Drafting for Flexibility
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Chapter 4: Drafting for Flexibility
Charles S. Ofstein, DeMent & Marquardt PLC
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I.   Introduction

§4.1   Notwithstanding the pervasive conception that estate planning attorneys simply fill in forms, there is a professional challenge and responsibility to draft trusts that not only address the infinitely unique situations of each client but also try to anticipate and properly address situations that might arise or that we cannot even foresee. To juggle the known, the unique, and the unknown, drafting trusts constantly requires counsel to use flexibility. It is key to a functioning, adaptable document.

Several factors have impacted the increased need for flexibility in our trusts. We have more blended families than ever before and, with them, priority struggles between spouses and children. The challenges of modern life include beneficiaries with sophisticated problems like incarceration and substance abuse. Our governmental system of benefits for those who are dealing with long-term challenges or disabilities requires special needs trusts to protect the beneficiary. Attorneys have done a good job informing consumers about the benefits of a trust, and clients now seek them more often as the given approach to their estate plan. And attorneys are getting better at their craft. The more trusts are drafted, administered, and challenged, the more language is developed to prevent or resolve potential issues.

II.   General Language for Flexibility

A. Trustee Selection

§4.2   In most, but not all, revocable living trusts, the settlor will be the primary trustee. But there is the choice of a successor trustee in the event of the settlor’s incapacity or death. Many clients choose a family member to be the successor trustee, but there is the chance that the family member will be deceased, incapacitated, or unable to serve when needed. Most often, we only discover the inability of the successor trustee to serve when the settlor is no longer able to name a replacement.

Discussions regarding trustee selection are very personal to each client. It is a duty of counsel to remind a client that a successor trustee should not be chosen based on birth order or gender. The role of a trustee in administration of the trust is sophisticated. The person in that position needs to have leadership skills, business acumen, organizational skills, and an understanding of finance. If an individual is chosen, there should always be at least one backup successor trustee of the client’s choosing. If it is at all palatable to the client, a corporate trustee as an ultimate backup will prevent the trust from being without an administrator if all the individual successors are unavailable. See form 4.1 for language regarding a possible successor.

In addition, flexibility requires attention to the possibility that a successor trustee may decline to act, resign, or generally fail to perform duties. There are many drafting tools to permit beneficiaries to replace or even remove a trustee. For example, a provision may allow a majority of current beneficiaries to replace a trustee who declines or resigns, but only if the replacement is a corporate trustee. This approach prevents a sole beneficiary from replacing one trustee with a new trustee who is perceived to favor that beneficiary. The objectivity of a corporate trustee is appealing to many clients. See form 4.2 for a sample paragraph.

However, as corporate trustees become increasingly selective in their trust work, it is not always reasonable to find or pay such a trustee. Alternatively, then, the requirement of a corporate trustee can be removed as long as a majority of beneficiaries agree on the replacement. If the beneficiaries cannot agree, the probate court is available to replace the trustee on the petition of an interested party. MCL 700.7202–.7208, .7901.

If a trustee is failing in the fiduciary duties or just making the beneficiaries unhappy, counsel and the client need to discuss whether language allowing the beneficiaries to remove a trustee is a valuable flexibility or a dangerous weapon. Such language can certainly avoid protracted litigation over a trustee’s duties. However, if a trustee has to curry the beneficiaries’ favor to keep the position, the trustee might not truly have the discretion necessary to perform the trustee’s duties. See form 4.3 for sample removal language that provides flexibility but also must be judiciously confined to prevent abuse.

B. Beneficiary Succession

§4.3   Certainly flexibility requires counsel to “kill everyone” during discussions and planning. If a beneficiary predeceases the settlor, the trust needs to address the order of distribution. In general, opting out of the antilapse statute, MCL 700.2708, .2709, .2713–.2716, means that the trust will not distribute assets to a deceased beneficiary’s estate—rather, distributions will move on to the next living beneficiary designated by the settlor in the trust. See form 4.4 for language to opt out of the antilapse statute. Beyond that, general flexibility often requires distributions to be made to issue per stirpes. See form 4.5. Recall that “issue” in Michigan includes only biological and adopted children. MCL 700.1105(d); see also MCL 700.1103(f), (k), .2707(1). “Per stirpes” distribution descends to the issue of a deceased beneficiary in equal shares. MCL 700.2718(2). If a child and a grandchild are both deceased before the settlor, general succession language that distributes first to issue, if any; to siblings if no issue; or to the settlor’s other issue can provide for generational distributions without pages of language. See form 4.6. If the child or grandchild predecease the settlor, there are no generation-skipping transfer (GST) tax consequences. IRC 2651(e). Finally, if we lose the whole limb of the family tree, the trust should have a catastrophic provision. Often, clients use these sections to be philanthropic. See form 4.7.

