This article was written by John A. Scott for the State Bar of Michigan's Probate and Estate Planning Journal, Spring, 1993.
Michigan is blessed with an abundance of cases which attempt to set the boundaries for the ability of a creditor (particularly preferred creditors such as the State of Michigan(1) or a divorcing spouse) to get at the assets or income of a trust created for the benefit of a debtor by another, usually a parent or grandparent. The most recent full opinion to be announced is Miller V. Department of Mental Health, 432 Mich. 426; 442 NW2d 617 (1989). I
In Miller, the Department of Mental Health sought to compel support payments for Carol Miller who was in the care of the Department since 1958. Her father died in 1984, leaving a trust which provides for Carol as follows:
"In the event that the Beneficiary Carol M. Miller survives the Settlor, the Trustee shall pay to or extend on behalf of such Beneficiary so much of the income of the trust and, also, such amounts of principal (even to the extent of all) as the Trustee deems proper for the support, maintenance and welfare of said Beneficiary." (p. 782)
The Michigan Court of Appeals held that the trust was in the nature of a "support trust" for Carol and reversed the Probate Court which had held that the trust was a "discretionary trust" not a trust in which Carol had an "ascertainable interest." The narrow holding of the Supreme Court is that in this case the Probate Court must not make this determination as a matter of law, but instead must have an "evidentiary hearing concerning the factual context and the circumstances." (p. 428) Such a proceeding will involve taking parole evidence and other evidence which may be necessary to determine the Settlor's intentions.
The most recent Supreme Court pronouncement is the In re Ferguson Estate, 439 Mich. 963; 483 Nw2d 365 (1992) (in which the Supreme Court reversed the Court of Appeals ruling that the trust in question was in effect a support trust (186 Mich. App. 409; 465 NW2d 357 (1992)) and remanded the case back to the Probate Court for an "evidentiary hearing" in keeping with Miller.
In giving guidance to the Probate Court, the Supreme Court in Miller followed the Restatement of Trust rules that there are three kinds of trusts: (1) a trust vesting an ascertainable portion of the trust in the beneficiary; (2) a trust providing that the trustee shall pay so much of the trust income and principal as is necessary for education or support of the beneficiary; and (3) a totally discretionary trust.
According to the Restatement of Trusts, if the terms of the trust provide that the trustee shall pay to or apply for a beneficiary only so much of the income and principal (or either) as the trustee in its uncontrolled discretion shall see fit to apply, a transferee or creditor of the beneficiary cannot compel the trustee to pay any part of the income or principal (Restatement of Trusts 2nd Edition, Section 155).
The Restatement of Trusts at §157 further provides that if the trust is an ascertainable portion trust or a support trust, then even if there is a spendthrift provision, the interest of the beneficiary can be reached to satisfy enforceable claims against the beneficiary:
(a) by the wife or child of the beneficiary for support, or by the wife for alimony;
(b) for necessary services rendered to the beneficiary or necessary supplies furnished to him:
(c) for services rendered and materials furnished which preserve or benefit the interest of the beneficiary;
(d) by the United States or a State to satisfy a claim against the beneficiary.
Commenting upon (a) above, the Reporter for the Restatement notes, "the result is much the same as though the trust were created not solely for the benefit of the beneficiary, but for the benefit of himself and his dependents." (p. 329). Commenting upon (b), the Reporter notes that "if such a claim were not enforced, it would tend to prevent the beneficiary from obtaining necessary assistance." (p.329)
The Probate Court in Miller found from an examination of the document that it was the intention of the Settlor that the trust was discretionary. The Supreme Court did not agree that such a determination could be made without a hearing to take evidence on the Settlor's intent. The Supreme Court said:
"The trust instrument did not provide that the trustee shall pay so much of the income and such amounts of principal as 'are necessary' for Carol Miller's support, maintenance, and welfare, but rather so much of the income and such amounts of principal as the trustee 'deems proper' for her support, maintenance, and welfare."
"In some circumstances, the words used, 'deems proper,' might be read as creating a support trust, vesting in the trustee only the discretion to determine the amount necessary for support of the beneficiary and establishing an entitlement on the part of the beneficiary to enforce payment of such amount as the trustee determines should be paid for support in the exercise of a discretion that is judicially reviewable for abuse of discretion. In other circumstances, those words might be read as creating a discretionary trust vesting in the trustee complete discretion regarding the amount, if any, to be paid for the support of the (2) beneficiary.
