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

27-Jul-20

Removal of A Trustee – Can the Settlor Handcuff the Probate Judge?

Take-Away: As a gross generalization, the Michigan Trust Code provides a series of default rules when a trust instrument is silent on a question. Only a handful of Michigan Trust Code provisions prevail over the express terms of the trust. A question addressed in a recent court decision is whether the trust instrument’s express provisions can restrict the reasons when and how a probate judge can remove a trustee. The Court found that the settlor could not restrict the ability of the probate court to remove a trustee.

Background: The Michigan Trust Code essentially provides a series of default rules that apply only if a trust instrument does not expressly address a situation. [MCL 700.7105(1).] Consequently, a trust settlor is pretty much free to put in any provision he or she wants into their trust instrument, but for a few exceptions identified in the statute.

Exceptions: There are a limited number of provisions in the Michigan Trust Code which must take priority over provisions contained in the trust instrument. Specific provisions of the Michigan Trust Code are identified where the Trust Code’s rules or requirements must prevail, e.g. “The terms of a trust prevail over any provisions of this article except for the following:…” [MCL 700.7105(2).] Not mentioned in that ‘laundry list’ of Michigan Trust Code sections that take priority over a trust’s terms is probate court’s power to remove the trustee.

Trustee Removal Power: The Michigan Trust Code gives a probate court exclusive jurisdiction with regard to many aspects of the administration of a trust, including the removal of a trustee. [MCL 700.1302(b)(i).]  While the settlor, a co-trustee, or a qualified trust beneficiary may request the removal of a trustee, a probate judge can remove a trustee on the judge’s own initiative. [MCL 700.7706(1).] The probate judge is given the power to remove a trustee if one or more of the following occur: (i) the trustee commits a serious breach of trust; (ii) a lack of cooperation among co-trustees, which substantially impairs the administration of the trust; (iii) because of unfitness, unwillingness, or persistent failure of the trustee to administer the trust effectively, the judge determines that the removal of the trustee best serves the purposes of the trust; and (iv) because of a substantial change in circumstances the judge finds that removal of the trustee best serves the interests of the trust beneficiaries and is not inconsistent with a material purpose of the trust. [MCL 700.7706(2).] As a ‘tag-along’ power, the probate judge “may order any  appropriate relief that is necessary to protect trust property or the interests of the trust beneficiaries.” One of the Trust Code explicit remedies for a breach of trust is the removal of the trustee. [MCL 700.7901(2)(g).]

Question: While there appears to be plenty of provisions in the Michigan Trust Code that give the probate judge the power to remove a trustee, either upon the request of others or on the judge’s own initiative, what happens of the trust instrument identifies specific reasons and procedures for the removal of a trustee that are inconsistent with what the Michigan Trust Code provides? Since the trustee removal powers are not identified as taking priority over the terms of the trust, can the terms of the trust effectively handcuff the probate judge? That was a question that a Florida court had to grapple with since Florida, like Michigan, has adopted several provisions of the Uniform Trust Code, including the model provision that is adopted in Michigan as MCL 700.7105(2) [the litany of statutory exceptions that take precedence] which is silent on the probate judge’s power to remove the trustee.

Florida Court Decision: Wallace v. Comprehensive Personal Care Services, Inc., Florida Third District Court of Appeal, No. 3D19-423 (June 3, 2020)

  • Facts: An irrevocable trust included provisions for the removal of a trustee by reason of disability. The settlor, Milton, created the trust. Milton was also the major beneficiary of the trust during his lifetime. Milton was also the trustee. The trust instrument prescribed in some detail the methods to determine the trustee’s disability. A trust beneficiary filed a petition to remove Milton as trustee, but that petition was based neither on the specific definition of disability used by the trust, nor did it follow the authorized removal provisions set forth in the trust instrument. Milton defended the petition to remove him as trustee based on his deteriorating mental condition. Milton argued that removing him as trustee based on his mental condition would be tantamount to declaring him as a ward of the court and deprive him of control over his own property.
  • Probate Court: The probate judge held that the trust required that the trustee’s removal could only be based on the terms of the trust, and the petition for the trustee’s removal failed because it did not follow the terms of the trust instrument.
  • Appellate Court: The trial judge’s decision was reversed. The appeals court held that a trust document could not eliminate or curtail the probate judge’s power to remove the trustee.

The appellate court had to address the fact that the trust instrument contained a lengthy provision that appeared to provide the exclusive provisions as to how and/or when a trustee can be removed. Thus, those trust provisions would normally govern to limit the probate judge’s ability to remove the trustee, i.e. only in accordance with the trust instrument’s express terms.

Florida’s statutory scheme grants a probate judge the power to remove an acting trustee which is almost identical to Michigan’s statutory scheme; both schemes are adopted from the Uniform Trust Code (UTC).

In addition, like Michigan’s version, there exits the absence of trustee removal provisions in Florida’s version of MCL 700.7105(2), the “exception” list of priority provisions of the Trust Code that cannot be ‘drafted away’ in the trust instrument.

However, unlike Michigan’s Trust Code section 700.7105(2), Florida’s version of UTC section 105 ends with an additional subsection (c) that is not a part of the Michigan Trust Code, which overrides the terms of the trust: “(c) The power of the court to take such action and exercise such jurisdiction as may be necessary in the interests of justice.”

To reverse the probate judge, the Florida appellate court relied upon that part of subsection 105(2)(c) which gives the probate judge the power to not follow the terms of the trust when “such action and exercise such jurisdiction as may be necessary in the interests of justice.” The Court noted: “…while the trust document may contain other and supplemental methods to remove a trustee, it cannot eliminate or curtail the probate court’s power and responsibility under the Trust Code to remove a trustee when necessary in the interests of justice to protect the interests of the beneficiaries.”

Question: So what would happen in Michigan if the same facts were presented to the probate judge? Michigan’s Trust Code does not include the exception to the general rule that the Trust Code is only a set of default rules, like Florida’s catch-all provision that gives the judge the ability to ignore trust terms if necessary  in the interests of justice to protect the interests of the beneficiaries. Michigan’s MCL 700.7105(2) does not elevate the judge’s ability to remove a trustee above the settlor’s unique terms by specifically identifying that such provisions take priority over the express terms of the trust. My guess is that a Michigan probate judge might reach a different result than did the Florida appellate court. If that is not the case, then MCL 700.7105(2) may be a bit misleading, since it suggests that only those statutory sections that are identified take precedence, when apparently other provisions of the Michigan Trust Code also cannot be overridden by the terms of the trust.

Conclusion: The Michigan Trust Code identifies only a dozen or so provisions that take precedence over the contrary terms of a trust, e.g. a trust director must serve in a fiduciary capacity; a no-contest penalty provision is unenforceable if the challenger has probable cause to make their challenge. The Florida court decision implies that there may be other limitations on what terms a trust can use, even if not identified in the statute that sets forth those provisions of the Code that cannot be altered by the terms of the trust. With decisions like that coming from Florida, we might begin to see other provisions of the Michigan Trust Code added to MCL 700.7105(2) that further restrain a settlor’s freedom to ‘opt out’ of the Trust Code’s provisions.