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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