7-Apr-20
Material Purpose v Benefit of the Beneficiaries – Reconciling the Tension
Take-Away: In the past we have reviewed the importance of identifying the settlor’s intent behind the creation of a trust. This focus is manifested in the Michigan Trust Code’s periodic reference to preserving a trust’s material purposes in trust modification or termination proceedings. However, the Michigan Trust Code and the Uniform Trust Code also have provisions that reference the trustee administering a trust for the ‘benefit of the beneficiaries.’ These statutory provisions can lead to confusion, or some tension, as to what ultimately controls or guides the trustee: the settlor’s intent, or what the beneficiaries perceive to be in their interests?
Background: Unlike English common law, which treats the trust estate as belonging to the trust beneficiaries, particularly after the settlor’s death, American common law places the emphasis on the settlor’s intent. This standard of trust construction requires that the beneficiaries do no violence to the settlor’s intent, which is often the question that surrounds petitions to either modify or terminate an existing irrevocable trust. Ask most trust beneficiaries, and they see no real reason to continue the trust, while a fair assumption is that the settlor saw some need for a trust and its restrictions, hence the decision to use a trust. Therefore, at common law, respect for the settlor’s intent prevailed unless that intent was contrary to some law or state public policy. However, in recent decades, starting with the adoption of the Restatement (Third) of Trusts, less emphasis is given to the settlor’s intent with more emphasis given to the ‘benefit of the beneficiaries.’
- UTC: The Uniform Trust Code (UTC), much of which is based on the Restatement (Third) of Trusts, mandates that a trust and its terms must be for the benefit of the beneficiaries. [UTC 105(b)(3); UTC 801.] Interestingly, of the 35 states that have enacted the UTC, 8 states, including Michigan have eliminated the benefit for the beneficiaries as a mandatory rule. In addition, the comments to this UTC benefit for the beneficiaries section do not indicate whether the benefit of the beneficiaries prevails over the settlor’s material purposes. Rather, that comment only references concerns with unlawful trusts or trusts that in some manner violate public policy, e.g. a trust provision that encourages/rewards a beneficiary’s divorce.
- MTC: The Michigan Trust Code (MTC) requires that a trust may be created only to the extent that its purposes are lawful and not contrary to public policy, just like the UTC. [MCL 700.7401.] The MTC also succinctly describes the purposes of a trust as: A trust may be created only to the extent its purposes are lawful, not contrary to public policy, and possible to achieve. {MCL 700.7404.] Yet the MTC also defines a trustee’s duty of care to administer the trust in good faith, expeditiously, in accordance with its terms, and for the for the benefit of the trust beneficiaries. [MCL 700.7801.] This last statute is one of the few MTC provisions that prevails over the contrary terms of a trust instrument. [MCL 700.7105(2)(b).] Thus, it is not clear if a trust in Michigan can expressly relieve the trustee of its duty to ‘administer the trust for the benefit of the beneficiaries’ or how that principle squares with the settlor’s material purposes that are the reasons for the use of a trust.
Fiduciary Tension: Accordingly, while the MTC directs that a trust be administered to carry out the settlor’s intent, with periodic references to the trust’s material purposes, the MTC also directs that the same trust be administered for the benefit of the trust beneficiaries. Those two directives, preserving the settlor’s intent vs assuring the beneficiary’s benefit, are not always the same thing.
- Trust Investments- Burn the Rembrandt: This tension between carrying out the settlor’s intent balanced against administering the trust for the benefit of the trust beneficiaries, was cleverly dramatized in an article written by law professor John H. Langbein, the title to which quickly explains the trustee’s conundrum: Burn the Rembrandt? Trust Law’s Limits on the Settlor’s Power to Direct Investments, 90 B.U.L Rev, 375, 398 (2000). This law review article raises the rhetorical question: What if the trustee of an irrevocable trust was directed to burn a Rembrandt that was one of the trust’s assets- clearly expressing the settlor’s intent, but obviously not in the beneficiaries’ interest if that directive is carried out. The article refers to the settlor’s interest in property transferred to an irrevocable trust as being evanescent [now that’s a word I never use!] as a reminder that, as a general rule, the settlor of an irrevocable trust has no legal standing to enforce the irrevocable trust (unless the settlor retained some beneficial interest in the trust.) Consequently, in the absence of some ambiguity in the terms of a trust, a court would be restricted to examining the trust’s material purposes as expressed solely in the trust document itself, and even then only in a court proceeding that is initiated either by the trustee or a trust beneficiary. Professor Langbein concluded that the benefit of the beneficiaries principle should be a mandatory provision of all trusts, not a default provision, and he attempts to reconcile (rationalize?) these two principles by concluding that “the material purpose doctrine requires a court to examine whether a disputed trust term has a purpose that is material to the best interests of the beneficiaries of that trust.” From that perspective, an instruction to the trustee to ‘burn the Rembrandt’ cannot be enforced, because it is a term that is inconsistent with the best interests of the beneficiaries. Arguing against Professor Langbein is yet another scholarly article that concludes that the benefit of the beneficiaries ought not be a mandatory principle governing all trusts, Cooper, Empty Promises: Settlor’s Intent, the Uniform Trust Code a, and the Future of Trust Investment Law, 88 B.U.L. Rev. 1165 (2008.)
- Trust Distributions: While looking at the material purpose from the trust beneficiary’s perspective seems logical when the subject of the dispute is the trust’s investment policy, e.g. ‘burn the Rembrandt,’ it seems less appropriate if the dispute centers on the trust’s distribution policy. Beneficiaries frequently disagree with their trust’s distribution policy as articulated by the settlor and implemented by the trustee. It should come as no surprise that trust beneficiaries can often show that a different distribution policy would be in their ‘best interests.’ In this situation, where the focus is on distribution policies, perhaps the settlor’s intent (or material purpose in using a trust to begin with) should prevail, and thus the settlor’s material purposes should guide the trustee to enforce the trust when it comes to making trust distributions, despite claims of beneficiaries that those distributions are not necessarily for the ‘benefit.’
Conclusion: A couple of the trust treatises have expressed a concern that the UTC’s benefit of the beneficiaries‘ principle erodes, if it does not eliminate, the requirement that the trustee administer the trust consistent with settlor’s material purposes. See Scott and Ascher on Trusts, Section 9.3 (5th Ed, 2006). As noted above, perhaps the two principles used in the MTC can be reconciled, if the settlor’s material purposes are given more weight to interpret the trust’s distribution provisions, while the benefit of the beneficiaries principle is given more weight to how the trust’s assets are to be invested, managed and administered by the trustee. Even with Trust Codes which carry the goal of consistency throughout the country, we still have debates on balancing the settlor’s purpose behind the trust with the needs, desires, and ‘benefit’ of the trust’s beneficiaries.