Trusts

TRUSTS

About the Professor:

Dr. Donald J. Baranski, received his Bachelor of Arts in Humanities Pre Law, from Michigan State University. This was a triple major of American History, Philosophy, and Psychology. He then received a Master of Arts degree in Philosophy from Michigan State University. He then obtained his Juris Doctor from Michigan State University College of Law. Dr. Baranski has been a licensed Attorney and Counselor at Law in the State of Michigan since 1988, practicing probate law including Last Wills & Testaments, Trusts, Powers of Attorney, Guardianships, Conservatorships, and Deceased Estates in Eaton Rapids. Dr. Baranski has been teaching since 1989. He has taught at Western Michigan University Cooley Law School, Michigan State University College of Law, Jackson College, and the Eaton Rapids High School.

 

TRUSTS

 

What is a Trust?

A trust is a legal entity established by a person to transfer property into and have that property managed and disposed of by a trustee. Unlike a Will, a trust can be oral.

When can a trust be created?

A trust is either created during the settlor’s lifetime (called an intervivos trust) or created when the settlor dies by Will (testamentary trust).

Why would someone want to set up a trust?

Common objectives are to reduce estate tax liability, to avoid Probate Court involvement after death, to dictate how his or her assets are to be managed if he or she becomes incapacitated, and to keep estate-planning intentions private. Unlike a Will, a trust is a private document that is not filed with the Probate Court unless there is a dispute regarding the trust or the trust agreement states that it should be registered with the Probate Court.

What is the name of the person that creates a trust?

The person that creates the trust is called the “settlor” or “grantor.” 

How do assets get into the trust?

It depends on the type of asset and when the transfer occurs. For example, real property is transferred to the trust by a deed, just as if the trust was a person. Personal property (like contents of a house), on the other hand, is transferred by bill of sale. Financial accounts are transferred under the protocol set forth by the particular financial institution (typically involves the institution’s particular forms).

A common mistake is that a trust is created, but no assets are then transferred into the trust.  Litigation can result over whether an asset was intended to be a trust asset.

What is the difference between a revocable and irrevocable trust?

A revocable trust can be changed or revoked by the settlor. In contrast, an irrevocable trust cannot be changed or revoked by the settlor. Upon the death of the settlor, a revocable trust becomes irrevocable.

While a gross over-simplication, for tax and creditor purposes, whether the settlor is considered to still be the owner of the assets in the trust depends on how much control the settlor retains over the assets once transferred. One aspect of control is whether the the settlor can change the trust’s terms or revoke the trust. 

Can a trust agreement be modified?

Yes, with the Court’s approval, depending on the particular facts and reason.  For example, it is possible for a trust agreement to be amended because of a drafting mistake, or a chance of circumstances that the settlor could not have anticipated at the time the trust agreement was drafted. However, the Court will not modify the trust agreement if doing so would conflicts with a material purpose of the trust.

What is a Constructive Trust?

It is not a “trust” in the typical sense.  Rather, it is a remedy that the Court grants if someone is in possession of property that rightfully belongs to someone else. For example, if someone is in possession of bank account funds that belong to someone else, the Court can enter an Order that the bank account funds are being “held in a constructive trust” for the true owner. 

Can the trustee charge a fee for his or her services?

Yes, a “reasonable” fee under Michigan law, unless the trust agreement states otherwise.  What is considered “reasonable” is often a source of litigation, and there is no set figure or range which is recognized as reasonable. Rather, what is reasonable depends on the specific facts and the complexity of administration.  The trustee’s reasonable fee is paid with trust assets.

 

Can the Trustee retain an attorney to assist with administration?

Yes, under Michigan law, unless the trust agreement states otherwise. Because the duties of a trustee are not intuitive and are complex, it is highly recommended that a trustee retain counsel to assist with administrative.  The trustee’s reasonable attorneys’ fees are paid by the trust.

Can a trustee be forcibly removed?

Yes, under circumstances explained by the trust agreement or by the Court if the circumstances warrant removal. A probate court can remove a trustee if the trustee has committed a serious mistake, is not cooperating with a co-trustee which is substantially impairing administration, the trustee is persisting failing to administer the trust effectively, or there has been a  substantial change of circumstance and doing so is in the trust beneficiaries’ best interests. Seeking removal of a trustee is also a common source of probate litigation.

Does the terms of the Will or Trust Agreement impact the transfer of jointly-held

property?

Usually, no. Jointly-held property transfers to the survivor, regardless of what the decedent’s Will

 or trust agreement says.  Common examples of jointly­held property is real property if titled as 

“tenants by the entireties” (married persons) or “joint tenants with rights of survivorship.” However, litigation can arise as to whether the decedent intended for the survivor on the account to get all of the funds, or rather, whether the survivor was simply listed as a joint owner for convenience purposes (e.g. to help the elderly person pay his or her bills).

