On June 18, 2009, Governor Jennifer Granholm signed into law the legislation enacting the Michigan Trust Code.2 The Code will provide the citizens of Michigan with the state's first comprehensive codification of the law of trusts. In doing so, the Code preserves much of Michigan's past statutory and common trust law and fills in many of the gaps of current law. It also represents a continuation of the modernization of Michigan's laws governing trusts and estates, which began in 1998 with the Estates and Protected Individuals Code ("EPIC") and continued with the enactment of the Uniform Principal and Income Act in 2004 and the repeal of the Rule Against Perpetuities in 2008.
The Michigan Trust Code was drafted by the Michigan Trust Code Committee of the Probate and Estate Planning Section of the State Bar of Michigan in close consultation with the Michigan Bankers Association's Trust Counsel Committee. The result of a five year drafting effort, the Code relies upon the structure and provisions of the Uniform Trust Code3 as the starting point for many of its provisions. However, the Michigan Trust Code is a uniquely Michigan document that draws from both the Uniform Trust Code and existing Michigan law to preserve long established procedures, practices, and principles concerning trusts in Michigan, while also filling the numerous gaps that have existed.
These materials are intended to provide an introduction to the Code, with a particular emphasis on aspects of the Code that are relevant to the institutional trustee.
ORGANIZATION, STRUCTURE, IMPORTANT THEMES
The Michigan Trust Code borrows the Uniform Trust Code's structure.4 The parts are:
Part 1 – General Provisions and Definitions. As its name suggests, Part 1 consists of a series of general provisions and one definitional section.
Part 2 – Judicial Proceedings. Part 2 sets forth several provisions dealing with the courts and their relationship to trusts, including jurisdiction, venue, and trust registration.
Part 3 – Representation. Part 3 deals with representation of beneficiaries in matters such as the receipt of notice and consent. It is discussed more below. See Section III.C, below.
Part 4 – Creation, Validity, Modification, and Termination of Trusts. Part 4 consists of fifteen sections pertaining to the creation, modification, and termination of trusts, including charitable trusts.
Part 5 – Creditor's Claims; Spendthrift and Discretionary Trusts. Part 5 deals with the relationships to the trust of creditors of beneficiaries of trusts, the enforceability of spendthrift provisions, and the effect of discretionary distribution provisions.
Part 6 – Revocable Trusts. Part 6 addresses issues unique to revocable trusts. It is also the place to find the existing provisions of EPIC permitting creditors of a decedent to bring their claims against the revocable trust when there is no probate estate or the probate estate is inadequate. See Section III.H, below.
Part 7 – Office of Trustee. Part 7 contains a series of default rules related to the office of trustee. The provisions include rules governing trustee acceptance, the rights and obligations of co-trustees, resignation, removal, and appointment of trustees, and trustee compensation.
Part 8 – Duties and Powers of Trustee. Part 8 sets forth the duties of the trustee and the trustee's powers.
Part 9 – Liability of Trustees and Rights of Persons Dealing with Trustee. Part 9 addresses the liability of trustees and beneficiaries' rights upon a breach of trust. It also contains provisions describing the relationships between the trustee and persons other than the beneficiaries.
Important Themes and Principles
There are several important themes and principles in the Michigan Trust Code.
It applies to all trusts. The Code takes effect on April 1, 2010, and applies to trusts whether they were established before, on, or after that date. Only a limited number of provisions will not apply to previously existing trusts.
It is a series of default rules. Section 7105 of the Code provides that the Code is a series of default rules, which can be varied by the settlor of the trust. From a practitioner's standpoint this is an extremely important rule, because it generally recognizes freedom of drafting. For the user of trust agreements, it is very important to read the trust instrument and follow it. Unless within one of the exceptions list in Section 7105, the statute only applies when the trust agreement fails to address a particular matter.
There are, however, a number of exceptions, which include:
- The requirements for creating a trust
- The duty to administer a trust in good faith, expeditiously, in accordance with the terms and purposes of the trust and for the benefit of the trust beneficiaries
- The requirement that the trust have a purpose that is lawful, not contrary to public policy, and possible to achieve
- The power of the court to terminate or modify a trust under certain circumstances
- The effect of a spendthrift provision, a support provision, and a discretionary trust provision on the rights of creditors and assignees to reach a trust
- The power of a court to require, dispense with, or modify or terminate a bond
- The power of the court to adjust a trustee's compensation
- The fiduciary duty of a trust protector
- The duty to provide trust beneficiaries with the terms of the trust and information about the trust properties and to give notice of the trust to qualified trust beneficiaries
- The power of the court to order statements of account and other information be provided
- The effect of an exculpatory term
- The rights of persons other than a trustee or trust beneficiary
- Periods of limitation
- The power of a court to take action and exercise jurisdiction
- The subject matter jurisdiction of the court and venue
It preserves existing Michigan law. A guiding principle in the drafting process was to preserve long standing Michigan law absent significant procedural or policy benefits from changing the law.
