Deeds , Promises and Oral Trusts

Take-Away: While Michigan respects the creation and enforcement  of an oral trust, there must be clear and convincing evidence of the trust’s terms, and other statutes, like the Statute of Frauds, override the oral trust statute.

Background: When property is conveyed, often along with the conveyance are some oral instructions from the transferor. The question then becomes whether those oral instructions become a binding contact to which the transfer is subject, or the terms of a trust imposed on the transferred asset. If there is no companion ‘writing’ that documents those oral instructions, it becomes unlikely that the instructions will become a binding contract or enforceable trust. Such was the conclusion in a recent Michigan Court of Appeals case.

In re Estate of Finney, Michigan Court of Appeals, No. 361305 (June 15, 2023)

Facts: Clisson Finney (Finney) died intestate in September 2017. Johnson, his son, petitioned to open a supervised probate estate in November, 2017. Johnson was appointed Personal Representative in January, 2018. In November, 2018 the plaintiff was directed by Johnson to file a lawsuit against Finney’s sister, Rosa Finney (Rosa.) The lawsuit claimed that Rosa had used undue influence over her brother (Finney) with regard to real estate. In August, 2017, the month before Finney’s death, Finney deeded his home to Rosa using a quitclaim deed. That deed was recorded with the Register of Deeds. In the lawsuit Rosa filed an affirmative defense to the Plaintiff’s claim of undue influence. Rosa’s affirmative defense stated: “Although the decedent died intestate, he made his wishes known to his sister Rosa Finney and that is the reason for transferring the home to her, which is not for her personal gain, and she has instructions as to whom to deed the home at the requisite time.” Apparently Rosa also admitted to the same thing in her pretrial deposition.

Probate Court: The plaintiff’s complaint sought to have the quitclaim deed held invalid. The plaintiff claimed that the ‘oral trust’ that Rosa admitted to in her affirmative defenses and in her deposition was invalid in violation of the Statute of Frauds, and thus the deed that was executed pursuant to that ‘oral trust’ was also invalid. The probate court held for Rosa after a bench trial. The probate judge found that the Statute of Frauds did not apply. Because there was nothing in writing from Finney that reflected that he transferred the home (real estate) to Rosa with the intent that she transfer it to another, there was nothing to enforce under the Statute of Frauds. The Plaintiff appealed the judge’s decision.

Court of Appeals: The Court of Appeals affirmed the probate judge’s decision in favor of Rosa. While most oral agreements are enforceable, the Statute of Frauds requires that agreements with regard to real estate to be in writing. [MCL 556.106.] The appellate panel  agreed that the Statute of Frauds did not apply since there was no ‘writing’ in conjunction with the transfer of the real estate other than the quitclaim deed by which title was conveyed.

“In other words, the conveyance from Finney to Defendant [Rosa] was accomplished by ‘a deed or conveyance in writing.’ MCL 566.106. Even if Defendant  and Finney have attempted to orally establish a trust or a binding agreement obligating Defendant to reconvey the property to another in the future, the agreement would have been invalid under the Statute of Frauds, leaving only the conveyance [the quitclaim deed] in writing. The plaintiff does not explain how that conveyance would become invalid as a result of the invalidation of any oral agreements concerning the property.”

Oral Trusts: There was no discussion in the Finney decision of whether an oral trust had been established by Finney in light of Rosa’s admissions that she was holding title, not for her benefit, but for the benefit of an undisclosed another. Michigan common law and the Michigan Trust Code both recognize the possibility that an oral trust can be established and enforced. The Michigan Trust Code expressly provides: “Except as required by a statute other than this article, a trust need not be evidenced by a trust instrument, but the creation of an oral trust and its terms may be established only by clear and convincing evidence.” [MCL 700.7407.] The Reporter’s Comments to MCL 700.7407 explains why the court in Finney probably did not spend any time addressing if an oral trust existed by virtue of Rosa’s admissions.

“MCL 700.701 permits a trust to be created by means of a declaration by the owner that the owner holds identifiable property as trustee or by a transfer of property to another as trustee. Although this section holds open the possibility of orally establishing the trust and orally conveying property in trust, Michigan law has long required transfers of title to real estate be in writing under the terms of the Statute of Uses and Trusts and the statute of frauds. MCL 555.11; MCL 566.106….. Section 7407 does not displace or override these other statutes. That is the purpose of and reason for the statement ‘[e]xcept as required by a statute other than this article,’ which introduces the remainder of the section.”

Due to the challenge in proving the terms of an oral trust this statute imposes the high clear and convincing evidentiary burden of proof. A much earlier case, with facts prior to the Michigan Trust Code, indicates how hard it is to establish an oral trust, when it used the clear and satisfactory standard of proof. In In re Estate of Rupert, Michigan Court of Appeals, No. 298605 (August 25,2011) there was testimony that the decedent gave an individual checks to ‘hold for him’ and that he had ‘expressed a desire to provide for his granddaughters in the event that something happened to him.’ The Court found that testimony was not sufficient evidence of the decedent’s intention to create an oral trust with regard to the delivered checks.

Conclusion: We probably will not see many occasions when an oral trust is claimed, but they do show up from time to time. The challenge is in meeting the high clear and convincing evidence burden of proof.