 

What is a convenience Account?

A Convenience Account is where the deceased added someone to their bank account for the purposes of paying bills for the deceased person.  An account for convenience means the money is really the property of the deceased and should go into the deceased’s estate.

 

Does the terms of the Will or Trust Agreement impact the transfer of contractual

assets?

No.  Examples of contractual assets are “Pay on Death” (POD) accounts, life insurance, and retirement accounts. These assets have a contractually-named beneficiary (usually designated on a “BeneficiaryDesignation Form”).  The financial institution pays the named beneficiary regardless of what the decedent’s Will or Trust Agreement say.  

What happens if the decedent’s intentions are not clear from the document? 

If the decedent’s intentions are not clear from the Will or trust agreement, for example there is some ambiguous language, the Probate Court will enter an order clarifying the meaning. Whether the Probate Court will look to evidence outside of the document itself to clarify the meaning depends on whether the Probate Court agrees that the decedent’s intentions are not clear from the document. 

WILL & TRUST CONTESTS

What are common grounds for contesting a will or trust?

Will or Trust Agreement was revoked. Existence of a later Will or restated Trust Amendment

Coercion and undue influence (e.g. “Grandma was pressured to sign the Will against her wishes”)

Fraud (e.g. “Grandma was tricked into signing a Will she thought was a letter”) Mental Incapacity

 (e.g. “Grandma didn’t understand she was signing a Will”) Improper execution (e.g. not signed by decedent) Forgery

 

What is a no-contest clause?

It is a provision found in some Wills and Trust Agreements which result in a beneficiary losing his or her interest in the Estate or Trust if the beneficiary challenges the Will or Trust Agreement and/or the 

fiduciary’s administration. A no-contest clause is not enforceable under Michigan law, even if the beneficiary loses the challenge, if there was “probable cause” to commence the contest. 

 

If a Will or Trust contest is successful, how is the property distributed?

If the Will being challenged was the decedent’s first Will, then Michigan’s intestate laws would govern

 distribution of the decedent’s assets. If the Will being challenged was not the last Will executed, then the preceding Will would govern the transfer of property. So, if the decedent had three Wills drawn up over time, and the last and third Will was set aside, the decedent’s assets would be distributed underthe decedent’s  second Will.   If the first trust agreement is invalidated, the decedent’s Will would govern If a trust amendment is invalidated, the trust agreement’s most recent version would govern.

BREACH OF FIDUCIARY DUTY

What is a fiduciary?

A fiduciary is a person in a position of trust or confidence. The following roles are considered fiduciaries: Personal Representative of the Estate, Trustee, Guardian, Conservator, Attorney, person acting as agent under a Power of Attorney document. A person can also be considered a fiduciary depending on the circumstances. For example, a child can be considered a fiduciary for a parent if the child is managing all or most of the parent’s finances and the parent is physically or mentally ailing.   

What are the types of fiduciary duties?

Because of this position of trust and confidence, a fiduciary owes special duties to whom that person represents. A fiduciary has a duty of loyalty, to not self-deal, to act solely in the best interests of the beneficiaries or principal, a duty to keep adequate records, a duty of care, and a duty of impartiality amongst beneficiaries.

What is the duty to not self-deal/loyalty?

A fiduciary at all times wears two hats: a fiduciary hat and a personal hat. The fiduciary cannot act in a way to personally benefit from his or her fiduciary actions. Here are a few examples. If the trustee embezzled trust property, this would be self-dealing and a clear breach of this duty. If the trustee bought trust property, this would be a breach of loyalty because as the purchaser the trustee has an incentive to pay the trust as little as possible. If the trustee refuses to make discretionary distributions to a beneficiary because the trustee is a remainder beneficiary, this could also violate the duty of loyalty.

 

What is the duty of care?

A fiduciary must act as a prudent person would in dealing with the property of another,

which includes investing funds, diversifying, and protecting assets. The breach of this duty can

 lead to litigation (e.g. “The Trustee should have diversified the trust’s investments”).

What is the duty of impartiality?

If a fiduciary estate has 2 or more beneficiaries, the fiduciary must act impartially in investing, managing, and distributing the fiduciary assets and not favor one beneficiary over another.

Breach of Fiduciary Duty Litigation

If a fiduciary has breached a duty, a claim to remedy the breach can be filed in Probate Court against the fiduciary. Depending on the facts, the fiduciary may be held personally liable for the financial loss to the fiduciary estate.

 

ACCOUNTINGS

What is an accounting?

It is a report prepared by a fiduciary that shows the assets coming in and the assets going out of a fiduciary estate in a given time period. Usually, accountings are issued annually. Fiduciaries who most often prepare accountings are trustees, Personal Representatives, conservators, and agents serving under a power of attorney. Litigation commonly arises over why an accounting has not been provided, actions taken or not taken by the fiduciary as shown on the accounting, and whether there is enough information provided on the accounting.