In all, thirty-two provisions of the Code have been identified as essentially consistent with either existing Michigan common law or current statutes. Another forty-eight sections of the Code involve sections of the UTC that have been modified or are sections that have been added, in either case so the Michigan Trust Code more closely follows existing Michigan common law or current statutes than what the UTC does. Only three provisions represent significant departures from current law.
It preserves the uniform act's language. Where Michigan's law and the UTC are substantively similar, the Michigan Trust Code tends to favor the UTC language if uniformity of language among the states might be advantageous.
It aligns wills and revocable trusts used as will substitutes. Because of the widespread use of revocable trusts as will substitutes, a trend in recent years has been to align the legal treatment of them. There are a number of places in the Code where this trend is exemplified.
It does not provide for self-settled asset protection trusts. Self-settled asset protection trusts are not part of the UTC, although Utah grafted on its version of the UTC provisions authorizing self-settled asset protection trusts. The Michigan Trust Code does not address this subject.
SOME IMPORTANT DEFINITIONS
Most of the definitions of terms used in the Code are found in Section 7103. Others, which have application to the rest of EPIC, are found in Sections 1103 through 1108 of EPIC. Some of the more important terms that are defined in the Code include:
Qualified Trust Beneficiary. A qualified trust beneficiary has a number of rights that are not available to other trust beneficiaries. These rights are typically related to notices or accountings. Section 7103(g) defines a qualified trust beneficiary as:
(g) "Qualified trust beneficiary" means a trust beneficiary to whom 1 or more of the following apply on the date the trust beneficiary's qualification is determined:
(i) The trust beneficiary is a distributee or permissible distributee of trust income or principal.
(ii) The trust beneficiary would be a distributee or permissible distributee of trust income or principal if the interests of the distributees under the trust described in subparagraph (i) terminated on that date without causing the trust to terminate.
(iii) The trust beneficiary would be a distributee or permissible distributee of trust income or principal if the trust terminated on that date.
This definition displaces the definitions now found in EPIC for "current trust beneficiary" and "interested trust beneficiary."
Action. Actions include acts or failures to act (omissions).
Discretionary trust provision. A provision in a trust, regardless of whether a trust provides a standard for the exercise of discretion and regardless of the presence of a spendthrift provision, that gives the trustee discretion to determine whether to distribute income or principal, the amount to distribute, who among a class of beneficiaries will receive a distribution, whether the distribution is income or principal, and when to pay, except that a power to determine when within a taxable or calendar year to distribute is not discretionary if the payment must be made.
Knowledge. Knowledge is defined in Section 7104(1), MCL 700.7104(1). A person has knowledge of a fact if the person has actual knowledge of it or has received notice of it, or from all the facts and circumstances known at the time in question the person has reason to know it. For organizations,
(2) An organization that conducts activities through employees has notice or knowledge of a fact involving a trust only from the time the information was received by an employee having responsibility to act for the trust or from the time the information would have been brought to the employee's attention if the organization had exercised reasonable diligence. An organization exercises reasonable diligence if it maintains reasonable routines for communicating significant information to the employee having responsibility to act for the trust and there is reasonable compliance with the routines. Reasonable diligence does not require an employee of the organization to communicate information unless the communication is part of the individual's regular duties or the individual knows a matter involving the trust would be materially affected by the information.
This definition is tempered by Section 7907, MCL 700.7907, which states:
If the happening of an event, including, but not limited to, marriage, divorce, performance of educational requirements, attainment of a specific age, or death, affects the administration or distribution of a trust, a trustee who has exercised reasonable care to ascertain the happening of the event is not liable for a loss resulting from the trustee's lack of knowledge or lack of notice.
Trust protector. A person or committee of persons appointed pursuant to the terms of the trust who has the power to direct certain actions with respect to the trust. It does not include the settlor or the holder of a power of appointment.
CHALLENGES TO TRUST VALIDITY
The Code includes a provision to bring finality to the question of when a contest may be brought over the validity of a revocable trust. It provides for an end to contests upon the earlier of two years after the settlor's death or six months after the trustee sends notice of the trust's existence, relevant portions of the terms of the trust that describe or affect the person's interest, the trustee's name and address, and the time allowed for commencing a proceeding to contest the trust. §7604(1), MCL 700.7604(1).
The notice was based upon the required disclosures regarding the trust's existence under Section 7814 (which in turn corresponds to current law). See the discussion below.
It also holds harmless the trustee administering the trust who distributes trust property without knowledge of any pending contest or plans to bring a contest of the trust. §7604(2), MCL 700.7604(2). The provision also obligates beneficiaries to return any distributions received if the trust is later determined to be invalid. §7604(3), MCL 700.7604(3).
