In In re John R. Adams Trust, Docket No 354677, 2022 WL 258980 (Mich Ct App Jan 27 2022), the Michigan Court of Appeals considered whether the surviving spouse’s withdrawal of trust assets was defective because she failed to follow the terms of the trust agreement.
The settlor of the trust died, survived by his spouse, Ruth, and his daughter, Jackie, from a prior marriage. The settlor granted Ruth the right to withdraw all assets from the trust, “but only by filing ... a writing evidencing [exercise] of that right ... with the court which has (or would have had if my estate were probated) domiciliary jurisdiction of my estate[.]” The writing was required to specifically reference the trust provision in question, be signed by Ruth, and be filed with the probate court no later than one month prior to the deadline for filing the federal estate tax return. “Failure of my Spouse to file the writing shall constitute an irrevocable disclaimer of any rights under this paragraph.”
After settlor’s death, Ruth’s attorney prepared the letter exercising her withdrawal right, but Ruth did not file the letter with the probate court because her attorney advised her that the court might reject the letter (apparently because no estate proceeding was open for the settlor). Nonetheless, the co-trustees transferred certain real estate from the trust to Ruth, based on her exercise of the withdrawal power.
Fourteen years later Ruth died, and there was litigation between Ruth’s estate and Jackie as to whether Ruth had effectively withdrawn the real estate from the trust. The probate court ruled that any assets transferred from the trust to Ruth during her lifetime were owned free and clear by her estate. Jackie appealed. The Michigan Court of Appeals held that Ruth had failed to comply with the trust terms governing her withdrawal power, because she had not filed her written notice with the probate court. Therefore, the Court of Appeals reversed the probate court’s ruling that the real estate was properly distributed from the trust to Ruth during her lifetime pursuant to the withdrawal power.
This ruling has significance for both trustees and estate-planning attorneys. For the trustee, this case makes clear that a beneficiary must actually comply with the express terms of the trust agreement in order to effectively withdraw assets from the trust. Absent compliance with the terms of the trust, the trustee should not distribute assets to the beneficiary. For the estate-planning attorney, this case compels the practitioner to think about the practicality of the withdrawal requirements being imposed on the beneficiary. Filing a letter with the probate court is not feasible unless there is a proceeding open in which to file the letter. If no proceeding is open, then the court could only return the letter to sender or destroy it.
If you need assistance with a dispute involving a probate, trust, estate, guardianship or conservatorship matter, contact David Skidmore at dskidmore@wnj.com or 616.752.2491.