C. Trust Amendments

§4.4   Often, flexibility requires changes to a document that is irrevocable or unchangeable because the settlor is deceased or incapacitated. Another flexible tool that needs to be drafted carefully is the power to amend the trust by a third party. For example, a trustee may be given the power to amend to accomplish tax goals. See form 4.8. More discussion about trust directors and powers of appointment occurs below in this chapter. But allowing a third party to amend special needs provisions, for example to terminate the trust, might be one way in which a trust builds in flexibility for the unforeseen. See form 4.9.

III.   Specific Issues and Flexible Tools

A. Minors or Multigenerational Beneficiaries

§4.5   Why: Many clients who need a revocable living trust are the parents of minor children. Their interest in a trust is based primarily on the fact that they want their estate to be managed for their children if a catastrophe takes the parents’ lives while the children are still young. While the age of majority in Michigan is 18, the revocable living trust offers the clients a way to make sure their estate would be administered for the benefit of the children without being owned by or under the control of the child until certain requirements are met and maturity attained.

Additionally, clients may indicate a desire to restrict the use of trust assets to one area only, like education. Flexibility cautions against a restriction that is so narrowly drawn that no funds would be available for a beneficiary’s medical emergency; an appropriate need for shelter, clothing, transportation, or another necessity; or to help the beneficiary find work or care for family. The simple use of qualifying language like “to the extent reasonable” could give a trustee the authority to help a beneficiary with a critical need that renders the settlor’s intention impossible to achieve until the need is met.

Other clients are interested in creating a dynasty of estate assets. They are looking for ways to provide benefits not just to their children but also to future generations. They may seek to preserve a farm or a legacy property, or perhaps they want to ensure income to their heirs for generations to come.

How: There are infinite options for drafting for minor beneficiaries; however, a majority of clients choose to make distributions based on either ages or events.

Age-related distributions are generally tied to the client’s personal evaluation of when a child is ready. Perhaps it entails an age at which the client expects maturity, or perhaps it is simply the fish-or-cut-bait point at which the client feels that, whether the child is mature or not, the time to protect has run its course. Form 4.10 includes age-related language with points of unrestricted distributions at ages 22 and 30. However, to provide greater flexibility, there is a provision that if, in the trustee’s discretion, distributions of principal are unwise due to the medical, physical, or emotional stability of the beneficiary at the stated age, the trustee has the authority to withhold the distribution. This language can resolve issues if a beneficiary is troubled, in bankruptcy, or under undue influence at the stated age, conditions that jeopardize any principal received. It also inserts a level of trustee discretion that could protect assets from creditors’ claims at the stated ages or events.

Other clients tie the distributions to certain events that they expect to occur in the beneficiaries’ lives (form 4.11). Connecting a distribution to an event, such as the completion of high school or undergraduate school or marriage, presupposes that the beneficiary’s objectives for the person’s life will follow the client’s path. However, a beneficiary may not be academic, or the beneficiary may be injured and unable to accomplish the goal. The events may be clearly stated, but there also needs to be a clearly stated alternative if the beneficiary’s life does not include these events. Do the assets transfer to someone else? Or are there alternate acceptable events at which the beneficiary may receive assets? Like incentive trusts, which are discussed in §4.6, event-related distributions can be one way to control behavior from the grave, but they also narrowly confine the ability of the trustee to provide assistance to the beneficiary.

It is also possible to tie distributions to a passage of time, regardless of the beneficiary’s age. See form 4.12. This language is valuable when a client is concerned that the beneficiary will blow through the money if the beneficiary does not have time to consider its impact. By providing discretionary distributions for a time under the trustee’s management, with outright distributions five or ten years later, the hope is that the beneficiary will realize the power of investing and wise money management over time.