The new period of limitations to contest the validity of revocable trusts creates an opportunity for persons administering decedent's estates to bring certainty to the validity of the trust within a reasonable time. This notice should be added to checklists for decedent's estates. In addition, fiduciaries will want to consider whether and how they will satisfy the requirement to provide relevant portions of the terms of the trust in satisfaction of the requirement that these be delivered to the trust beneficiaries with the notice. For example, will a copy of the entire trust instrument be provided or only a redacted version?
NO CONTEST CLAUSES
The Michigan Trust Code borrows from EPIC §2518 and §3905 the provisions recognizing in terrorem or no contest clauses and extends them to trusts. Coincidentally the court of appeals did likewise in late 2008. In re Griffin, Case No. 277268 (Mich. Ct. App. December 2, 2008), rev'd on appeal case No. 138831 (Mich. S.Ct. June 22, 2009). This provision is found in Michigan Trust Code Section 7113.
This rule provides that a no contest clause is valid unless probable cause exists for instituting a proceeding contesting the trust or another proceeding related to the trust.
Part 3 of the Code is a series of provisions dealing with the representation of beneficiaries in matters such as notice and consent. These sections build from and closely track the representation provisions of the Uniform Probate Code and EPIC, which are found in Sections 1209 and 1403. Due to their similarity to existing provisions of EPIC, the concepts embodied in may be familiar. However, current EPIC Sections 1209 and 1403 only apply in the context of judicial proceedings. One significant change Part 3 represents is that it applies at all times, not just when a judicial proceeding is ongoing.
When a representation rule applies, it has two important effects:
Notice to someone who may represent and bind another has the same effects as actual notice to the other person.
The consent of someone who may represent and bind another has the same effects as the consent of the other person.
§7301, MCL 700.7301.
Representation occurs in several ways:
- Holders of powers of revocation or amendment and holders of presently exercisable or testamentary general or special powers of appointment represent and bind those persons whose interests as an appointee, taker in default or otherwise is subject to the power. However, in the case of modifications or terminations of a trust or approving a settlement agreement under §7111, only the holders of general powers of appointment may represent and bind another.
- To the extent no conflict of interest exists, various fiduciaries may represent and bind those for whom the fiduciaries serve. These include conservators, plenary and partial guardians, agents under a durable power of attorney, and guardians, who may bind the estate, principal, and ward, respectively. It also includes trustees, who may bind beneficiaries, personal representatives, who may bind beneficiaries of the estate, and parents, who may bind their minor or unborn children.
- To the extent there is no conflict, a minor, incapacitated, or unborn individual or a person whose identify or location is unknown and not reasonably ascertainable may be represented and bound by another whose interest is substantially identical (so-called "virtual representation").
- Guardians ad litem also may be appointed to represent and bind another.
§7302, §7303, §7304, and §7305, MCL 700.7302-.7305.
The usefulness of the representation rules may not be intuitively obvious. Some examples where the representation provisions will be helpful include:
- Approval of an accounting
- Approval of the trustee's fees
- Consent to an investment strategy or decision to retain or divest the trust of an interest in a family held business
- Consent to the termination, modification, or reformation of a trust
- Approval of a nonjudicial settlement agreement
NOTICES OF TRUST EXISTENCE
ACCOUNTING TO TRUST BENEFICIARIES
An important obligation of a trustee is to deliver notice of the existence of a trust to the trust beneficiaries and to deliver periodic accountings and other information to the trust beneficiaries. These obligations had been found in former EPIC §7303. Trustees who delivered adequate information to the beneficiaries could avail themselves of a shorter period of limitations for challenges to their management of trust property under former EPIC §7307.
Although it relies on the UTC structure for organizing these provisions, the Michigan Trust Code adopts the conceptual approach to disclosing trusts, providing information about the trust status, and accountings that is found in former EPIC §7303. An important distinction to note is a change in terminology. EPIC §7303 refers to "current trust beneficiary" and "interested trust beneficiary." These terms, which are currently defined in EPIC §1103 and §1105, respectively, will not be used in the MTC and the definitions will be deleted. The Michigan Trust Code uses the terms distributees, permissible distributees, and "qualified trust beneficiary" to describe the same persons.
Settlors and Incapacitated Settlors of Revocable Trusts
Under the MTC, if the trust is revocable, the rights of the trust beneficiaries are subject to the control of and the duties of the trustee are owed exclusively to the settlor. §7603, MCL 700.7603. As a result, notice to beneficiaries, other than the settlor, of the existence of the trust and of accountings is not required or appropriate unless the trust directs otherwise.
Note that the Code makes clear that a trust does not cease to be "revocable" if the settlor becomes incapacitated. See §7103(h), MCL 700.7103(h).
