What You Need to Know About Trusts in Michigan
To those outside the legal profession, the term "trust" conjures up an image of an estate planning document or instrument, something which concerns the passing of property to heirs in the event of a death. However, many lawyers think of a trust as an operating entity, with its own set of rules and statutes, separate and apart from the rules that apply to the owners of assets under a name.
Legally, a trust is defined as: "A fiduciary relationship with respect to property, as by one person holding legal title and another having a beneficial interest." Mich. Comp. Laws § 556.1208(i). "A fiduciary relationship exists when one person "depends on and must look to another for protection." Mich. Comp. Laws § 700.4703. The "conception of a trust is . . . a very old one, originating probably with the ancient Egyptians, and referred to . . . as the ‘father of equity.’" Joseph H. Beale, The Nature and Serivce of a Trust (1914) 1-2 [hereinafter "Nature"].
The fundamental idea behind a "trust" is that a person (the trustee) has a legal title to some property, and that another (the "beneficiary") is entitled to benefit from what that person does with it. The trust document creates the fiduciary relationship, spelling out the rights and obligations of the parties.
Michigan law defines trusts as either inter vivos (a trust created during a person’s life) or testamentary (a trust created upon death). Mich. Comp. Laws § 556.1106.
These two types of trusts describe the basic types of Michigan trusts. In Michigan there are many forms of inter vivos and testamentary trusts, including express trusts, constructive trusts, resulting trusts, foreign trusts, charitable trusts, and custodial trusts.
Different Types of Trusts in Michigan
Michigan law provides for numerous types of trusts, each specifically designed to meet particular needs. At the most basic level, trusts created under Michigan law are categorized into two major groups: revocable trusts and irrevocable trusts.
Revocable Trusts
Under Michigan law, a revocable trust is one which the creator retains the ability to modify or terminate the trust at any time, including its termination by written instrument. Revocable trusts may be created by individual settlors (also known as trust grantors) or joint settlors (i.e., a husband and a wife). Further, a revocable trust may be created during the lifetime of the settlor (known as a "living trust") or alternatively, upon the death of the settlor by a testamentary trust in the settlor’s will. Common uses for revocable living trusts include:
Irrevocable Trusts
Under Michigan law, an irrevocable trust is a trust created by the settlor which cannot be modified or terminated without the consent of the beneficiary or by court order. If a trust is created during the lifetime of the settlor, this means that the settlor has given up all rights to the principal and income of the trust. Irrevocable trusts may be created by individual or joint settlors and common uses include:
Special Needs Trusts
While technically classified as irrevocable, special needs trusts deserve additional attention. This type of trust allows a disabled beneficiary to have supplemental support without disqualifying them from government benefits.
How to Set Up a Trust in Michigan
Establishing a trust in Michigan is a pivotal decision for individuals looking to manage their assets and provide for their beneficiaries in a specific manner. Trusts are legal arrangements that distribute assets to designated beneficiaries per the stipulations within the trust document. They serve as an alternative to wills, allowing for more direct control over how assets are handled without the need for probate court.
The steps to establish a trust in Michigan are relatively straightforward, though they require careful planning and legal understanding:
Step 1: Work with an Attorney or Advisor
The first step in establishing a trust is to consult legal or financial professionals. An attorney or financial advisor that specializes in trust and estate planning can guide you through the process, ensuring that your trust is legally sound and tailored to your specific needs.
Step 2: Define the Trust Purpose
Before drafting a trust document, it’s crucial to define its purpose. Are you trying to minimize taxes, avoid probate, manage assets for a minor, or provide for a disabled beneficiary? Clearly articulating the purpose of the trust will help shape its design and structure.
Step 3: Decide on a Trustee
A trustee is an individual or a financial institution that will manage the trust. Choosing the right trustee is vital, as this person will have significant control over the assets and will be responsible for adhering to the terms of the trust. You can be your own trustee initially and then appoint a successor trustee upon your disability or death.
Step 4: Draft the Trust Document
After consultation with an advisor and deciding the trust’s terms, a qualified attorney will draft a comprehensive trust document. This document includes the rules for how the trust operates, as well as the names of the beneficiaries and what they each will receive.
Step 5: Fund the Trust
For a trust to be effective, it must be funded—meaning that your assets must be transferred into the trust during your lifetime. Depending on the type of assets, the funding process may vary. Bank accounts and personal property can be transferred into the trust by change of title or registration. Assets like real estate may require a specific deed or assignment document.
Step 6: Retain Certain Powers
While establishing a trust provides for the administration and distribution of your assets, retaining certain powers can be beneficial. You might want to retain the power to change trustees, amend the trust terms, or remove assets from the trust. However, retaining too much power may impact the trust’s tax benefits, so it’s important to consult an attorney regarding which powers to retain and which to relinquish.
Establishing a trust in Michigan requires careful consideration and planning. A qualified attorney or financial advisor can help you navigate the process, ensuring that your assets are protected and distributed according to your wishes.
Michigan Trustee’s Responsibilities and Duties
It is important to note that a trustee, like a personal representative of a decedent’s estate, has fiduciary duties to trust beneficiaries. A person is a fiduciary when they have the legal duty to take care of someone else’s money and property. Since the chances of an estate being mismanaged are higher now more than ever, the cost of estate and trust litigation has dramatically increased. That is why my office will represent beneficiaries if there is mismanagement of estate assets.
When considering whether a trustee has breached his or her fiduciary duty, beneficiaries should consider the following factors (this is not an exhaustive list):
Probably the most serious type of breach is "self-dealing" where a trustee takes money or property from a trust for his or her immediate use. Often, beneficiaries need to litigate and argue to prove that a trustee acted inappropriately.