Finally, clients need to be aware of the potential tax traps if they want to create dynasty, or generation-skipping, trusts. See chapter 5 regarding the taxation of trusts and chapter 9 regarding dynasty trusts. However, the general principle is that the IRS loathes a generation without taxation, so a special tax is levied if a settlor, directly or indirectly, skips a generation. IRC 2612. The penalty tax is an onerous 40 percent. See Instructions for Form 709, Schedule D. However, each U.S. citizen has an exemption from GST tax, which is determined by a formula of included (nontaxable) and excluded (taxable) generation-skipping gifts. To be maximally flexible and tax advantaged, then, a trust that seeks to provide benefits to multiple generations requires the trustee to allocate distributions according to the formula. See form 4.13 for sample language.

B. Incentivizing Behavior

§4.6   Why: One definition of an incentive trust is

a legally binding fiduciary relationship in which the trustee holds and manages the assets contributed to the trust by the grantor. In an incentive trust arrangement, the trustee must adhere to specific requirements set out by the grantor regarding what conditions the trust’s beneficiaries must meet in order to receive funds from the trust.

Julia Kagan, Incentive Trust (Investopedia, Jan 13, 2020). An incentive trust operates as a sort of conditional inheritance for beneficiaries named in the trust.

The concept of control beyond the grave is probably in a tie with the avoidance of probate for the appeal of trusts to clients, but the desire to control is, of course, timeless. One attorney noted that, “Medieval alchemists failed to turn lead into gold. Wealthy twenty-first century parents fear a reverse alchemy. Will their children transmute inherited gold into leaden lives—hollow, shallow, self-absorbed, addicted, indolent, meaningless, wasted?” Gerald LeVan, Raising Rich Kids 32 (2003).

We are all familiar with the Warren Buffet principal that children should receive enough inheritance to do anything but not enough to do nothing. But the concern of an extremely wealthy self-made individual about the perils of inheritance goes back many generations. Andrew Carnegie wrote The Gospel of Wealth in the 1800s, in which he mused:

That the parent who leaves his son enormous wealth generally deadens the talents and energies of the son, and tempts him to lead a less useful and less worthy life than he otherwise would, seems to me capable of proof which cannot be gainsaid. It is many years since I wrote in a rich lady’s album, “I should as soon leave my son a curse as ‘the Almighty Dollar.’” … [L]et us state the proposition thus: that wealth left to young men, as a rule, is disadvantageous; that lives of poverty and struggle are advantageous.

Andrew Carnegie, The Advantages of Poverty, in 29 The Nineteenth Century 371 (Mar 1891).

As if in support of Carnegie, many clients are distrustful of their children’s ability to handle money. One lawyer opined, “Many clients wish to discourage … behavior, such as profligate consumption, sloth or self-destructive behavior. … [Incentive] trusts are not significantly different from traditional irrevocable trusts. They differ only in that they typically set specific criteria for beneficiary behavior.” R. James Young, Incentive Trust: An Idea Whose Time Has Come (and Gone?) (presented to American College of Trust and Estate Counsel).

In other words, an incentive trust is the next level of control. It imposes requirements that tie beneficiary actions to an award or penalty. However, the authority to draft and administer an incentive trust is not specifically addressed in statute; and examples are not available except as shared by other attorneys, clients, or appellate courts, as the privacy of trust documents prevents models from being readily available. IRC 674 generally discusses the roles of a settlor of a trust and the powers of a trustee, but there is nothing unique to incentive trusts. Therefore, a survey of examples, models, and hypotheticals from other sources may provide inspiration for document drafting. See form 4.14.

Some of these incentives border on the insulting—maybe the beneficiary does not want to be an entrepreneur. Perhaps, to maintain a certain grade point average, the beneficiary takes the easiest possible courses and fails actually to challenge themself and develop intellectually. A beneficiary could be mentally or physically unable to meet the settlor’s requirements. Some of these trusts may seem like a not-so-veiled manipulation by the settlor. If an incentive trust rewards marriage, for example, this could force a beneficiary to remain married to an abusive spouse or penalize the beneficiary if the spouse abandons or divorces the beneficiary. If a trust matches income, especially on a graduated scale, the lesson sent could be that only high earners are valuable people. If a trust covers all the basic necessities of life, the settlor could be infantilizing the beneficiary. Each and every one of these incentives has a down side for the beneficiary, perhaps psychologically if not financially.

One of the greatest concerns has to be the choice of a trustee for such trusts. Many of these examples provide the trustee with extraordinary discretion. Trustee favoritism could also endanger the settlor’s intentions, if the trustee is free to interpret what is a “significant contribution” or an “adherence to my family philosophy.” The drafting attorney should establish measurable standards for analysis of the beneficiary’s accomplishment of the trust’s requirements as clearly but as flexibly as possible.