Prior EPIC §7303 dealt somewhat imperfectly with how the trustee of a revocable trust is to keep an incapacitated settlor informed of the trust administration. EPIC provides a duty to do so and to provide this information to the settlor's designated agent. Left unclear is what to do if the designated agent is the settlor's trustee. This potentially leaves the incapacitated individual vulnerable and the trustee in ambiguous circumstances.
Section 7603(2), MCL 700.7603(2), of the Michigan Trust Code builds on the prior provision and offers a more complete default rule that is more protective of the incapacitated individual. If the trustee reasonably believes the settlor of a revocable trust is an incapacitated individual, the trustee must keep the settlor's designated agent, or if none or if the sole designated agent is a trustee, each person who would be qualified trust beneficiary if the settlor were deceased, informed of the existence of the trust and reasonably informed of its administration.
Section 7814, MCL 700.7814, contains the provisions for notice of the existence of the trust and delivery of accountings. A trustee must:
- Keep the qualified trust beneficiaries reasonably informed about the administration of the trust and of the material facts necessary to protect their interests.
- Upon reasonable request furnish a copy of the terms of the trust that describe or affect the beneficiary's interest and relevant information. The drafters intended that a redacted copy of a trust instrument could be delivered to satisfy this requirement.
- Within 63 days of accepting a trusteeship or of a trust becoming irrevocable, notify the beneficiaries of the existence of the trust, of the identity of the settlor, of the court in which it is registered,5 and of the right to request a copy of the terms of the trust that describe or affect the beneficiary's interests. Note that one change made by the Code is to double the time permitted for delivery of this notice.
A trustee also must deliver to distributees or permissible distributees and to other trust beneficiaries who request it, at least annually and at termination, a report of trust property, liabilities, receipts and disbursements, including the source and amount of the trustee's compensation, and a listing of trust property and if feasible their respective market values. There are several noteworthy aspects of this duty:
- The information required for delivery is modeled after the current EPIC provision.
- The terms of the trust may vary who receives the accountings (and frequently will).
- The trustee may also send this information to any trust beneficiary.
- The court may order delivery of accountings to persons excluded under the terms of the trust (and this power cannot be eliminated by the settlor).
- A trust beneficiary may waive his right to an accounting. §7814(5), MCL 700.7814(5).
The statute of limitations provisions of the MTC follow the current EPIC provision. It is found in MTC §7905, MCL 700.7905. It gives a beneficiary one year to bring a claim if a report adequately discloses the existence of a potential claim and the report disclosed the time period for commencing a proceeding. A report adequately discloses the existence of a claim if it provides sufficient information so the trust beneficiary or his representative knows of the potential claim or should have inquired into the potential claim's existence. If the requirements for the one year period are not met, then the period of limitations is five years from the removal, resignation or death of the trustee, from the termination of the trust beneficiary's interest or the termination of the trust, whichever first occurs. This is the same as current law.
However, the Code adds something new with respect to waiver of an accounting. If a trust beneficiary waives the right to receive reports, the trust beneficiary does not receive the benefit of the five year period of limitations. The period of limitations is one year after the end of the calendar year in which the breach occurred. §7905(1)(b), MCL 700.7905(1)(b).
THE PRINCIPAL PLACE OF TRUST ADMINISTRATION
Section 7209 defines the principal place of administration of trusts in a manner consistent with EPIC. It is:
- The trustee's usual place of business where the records pertaining to the trust are kept. For a corporate trustee, the usual place of business is the business location of the primary trust officer for the trust.
- The trustee's residence if the trustee does not have a place of business.
- If there are co-trustees, only one of which is a corporate co-trustee, the principal place of administration is the trustee's usual place of business. Otherwise it is the place as the co-trustees agree.
The Code requires a trustee administer the trust at a place appropriate to its purposes, its administration, and the interests of the qualified trust beneficiaries. §7108(2), MCL 700.7108(2).
Both private and institutional or professional Trustees regularly transfer or relocate the principal places of administration of trusts. In many cases the trust agreement expressly permits the trustee to do so; in other cases the trustee simply does so subject to the existing EPIC requirement that the trustee "administer the trust at a place appropriate to the purposes of the trust and to its sound, efficient management." The MTC continues to permit the trustee to transfer the principal place of administration without court approval.
However, the MTC requires the trustee give written notice of the proposed change. §7108(4), MCL 700.7108(4). The notice is given to the qualified trust beneficiaries. The trustee is free to change the place of administration after 63 days unless a beneficiary objects. If an objection is raised, the trustee will need to either cancel plans to transfer the principal place of administration or obtain court approval of the change. §7108(5), MCL 700.7108(5). If no objection is raised, the transfer of the place of administration can freely occur.
