Chapter 19: Office of Trustee

I.   Identification of the Trustee

A. Original Trustee

§19.1   The settlor of a revocable grantor trust ordinarily acts as the trust’s original trustee. However, if the settlor expects their own death or incapacity in the near future, the settlor may choose to name another person as an original cotrustee or even as the sole original trustee to avoid any complications associated with the transfer of trusteeship on the settlor’s death or incapacity. In addition, the settlor may choose to name another original cotrustee, often a bank or trust company, if the settlor would like assistance in managing the trust assets. See §§15.2–15.4 for sample clauses naming the original trustee.

B. Trustee Defined to Include One or More Trustees

1. In General

§19.2   It is important for the identification of the trustee throughout the document to be clear and consistent. Because there may be multiple trustees of a trust at different times, it is helpful to define the word trustee to refer to the one or more persons acting as trustee, regardless of number. This makes the trust instrument easier to read than if a phrase such as “trustee or trustees, as the case may be,” is used throughout.

2. Sample Clause: Trustee Defined to Include One or More Trustees

§19.3  

See ¶3.1 of form 13.1.

C. Successor Trustees

1. In General

§19.4   The trust instrument should clearly identify the successor trustees and the order in which they are to take office. If individuals are named as successor trustees, a sufficient number should be named to ensure that one of them is able to act as successor trustee when necessary. The trust should also indicate whether they are to serve one at a time or together. If the trust has or may have multiple trustees, the trust should indicate whether a successor is to take office when any of the trustees cease to serve or only if all of the original trustees cease to serve. Only individuals or corporations authorized to act as a fiduciary under the Michigan Banking Code of 1999 are authorized to act as a trustee of a trust. MCL 487.11105(2). While an attorney or a financial advisor of a client may be named as a trustee, that attorney or financial advisor must be named in their individual capacity unless the company for which the individual works is authorized to act as a fiduciary under the Michigan Banking Code of 1999.

2. Sample Clause: One Original Trustee; Multiple Successors Serve Together

§19.5  

See the second alternative ¶3.2 of form 13.1.

3. Sample Clause: One Trustee; Multiple Successors Serve One at a Time

§19.6  

See the third alternative ¶3.2 of form 13.1.

4. Sample Clause: Multiple Trustees; Successor If None Acting

§19.7  

See the fifth alternative ¶3.2 of form 13.1.

5. Sample Clause: Multiple Trustees; Successor If Any Cease to Serve

§19.8  

See the sixth alternative ¶3.2 of form 13.1.

D. Bank as Trustee

1. In General

§19.9   If a bank, trust company, or other corporate entity that provides trustee services is named as a trustee, the settlor should consider sending a copy of the trust instrument to this professional trustee before the instrument’s execution. This allows the bank or other entity to review the terms of the trust to determine whether the trust’s terms will prevent it from acting as a trustee. Even when a bank is named as a successor trustee, it is best to allow the bank to make this determination while the settlor is able to change problematic terms or name a different successor trustee. As a condition of acting as a trustee, some banks require specific language in the trust instrument concerning the trustee’s powers and duties. Often, the instrument must include the power to invest trust assets through entities affiliated with the bank.

In addition, if the settlor names a bank as a trustee, the trust should anticipate potential future mergers and consolidations. The Michigan Banking Code of 1999 expressly provides that a consolidated bank “holds and enjoys the same and all rights of property, franchises, and interests, including appointments, designations, and nominations and all other rights and interests as a fiduciary, in the same manner and to the same extent as those rights and interests were held or enjoyed by each consolidating organization at the time of the consolidation.” MCL 487.13703(2). Nonetheless, if the client wishes to have the consolidated entity continue to serve as the trustee, it will provide further clarification if the trust instrument expressly indicates this.

2. Sample Clause: Merger or Consolidation of a Corporate Trustee

§19.10  

See ¶3.8 of form 13.1.