How: Before counsel begins proposing incentive trusts to everyday clients, it is incumbent to decipher for whom an incentive trust is an appropriate option. Counsel is cautioned to remember that “there is a fine line between encouraging and coercing certain conduct … . Draft cautiously, flexibly, and, when possible, in consultation with the beneficiary.” Investigating Incentive Trusts, The Calibre Papers (Fall 2005). Establish the ultimate goal of the settlor. These are trusts for which a mission statement may well serve to assist the trustee and beneficiaries. Advise clients to stress the positive behavior they seek from the beneficiaries as opposed to emphasizing penalty provisions. Questions for the client include the intended duration of the trust, the intended beneficiaries, the assets to be specially monitored, and the criteria of measurement. Id.

An article in the National Law Journal opined:

The statement [of purpose] should be broad enough not to hinder the trustees in administering the trust when unforeseen circumstances arise, but tailored to truly express the Settlor’s goals. It should be clear and irrevocable, but nevertheless a statement that reflects human values, not legal principles … . [O]verly rigid incentive provisions can have the unintended effect of paralyzing the trustees from being able to adapt trust administration in the face of unforeseen circumstances.

James E. McNair, et al., Incentive Trusts Help Perpetuate Family Values, National Law Journal (Feb 12, 2007).

Some guidelines for trustee selection and trustee powers are as follows:

  • Be objective, with as little fiduciary discretion as possible.
  • Make rules that are clearly understood and clearly determinable.
  • Eliminate trustee sympathy as a basis for distributions.
  • Describe precisely how the trustee will obtain the information necessary to carry out the incentive provision.
  • Evaluate whether the burdens on the trustee and the beneficiaries outweigh the intended benefits.
  • Include provisions to prevent litigation for resolving a dispute between a trustee’s interpretation of the incentive provisions and a beneficiary’s interpretation, perhaps through the use of a trustee committee or a predetermined third-party arbitrator.
  • Draft as carefully as possible to prevent a creative beneficiary from being able to thwart the trust’s objectives.
  • Make sure that the standards for a beneficiary are appropriate and attainable—for example, not everyone can or should be a doctor.
  • Make sure that the trustee is one who can stand up to difficult beneficiaries.
  • Anticipating that the trustee’s exercise of discretion may lead to dispute, provide that the trust will exculpate, hold harmless, and indemnify out of trust assets a trustee who is exercising discretion in good faith.
  • Include an in terrorem clause to deter bad-faith, troublesome beneficiary actions.
  • Use a trust director to evaluate the criteria objectively and protect the intentions of the trust.
  • Authorize the trustee to amend the distribution guidelines under certain conditions in the beneficiaries’ best interests.

Trust directors are thoroughly discussed in chapter 3. Incentivizing trusts may be one area in which trust directors can be especially effective. Perhaps a corporate trust director is responsible for the financial management and reporting activities of the trust, but a separate trust director for behavioral evaluation might be a personal and relevant way to decide if the incentive has been met. For example, a religious advisor—an imam, rabbi, minister, or priest—might best evaluate the accomplishment of religious incentives. A business partner or family member may be instrumental in judging whether a beneficiary has sufficiently met work-related goals.

Additionally, providing these third parties, whether as trustees, trust directors, or individuals, with special limited powers such as the power to amend or revise an incentivized trust can provide for unforeseen circumstances. For example, a client may establish a work-related incentive program for a ne’er-do-well child. However, after the settlor’s death, that child may turn their life around, becoming a military hero or spiritual professional. The third party would have authority to revise or even remove the incentivizing restrictions if, in the third party’s discretion, the beneficiary’s behavior has become behavior of which the settlor would have approved.

There are countless ways a trust may incentivize behavior. Form 4.14 is a list of some examples. As always, flexibility demands answers to three questions:

  1. What behavior is sought?
  2. How will it be measured?
  3. What if the behavior is not achieved?

C. Special Needs Beneficiaries

§4.7   Why: Chapter 12 covers special needs trusts, and our discussion here refers to a revocable living trust created by the settlor for the benefit of a special needs, nonspousal beneficiary. For discussions on first-party special needs trusts or testamentary special needs trusts, please refer to chapter 12.