Settlors will remain free to provide their own rules in this area as well, so the terms of a trust must be reviewed carefully in connection with changing the place of administration.
The Code includes a number of provisions related to distributions that will be of interest and importance to trustees.
Events Affecting Administration or Distribution
Section 7907 excuses a trustee for loss that occurs as a result of lack of knowledge if the trustee has exercised reasonable care to ascertain the happening of events and makes a decision affecting administration or distribution from the trust. The section specifically lists the events of marriage, divorce, educational requirements or death as events that are encompassed by this provision.
Plan for Distribution in Partial or Total Termination
Section 3908 of EPIC permits a personal representative of a probate estate to provide a proposal for distributions to the beneficiaries. The beneficiaries of the estate have 28 days to object or be bound by the proposal.
Section 7821 extends this provision to distributions upon termination of trusts. It permits the trustee to offer a proposal for distribution of trust property upon termination of the trust and gives the beneficiaries 28 days to object or be bound. The notice of proposed distribution must include provisions informing the trust beneficiaries of the right to object and the time permitted.
Part 5 of the Code deals with the relationships to the trust of creditors of beneficiaries of trusts, the enforceability of spendthrift provisions, and the effect of discretionary distribution powers. Part 5 codifies the Restatement (Second) of the Law of Trusts, which has been incorporated into Michigan's common law in decisions such as Miller v Dept of Mental Health, 432 Mich 426 (1989); In re Estate of Edgar, 425 Mich 364 (1986); Evans & Luptak v Obolensky, 194 Mich App 708 (1992); Coverston v Kellogg, 136 Mich App 504 (1984); In the Matter of Estate of Sykes, 131 Mich App 49 (1983); and Hurley v Hurley, 107 Mich App 249 (1981). This part of the Michigan Trust Code does not follow the general approach taken in the Uniform Trust Code and the Restatement (Third) of the Law of Trusts.
Among the important points for trustees to understand are the distinctions drawn in the Code between discretionary trusts, support trusts, and spendthrift trusts. Under the Code, a spendthrift trust is treated similarly to how such trusts were treated in the past. The creditors of the beneficiary may not reach the trust property until it is distributed from the trust. The spendthrift provision cannot be used, however, to prevent a distribution otherwise required under the terms to frustrate a creditor's claim for child support or spousal support, the claims of those providing services to the trust, or for claims by the state or federal government. See §7502 and §7504, MCL 700.7502, .7504.
Trusts with support provisions are treated in a similar fashion. A support provision is a provision that describes the standard for distribution of income or principal by reference to health, education, support, or maintenance. §7103(k), MCL 700.7103(k).
Trusts with discretionary trust provisions are given significant protection from the claims of creditors. The Code provides that the transferee or creditor of a beneficiary of a trust with a discretionary distribution provision does not have any right to any amount from the trust that may be distributed only in the exercise of a trustee's discretion and is not subject to enforcement of a judgment until property is distributed to the beneficiary. §7505, MCL 700.7505.
Section 7815 makes clear that a beneficiary has no property right in a trust that is subject to a discretionary trust provision and has no right to any amount of trust income or principal that may be distributed in the trustee's discretion. The Code also confirms the traditional understanding that a trustee's discretion is not unlimited, even if qualified by terms such as "absolute," "sole," or "uncontrolled." A trustee may not exercise a discretionary power in a manner that is dishonest, with improper motive (even if honest), or if it is not in accordance with the trust's terms and purposes. §7815(1), MCL 700.7815(1).
This section also contains provisions designed to prevent income or transfer tax problems for certain trustees who also are a beneficiary of the trust. If a beneficiary of a discretionary trust is also a co-trustee, the remaining trustees may exercise powers of distribution necessary to prevent income or estate tax problems. See §7815(3), MCL 700.7815(3).
MODIFICATION, TERMINATION, REFORMATION,
COMBINATION, AND DIVISION OF TRUSTS
The Code contains a comprehensive series of provisions addressing the modification, termination, reformation, combination, and division of trusts. These provisions are found in part 4 of the Code, beginning with Section 7410 and continuing through Section 7417.
The representation rules discussed above are generally available in connection with proceedings for the termination or modification of trusts.
The nonjudicial settlement agreement provisions (discussed below) are not available to use if the result is the termination or modification of a trust. Note, however, that the nonjudicial settlement agreement provisions may be used to reach agreement on interpretation or construction of a trust provision, which may sometimes prove to be a satisfactory alternative of dealing with a matter instead of trust reformation or modification.
Termination and Modification Generally
Michigan Trust Code Section 7411(1) is the principal provision dealing with termination and modification of trusts. It is prospective only. It permits courts to approve the termination or modification of the trust upon petition of the qualified trust beneficiaries when continuance is not necessary to achieve a material purpose of the trust. This is consistent with current Michigan law. See Rose v. Southern Michigan National Bank, 255 Mich 275 (1931).