Such evidentiary hearing may deal with the Settlor's legal obligations, if there are any, to the beneficiary and how much, if any, the Settlor had supported the beneficiary during his or her lifetime. As to the admissibility of such evidence, the Court footnotes its concerns about the factual context and circumstances with the following further citation in footnote 15:
"In the interpretation of the words and other conduct of the Settlor, circumstances throwing light upon the Settlor's intention are relevant, and evidence of such circumstances is admissible except when excluded by the parole evidence rule, by the statute of frauds or the statute of wills, or some other rule of law. [Restatement of Trusts 2nd, Section 24, Comment, p. 17.]"
"Under the parole evidence rule, if the manifestation of intention of the Settlor is integrated in a writing, that is, if a written instrument is adopted by him as the complete expression of his intention, intrinsic evidence, and the absence of fraud, duress, in the state, or other ground for reformation or rescission, is not admissible to contradict or vary it. On the other hand, if the meaning of the writing is uncertain or ambiguous, evidence of the circumstances is admissible to determine its interpretation. [1 Scott, Trust, Section 38, pp. 403-404]."
"Similarly, see Flynn v. Brownell, 371 Mich. 19, 27; 123 Nw2d 153 (1963)." (p. 433)
It now appears to be the rule that except in the most patent cases (in which case there should be no contest), the Probate Court will have to hold an evidentiary hearing as to intent of the Settlor of the Trust. In arriving at such determination, the Probate Court may be governed by earlier pronouncements of the Court of Appeals, for example, In Re Sykes Estate, 131 Mich. App. 49; 345 Nw2d 642 (1983) and Coverston v. Kellogg, 136 Mich. App. 504; 357 Nw2d 705 (1984).
In Sykes, the Court of Appeals approached the problem of the Settlor's intent from a slightly different angle than the Supreme Court in Miller. Here the rights of the beneficiaries were described as follows:
"(1) My Trustee shall apply such amounts from the income and principal hereof to or for the benefit of my said wife, Della A. Sykes, and my son, Benjamin T. Sykes, Jr., in such proportions and amounts and at such intervals as the Trustee shall deem necessary to provide for their proper care, support and welfare, always considering the means reasonably available to each such beneficiary from all sources; any unused income in any accounting year shall be accumulated and added to principal hereof; the amounts of and occasions and necessity for and preferential use between the beneficiaries of any such income or principal payments shall be wholly within the discretion of my Trustee and its judgment shall be conclusive.'" (p. 52)
The issue was framed as a claim by the Department of Mental Health that the Trustee had abused its discretion in paying only approximately $2,000.00 of a greater than $17,000.00 bill for the adult son Benjamin in a mental hospital. The Department of Mental Health cited cases from California and Illinois in which those courts had held that the Trustees in those cases had discretion, which while "complete and absolute", was not arbitrary. Such discretion would not permit the Trustee to provide no support whatever for the beneficiary and "to throw him on the charity of others or the state." (p. 55) It was determined in those cases that the Settlors had created support trusts which did not grant the trustees power to provide no support. In one case, in fact, it was determined that the trust in question was "intended to provide for the support of the beneficiaries." (p. 55)
While not engaging in the overt classification system later found to be appropriate in Miller (discussed above), in Sykes, the Court of Appeals held that the language of the Trust gave the Trustee complete discretion as to whether the son was to receive any payments of the Trust. The amount and frequency was completely up to the Trustee ways consider the "means reasonably available to the son from all sources." The Court of Appeals further said that the Trust was discretionary and the beneficiary's interest unascertainable: i.e. "he could not be certain he would ever receive anything" (p. 56). The Court earlier noted that "as to these matters which the Settlor has left to the discretion of the Trustee, the Court will not interfere with the Trustee's exercise of its discretion unless the Trustee has abused his discretion.", citing Moss v. Axford, 246 Mich. 288 (1929). [p. 54] 224 NW 425 (1929). The Court finally found that the Trustee had not abused its discretion. Note that the Court of Appeals in its Miller decision, 161 Mich. App. 778 (1987) at p. 783 (which was reversed by the Supreme Court, supra) , distinguished Sykes from the Miller fact situation as a case involving a claim of abuse of discretion. In doing so, the Court of Appeals conveniently dispensed with the underlying question of Sykes: "Was the trust a support trust or a discretionary trust?" In order to have an abuse of discretion, there must be discretion to be abused.
