On December 22, 2022, the Michigan Court of Appeals issued a fascinating opinion which dealt with protection of the rights of a charitable beneficiary under the decedent’s trust. Estate of Evelyn R Ragsdale v. Bishop, Docket No 358734, 2022 WL 17870390 (Mich Ct App Dec 22 2022).
In 1998, Evelyn Ragsdale as grantor created her revocable trust, naming Comerica Bank as the trustee. Effective at her death, Evelyn directed the trustee to distribute the remainder to Shriners Hospital. As required by Michigan law, Evelyn directed the trustee to pay her legally enforceable debts and duly allowed claims against her probate estate, to the extent that estate assets were insufficient to pay such items. She also directed the trustee to pay bequests under her will, to the extent that estate assets were insufficient; that obligation was not imposed by Michigan law.
In 2013, Evelyn executed her will. She made monetary bequests to named individuals in the aggregate amount of $730,000 (which was how much cash she then held in her bank accounts). She named her neighbor Terrence Bishop as the residual beneficiary of her estate. In 2015, Evelyn removed her daughter’s name from her bank accounts and added her neighbor Katie Bishop’s name to the accounts. Katie was Terrence’s wife. By this point, the aggregate value of the accounts had declined to $590,000.
In 2018, Evelyn died. Subsequently, Katie closed all of her bank accounts and withdrew all of the funds. As a result, Evelyn’s estate lacked sufficient assets to cover the bequests in Evelyn’s will and estate administration expenses. Robert Huth Jr. as personal representative of Evelyn’s estate filed a complaint (i.e., a civil action rather than a proceeding) against the Bishops, “alleging that Katie Bishop had misappropriated the funds in Evelyn’s bank accounts both during Evelyn’s lifetime and after her death.” Id. at *1.
The personal representative of Evelyn’s estate subsequently learned that Comerica as trustee of Evelyn’s trust, under the terms of the trust agreement, was liable for unfunded estate debts, claims and bequests. Therefore, the personal representative and the Bishops entered into a settlement agreement, under which the Bishops would not have to repay any monies received; the lawsuit against the Bishops would be dismissed; and Comerica as trustee of Evelyn’s trust would pay all unfunded estate debts, claims and bequests. The personal representative then petitioned the probate court to approve the settlement.
Shriners, the trust beneficiary, appeared at the hearing. Shriners argued that if Comerica as trustee paid all of the estate’s unfunded debts, claims and bequests, then (1) such payments would be made at the expense of Shriners as the sole beneficiary of Evelyn’s trust and (2) the estate’s claims against the Bishops should be assigned to Shriners for it to pursue. In response, the probate court declined to approve the settlement. Later, the probate court granted Shriners’ motion to intervene as a plaintiff in the lawsuit against the Bishops, and Shriners filed its complaint against the Bishops. Ultimately, the probate court granted Shriners’ motion to assign the estate’s claims against the Bishops from the estate to Evelyn’s trust, and from Evelyn’s trust to Shriners; ordered the trustee to pay the unfunded estate obligations; and dismissed the lawsuit (without prejudice to Shriners ability to file a new suit against the Bishops). The Bishops appealed.
The Bishops first argued that Shriners had no right to be heard at the hearing to approve the settlement between Evelyn’s estate and the Bishops. The Michigan Court of Appeals disagreed, finding that Shriners was entitled to intervene in order to protect its interests, because Comerica as trustee of Evelyn’s trust had not protected Shriners’ interests.
The Court of Appeals found that the trust’s liability to the estate was not absolute or certain. “The [trust a]greement did not provide a method for resolving disputes over whether ... a debt was legally enforceable, whether a claim had been allowed, and whether a particular bequest was valid.” Id. at *4. “Comerica, as the trustee, had significant discretion to contest whether an expense had been properly allowed, whether a debt was legally enforceable, and whether a particular bequest had remained unpaid and was unfunded.” Id. Comerica could, therefore, have contested some or all of the payments that [the personal representative] contended should be made by the trust.” Id. Under the circumstances, the Court of Appeals concluded that it would have been appropriate for Comerica as trustee to “protect Shriners by requiring [the personal representative] to assign ownership of [the estate’s] chose in action – i.e., the lawsuit against the Bishops – as a condition precedent to fully funding the [estate’s] debts and claims.” Id. Because Comerica as trustee took no such action – instead simply agreeing to pay the amounts claimed by the estate – the Court of Appeals held that Shriners had the right to intervene, in order to protect its significant interest in the matter, and that under the circumstances it was appropriate for the probate court to not approve the settlement agreement.
The Bishops next argued that Comerica as trustee owned any claims belonging to Evelyn’s trust, and that the trustee – rather than Shriners – was the real party in interest to intervene. In response, the Court of Appeals agreed that the trustee, in the first analysis, was the proper party to take action to protect the trust assets. “Comerica had a duty to protect the corpus of Evelyn’s [trust] and so was the real party in interest for enforcing the terms of Evelyn’s [trust] as against the [estate] and the [estate’s] creditors and claimants.” Id. at *5. Because the trustee failed to fulfill such duty, its beneficiary – Shriners – had the choice of either taking action to compel the trustee to fulfill its duty, or bypassing the trustee and taking direct action against the Bishops itself. “Under those circumstances, Shriners had the right to sue in equity to compel Comerica to take steps to protect the corpus from improper payments to the [estate’s] creditors or claimants, such as through an assignment of the claims, or to compel Comerica to seek a decree in equity subrogating the trust to the [estate]s] claims; in doing so, Shriners had the right to sue both the trustee and third-parties such as the [estate].” Id. Thus, Shriners had standing to take legal action, after its trustee failed to act.
The Bishops argued that the assignment of the estate’s claim to Shriner’s violated Evelyn’s testamentary intent, because Terrence as the residuary beneficiary under her will would have been entitled to receive the damages recovered through the estate’s claim. The Court of Appeals rejected this argument. Evelyn had intended $720,000 in specific devises to be paid from her estate before Terrence received anything, and the assignment of the claim to Shriners resulted in the trust funding such devises. Considering Evelyn’s estate plan as a whole (i.e., both will and trust), “[t]he assignment also gave Evelyn’s [trust] the opportunity to recoup some of the losses occasioned by the allegedly tortious conduct, which would maximize the benefit to the charity that Evelyn designated as her beneficiary under that trust.” Id. at *6. The Bishops further argued that any recovery obtained by Shriner’s would belong to Terrence under the residuary clause of Evelyn’s will. The Court of Appeals disagreed, noting that the assignment from the estate to the trust, and from the trust to Shriner’s, removed the claim both from Evelyn’s estate and from the operation of her will.
This ruling is important for three reasons. First, it stands for the proposition that an individual or entity whose interests will be adversely affected by the outcome of a civil action in probate court should be permitted to intervene. Second, it reflects a muscular view of what is required of a trustee of a decedent’s revocable trust when being asked to fund obligations of an insolvent or partially insolvent estate (which would not be so crucial where the beneficiaries of the estate and trust are identical). Third, it affirms the authority of the probate court to order the assignment of a legal claim to protect the interests of an innocent beneficiary.
If you need assistance with a disputed Probate Court matter, please reach out to David Skidmore at firstname.lastname@example.org or 616.752.2491 or a member of Warner’s Probate Litigation Practice Group.