In the recent case of Schaddelee as Cotrustee of Ronald Schaddelee Irrevocable Trust v. Deleon as Cotrustee of Ronald Schaddelee Irrevocable Trust, 2023 WL 4143639 (Mich Ct App Jun 22, 2023) (unpublished), the Michigan Court of Appeals considered whether a trust settlor’s execution of a declaration of trust ownership converted a beneficiary designation investment account to a trust asset.
In this case, the father opened an investment account with a bank and designated his daughter as the beneficiary of such account. Years later, the father executed his trust agreement to create his irrevocable trust, designating his son and daughter as the initial cotrustees. On the same day, the father executed his declaration of trust ownership, providing: “[B]y this declaration, I transfer and convey to the cotrustees ... solely and exclusively for and in behalf of the trust, all property, whether owned or later acquired, regardless of the means by which acquired, including, without limitation, the following. ...”
The father then listed: “bank accounts, including but not limited to checking accounts, savings accounts and certificates of deposit; mutual and money market funds of all kinds; securities, including but not limited to stocks, bonds, treasury instruments and notes receivable; agency and agency accounts, including but not limited to those at banks or brokerage firms; [and] any property that now or at any time after the date of this declaration is held in my name or any variation of my name, but excluding any interest in property owned by me with another person as joint owners or as tenants by the entireties.”
The cotrustees counter-signed the declaration of trust ownership in order to affirm and declare that each of them would “hold all property described above solely and exclusively for and on behalf of the trust as trust owner, subject to any and all instructions from the acting trustee.” Each cotrustee agreed, “I have and shall have no personal interests in any of the properties described above ... except to the extent of beneficial interests provided to me under the terms and provisions of the trust agreement, as now written and as may be amended in the future. ...”
After the father’s death, his son asked his sister to convey the investment account to the trust. The daughter refused, claiming the beneficiary designation overrode the declaration of trust ownership. The son then petitioned the probate court to remove his sister as cotrustee, claiming she had violated the declaration of trust and breached her fiduciary duties.
The probate court ruled against the son and for the daughter. First, the probate court found the declaration of trust was not a contract. Second, the probate court found the declaration of trust was only effective to transfer assets owned by the father into the trust. Third, the probate court diminished the force and effect of the declaration of trust: “ ‘It’s simply [the father] saying: This is my understanding of the kinds of assets that should go into my trust.’ ” Id at *2. Fourth, the probate court found the father could not transfer the investment account to his trust, because the father did not own the account, because the daughter became the owner of the account at the father’s death by virtue of the beneficiary designation.
The son appealed, and the Michigan Court of Appeals affirmed, focusing on the distinction between the trust agreement and the declaration of trust ownership. “Here, [the father] executed a trust agreement outlining the terms of the trust, his duties, and the duties of the cotrustees. That document was a contract creating a trust. ... This separate declaration of trust ownership is not part of the agreement creating the trust. ... Accordingly, the probate court property granted summary disposition in the daughter’s favor in this regard.” Id at *3.
The decisions by both the trial court and the appellate court were problematic. Yes, the trust agreement and the declaration of trust were two separate instruments. The trust agreement set forth the terms of the trust, while the declaration of trust conveyed assets from the father individually to the cotrustees. The declaration of trust was effective to convey ownership of assets from the father to the cotrustees, to the extent the assets were owned by the father individually and did not require additional title documentation to be completed.
Was the declaration of trust effective to convey ownership of the investment account from the father to the cotrustees? The answer is unclear because the case says nothing about whether the bank account agreement permitted the father to change or override a beneficiary designation by an instrument such as a declaration of trust. If the bank account agreement permitted the father to override his beneficiary designation in this way, then the declaration of trust put the investment account in the trust. If the bank account agreement did not grant such permission, then the declaration of trust was ineffective to change ownership of the investment account. The father would have had to follow the steps outlined in the account agreement to make the change, which he apparently did not do. The parties, the trial court and the appellate court all overlooked this key factor.
The father’s ownership of the investment account would be determined on the date he executed the declaration of trust, rather than on his death. Hence, the probate court’s ruling that the father could not have transferred ownership of the investment account on the date he signed the declaration of trust, because his daughter became the owner at his death was erroneous.
At a minimum, I would consider the daughter’s signature on the declaration of trust ownership to have been a waiver of any interest in her father’s assets, other than as a beneficiary of the trust. If the beneficiary designation was not overridden by the declaration of trust, then the investment account proceeds may have been payable to the daughter – but she should then have been required to turn them over to the trust.
The analysis is similar to when an ex-spouse waives an interest in an insurance policy under a judgment of divorce, but the beneficiary designation is never changed. The insurance proceeds may be payable to the ex-spouse at the death of the insured, but because the ex-spouse had waived her interest in the proceeds, equity would require her to turn them over to the deceased ex-spouse’s estate. The probate court and the Michigan Court of Appeals have sowed some unnecessary confusion about declarations of trust ownership in this case, but fortunately it is not a published decision.
If you would like to consult David Skidmore regarding a contested trust or estate matter, please contact him at 616.752.2491 or firstname.lastname@example.org.