What must be included on a trust accounting?

A trust accounting should list: (1) the starting value of the trust property and liabilities at the beginning of the period; (2) all income and receipts received by the trust during the period; (3) all payments and disbursements made from the trust during the period; (4) the ending value of the trust property and liabilities at the end of the period; and (5) the source and amount of the trustee’s compensation. 

Does an accounting have to be put into a certain format?

No. However, the State of Michigan has created a template form that can be used by a fiduciary to prepare an accounting.

What information is a trust beneficiary entitled to?

A trustee has a duty to keep the beneficiaries reasonably informed about trust administration.

Upon the reasonable request of a trust beneficiary, a trustee must provide a copy of the terms of the trust document that describe or affect the trust beneficiary’s interest, and information about the trust assets. Within 63 days after accepting the position of trustee,  a trustee must notify

the beneficiaries of the acceptance, if the trust is registered and if so with which court, and the trustee’s name, address, and telephone number. Within 63 days of a trustee learning an irrevocable trust  has been created, or that a formerly revocable trust has become  irrevocable (e.g. the settlor dies), then the trustee just notify beneficiaries of the trust’s existence, who the settlor is, if the trust is

registered and if so with which court, and that the beneficiary has a right to a copy of the  trust 

agreement’s  terms that  describe or affect the trust beneficiary’s interests. Unless the trust agreement says otherwise, the trustee is required (at least annually) to send a trust accounting to: (1) the trust beneficiaries that are currently eligible to receive mandatory or discretionary distributions of income or principal from the trust; (2) any other trust beneficiaries who ask to receive the accounting; and (3) any other trust beneficiaries who the trustee believes should receive the accounting. The Court may also order the trustee to provide an accounting at any time.

 

If the information is not provided by the trustee, what remedies are available?

The beneficiary or other interested party may petition the Probate Court to order the trustee or other fiduciary to produce the information and/or documents, or may ask for the trustee or fiduciary to be removed.

CONTESTED GIFTS

Can a gift be “undone”?

Yes, with Court involvement.  Sometimes a transfer is called a “gift” but was not

actually intended to be a gift, or was the gift or was tricked or lacked mentally capacity

to understand what he or she was gifting.

LACK OF MENTAL CAPACITY CLAIMS

What is the standard for mental capacity to make a will or a trust?

To have sufficient mental capacity to make a will or a trust, an individual must satisfy four requirements. First, the individual must be able to understand that he or she is providing for the disposition of his or her property after his or her death. Second, the individual must be able to know the nature and extent of the property that he or she owns. Third, the individual must be able to know the identity of his or her heirs. Fourth, the individual must be able to generally understand the significance of signing the document.

Does the same mental capacity standard also apply to will or trust amendments or

revocations?

Yes. Just as an individual must possess sufficient mental capacity to make a will or trust, the individual must also possess sufficient mental capacity to execute a document that amends or revokes the will or trust.

When is mental capacity evaluated?

In lack­of­capacity litigation, the Court’s job is determine whether the individual had sufficient mental capacity at the time the estate-planning document was signed. Even if the person lacked mental capacity before and after the signing, if the person had sufficient mental capacity at the precise time it was signed, the estate-planning document will be upheld.

How do you prove lack of mental capacity?

In lack-of-capacity litigation, it will be highly relevant whether the individual who made the will or trust

trust was diagnosed with any mental illness, such as dementia or Alzheimer’s disease; whether the individual was suffering from extreme pain or weakness; whether the individual was taking any medication with the potential to cause side effects; and whether the individual’s medical records

reflect mental impairments. The doctors who treated the individual will be key witnesses, as will be those who had the opportunity to observe the individual’s conduct, statements and thought processes.

The parties to the litigation may retain expert medical witnesses to provide opinions. The opinions of the attorney who drafted the challenged document, as well as persons who witnessed or notarized the document, will also be important.

UNDUE INFLUENCE CLAIMS

What is undue influence?

It is a claim brought to “undo” an estate­planning document, gift, or other transfer of property. To establish undue influence it must be proven that the person was subjected to “threats, misrepresentation,  undue flattery, fraud, or physical or moral coercion”sufficient to “overpower volition, destroy free agency and impel” the person to act “against his inclination and free will.” Because undue influence typically happens behind closed doors, Michigan has established a presumption of undue influence if the evidence establishes: (1) the existence of a confidential or fiduciary relationship between the person transferring the property through the transaction and the fiduciary; (2) the fiduciary benefits from the transaction; and (3) the fiduciary had an opportunity to influence the person’s decision in that transaction. If the presumption is satisfied, then the burden shifts to the fiduciary to prove there was no undue influence. If the fiduciary fails to rebut the presumption, then the interested person challenging the transaction wins and the transaction will be undone.