Trusts - New Michigan Rules

This will no doubt not be the last newsletter about the new Michigan trust rules which go into effect April 1, 2010. The new trust statutes were enacted this summer after many years of debate. A special panel of Michigan attorneys and bankers has been working on a local adaptation of the Uniform Trust Code (UTC).

The UTC has been adopted with some local modifications by over 20 states, and the number is growing . The attempt in Michigan has been to codify many rules involving trust execution and administration that were part of normal practice and case law. The drafters attempted to clarify various uncertainties and to spell out in greater detail certain issues that have arisen.

Effective Date. As noted above, the effective date of the statute is April 1, 2010. The statute will be effective for trusts created on or after that date. As to trusts created prior to that date, the terms of the trust will control except that "any rule of construction or presumption" in the new statute will apply to trusts executed before the effective date, "unless there is a clear indication of a contrary intent in the terms of the trust."

A Few Important Observations. Obviously, there will be questions of interpretation of the new statute where disputes involving trusts arise, especially trusts that are not modified after April 1, 2010. Three points of concern may be of interest:

1) Jurisdiction - what court hears trust disputes.
2) Registration of a trust.
3) Should a trust have a trust protector?

Jurisdiction. All trusts should be reviewed to ascertain whether there are provisions concerning a designation of a court to hear disputes is either necessary or proper. One example in my practice recently brings this issue to the fore. A Settlor in Grand Traverse County dies. No beneficiary resides in Grand Traverse County. Under the probate statute, the decedent's Will would be filed in Grand Traverse County, regardless of the identification of location of the Personal Representative and beneficiaries.

The decedent's trust, on the other hand, appointed a relative as Successor Trustee who resided on the East Coast. Typically, jurisdiction over a trust is determined by "place of administration". Does this mean that any issues concerning the trust, administration or interpretation, have to be brought in a different state because the trust is supposed to be administered there, even though Michigan law applies?

Proper jurisdiction to hear disputes about trust administration and interpretation, which can arise long after death, will become a very important issue under the UTC. You can imagine the added expense if the decedent's trust had to be interpreted and applied in a Massachusetts or New York court, while a probate matter would clearly stay in Michigan.

Registration. The registration of a living trust has been something that has typically been avoided by attorneys and clients alike. The process is simple. It involves filing a short form with the Register of Probate of the Settlor's county of residence. The terms of the trust do not have to be included, but the form identifies the Settlor, the Trustee and the Successor Trustee. Trust registration was typically regarded as a nuisance and an unnecessary detail.

However, trust registration may take on a new importance under the UTC as a means to establish jurisdiction for possible disputes.

Trust Protector. The UTC has extensive provisions regarding the duties, responsibilities and powers of a Trust Protector. A Trust Protector is an individual or entity identified in a trust whose duties are stipulated, generally in detail. Sometimes the Trust Protector's duties are to stay in touch with the family situation and advise the trustee about the needs of beneficiaries. Sometimes a trust protector is given authority to change the trustee, direct withholding of distributions, if appropriate, and to change the situs of the trust and the applicable law.
A Trust Protector is generally desirable to introduce an element of flexibility in a trust which may last for many years.

A Trust Protector can also introduce a personal element in trust administration where the trustee is either a corporate trustee, without particular personal contact with the Settlor and the Settlor's family, or to provide a mechanism for changing trustees. The ability to change trustees can be especially important where trusts are designed to last for many years.

Another concern would be the desirability of "forum shopping" for administration of the trust. For example, the law of one state may be more favorable in permitting premature termination of a trust than another.

For example, in a "dynasty trust" intended to last for lifetime of each child beneficiary, should the children, by unanimous agreement, be able to terminate the trust early and get their hands on the trust assets directly? The laws of various states and application by their judges could differ radically in this respect and thus frustrate the intent of the Settlor who may have really intended the trust to benefit grandchildren and/or future generations.

Conclusion. These are some of the issues that concern trust drafters. We will devote future newsletters to other issues which may impact clients thinking about their trust instruments. We always recommend review of estate planning documents every five years for people over 65 and every ten years for younger clients.

However, the UTC (and possibly a new estate tax law) will no doubt be an encouragement to all clients and attorneys to review trust documents to determine whether amendments should be made before April 1, 2010, to take advantage of present law, or whether any changes should take place after that date, and subject the trust to the UTC in its entirety.

For a review of your trust and other estate planning matters, please contact Jim Modrall, Tom Pezzetti, or any of the attorneys listed below.

Donald A. Brandt, Joseph C. Fisher, Thomas R. Alward, Matthew D. Vermetten, Susan Jill Rice, Gary D. Popovits, H. Douglas Shepherd, Laura E. Garneau, David H. Rowe, or Nicole R. Graf at (231) 941-9660
©BRANDT, FISHER, ALWARD & PEZZETTI, P.C.