The Code also recognizes the authority of trust protectors, alone or with the qualified trust beneficiaries, to terminate trusts when the trust instrument so provides.
This provision is one of the few that is prospective only.
The drafters did not intend the adoption of this provision to be in derogation of existing Michigan law, which permits settlors and beneficiaries to agree to termination of a trust with court approval, see Hein v. Hein, 214 Mich. App. 356 (1995), and when the settlor and the trustee to agree to do so, see Fredericks v Near, 260 Mich 267 (1931).
Occasionally trustees find that administration becomes difficult due to circumstances not anticipated by the settlor. Section 7412 distinguishes between two situations:
- When continuation of a trust on its terms would be impracticable or wasteful or would impair administration, the administrative terms may modified by the court. However, these grounds are not grounds for termination.
- When due to unanticipated circumstances, the court may modify administrative or dispositive terms or terminate a trust if doing so will further the settlor's stated purpose, or if none, the settlor's probable intention.
The Code codifies the long standing common law of Michigan related to cy pres. These rules facilitate the termination or modification of charitable trusts when continuation is unlawful, impracticable or impossible to achieve, no taker in default is named and the court finds the settlor had a general (and not a specific) charitable intent. §7413, MCL 700.7413.
Termination of Small Trusts
Courts have routinely authorized the termination of trusts that have become too small to administer effectively or efficiently. Many trust agreements expressly permit the trustees to also terminate trusts under similar circumstances. The Code includes a provision that specifically authorizes the modification or termination of uneconomic trusts with or without court approval. §7414, MCL 700.7414.
This section sets the threshold for termination at $50,000 and adjusts this amount for inflation in the manner provided for amounts under EPIC, such as the family allowance amount. The Code directs the distribution of the assets of small trusts to the current beneficiaries if no manner is provided for in the trust instrument.
Notice to the Attorney General is required if the trust is a charitable trust. §7414(1), MCL 700.7414(1).
Reformation or Modification to Correct Mistakes or Achieve Tax Objectives
The Code also recognizes the power of a court to reform a trust to correct a mistake of fact or law, §7415, MCL 700.7415, or to achieve a settlor's tax objectives, §7416, MCL 700.7416.
Division or Combination
The Code contains provisions similar to prior law that permits a trustee to combine or divide trusts. §7417, MCL 700.7417. Before combining or dividing trusts, the terms must be substantially identical. When the rule against perpetuities runs from different dates (or does not apply to one trust or to a portion of the trust assets), trustees are directed to maintain funds in separate accounts as needed to recognize and give effect to the differences.
NONJUDICIAL SETTLEMENT AGREEMENTS
Trustees are undoubtedly familiar with "Dodge Act" proceedings in which parties to a dispute involving a trust could ask the court to approve their settlement agreements.
The Code recognizes nonjudicial settlement agreements. §7111, MCL 700.7111. These agreements may be used in a variety of areas and matters related to trust administration, such as interpretation or construction of the trust, approval of accountings, resignation, appointment or compensation of the trustee, transfers of the principal place of administration, and trustee liability.
The list provided in the statute is not exclusive; it is illustrative. However, nonjudicial settlement agreements cannot be used to achieve termination or modification of trusts. These actions remain subject to the provisions found in Part 4 of the Code.
The agreements must not violate a material purpose of the trust and must include terms that could be properly approved by the courts. Parties remain free to ask the court to approve or disapprove these agreements. However, courts are directed to approve all agreements when the court finds representation was adequate under Part 3, the terms of the agreement do not violate a material purpose of the trust, and the agreement contains terms the court has the power to approve.
ATTORNEYS FEES IN LITIGATION
The ability (or inability) of a beneficiary to recover attorneys fees following litigation involving a trust can provide a significant incentive or disincentive to litigate matters with a trustee. The law in Michigan has long required the court to find that the beneficiary's efforts enhances, preserves, or protects the trust before authorizing payment of the beneficiary's attorneys fees from the trust. See Becht v Miller, 279 Mich 629 (1937); In re Estate of Temple, 278 Mich App 122 (2008). The Code preserve this common law. §7904(1), MCL 700.7904(1).
In addition, the Code provides for reimbursement of a trustee who defends or prosecutes a matter in good faith, unless it involves a breach of trust for which a court orders relief described in Section 7902(2).
NOTEWORTHY PROVISIONS INVOLVING
THE OFFICE OF TRUSTEE
One of the advances made by the Michigan Trust Code is that it fills several gaps in the law regarding the office of trustee. The provisions regarding the office of trustee are found in Part 7. Some of the noteworthy provisions include the following.