E. Trustee of a Qualified Domestic Trust

§19.11   It is important to identify a trustee who qualifies under the tax regulations if the trust provides for the creation of a qualified domestic trust (QDT). As discussed in chapter 16, when the surviving spouse is not a U.S. citizen, the spouse may qualify for a marital deduction for property passing for the benefit of the surviving spouse only if the property is transferred to a QDT. IRC 2056(d)(1). This requirement stems from the concern that a surviving spouse who is not a U.S. citizen could take the property offshore so that, on the death of the surviving spouse, the property would not be available for the collection of federal estate tax. Placing the property in a QDT ensures that the property will be available to the Internal Revenue Service (IRS) at the death of the surviving spouse. Among other requirements, to qualify as a QDT, the terms of the trust must provide that at least one trustee of the trust is an individual U.S. citizen or a U.S. domestic corporation. IRC 2056A(a)(1)(A).

F. Additional Trustees

1. In General

§19.12   The terms of the trust may give the trustee the authority to appoint a cotrustee. This may be helpful to a trustee who was named because of knowledge of the family’s affairs but needs assistance with managing the trust assets. The trust may limit this power. For example, the trust may limit the appointment to a corporate cotrustee. See the sample clause in §19.13.

The power to appoint a cotrustee also allows the trustee to appoint a successor, or the trust may specifically authorize the trustee to appoint a successor. Allowing an individual trustee to designate their own successor, individual or corporate, is often an appropriate way to add flexibility to the trust instrument.

In addition, when separate trusts are created for the benefit of each child, it may be appropriate to allow the beneficiary to elect to be cotrustee when the child reaches a designated age. This gives the beneficiary the opportunity to participate in the management of the assets the beneficiary will eventually receive outright without giving the beneficiary complete control all at once.

2. Sample Clause: The Trustee May Appoint a Corporate Cotrustee

§19.13  

See the first alternative ¶3.3 of form 13.1.

3. Sample Clause: A Beneficiary May Elect to Serve as Cotrustee

§19.14  

See the second alternative ¶3.3 of form 13.1.

G. Divided and Directed Trusteeships

1. In General

§19.15   Michigan has directed and divided trustee laws. Under these provisions of the Estates and Protected Individuals Code (EPIC), the terms of a trust may appoint a trust director. MCL 700.7703a(3). In addition, a trust instrument may name separate trustees and designate different responsibilities, powers, and liabilities of each separate trustee regarding the trust. MCL 700.7703b(1).

2. Directed Trusteeships and Trust Directors

§19.16   The terms of the trust may appoint a trust director or otherwise contemplate the future appointment of a trust director. MCL 700.7703a(3). As a general matter, a trustee is required to follow the directions of a trust director in accordance with the terms of the trust instrument. MCL 700.7703a(7). See chapter 21 for a detailed discussion on trust directors and directed trusteeships.

3. Divided Trusteeships and Separate Trustees

§19.17   The nomination of separate trustees to act in specific roles regarding a trust is referred to as a divided trusteeship. Under this structure, each separate trustee has independent authority to act regarding the designated trustee functions in the trust instrument without approval from the other separate trustees. MCL 700.7703b(2)(b). The trust instrument may create multiple separate trustee roles. Michigan law contemplates three different types of separate trustee roles:

1. Separate investment trustee
2. Separate distributions trustee
3. Separate resultant trustee

MCL 700.7703b(2)(a). In general, a separate investment trustee may be designated as the trustee to perform investment functions. MCL 700.7703b(2)(a)(i). A separate distributions trustee may be designated as the trustee with authority to make discretionary distribution decisions. MCL 700.7703b(2)(a)(ii). A separate resultant trustee would be designated to perform all other functions of the office of trustee not otherwise allocated to a separate distributions trustee or a separate investment trustee. MCL 700.7703b(2)(a)(iii).

If implementing a divided trusteeship in a trust instrument, the separate trustee provisions must be drafted carefully as the statute authorizing this structure is complex. For detailed discussion regarding divided trusteeships and the roles of separate trustees, see chapter 21.