied on it as controlling (if that is what it did).  Clearly that is not true. 

This ruling creates confusion about the scope of activities that would potentially create a challenge to a document sufficient to trigger a terror clause penalty.  I suppose this terror clause could have said that any petition to remove a PR would be grounds for invocation of a penalty, but that is not the case.  So we are left with the proposition that an action to remove a PR (or trustee for that matter) who is expressly nominated in the document will be treated as a challenge to a provision of the Will or Trust at issue sufficient to trigger a terror clause.  It leaves us with the question of whether the result would have been different if B had not challenged the appointment of A at the hearing on admission of the Will but had instead waited a week and filed a separate subsequent petition for removal of A as PR for cause. This type of decision only further muddies the waters in what is becoming a troubling mire of opinions (in light of the Perry Trust matter discussed extensively in this blog). 

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Case Trends and Technical Formalities

The topic for this post was triggered by my end of year clean up. During that process, I go through piles of things I think are interesting and have set aside. In doing so I pulled out five unpublished Court of Appeals cases that relate to the issue of the treatment of testamentary documents which fail to meet formalities (some woefully so) normally associated with their execution. This is far from an exhaustive review of the cases, but enough, I thought it was worth a discussion.

Following are the cases from my pile in order of most recent first:

In Re Gwendoline Louis Stillwell Trust. November 2012. Decedent/Settlor created a revocable trust. She also instructed a grandchild to deliver an envelope to the Trustee in the event of her death. In that envelope were several pages of handwritten, dated, but unwitnessed and unsigned instructions altering the disposition of her estate from what was provided in her Trust. The trial court held that the notes were amendments to the trust and that decision was upheld by the Court of Appeals.

The decision of both courts relied heavily on the language of the trust which granted the settlor the ability to modify the trust by written instrument delivered to the trustee. The fact that the document was not signed and not delivered until after death did not prove to be obstacles to the result. This case is a good example of what appears to be the expanding scope of the movement started by MCL 700.2503. It also suggests that trust agreements may be even more vulnerable than wills, notwithstanding the fact that the Michigan Trust Code offers no provision comparable to MCL 700.2503.

In Re Leach. October 2012. The trial court upheld certain documents which purportedly conveyed a remainder in real estate to X as wills. The trial court granted the relief on summary disposition. The Court of Appeals remanded for an evidentiary hearing on the issue of intent, and specifically requiring the Court to make a finding that the evidence could sustain the burden of proof: clear and convincing.

This case is interesting because it seems to suggest that summary disposition is not appropriate to make a finding in favor of a non-complying document under MCL 700.2503, but also because it addresses (briefly) the interplay between capacity and intent.

In Re Estate of Waller. November 2011. This case upholds a handwritten prenuptial agreement which was signed on the date of the marriage, and which included no disclosure of the parties’ respective assets or debts. The surviving spouse contested the validity of the document and lost.

The point here is again, a handwritten document is given full effect. It is also noteworthy in that it suggests that notwithstanding the perception of the family law bar, the formalities generally associated with the execution of a prenuptial agreement in order for it to be upheld are not so firm as they might believe.

In Re Daniel Mannes. October 2011. Decedent died leaving a will. She also had handwritten notes that altered the disposition of a certain investment Account. The handwritten notes were admitted as valid holographic wills but the interests of the beneficiaries of the notes were dismissed due to the timeliness of their action. The Court of Appeals reversed the trial court on the dismissal of the claim of the beneficiaries of the notes, upheld the notes as testamentary documents.

The case is bogged down in side issues about a pending divorce and timeliness of the action, so the Court of Appeals never addressed the factual basis for finding that the notes could be treated as holographic codicils (the party who would have contested that finding apparently dropped the issue on appeal). For the purposes of this post, the point is only that this is another case upholding notes as testamentary instruments.

Estate of Annette K. Boyle. September 2011. Decedent’s will specifically identified the Property in dispute as part of her estate and in fact Decedent held title to the property at the time of her death. The Property was listed on the estate inventory of the estate but with a notation that the decedent “agreed to transfer” this Property to Son. Residuary beneficiaries objected to this notation and to the Petition, filed by Son seeking the Court to order the PR to convey the property to him. Son had some good facts in his favor including testimony that the Decedent referred to the property as Son’s property, that the property tax statements were sent to Son, and that Son paid the taxes. Respondent residual beneficiaries argued that the will was unambiguous.

After a bench trial the property was awarded to Son under a constructive trust theory, and that decision was upheld by the Court of Appeals.

This case speaks to the broad reach of the remedy of “constructive trust” often, I suggest, underutilized in litigation. But the case also offers an example of the clear language of a testamentary document, in this instance a will, to be circumvented by facts that suggest that notwithstanding the plain language of the document, the intent of the Decedent was otherwise.

Conclusion. So what does it mean? As is often the case, bad news for planners is good news for litigators. Because these cases do not necessarily hinge on the statutory language of MCL 700.2503, they appear to merely reflect a trend away from holding fast to enforcement of clear testamentary documents, and allowing parties who believe a decedent intended something else to get a foot in the door. The remedy of constructive trust seems most well suited for these cases, as it is equitable and accordingly allows the party seeking deviation from the documents to avoid the traditional rules of ambiguity and extrinsic evidence.

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