The Code has a strong bias against the use of bonds. Bonds are used in only two circumstances:
Moreover, in the case of financial institutions qualified to engage in the trust business in Michigan, a bond is not required even if the terms of the trust generally requires bonds. These provisions are found in Section 7702, MCL 700.7702.
Acceptance and Declination
Michigan law has never had law that specifies how a person accepts the office of trustee. In addition to complying with the method of acceptance found in the terms of the trust, Section 7701, MCL 700.7701, describes several additional means by which a person accepts the office of trustee:
- accepting delivery of the trust property.
- exercising powers or performing duties as trustee.
- otherwise indicating acceptance of the trusteeship.
A failure to accept within a reasonable time is deemed a rejection of the trusteeship.
A person designated to serve as trustee may take several actions without being deemed to have accepted the position of trustee. These actions include:
- Acting to preserve the trust property if, within a reasonable time after acting, the person sends a rejection of the trusteeship to the settlor or, if the settlor is dead or lacks capacity, to a qualified trust beneficiary.
- Exercising all powers set forth under section 7818(1)(a) to inspect property for environmental compliance or to respond to actual or threatened violations of environmental law.
- Inspect or investigate trust property to determine potential liability under other law or for any other purpose.
Resignation and Removal
Section 7705, MCL 700.7705, provides that Trustees may resign with 28 days notice or with court approval.
Section 7706, MCL 700.7706, describes the basis on which trustees can be removed. In addition to permitting removal on the basis described in the terms of the trust, it also identifies several grounds for removal of a trustee by the court:
- If there has been a serious breach of trust.
- If a lack of cooperation among cotrustees substantially impairs the administration of the trust.
- If removal best serves the purposes of the trust because of unfitness, unwillingness, or persistent failure of the trustee to administer the trust effectively.
- When there has been a substantial change of circumstances, if removal of the trustee best serves the interests of the trust beneficiaries and is not inconsistent with a material purpose of the trust, and a suitable cotrustee or successor trustee is available.
The Code provisions regarding trustee compensation are limited. Section 7708, MCL 700.7708, states:
(1) If the terms of a trust do not specify the trustee's compensation, a trustee is entitled to compensation that is reasonable under the circumstances.
(2) If the terms of a trust specify the trustee's compensation, the trustee is entitled to be compensated as specified, but the court may allow more or less compensation if either of the following apply:
(a) The duties of the trustee are substantially different from those contemplated when the trust was created.
(b) The compensation specified by the terms of the trust would be unreasonably low or high.
These provisions do not attempt to restate, or to change, the standards found in cases such as Comerica Bank v Adrian, 179 Mich App 712 (1989).
The Code contains several provisions of interest to co-trustees. §7703, MCL 700.7703. Subject to modification in the terms of the trust,
- The trustees act by majority decision.
- The remaining trustees may act when a vacancy exists.
- A trustee must participate unless unavailable to do so due to absence, illness, disqualification or other incapacity or delegation has properly occurred.
- When prompt action is required, a trustee may act alone if the co-trustee is unavailable due to absence, illness, disqualification or other incapacity.
- When prompt action is required, a trustee may act alone if a co-trustee who is available fails or refuses to participate in the administration of the trust following notice. This power could be very helpful to a corporate trustee dealing with a nonresponsive co-trustee.
The provisions allowing for delegation between co-trustees have been significantly improved. Former law included a requirement that the court approve delegations. This provision was widely ignored, at some peril to the trustees.
The Code takes a much more sensible approach to delegation than did prior law. As a general matter courts are unlikely to be involved in these decisions. If the trustees would be permitted to delegate a matter to a third party, the trustees are free to delegate the matter between themselves without notice to the beneficiaries or the courts.
If the power can only be performed by a trustee, then the trustees may delegate between themselves with notice to the trust beneficiaries. The notice needs to occur within 28 days of the decision to delegate. Presumably beneficiaries who object will then commence proceedings to prohibit delegation.
NOTEWORTHY PROVISIONS INVOLVING TRUSTEE POWERS
Most of the language of the Code dealing with trustee powers was taken from the current powers provisions of EPIC. In addition, three existing provisions of EPIC that deal with the powers of trustees with respect to environmental and tax matters and for facilitating payments have been included in the Code without change. The following summarizes the powers of trustees.
Powers in General
Sections 7816 and 7817 of the Michigan Trust Code set forth the general and specific powers of the trustee. Section 7816 sets forth the general rule: A trustee may exercise all powers conferred by the trust and, unless limited by the terms of the trust, all powers that an unmarried competent owner has over individually owned property, any other powers appropriate to achieve proper investment, management, and distribution of trust property, and any other powers conferred by the Code.
Section 7817 relies upon the previous provisions of EPIC for a list of specific powers. There are five new powers expressly provided in Section 7817:
- Powers related to employee benefit and retirement plans; added as Section 7817(jj).
