Revocable Trust as “Will Substitute”- Well, Not Exactly

Take-Away: We regularly refer to a funded revocable trust as a will substitute. In many respects, that is a correct description. However, that description is not entirely correct.

Background: Legal treatises and commentators regularly refer to a revocable trust as a will substitute. That is also how most estate planning attorneys and their clients refer to the use of a trust- as a will substitute. Article 7 of the Estates and Protected Individuals Code [EPIC] applies to trusts. [MCL 700.7102.] A trust is defined in MCL 700.1107(n) fairly expansively, with only unanswered question- whether an individual retirement trust (IRT) that is used in conjunction with an IRA would also be covered as a trust that is subject to Michigan’s Trust Code?

Michigan Trust Code: The comparison of a Will to a revocable trust is clearly reflected in the Michigan Trust Code. By way of example, the testamentary capacity required to sign a revocable trust was changed in 2010 with the adoption of the Michigan Trust Code to be consistent with the capacity required to sign a Will. MCL 700.7601 provides: “The capacity required to create, amend, revoke or add property to a revocable trust, or to direct the actions of the trustee of a revocable trust, is the same as that required to make a will.”

The Reporter’s comment to this testamentary capacity statute observes: “There are several reasons it is good public policy for wills and revocable trusts to have a common standard of capacity: They are used as substitutes for one another and individuals refer to their revocable trusts as their ‘wills.’”

Trusts are Not Always Will Substitutes: However, a revocable trust is not necessarily always treated as a will substitute.

Rules of Construction: For example, the Uniform Trust Code, upon which much of Michigan’s Trust Code is based, has as part of its proposed uniform law Section 112, which makes all rules of construction that are applied to Wills also applicable to trusts. Section 112 was not entirely adopted by Michigan with its Trust Code in 2010. In Michigan, only those rules of construction that are associated with accessions, ademptions and exoneration [MCL 700.2605 to 2608] that pertain to a Will are also applied to the construction of a trust. MCL 700.7112 states: The rules of construction in sections 2605 to 2608 that apply in this state to the interpretation or and disposition of property by will also apply as appropriate to the terms of a trust and the disposition of trust property.

It is not clear what the statute’s term as appropriate actually directs. Presumably, it means that a probate judge does not have to apply the identified rules of construction to a trust after the settlor’s death if unique circumstances are present.

Aside: Section 2605 deals with an increase in securities acquired by a testator through stock splits and mergers. Section 2606 deals with nonademptions, i.e. the disappearance of specifically devised real estate or tangible personal property in a Will upon the testator’s death. Section 2607 deals with the specific devise in a Will of real estate that is subject to a mortgage. Section 2608 deals with a lifetime gift by the testator that satisfies a specific devise of real property or tangible personal property that was made in the testator’s Will. These are all rules of construction that will apply to the interpretation of a revocable trust after the death of the trust’s settlor.

There are other rules of construction that are applicable to the interpretation of a Will, like pretermitted, aka omitted by neglect, spouses and heirs who are not mentioned in the testator’s Will that do not apply to trusts under the Michigan Trust Code.

Elective Rights: Yet another example where a revocable trust is not treated the same as a Will deals with spousal elective rights which are intended to prevent a surviving spouse from being disinherited by the testator. Many states that have adopted both the Uniform Probate Code and Trust Codes pretty much define a deceased spouse’s entire estate against which a surviving spouse’s elective share can be claimed. However, Michigan opted to not use an augmented estate approach to determine the amount of the deceased spouse’s estate against which the surviving spouse can elect to take proportionate elective share. Those other states include a funded revocable trust as part of the deceased spouse’s augmented estate against which a spousal election can be taken. In Michigan, a surviving spouse’s elective right is calculated without consideration of the deceased spouse’s funded revocable trust. In general only applies to the deceased spouse’s probate estate. MCL 700.2202.]

Aside: I used to refer to this narrow spousal elective right under Michigan law as the coward’s prenuptial agreement. A coward who is afraid to ask their intended spouse for a prenuptial agreement to protect premarital assets in the event of a future divorce, could transfer their assets to a revocable trust prior to the marriage, and if that coward later died, his/her spouse could only pursue his/her right of election against the deceased spouse’s probate estate [excluding the decedent’s funded trust.]

Common Law: The common law also treats the rights of a beneficiary differently under a Will than under a trust. The transfer of assets to a revocable trust immediate creates vested remainder, an interest that is subject to defeasance by the settlor’s act of revocation of the trust. Unless the disposition under the trust is expressly conditioned on the named beneficiary surviving, that interest does not ‘lapse’ when the beneficiary predeceases the settlor, but instead passes to the beneficiary’s estate. If the residuary beneficiary named under a Will predeceases the testator, that results in a partial intestacy, in other words, the named beneficiary in a Will has no interest in the testator’s estate until the testator dies.

Conclusion: To summarize, a revocable trust, which is actually a recent phenomenon, is not really a will substitute, except in a nominal sense. There are differences in the use of a revocable trust as opposed to the transfer of wealth by Will at death. Referring to a revocable trust as a will substitute is not incorrect. Rather,  it is just a bit misleading when only some parts of Michigan’s laws that deal with a Will apply to the use of a revocable trust to transfer assets at the owner’s death.