It is not uncommon for a husband and wife in a second marriage situation to create a joint trust, naming all their respective children from their prior marriages as the equal remainder beneficiaries. If the surviving spouse, after the death of the first spouse, takes action to reduce or eliminate the trust shares of the deceased spouse’s children, then there may be litigation to determine whether the surviving spouse acted properly or not. This situation was present in In re James M. Kurtz Protection Trust, Docket No 360605, 2023 Westlaw 2618498 (Mich Ct App Mar 23 2023) (unpublished).
In Kurtz Trust, James and Barbara each had children from their respective prior marriages. The couple created a joint trust, naming Barbara’s three children and James’s two children as the equal remainder beneficiaries. The joint trust provided that it could not be revoked or amended by the surviving spouse, after the death of the first spouse. Nonetheless, after Barbara’s death, James purported to restate the terms of the joint trust, eliminating all children as beneficiaries and naming his new “protection trust” as the sole beneficiary. In the final version of his protection trust, James named his son as the sole beneficiary. James also removed a number of assets from the joint trust, conveying them first to himself and then to the protection trust.
After James died, Barbara’s children brought suit before the Kent County Probate Court, challenging the changes that James had made to the terms and funding of the joint trust. James’ son defended what James had done, noting that original terms of the joint trust directed the trustee to distribute trust assets “to the surviving grantor as the surviving grantor may request.” Judge Murkowski invalidated James’s restatement of the joint trust, his withdrawals from the joint trust, and his creation of the protection trust. James’s son appealed.
The Michigan Court of Appeals analyzed the disparity between the joint trust provision prohibiting amendment and/or revocation after the death of the first grantor (the “irrevocable upon death clause”), and the joint trust provision granting the surviving grantor the right to withdraw principal from the joint trust after the first grantor’s death (the “power of withdrawal clause”).
The appellate court found that “one of the primary intents of ... the Trust document when considered as a whole ... was to ensure the children of one settlor would not be posthumously disinherited following the death of that settlor.” Id at *4. “If the tension between [the irrevocable upon death clause and the power of withdrawal clause] were resolved in such a way that would enable the surviving grantor to remove all trust assets and then place them in a different trust for which one child of the surviving grantor is the sole remainderman, the intent of the deceased grantor would be frustrated ...” Id.
The Court of Appeals found that the power of withdrawal clause, by its terms, did not permit the surviving grantor carte blanche to withdraw any or all joint trust assets. Rather, the surviving grantor was only empowered to withdraw joint trust assets “for the use and benefit of the surviving grantor.” James’ withdrawal of assets in order to fund the protection trust and defeat Barbara and James’ joint dispositive plan was not “for the use and benefit” for James. Therefore, James’ withdrawals from the joint trust had been improper, as was his purported restatement of the terms of the joint trust. The Court of Appeals generally affirmed the probate court’s ruling, except for its invalidation of the new protective trust; James was not barred from creating a new trust, but he could not fund it with assets from the joint trust.
It should be emphasized that when dealing with this type of joint trust, the terms of the trust govern the powers possessed by the surviving grantor. Not every joint trust will prohibit the surviving grantor from amending or revoking the trust. Some joint trusts expressly authorize the surviving grantor to amend or revoke the joint trust. Empirically, we know that a certain percentage of surviving grantors will be tempted to change the joint trust terms in order to favor his or her own children. Given this reality, it is incumbent on drafting attorneys to use language that is crystal clear what the couple intended regarding the possibility of amendment or revocation after the death of the first grantor.