10-Sep-20
Silent Trusts in Michigan
Take-Away: The State Bar’s Probate and Estate Planning Council is currently studying proposed legislation with regard to permitting silent trusts in Michigan. A trustee should think twice before accepting the appointment of a silent trust due to the increased risks associated with administering a silent trust. .
Background: Some settlors want to restrict a beneficiary’s right to notice and information or accountings for a period of time. A settlor of a large trust may not want the beneficiaries to become aware of the trust until they reach a suitable age, in order to foster productive lives, careers, attain higher educations, and prevent the beneficiaries from becoming dependent upon the trust. To achieve these objectives, the trustee is directed to not provide information to the trust beneficiary with regard to the trust and its assets, resulting in what is sometimes called a silent trust or a blind trust.
Opinion: Greenleaf Trust would not be well suited to administer a silent trust inasmuch as Greenleaf’s strength is the high level of attention and service along with extensive communication that it provides to trust beneficiaries, all of which would be frustrated if it was restricted in how much it could communicate to the trust beneficiaries it serves.
Common Law: A silent trust runs contrary to the common law’s several fiduciary duties imposed on a trustee. Open disclosure of information to trust beneficiaries typically is viewed as an indicia of the trustee acting in good faith in the administration of the trust. In contrast, there is a greater likelihood that a trustee that acts in secret will be viewed by a probate court as acting in bad faith. A good description of the common law’s duty to provide information to trust beneficiaries is found in Bogert, The Law of Trusts and Trustees, Section 961:
“That the settlor has created a trust and thus required that the beneficiary enjoy his property interest indirectly does not imply that the beneficiary is to be kept in ignorance of the trust, the nature of the trust property and the details of its administration. If the beneficiary is to hold the trustee to proper standards of care and honesty and to obtain the benefits to which the trust instrument and doctrines of equity entitle him, he must know of what the trust property consists and how it is being managed.”
Michigan Trust Code: The Michigan Trust Code requires a trustee to:
(i) furnish a copy of the terms of the trust that describe or affect the trust beneficiary’s interest and relevant information about trust property to trust beneficiaries who request it;
(ii) notify qualified trust beneficiaries of a trustee’s acceptance of the trusteeship, of the court, if any, where the trust is registered, and the trustee’s contact information, all of which must be given within 63 days of accepting the appointment; and
(iii) notify qualified trust beneficiaries of the trust’s existence, of all settlors’ identities, the court, if any, where the trust is registered, and of the right to request a copy of the terms of the trust that describe or affect the trust beneficiary’s interest. [MCL 700.7814.]
However, the terms of the trust instrument can prevail over some of these statutory ‘duties.’ While notice of the existence of the trust must be given to qualified trust beneficiaries, which cannot be eliminated by the terms of the trust, the settlor is free to direct the trustee to deliver accountings only to those persons who are named by the settlor (unless a probate judge directs otherwise.) [MCL 700.7105(2)(i).] By departing from the Trust Code’s duty to account to trust beneficiaries, the trustee loses the protection of the short one year statute of limitations. [MCL 700.7905(1)(a).]
It is important to also distinguish a trustee’s duty to keep and render accounts from a trustee’s duty to furnish information and permit inspection of trust property. While admittedly closely related, they are distinct fiduciary duties. [See Restatement (Second) of Trusts, Section 172 and 173 and Restatement (Third) of Trusts, Sections 82 and 83.] Consequently, even if the trustee is relieved from providing accountings to trust beneficiaries, common law principles impose a duty on a trustee to provide information to beneficiaries who request it; the duty imposed on a trustee to provide information to beneficiaries who request it is often broader than the duty to formally account to the trust beneficiary.
Beneficiary’s Request for Information: While the trustee’s duty to disclose is seldom subject to controversy, much less clear is to whom the duty is owed, and thus often it becomes the subject of litigation. States can differ on who is entitled to request information. Bogert, The Law of Trusts and Trustees, Section 961, notes:
“Current beneficiaries would appear to include persons eligible to receive income or principal in the exercise of the trustee’s discretion and may include remainder beneficiaries who have vested interests. This view is similar to the one adopted by a majority of the states to the effect that only a beneficiary currently entitled to payment of trust income may compel the trustee to render an account, although a contingent remainderman has standing to secure an account if he alleges and makes a case for mismanagement or waste of trust assets.”
The question of a beneficiary’s right to information with regard to a trust was the subject of litigation in Welch v Weiner, 2007 Mich. App. LEXIS 2704 (December 4, 2007.) In that case Alice established a trust in 1976. She later amended her trust to make her husband a trustee, and apparently a partial co-settlor of the trust for all assets other than the provisions in Article 5 of the trust instrument. Alice died in 2003 leaving her husband as trustee. Patricia was named as the beneficiary of Article 5. The trustee’s attorney sent Patricia a check for $50,000 drawn on the trust’s account, along with a letter that informed Patricia that she was one of the contingent trust beneficiaries and that the trustee was making an advance payment to Patricia and would continue to do so annually until the future legacy to her was paid in full. Patricia asked for additional information but she was denied a copy of the trust instrument. Patricia later sued in 2003 seeking an accounting, a copy of the trust instrument, removal of the trustee, and sanctions. The probate judge denied Patricia’s claims. The probate judge’s decision was reversed on appeal. Patricia was entitled to a copy of the trust instrument and an accounting on the bases that: (i) Alice had not expressly overridden the trustee’s disclosure obligations in the trust instrument; (ii) the trust was irrevocable because Alice was deceased and her husband was not the settlor of Article 5 that was the subject of the request; and (iii) Patricia was a current beneficiary of the trust because the trustee had already made a distribution to her from the trust. Alice’s husband was removed as trustee for failing to disclose information to Patricia, and the case remanded to the probate court on Patricia’s surcharge claim.
Increased Trustee Risk: A desire by the settlor (or a senior generation beneficiary) for secrecy, or the imposition of trust terms that restrict the trustee from disclosing information to beneficiaries, may actually increase the trustee’s exposure to liability by preventing the trustee from starting the running of applicable statutes of limitations. In addition, if the trust instrument restricts the trustee’s ability to disclose information also may prevent the trustee from taking advantage of several risk management tools available to it under the Michigan Trust Code, which include:
(i) entering into binding nonjudicial settlement agreements with trust beneficiaries [MCL 700.7111];
(ii) shortening the statute of limitations on trust contests to 6 months [MCL 700.7604(b)];
(iii) limiting to 28 days a beneficiary’s right to object to a terminating distribution [MCL 700.7821(1)];
(iv) shortening the statute of limitations on claims against the trustee to one year [MCL 700.7905(1)]; and
(v) obtaining a beneficiary’s consent, release, or ratification of an act by the trustee.
Conclusion: When the Michigan Trust Code was first being considered (2007 to 2009), the drafting committee looked at, but rejected, the authorization of silent trusts in Michigan. Ten years later we are back looking at the prospect of permitting silent trusts in Michigan. This evolution of the law with regard to a trustee’s duty to disclose information to trust beneficiaries creates new risks for trustees, especially for those fiduciaries who are unaware of their obligations. That same evolution in trust law also creates new opportunities for trustees to use disclosure to beneficiaries to manage their risk which might be impeded if a trustee administers a silent trust.