New Trust Rules

Michigan adopted its own version of the Uniform Trust Code, effective April 1, 2010. Since the new law will impact trusts created both before and after April 1, 2010, it will behoove readers who currently have trusts to consider possible reasons for modifying those trusts. There may be tax reasons also which we will mention briefly.

Some of the comments in this newsletter will be particularly appropriate for second marriages and blended families. Please review these comments and see if any of them may apply to your situation.

1. Simplification. We have mentioned before that the 2010 changes to the federal estate tax law, raising the exemption to $5.0 million per person, makes the complicated A-B Trust formulas obsolete for most people. Most standard trusts for married individuals had a "hard to understand" formula for dividing trust property after the death of the first spouse into two separate trusts. The A Trust was generally a Marital Trust, qualifying for the marital deduction. The B Trust, sometimes called a Family Trust or Credit Shelter Trust, could have different beneficiaries, including children as well as the surviving spouse. For married couples with separate trusts, we generally recommend simplification to provide for a single Trust at the first death, with defined beneficiaries (usually just the surviving spouse) and a tax saving clause in the event the marital deduction is necessary.

The new portability feature, whereby a married couple gets the full $10.0 million exemption, may or may not be helpful. In any event, portability could affect the trust provisions depending upon order of death and the division of assets between the respective spouses.

2. Material Purpose. The new MTC (Michigan Trust Code) introduces a standard of "material purpose" for a court to apply when considering any post death modifications, reformation and termination of a trust. In our experience, families often try to correct ambiguities or otherwise change trust provisions after the death of the Settlor. Controversies often arise in second marriage situations with natural children and step children having different views about the interpretation of parent's trusts and the impact of a change in circumstances or change in tax laws on how trusts are administered. Typically, in drafting the purpose clauses for trusts, the emphasis was on saving estate taxes. There were often not explanations or amplifications of the intentions regarding the surviving spouse, discretionary distributions, and potential early distributions.


For example, it would be easy for a surviving spouse and surviving children or step-children to get together to agree to a premature termination of the trust, contrary to the Settlor's wishes. Protection of trust property from creditors and predators is often not explained as a Settlor's "material purpose" for delaying distributions or limiting trust withdrawals.

3. Place of Administration. Disputes about trusts after a Settlor's death are becoming more common as family disagreements come to the fore. Michigan law makes the "venue" for settling disputes frequently dependent on the "place of administration". In today's modern banking world, where banks change names, officers and personnel frequently, there can be arguments about which is the proper "place of administration" for deciding in what court disputes shall be resolved.

The family may not want the disputes resolved in a court in Los Angeles, Chicago or New York just because one of the bank's trust officers is located there. Similarly, if a successor trustee moves to Florida, does that mean that trust disputes, with Michigan law applicable, should be resolved in Orlando or Tampa? When two trustees reside in different places, which is the proper location for resolution of disputes?

We typically recommend that the trust provide that the disputes be resolved where property is located (Michigan real estate, for example) or a court in Michigan where the Settlor resided, on the theory that there may be local witnesses required and that a gathering at the family's prior location would be most convenient, or less inconvenient, than a court in another state.

The solution is to make sure that the trust specifies the proper venue for resolution of disputes. At least this will give some guidance to the successor trustee and surviving beneficiaries as to the Settlor's wishes for dispute resolution.

Conclusion. The intention of this newsletter is to cover several important points. For second marriages and blended families, these points are especially critical and our readers in those circumstances should make sure their trusts are up to date and in accordance with new Michigan Trust Rules and consistent with the new Federal Estate Tax rules (which are much more liberal to most clients than the prior law). If you have any questions regarding your trust, or want an up to date review, 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, David H. Rowe, Nicole R. Graf, Priscilla V. Hirt or E. Molly Kuras at (231) 941-9660

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