When talking to clients with a special needs beneficiary, the concern is generally to secure the inherited assets from clawback by governmental agencies providing services or benefits to the beneficiary. Generally, Michigan courts have supported the concept that if the trustee (1) is not required to provide support to the beneficiary and (2) has discretion over whether and for what use the beneficiary will receive trust assets, the trust is sufficiently secure and does not count as an asset of the beneficiary. MCL 700.7503, .7505; Miller v Department of Mental Health, 432 Mich 426, 442 NW2d 617 (1989).

How: Form 4.15 is a sample of special needs distributions to be made by a trustee after the settlor’s death for a nonspousal beneficiary. To provide for flexibility, we include a limited power for an appropriate person so changes may be made in the event of unforeseen circumstances. For example, if the special needs beneficiary suffers from fibromyalgia and a cure is found after the settlor’s death, the agent could authorize outright distribution if protection is no longer necessary. Alternatively, if laws change to permit governmental agencies to invade the trust, the agent could revise the trust to make it comply with new rules of protection or to direct the trust assets elsewhere and avoid a clawback.

D. Spendthrift Beneficiaries

§4.8   Why: The negative connotation of the word spendthrift implies a beneficiary who is unable to handle money properly, and a spendthrift provision inserts the flexibility for a trustee to manage assets and protect such a beneficiary from themself. But a spendthrift provision in a trust can go further. It can protect assets from third-party creditors, such as soon-to-be ex-spouses or bankruptcy creditors of the beneficiary. MCL 700.7502, .7504. The point of a spendthrift provision is to build in protections that will interrupt the beneficiary’s right of withdrawal and insulate the assets.

How: Under EPIC, a spendthrift provision “restrains both voluntary and involuntary transfer of the trust beneficiary’s interest.” MCL 700.7502(2). Thus, the trust property is not subject to enforcement of a judgment until it is distributed directly to the beneficiary, MCL 700.7502(3), with exceptions for child or spousal support, taxes, claims against the settlor, or mandatory distributions, MCL 700.7504(1).

Some clients may require enhanced spendthrift provisions. These enhancements would include counsel making sure that there are no mandatory distributions to the protected beneficiary—all distributions are only in the trustee’s discretion. See form 4.16 for an example of a spendthrift provision as a basic protection.

E. Beneficiaries with Substance Abuse Problems

§4.9   Why: Addiction can take many forms, of course; and some addictions, like gambling, are related to behaviors. Behavior modification or incentivizing better behavior are addressed in §4.6. But when dealing with addictions involving substance abuse, testing and treatment tend to be the concerns of the settlor. The goal is to help the beneficiary recover, not to provide the funds that could aid in further addiction or death.

The trustee, then, must be empowered to use discretion to determine if the beneficiary is using the substance, whether the beneficiary is following treatment guidelines, and to whom and when distributions will help the beneficiary regain health. Many trustees will balk at this level of scrutiny, involvement, and responsibility.

How: The greater the detail for the trustee, the more the trustee is protected as the trustee monitors the beneficiary’s health. See form 4.17 for an example that requires random testing at least annually. This requires the trustee to have a directed, albeit limited, interaction with the beneficiary. Some clients will say that a failed test means no distributions to that beneficiary until two or three tests show the beneficiary is clean of the abused substance. Other clients may wish the trustee to pay for shelter and food or legitimate treatment but provide no cash distributions until treatment is successful. Definitions are key—What is success? What treatments are acceptable? Trustee discretion is especially meaningful here, as methods and treatment opportunities may arise that the settlor cannot envision.

This is also an area in which trust directors (chapter 3) can be particularly helpful. One trust director may have the administrative job to invest, account, report, and distribute as directed by the other trust director, who determines whether testing, treatment, and discretionary distributions are accomplished for the addicted beneficiary. Another tool of flexibility is to provide the trustee direction on how best to monitor the beneficiary, the power to amend the trust, and a clear description of the settlor’s intent.

F. Incarcerated Beneficiaries

§4.10   Why: Michigan has a specific statute, the State Correctional Facility Reimbursement Act (SCFRA), MCL 800.401 et seq., that requires a prisoner to provide the state of Michigan with complete financial information. MCL 800.403a(1). The purpose of this information is to secure reimbursement to the state for expenses incurred during incarceration. One specific point is not covered by the SCFRA. There is no obligation in the statute for a trustee or other fiduciary to report to the Department of Corrections. For that reason, the obligation to disclose a beneficial interest in a revocable living trust falls to the prisoner.

