What If I Lose It?

What Happens To My Trust If I Lose It? This is a question we sometimes get from clients who are concerned about management of their trust and finances if they become incapacitated, mentally or physically. First, let's clarify the terminology. "Incompetence" used to be the common term in the days of asylums. It meant a person would be or could be confined involuntarily to an institution. The term commonly used today is "capacity" or "incapacitated", which means lack of capacity to perform a specific act or make a specific decision. That lack of capacity may be a permanent or temporary condition of the brain, or it may be a physical condition that inhibits normal activity.


Just as an example, a person may be heavily medicated and thereby unable to make medical decisions. In such a case, physicians may provide the necessary written determination of lack of ability or capacity to make medical decisions. Those decisions would trigger the patient's Medical Power of Attorney (MPOA).

How Does This Relate to Your Trust? The typical Living Trust is revocable by the trust maker, sometimes called a "Settlor" or "Grantor". The Settlor typically retains the power to amend the trust and is usually the Trustee. As Trustee, the Settlor continues to manage his or her property in the same manner that he or she would do without a trust. However, as people age, their ability to make financial decisions and judgments often wanes.

Trusts typically contain a provision stating that if the initial Trustee is unable to manage the trust, or becomes "incapacitated" (which in this case refers to management of trust property), a Successor Trustee takes over. Usually, a trust will contain a provision stating that the new Trustee (often designated as "Successor Trustee") can or shall take over management of the trust, when one or two physicians make a written determination that the initial Trustee is not able to manage trust affairs. (There does not need to be any further medical diagnosis or reasoning, so most physicians do not feel that they are revealing confidential information.)

Delicate Situation. Often the designated Successor Trustee is a spouse or child. In some cases, the Successor is reluctant to confront the initial Trustee, a parent or spouse, with the realities of the situation, perceived or actual. Sometimes the initial Trustee is reluctant to admit reality or give up control. Those situations often involve the intervention of a third party such as a physician, attorney or CPA, to help smooth the transition.

In many cases, the transition to Successor Trustee is made easier by accident, stroke or advanced dementia, where there is no resistance on the part of the initial Trustee.

However, the purposes of this discussion are to bring the matter of potential transition to our readers' attention, and to inform the potential Successor Trustees of their duties and responsibilities.

What Does the Successor Trustee Have To Do? The job of Successor Trustee should not be taken lightly. A trustee is a fiduciary, meaning that the Successor is accountable to the trust Settlor and the ultimately beneficiaries of the trust, often the spouse and/or children. A fiduciary has a relationship of trust, as "trustee" indicates, and is legally responsible to all interested persons. A trustee has duties of fairness, royalty and responsibility to all interested persons, without self-aggrandizement.

The thrust of this month's newsletter is dealing with a situation where the initial Trustee is still living, but is incapacitated for one reason or another, so that a Successor Trustee has taken over. The new Michigan Trust Code spells out the duties of a Successor Trustee while the Settlor is incapacitated. The principal rule is set forth in MCL 700.7603(2). That section states that the Successor Trustee shall account to the Settlor's designated agent (in a Power of Attorney), or if the sole agent is the Trustee, the Successor Trustee has to account to all "qualified trust beneficiaries" , informing them of the existence of the trust and keeping them reasonably informed about its administration.

Trust Language and the DPOA. Everyone who has a trust, which will include most readers of this newsletter, should be especially aware of the provisions of their trust and their DPOA (Durable Power of Attorney) relating to the power of an agent to amend the trust and withdraw funds from the trust. To save controversy and expense, the provisions in these two documents should be consistent. If an agent has a power to withdraw funds from the trust, the instruments should state whether that power is individual or only as a fiduciary. In other words, does the agent have the power to withdraw funds or make trust amendments in any way the agent sees fit and for any purpose, or is the power to be exercised only for the benefit of the trust Settlor?

Duty To Account and Report. The new Michigan Trust Code has extensive provisions about the duties of a Successor Trustee to report to the Settlor, the Settlor's Agent, and "qualified trust beneficiaries". At the risk of oversimplification, a "qualified trust beneficiary" is any current permitted beneficiary or a beneficiary who would take if the trust terminated on that date (which usually means the death of the trust Settlor).

Trust administration is not to be taken lightly. The Michigan Trust Code provides specific duties for Successor Trustees and clarifies their duties, obligations and responsibilities concerning reporting and accountability. We find more Successor Trustees taking over responsibilities for disabled spouses or parents, without proper counsel. It is a situation fraught with controversy in many families. Professional counsel and assistance will save a family from disharmony, litigation and expense.

Conclusion. The purpose of this newsletter is to highlight a situation which is becoming more common as we live longer, i.e. a trust Settlor who is unable to properly manage trust property. If you have a trust, or if you are designated as Successor Trustee, with a prospect of taking over trust management, please contact Jim Modrall or Priscilla Hirt, or any of the other attorneys listed below at (231) 941-9660. Our assistance can save you time, money and aggravation.

Donald A. Brandt, Joseph C. Fisher, Thomas R. Alward, Matthew D. Vermetten, Thomas A. Pezzetti, Jr., James R. Modrall, III, Susan Jill Rice, Gary D. Popovits, H. Douglas Shepherd, Laura E. Garneau, David H. Rowe, Nicole R. Graf, Priscilla V. Hirt at (231) 941-9660

BRANDT, FISHER, ALWARD & PEZZETTI, P.C.
http://www.bfarlaw.com
This newsletter is provided for informational purposes and should not be acted upon without professional advice.