In re Esther Kratzer Revocable Trust & In re Wendell Kratzer Revocable Trust, Docket Nos 357860, 357861 (Mich Ct App Mar 23 2023) (unpublished).
Wendell and Esther Kratzer, husband and wife, had four children including their son Richard. Richard and his father operated a farming business. Wendell was the settlor and trustee of a revocable trust he created, and successor trustee of his wife Esther’s trust at her death. At Esther’s death, Wendell was serving as trustee of both of their trusts. At Wendell’s death or incapacity, Richard was nominated to serve as trustee of both trusts. The farm-related assets were to pass to Richard under the trusts and the remaining assets split equally between the four children. Richard was “more or less” handling most of the financial affairs and managing the trusts’ property with his father’s consultation.
During Wendell’s lifetime, Richard made notable improvements to the farmhouse where he and his wife lived and which was financed with trust funds. His father was living in an assisted-living facility at this time. The probate court held Richard had to pay the trust back for the cost of the improvements that only Richard benefitted from because he lived there and would ultimately inherit the farmhouse. The Court of Appeals reversed this decision on the grounds that 1) the father was still the trustee when the improvements were made - not Richard, 2) there was no evidence that the father was mentally incapacitated and 3) Richard consulted with his father about the farmhouse improvements and his father consented to them. As a result, the farmhouse improvements did not amount to a breach of Richard’s duty to his father and Richard only owed duties to his father Wendell. Because Wendell created his revocable trust, Wendell could also override the terms of his trust and grant such permission to Richard.
Kratzer tells us that so long as the settlor/trustee is competent and the agent was acting with the settlor/trustee’s knowledge and delegation of authority, the agent only owes fiduciary duties to the settlor/trustee and not remainder beneficiaries. This case in large part turned on that the father had capacity and that the father continued to participate to some degree in trust business with Richard’s assistance. If there was evidence that the father had compromised mental abilities, the outcome could have been very different because the father arguably would not be in a position to authorize or delegate authority as settlor/trustee.
Kratzer also discusses the importance of a trustee segregating his or her personal funds from those of the trust. When funds are commingled, it is very challenging to account for the use of just trust funds. In a challenge to the accounts, “the trustee has the burden to establish the correctness and the proprietary of his charges.” Richard formally became trustee of his parents’ trusts after his father’s death, and commingled his money with trust money. This led to accounting issues. The probate court held Richard was liable for failing to properly account to the other trust beneficiaries and this decision was affirmed on appeal.
If you are serving as trustee or you are a beneficiary aiding the trustee in administering the trust, there is a risk that you can be held personally liable to the trust beneficiaries. Getting legal advice on the front end can prevent a legal battle down the road. If you would like a consultation, please contact Laura Morris at firstname.lastname@example.org or 616.752.2407 or a member of the Probate Litigation Practice Group.