However, if a prisoner is the beneficiary of a trust, will the trust assets automatically be available for reimbursement to the state? The answer is no if the trust incorporates the proper flexibility language.

Definitions are key to the applicability of the SCFRA, and in this case the language of the statute is clear and comprehensive. “Prisoner” means any person under the jurisdiction of the Department of Corrections who is either confined in any state correctional facility or is under the continuing jurisdiction of the department. MCL 800.401a(e). “Assets” mean property, tangible or intangible, real or personal, “belonging to or due a prisoner or former prisoner … from any other source whatsoever.” MCL 800.401a(a). The only exceptions are (1) a homestead of the prisoner up to $50,000 in value and (2) money saved by the prisoner from wages and bonuses paid to the prisoner while the prisoner was confined to a state correctional facility. Id. Everything else is fair game, including state pensions. State Treasurer v Schuster, 456 Mich 408, 572 NW2d 628 (1998).

“Cost of Care” means the cost to the department for providing the prisoner transportation, room, board, clothing, security, medical care, and other normal living expenses, plus the cost of college-level classes or programs. MCL 800.401a(b). “State correctional facility” means a facility or institution that houses a prisoner under the jurisdiction of the department. MCL 800.401a(f). The term is not limited to prisons and includes correctional camps, community correction centers, and state reformatories. Id.

The SCFRA requires the department to develop a form to obtain asset information from prisoners. MCL 800.401b(1). “Every” prisoner must complete the form, swearing to its accuracy. MCL 800.401b(3). The department prepares a report on each prisoner, which is sent to the attorney general. MCL 800.402. The attorney general is responsible for investigating these reports. If the attorney general has “good cause” to believe that a prisoner has assets available to the state to recover not less than 10 percent of the estimated cost of care or 10 percent of the estimated cost of care for two years, whichever is less, and that sum does not exceed 90 percent of the value of the prisoner’s assets, the attorney general must seek reimbursement for the cost of care of that prisoner. MCL 800.403.

The SCFRA demands the full cooperation of the prisoner. MCL 800.403a(1). Failure to cooperate fully may be a factor in parole considerations. MCL 800.403a(2). But nowhere in the SCFRA is any third party, such as a trustee or personal representative, required to disclose the beneficiary or devisee status of the prisoner to the state. Only the sentencing judge, sheriff of the county, facility administrator, and Department of Treasury are required to provide information and assistance to the attorney general or, if necessary, a prosecuting attorney. MCL 800.405.

How: The supreme court interprets the SCFRA literally, and the plain intention of the legislature informs many of the related case decisions. In State Treasurer v Snyder, 294 Mich App 641, 823 NW2d 284 (2011), an incarcerated defendant disclaimed insurance proceeds on which he was a named beneficiary. His share of the insurance was only $2,500, but the treasury pursued him. The court affirmed the trial court decision to recover the proceeds for the state, stating, “The SCFRA imposes a civil, statutory duty on prisoners to reimburse the state for the cost of their incarceration.” 294 Mich App at 646 (citing Schuster, 456 Mich at 419). The court also pointed out that the SCFRA says an asset is one “belonging to or due a prisoner” (emphasis added), so actual receipt is not a requirement. Snyder, 294 Mich App at 645. The court concluded that “a prisoner cannot impede the State’s clear statutory right to reimbursement.” 294 Mich App at 648 (citing State Treasurer v Sheko, 218 Mich App 185, 188, 553 NW2d 654 (1996)).

Apparently, the courts are holding prisoners’ feet to the SCFRA fire. So how can a client, as the parent of an incarcerated child, provide any benefit that will not be accessible by the department?

For the incarcerated beneficiary, the principles of Miller v Department of Mental Health, 432 Mich 426, 427, 442 NW2d 617 (1989), apply. If the settlor does not intend to require a trustee to pay needed amounts to a beneficiary and if the trust distribution terms are fully discretionary, the beneficiary has no ascertainable interest in the trust and “her interest would not be subject to the claims of creditors including a claim asserted by the state.Id. at 436 (emphasis added).

The key is discretionary language that is clear and ambiguous within the four corners of the trust document. This is because creditors may not reach a discretionary trust because the beneficiary has no ascertainable interest in the assets. Id. at 431. So the flexibility tool is a discretionary trust.