Coverston v. Ke11ogg gives us a slightly less fact specific test of what may be a discretionary trust. Again citing the Restatement of Trusts 2nd, Section 155(1), the Court cited Bogart for the further gloss that "[the Trustee must have complete discretion to pay or apply or to totally exclude the beneficiary, if the trust is to be called 'discretionary' in the untechnical sense. Bogart, [Trusts and Trustees 2nd Edition], §228, pp. 509-510." (our emphasis) 136 Mich. App. at page 508.
The Court of Appeals also cites the comment to the Restatement that the rule stated in Section 155(1) applies only in a situation where the Trustee "may in his absolute discretion refuse to make any payment to the beneficiary or to apply any of the trust property for his benefit." (our emphasis) (p. 508)
The Court of Appeals found that:
"Although paragraph 3(a) of the instant trust contains terminology purporting to vest the Trustee with the absolute unfettered discretion to use the income and, if necessary, the principal for the benefit of Gerald Kellogg's welfare and maintenance during his lifetime, our examination of the remainder of the trust reveals that the Settlor, Edith Kellogg, did not grant the Trustees the power to refuse to apply trust funds for the benefit of her son. Furthermore, under the terms of the trust, Gerald Kellogg is ultimately entitled to the whole or part of the trust property." (our emphasis) (p. 509)
The Court held that because there was no power to refuse to make distribution, and because after age 50 the trustee could turn over assets to the beneficiary, the trust was either an ascertainable portion spendthrift trust or a support trust. It was not in any event a discretionary trust. Since it was not a discretionary trust under the Restatement §157 rule, the income could be reached to satisfy alimony claims. A lump sum from principal was disallowed but could be ordered if the trustee were to terminate the trust. The trial court could also order the trustee to keep the claimant advised of the condition of the trust assets to prevent the trustee from depleting the same.
From these cases, we conclude that the following rules apply:
1. For purposes of claims by "preferred creditors," trusts are either truly discretionary or not. Truly discretionary trusts are not subject to invasion, others are, despite spendthrift language to the contrary.
2. Whether or not a trust is truly discretionary can probably only be determined by an evidentiary hearing or at least a full stipulation of the facts sufficient to determine what may have been the history of the relationship of the Settlor to the beneficiary; the duty, if any, of the Settlor owed to the beneficiary to provide support; the kind and amounts of support provided the beneficiary by the Settlor during the Settlor's lifetime and how the language of the trust relates to the foregoing conditions.
3. Trust language which directs the trustee to consider other resources available to the beneficiary in deciding whether or not to make a distribution, but not how much to make, may be indicative of a discretionary trust.
4. Trust language which allows the trustee the discretion to make no distributions is a fairly sure indication of a discretionary trust but is not absolutely necessary for such determination.
5. Spendthrift provisions alone will not protect an otherwise incapable trust.
6. Language which describes the purposes for which the distributions can be made, i.e. health, support and maintenance, may be indicative of a support trust.
7. Simple discretion for the trustees without other language or facts is probably not enough to prevent the trust from being viewed as incapable.
8. If the claimant may invade the trust, the Probate Court may frame the nature of the claimant's rights in the trust to fit the nature of the claim and the rights of the beneficiary.
9. If the trust is truly discretionary, the Court should not second guess the trustee's exercise of discretion unless there has been an abuse of the same.
10. Litigants should consider asking the Court to retain jurisdiction for purposes of determining whether or not a creditor's rights continue to be enforceable if there is a change in the status of a beneficiary or the conditions which give rise to the beneficiary's rights.
With shrinking state budgets, we can expect to find state and local government agencies taking an increasingly active role in assertions of trust estate responsibility for the care of trust beneficiaries. Attorneys drafting trust documents for persons wanting to benefit family members with special needs should pay particular attention to the evolving case law in this area. However, even estate plans for families thought to not have unusual problems can come a cropper if daughter Susy suffers a badly disabling injury or grandson Johnnie turns out to be a stinker.
1. 1e.g. under Mental Health Code: MCL §330.1800, MSA 14.800(800); MCL §330.1804, MSA 14.800(804); MCL §330.1818, MSA 14.800(818); and under Juveniles and Juvenile Division of the Judicature Act (Chapter XIIA): MCL §712A.18(2), (3). (5) and (6), MSA §27.3178(598.18)(2), (3), (5) and (6).
2. A trust instrument may establish a discretionary trust although the words 'uncontrolled' are not added before the word 'discretion.' See reporter notes accompanying 1 Restatement Trusts, 2d, §155, illustration 1, p 324." (pp. 432-433)