Trustees have a legal duty to administer the trust according to the terms of the trust according to MCL 700.7602. This means that the trustee must follow the specific instructions contained in the trust. It is fairly common for a trustee to want to distribute money held in trust to a beneficiary, however doing so might violate the terms of the trust. This applies even in cases where a beneficiary has asked for money from the trust. Depending on the terms of the trust, a trustee may be making a mistake by releasing these funds without specific direction from the trust or a court.
Ignoring the terms and conditions of a trust can cause major problems when it comes time to file taxes on the trust. In particular, a trustee must be careful to distinguish between distributions made to a beneficiary in the past and money which is left in trust. Often, distributions during the administration of a trust are taxable to the beneficiary and should not be reported as taxable income to the trust.
A trustee has a duty to properly manage and distribute the trust property according to MCL 700.7604 and 700.76013. This includes duties to invest property appropriately, preserve it from loss, keep it separate from his or her own property and to carry out the terms of the trust.
Trustees have the highest duty to invest in a way that will grow the value of the trust. This means that a trustee should not keep trust property in a low yielding savings account. In general, a trustee has 3 options where to invest property:
It is important for a trustee to keep in mind that each investment carries a different risk. Considerations include factors such as how much volatility are you willing to have with the trust property, how quickly will the beneficiaries need the money, what tax implications are there, how can you keep the trust property liquid and will diversifying investments hurt your return?
Trustees must properly pay all debts of the trust including taxes. It is important to note that trustees of a trust that has to file a tax return for that trust also need to consider paying for the decedent’s final expenses. Ultimately, the costs of administering the trust including taxes and bills will be paid either from the principal or the income from the trust.
How a Trust Can Benefit You in Michigan
Setting up a trust can have many benefits, especially if you don’t want the government involved in your estate planning. You may or may not want the courts involved either. Setting up a trust can make everything run smoother, and the assets can be distributed much easier and quicker. These are all advantages to having a Michigan trust.
Michigan trusts also provide you with added privacy. Your estate doesn’t become a matter of public knowledge through probate. Who wants their financial assets public record? The court processes are very public, and everyone will know the value of the assets you left behind. So many people just don’t want that type of information out there after their death.
One of the main reasons Michigan residents set up trusts is to manage assets , even when they are alive. Some people have a difficult time managing their finances on their own. So they can transfer their assets into a trust where a trust manager will take care of everything. There are many people who transfer their mortgage or property deed into a trust to help reduce their mortgage after their death. The bank can foreclose on their property if it’s not in a trust, because they typically do not have a right to market that property if the owner dies.
A Michigan trust is great for asset protection and management, to avoid probate processes and taxes, and to maintain privacy.
Common Issues and Legal Disputes
Even as estate planning professionals work to create airtight, risk-averse language that reflects their clients’ goals, the fact is that Michigan’s laws are replete with opportunities for dispute and litigation. In fact, the Michigan Court of Appeals has ruled that as long as a litigant is not challenging the actual language used in a trust instrument, even "a marginally reasonable argument for the existence of a right in favor of a litigant" is sufficient to mandate trial court review of a trust-and-estate dispute in Michigan.
For example, Michigan estate planning attorneys may regularly field calls from individuals who are suspicious about the terms of a trust that hasn’t yet gone into effect. On the other hand, once a trust goes into effect, beneficial individuals obviously have an interest in ensuring that the Terms of the trust are being adhered to and will sometimes involved litigation if they are broken; for example, A beneficiary of an irrevocable trust may see modifications that have taken place over the years as evidence that the trustee isn’t keeping the spirit of the trust on course. Consider one recent case where the its creator’s ex-wife argued that changes made by the decedent’s adult children too him as he lay stricken in a New York hospital were not permitted under Michigan probate law and claimed that the children fraudulently reassigned the ownership of a house away from her deceased husband shortly before he died. When analyzed in the wake of general probate law, such actions may not rise to more than the level of shady business practices; however, it demonstrates the mechanism through which trust-related legal disputes can come about.
Recent Trends and Updates in Michigan Trust Laws
Since early 2018, the Michigan Trust Code has gone through some updates that are noteworthy for trustees and the professionals who assist them.
On March 7, 2018, the Michigan Court Rules were amended to create a new Rule 5.123 – Determination of Incapacity of a Trustee to Serve or Continue Serving. Rule 7.104 was also amended to prescribe a new Court Fee of $150 "if there is a petition to determine incapacity of a Trustee to serve or continue to serve." This new Rule 5.123 provides an expedited process for the Court to determine if the trustee of a Michigan trust can continue to serve. The new expedited process could prove very useful for family members of an incapacitated trustee who are concerned about disagreements over distributions and the financial management of the trust assets .
The Michigan Trust Code continues to mandate that a personal representative of an estate, or a trustee of a trust, must make an annual trust accounting or report to all current beneficiaries who have requested one, but the duty of the trustee or personal representative to provide such accounting is now limited to once every six (6) months (unless the beneficiary requests a yearly accounting). Should the Court grant an exception to this accounting rule under MCL 700.7607, no exception may be granted extending longer than three (3) years from the date of the order.
Note that a Court order has not been used as a means to provide an exception from the accounting requirement for a trustee for many years. Instead, the Court relied upon the accountings provided during the course of the case, the disposition of the trust assets and the totality of the circumstances to determine whether scope of an accounting was appropriate. Therefore, this change has little practical effect, but it does provide specific language in the statute confirming what has been accepted practice in Michigan.