The court of appeals held in State Treasurer v Hayden, No 277138 (Mich Ct App May 13, 2008) (unpublished), that the following language successfully created a discretionary trust:

[U]nder the heading “During the Incarceration of Settlor’s Son” … “[t]he Trustee may, in its sole and absolute discretion, distribute income and/or principle to or for the benefit of Settlor’s son … ”. Moreover, section 6(d)(1)(c) provides “the Trustee shall not distribute income and/or principal for care or services which, in the absence of this trust, would be paid by any State … correctional facility.”

See form 4.18.

One cautionary tale for drafting attorneys is that the state will latch on every mandatory verb—shall, must, will—to pursue reimbursement. Avoid these verbs at all costs to avoid a determination that the trust is not fully discretionary.

In short, caselaw has provided us a list of guidelines for flexibility:

  • Give the trustee sole and unfettered discretion over the beneficiary’s benefits from the trust.
  • Provide that incarceration, parole, or the existence of any potential claim of the state or federal government against a beneficiary suspends any and all rights the beneficiary may have to a withdrawal right or demand right.
  • Use verbs like may for trustee decisions, adjectives like sole and unfettered for discretionary powers, and caveats like suspension rights for convicted beneficiaries.
  • Ask your client if incarceration may be an issue. It’s a difficult point, to be sure, but the client will appreciate your interest in protecting the client’s assets.

See form 4.19 for sample language.

G. Blended Families

§4.11   Why: Our practices are little studies in modern families. We are challenged by our clients to create an effective, efficient transfer of assets among spouses, children, stepchildren, and perhaps ex-spouses if there are obligations. When married clients begin to discuss the issues of yours, mine, and ours and age differences, the blended family particularities will require as much discussion and flexibility as possible.

Before drafting, counsel should discuss certain principles with the clients to be certain the plan is possible.

First, determine if the spouses on the same page. If they are not, each should have a different attorney to prevent a conflict. Find out if there is a prenuptial agreement on which counsel and the clients may rely for the division of assets and a waiver of the spousal election and allowances. If not, the clients need to understand the spousal election and family allowances that are available to a surviving spouse. MCL 700.2401–.2405, .2801. It is helpful as a beginning to find out the level to which, if any, the spouses intend to provide for one another.

Second, clients need to be reminded that almost all children, to some extent, equate their inherited share of a parent’s trust with their share of that parent’s love. If a child receives some benefit at a parent’s death, they often calm a bit and will be less afraid of total disinheritance, which in turn may reduce hostility against the stepparent who survives. Each client should evaluate whether there is some provision the client can make for children as well as a surviving spouse.

Third, choosing a trustee over assets is an important point to discuss. Making an adult child trustee over a stepparent will often lead to distress—but so will a stepparent as trustee over assets for the benefit of the decedent’s child. Family relationships and their preservation are critical when planning for blended families. The lawyer as counselor is critical in these discussions.

There is more information regarding planning for blended families in chapter 8, but the following are some tools for flexibility.

How: Encourage a client to provide some benefit, even as a token, to all the beneficiaries at the client’s death. A trust may provide income to the second spouse for life; it may even include the power to invade principal, if necessary, after considering other assets available to the surviving spouse. This is common language, but surviving spouses fear the trustee will refuse to provide any principal distributions to help a surviving spouse unless the surviving spouse discloses all assets and expenditures outside the trust, and indeed, that is the intent—if the spouse has money of their own, the principal is not to be invaded. A surviving spouse will resent this as an invasion of privacy especially if the trustee is an adult child of the settlor. But if the surviving spouse is also the trustee, the children of the decedent are often suspect of the trustee’s ability to be objective or properly to evaluate an ascertainable standard. For flexibility, it is best to use a third-party trustee who is reminded of the settlor’s goal—whether it be to maintain a standard of living, prioritize the spouse’s well-being above all other beneficiaries, preserve as much principal as possible, or perhaps provide a five-by-five withdrawal right to the surviving spouse. See form 4.20.

Perhaps the trust begins with a distribution to children—perhaps a set sum for each, available for them immediately. While this obviously diminishes the assets available to the spouse, it accommodates all loved ones to some degree and lessens discord among the surviving spouse and the settlor’s children. Another common provision gives the surviving spouse the right to use the home with the children as ultimate owners when triggered by certain events. See form 4.21.

