On January 12, 2023, the Michigan Court of Appeals issued its decision in In re Claeys Revocable Living Trust, 2023 Westlaw 175242, No 360054 (Mich Ct App Jan 12 2023), which considered whether a trust beneficiary was entitled to distribution in kind of trust-owned real estate.
Loraine and Thomas were the surviving children of Bernard and Terese, who had created a joint trust. After the parents died, Loraine and Thomas were named as the successor co-trustees of the trust. The siblings as co-trustees could not agree on trust administration, and the probate court eventually removed Loraine, leaving Thomas as sole trustee. For five years, the siblings repeatedly brought their disagreements about the trust to the probate court for resolution.
One of the disagreements involved distribution of four lakefront lots. Loraine wanted these lots distributed as part of her trust share. However, Loraine and the trustee, Thomas, could not agree on the fair market value of the lots. Thomas believed that Loraine was undervaluing the lots and that the lots could be sold for much more on the open market. The siblings at one point agreed to list all four lots for sale. Thomas believed the four lots were worth $750,000, but he offered to distribute them in kind to Loraine with a discounted value of $600,000. Loraine rejected this offer, believing that the four lots were not worth more than $548,000.
When Thomas entered into a purchase agreement to sell two of the lots for $420,000, Loraine petitioned the probate court to order the trustee to distribute the two lots to her share in kind, valued at $420,000. Loraine had previously valued these two lots at $318,000. The probate court declined to order distribution in kind to Loraine and instead authorized Thomas to close on the sale to the third-party buyer for $420,000. Loraine appealed.
Initially, the Court of Appeals noted that the trust agreement granted the trustee broad discretion in deciding whether to distribute trust assets in kind or in cash. Loraine had no right under the trust agreement to receive distribution of the lots in kind. Loraine claimed that MCL 700.3906(1) supported her request for distribution in kind. That statute provides: “Unless the will [or trust] indicates a contrary intention, the distributable property of a decedent’s estate shall be distributed in kind to the extent possible...” (The rules of construction for wills also apply to construction of trusts.) The Court of Appeals noted that the statute deferred to the terms of the trust agreement (“Unless the will [or trust] indicates a contrary intention...”), and the statute also indicated that in-kind distribution was only to be preferred “to the extent possible.” Given the siblings’ chronic disagreements and the trustee’s discretion under the trust agreement, the Court of Appeals found that the probate court did not err in authorizing the sale to a third party. Moreover, the appellate court found that the trustee had acted in good faith by offering Loraine the option of taking all four lots for a discounted rate, which she declined. Furthermore, Loraine’s case was weakened by her prior agreement to list the four parcels for sale on the market.
Based on the information available from the decision, it seems that Loraine likely could have obtained the lots in kind had she pursued a different strategy in dealing with Thomas. When the parties make everything about trust administration as difficult as possible, the probate court can be forgiven for choosing the most simple and clean-cut outcome. If you need assistance with a contentious trust administration, please contact Warner’s Probate Litigation Practice Group or David Skidmore at dskidmore@wnj.com or 616.752.2491.