- Making loans; added as Section 7817(kk).
- Pledging trust property to guarantee debts of others; added as Section 7817(ll).
- Using alternative dispute resolution mechanisms; added as Section 7817(mm).
- Exercising powers to wind up the trust and distribute property to those entitled to it; added as Section 7817(nn).
Specific EPIC Powers
EPIC contains several very specific powers related to environmental matters, tax matters, and for facility of payment. Each of these has been carried to the Trust Code without modification. They may be found at §7818, §7819, and §7820, MCL 700.7818-.7820.
The Code includes Michigan's first law concerning the use of trust protectors. §7809, MCL 700.7809. Despite the lack of common or statutory law concerning trust protectors, they are believed to be in widespread use in Michigan to provide someone with authority to appoint and remove trustees, modify trusts, consent to the exercises of powers of appointment, approve distributions, and more.
With certain exceptions, the Michigan Trust Code requires that trust protectors be fiduciaries, act in good faith, act in accordance with the terms of the trust instrument, and be liable for their actions. The exceptions include trust protectors who are beneficiaries of the trust and trust protectors whose powers are powers of administration within the meaning of Section 675(4) of the Internal Revenue Code. The latter exception is important because these powers of administration are sometimes used to create grantor trust income tax treatment of certain trusts.
When a trust protector is serving, the trustee may not act without approval of the court if an instruction is contrary to the terms of the trust or would result in a breach of a duty that the trust protector owes to the beneficiaries. However, when the trust protector's directions are within the scope of the protector's authority and are consistent with the protector's duties, the trustee is protected from liability for compliance with the directions of the trust protector. The trustee is also protected from liability for not taking actions that requires trust protector approval if the trustee has timely sought, but not received, approval. The trustee is also protected if it seeks court approval if the trustee has any question about the propriety of the direction.
The trust protector provisions also ensure that the trust protector is subject to the jurisdiction of Michigan's courts. Finally, the trust protector provisions place nonmodifiable limits on the exculpation of trust protectors, which match the limits on exculpation that apply to trustees.
Institutional trustees will find that much of the Trust Code is familiar and preserves existing laws. They will also come to appreciate the certainty that exists in the law because of the many provisions of the Code that fill the gaps in the statutory and common law that have long existed. Inevitably there will be a period of transition, but the Code represents a significant step forward and will be helpful to trustees and beneficiaries alike.
1Copyright 2009. Mark K. Harder. All rights reserved.
The author is a partner with Warner Norcross & Judd LLP. He chairs the Michigan Trust Code Committee of the State Bar of Michigan Probate and Estate Planning Section and served as Reporter for the Trust Code drafting project. He also serves as Secretary of the Section and is a Fellow of the American College of Trust and Estate Counsel, where he is a member of the College’s State Laws Committee. He is listed in Best Lawyers in America for Trusts and Estates.
Together with John H. Martin, Reporter for EPIC, he is the co-author of the forthcoming "ESTATES AND PROTECTED INDIVIDUALS CODE AND MICHIGAN TRUST CODE WITH REPORTERS’ COMMENTARY," which will be published by the Institute for Continuing Legal Education in February 2010.
2The Code will be codified at MCL 700.7101 et seq. The Code can be viewed or downloaded from the Michigan legislature's Web site: www.legislature.mi.gov. A copy of the Code is most easily found by entering the bill number (387) of the enacting legislation in the search box on the legislature's Web site and selecting the public act.
3The National Conference of Commissioners on Uniform State Laws gave final approval to the Uniform Trust Code in 2000. In addition to Michigan, twenty-two other states and the District of Columbia have adopted trust codes in recent years that are based on the Uniform Trust Code. In addition, Iowa's trust code is an early version of the UTC.
4In general the Michigan Trust Code numbering scheme follows the UTC. There are, however, several changes. The MTC adds a "7" at the beginning of the section number to reflect that the provision is part of Article VII of the EPIC enabling act. For example, MTC section 7101 corresponds to UTC section 101. In addition, the MTC is divided into "parts," which correspond to the UTC's "articles." The UTC reserves Article 9 for the Uniform Prudent Investor Act for states that have not otherwise enacted it. Because Michigan has already enacted the UPIA, and because of the numbering convention used for the Michigan Compiled Laws, Article 10 of the UTC has become part 9 of the MTC. The enabling provisions of the UTC found in its Article 11 are part of Article VIII of EPIC.
5The MTC retains Michigan's existing system of voluntary trust registration. See §7209 to §7211, MCL 700.7209-.7211. Although infrequently used, trust registration can be helpful for fixing venue for any proceedings involving a trust and assuring jurisdiction over beneficiaries. See §7202, MCL 700.7202, and §7204, MCL 700.7204.