A spouse may also be provided a limited power of appointment to amend the distribution of trust assets among beneficiaries other than the spouse, the spouse’s creditors, or the spouse’s issue. This provision may provide a surviving spouse with the power to keep particularly hostile stepchildren from creating too many problems, lest the power be exercised by the surviving spouse to disinherit them from the remainder estate.

A third party, or a trustee, may be provided the right to modify or terminate the trust if circumstances arise that make changes or termination necessary to satisfy the settlor’s intent. EPIC provides that a noncharitable trust may be modified or terminated by a trustee or trust director to whom a power to direct the termination or modification of the trust has been given. MCL 700.7411(1)(c). See form 4.22 for sample powers for a trustee to terminate or modify a trust.

H. Beneficiaries in Poor Relationships

§4.12   Why: Often, clients’ interest in a trust arises from their concern over a poor relationship of one of their beneficiaries. Perhaps a child is in an abusive relationship. Perhaps a relationship has not been formalized by marriage as the client would prefer, and the client fears for the child’s financial security. Often, the client simply distrusts or dislikes a beneficiary’s spouse or significant other and is clear in the intention that the client doesn’t ever want that person to benefit from their assets.

Counsel should explain that assets are only controlled by the client’s wishes while they are held in trust. Once distributed to a beneficiary, the assets become subject to the beneficiary’s choices, problems, and bad decisions. Therefore, the client must understand that the trustee will need to be involved in managing assets for the benefit of the beneficiary and perhaps the beneficiary’s issue. This results in protracted trust administration and fees. Also, although by definition the client won’t be around to suffer the fallout, the client has to address and acknowledge the legacy that the choice to control from beyond the grave will leave with the child. The controlled beneficiary will know how the settlor felt about the beneficiary’s partner, and so will the partner. The client must determine whether the emotional problems that knowledge creates will be worth the control.

How: The job of counsel is to protect the beneficiary from the poor relationship, but not necessarily from all relationships. Therefore, the client needs to answer these questions:

  • How are the assets managed if the beneficiary is in this relationship for the beneficiary’s entire life?
  • How are the assets managed if there is a legal separation or divorce?
  • How does the trustee make sure the divorce or legal separation is not just a ploy to defeat the trust?
  • What happens to the assets if the unwelcome individual dies?
  • What happens to the assets if the beneficiary dies before the unwelcome individual?

See form 4.23 for sample language to be tailored, as always, to the client’s wishes.

Footnotes

1 The author acknowledges and thanks Michele C. Marquardt for her contribution in writing the original chapter.

Forms and Exhibits

Form 4.01 Trust Clause - Designating Successor Trustee
Form 4.02 Trust Clause - Resignation of Successor Trustee
Form 4.03 Trust Clause - Removal of Trustee
Form 4.04 Trust Clause - Opt Out of Antilapse Statute
Form 4.05 Trust Clause - Children or Issue Per Stirpes
Form 4.06 Trust Clause - Descending Order of Family Beneficiaries
Form 4.07 Trust Clause - Catastrophic Provision
Form 4.08 Trust Clause - Trustee Power to Amend for Taxes
Form 4.09 Trust Clause - Power to Terminate a Special Needs Trust
Form 4.10 Trust Clause - Age-Related Distributions
Form 4.11 Trust Clause - Event-Related Distributions
Form 4.12 Trust Clause - Time Interval Distributions
Form 4.13 Trust Clause - Generation-Skipping Tax Language
Form 4.14 Trust Clause - Options for Incentive Trusts
Form 4.15 Trust Clause - Special Needs - Limited Power of Appointment
Form 4.16 Trust Clause - Spendthrift Provision
Form 4.17 Trust Clause - Substance Abuse - Random Drug Checks
Form 4.18 Trust Clause - Incarcerated Child or Beneficiary
Form 4.19 Trust Clause - Qualifying Language for an Incarcerated Beneficiary
Form 4.20 Trust Clause - Five-by-Five Power
Form 4.21 Trust Clause - Blended Family Provisions
Form 4.22 Trust Clause - Trustee Power to Terminate or Modify
Form 4.23 Trust Clause - Distribution to a Child Who Is Married to an Undesirable Spouse
Form 4.24 Trust Clause - Limited Powers of Appointment (Spouse or Trustee)
Form 4.25 Trust Clause - General Power of Appointment (Spouse)
Form 4.26 Trust Clause - Ascertainable Standard

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