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George F. Bearup, J.D. Senior Legal Trust Advisor

29-Oct-19

Non-Judicial Settlement Agreements

Take-Away: Michigan’s Trust Code adopted part of the Uniform Trust Code’s non-judicial settlement agreement provision. However, Michigan’s version of that model statute does not go as far as other state’s versions, like Delaware, with regard to what modifications can be made to an irrevocable trust by an agreement without the approval of a probate court. Consequently, the subject of a binding nonjudicial settlement agreement is not as clear as some would like, making its utility problematic.

Background: The Michigan Trust Code contains a non-judicial settlement authorization that closely follows the Uniform Trust Code’s version. [MCL 700.7111.] The statute permits a voluntary modification of a trust instrument, but only so long as the modification does not violate a trust’s material purpose. The Michigan’s statute provides:

Except as otherwise provided in subsection (2), interested persons may enter into a binding nonjudicial settlement agreement with respect to any matter involving a trust. [MCL 700.7111(1).]

Interested Persons: The nonjudicial settlement agreement statute defines interested persons as “persons whose consent would be required in order to achieve a binding settlement were the settlement approved by the probate court.” [MCL 700.7111(5).] EPIC’s definition of an interested person is very expansive, and includes the incumbent fiduciary, beneficiary, and ‘any other person that has a property right in or claim against a trust estate, and a fiduciary representing an interested person.’ EPIC’s definition further states that “the identification of interested persons may vary from time to time and shall be determined according to the particular purposes of, and matter involved in a proceeding.” [MCL 700.1105(c).] Accordingly, there could be a lot of guesswork and uncertainty as to who would be the interested persons who would be required for there to be a binding nonjudicial settlement agreement.

Modification and Termination: Moreover, a nonjudicial settlement agreement cannot be used to modify or terminate an irrevocable trust.

“A nonjudicial settlement agreement is valid only to the extent it does not violate a material purpose of the trust and includes terms and conditions that could be properly approved by the court under this article or other applicable law. A nonjudicial settlement agreement shall not be used to accomplish the termination or modification of the trust. [MCL 700.7111 (2).]

Several other provisions of the Michigan Trust Code permit a modification or termination of a trust, but all involve to some degree the approval of the probate court. [Example: See MCL 700.7401.]

Administrative v. Beneficial Changes: The Michigan nonjudicial settlement agreement statute also provides a list of the issues or topics that can be resolved by such an agreement. [MCL 700.7111(3).]

  • The interpretation or construction of the terms of the trust;
  • The approval of the trustee’s report or accounting;
  • The direction to a trustee to perform or refrain from performing a particular act or to grant to or withhold from a trustee any power;
  • The resignation or appointment of a trustee and the determination of the trustee’s compensation;
  • The transfer of a trust’s principal place of administration; and
  • The liability of a trustee for an action relating to the trust.

The Reporter’s commentary to the statute notes that these identified ‘matters’ are only examples; they are not an exhaustive list, which seems to be a reasonable conclusion since the first section of the nonjudicial settlement agreement statute refers to “such an agreement applying to any matter involving a trust.”

Caution: However, a fair interpretation of the statute’s examples is that only administrative provisions of a trust should be the subject of a nonjudicial settlement agreement.

  • If beneficial interests are changed by agreement or consent of the interested persons, then there are gift tax implications if beneficial interests are shifted in any manner by the agreement arising from the beneficiary’s consent.
  • In addition, if the trustee is involved in an agreement where beneficial interests are impacted, then the trustee’s agreement or consent might be subsequently challenged as a breach of the trustee’s duty of impartiality to all trust beneficiaries.
  • Finally, even the Reporter’s Comments to this binding nonjudicial settlement agreement seem to acknowledge that it might be limited to administrative provisions or procedures. The Reporter notes that “Courts possess the power to approve such agreements: See MCL 700.7201 which confers broad subject matter jurisdiction on probate courts on matters related to the administration of trusts.”
  • Limited support for this narrow interpretation of the utility of a nonjudicial settlement agreement to only administrative matters can also be gleaned from a Michigan Court of Appeals decision, which observed that the purpose of a nonjudicial settlement is “to allow beneficiaries to resolve routine administrative issues free from court supervision.”  Draves v Draves (In re Draves) 298 Mich App 745 (2012)

Court Approval: The nonjudicial settlement agreement statute also permits either the trustee or an interested person to request a probate court to approve or disapprove a nonjudicial settlement agreement. [MCL 700.7111(4).] Seeking judicial approval of an agreement could be beneficial in situations where: (i) who is, or is not, and interested person is unclear; (ii) the virtual representation of interested persons is not adequate, or susceptible to conflict of interest claims; (iii) the material purposes of the trust are uncertain or ambiguous; or (iv) the addition of new terms to the trust instrument might not clearly reflect what a probate court could permissibly add to the trust instrument acting on its own.

Conclusion: While it is nice that the Michigan Trust Code authorizes the use of nonjudicial settlement agreements, it is questionable just how often that provision will be relied upon to ‘fix’ irrevocable trusts that are not working as well as either the trustee or the interested persons would like. There appear to be many conditions to satisfy before such an agreement can be used. Additionally, it is probable that even when such an agreement could be put in place to modify the terms of a trust instrument, a trustee will want a probate judge to approve the agreement, so avoiding the probate court may not occur as frequently as the authors of the Uniform Trust Code claimed when the provision was initially adopted.