The Silent Treatment: Navigating Michigan’s Undisclosed Trust Law

Michigan Trust Code (MTC) is a uniquely Michigan comprehensive body of laws governing the creation, administration, and termination of trusts in Michigan. This framework is designed to promote transparency and protect the interests of all parties involved. The MTC works in conjunction with the trust instrument (or document) to achieve the common goal of executing the trust’s provisions within the legal framework established by law. Essentially, a trustee is obligated to adhere to the instructions outlined in the trust instrument while simultaneously complying with the regulations set forth in the MTC to fulfill the objectives defined within the trust instrument.

As a corporate trustee, Greenleaf Trust relies extensively on the MTC to uphold its fiduciary duties. The MTC provides default rules for trust administration, which may be modified by the trust instrument, except for mandatory provisions that cannot be altered. One such provision mandates that a trustee keeps qualified current and remainder beneficiaries of a trust reasonably informed of their beneficial interest in the trust. This obligation requires trustees to provide the beneficiaries with information regarding the existence of the trust, a copy of the trust instrument, and an accounting of trust assets on a periodic basis – requirements that remained in effect until February 21, 2024.

On February 21, 2024, a new section was added to the MTC through Michigan’s omnibus bill, allowing trusts to include provisions that permit them to remain undisclosed to qualified beneficiaries for a maximum period of 25 years, creating what is commonly referred to as “silent trusts.” While this legislation is new in Michigan, several other states, including Alaska, Delaware, Nevada, New Hampshire and South Dakota, have previously enacted similar silent trust statutes. These states have recognized the potential benefits and challenges of silent trusts, allowing grantors greater flexibility in managing their estate plans.

There are numerous reasons why a grantor may prefer to keep a trust undisclosed to beneficiaries. A common concern expressed by clients considering an undisclosed trust is the fear that revealing the trust and its assets may lead to a lack of motivation in heirs, potentially fostering a sense of entitlement that can hinder personal growth. Other motivations may include the beneficiary’s history of gambling or other addictions, mental health challenges, difficulties in financial management, privacy concerns, asset protection issues, or simply the desire of the grantor to maintain control long after the grantor has passed. Such factors often reflect the grantor’s deep understanding of family dynamics and individual circumstances.

While the option of establishing an undisclosed trust can be appealing, it is essential to carefully consider and study the potential challenges that may arise, including:

• Increased costs associated with the preparation and administration of an undisclosed trust, due to its complex nature requiring meticulous legal, financial planning and administration that may demand additional expertise.
• The identification of a designated representative, or trust director, that will represent and bind the beneficiaries during the silent period, along with the level of oversight required to ensure accountability and transparency.
• The implications if the undisclosed trust is disclosed to a beneficiary due to tax reporting requirements, which could adversely affect the trustee-beneficiary relationship that reaches beyond the undisclosed trust provisions and create potential conflicts.
• The potential for legal challenges arising from the lack of transparency during the undisclosed period, which could lead to disputes among family members or beneficiaries who may feel marginalized.
• The critical importance of selecting a trustworthy and competent trustee to mitigate the risks of abuse associated with actions taken “behind the curtain”, ensuring that all fiduciary duties are fulfilled with integrity.
• Possible increased tax liability when income and capital gain generated by trust assets are retained rather than distributed to beneficiaries.

While ongoing legislative efforts aim to enhance the MTC by modernizing and clarifying its framework for creating, administering and terminating Michigan trusts, it remains to be seen whether the introduction of MCL Section 700.7409a – allowing the formation of undisclosed trusts – will prove beneficial or lead to abuse and increased trust litigation. Although undisclosed trusts may offer significant advantages in terms of privacy and control, they necessitate careful planning and professional management to ensure their effective operation without complications. It is advisable to proceed cautiously and collaborate closely with a qualified estate planning attorney well-versed in the new MTC statute regarding undisclosed trusts, thereby minimizing potential difficulties for both trustee and beneficiaries while safeguarding the grantor’s intentions.