26-Jan-21
Trustee’s Duty to Notify Trust Beneficiaries
Take-Away: Trust Codes contain statutes of limitations that are intended to enable the expeditious administration of a trust by avoiding late-in-the-day trust challenges. It is difficult, however, to active those statutory statutes of limitations to eliminate future trust challenges.
Background: Challenges to the validity of a trust in Michigan are limited by a statute of limitations. When that limitations period is ‘triggered’ by the trustee is a bit more difficult to determine, when words like relevant portions or affect are used to start the calculation of the period of time in which an individual may commence a legal proceeding to challenge the validity of the trust, or an amendment to the trust.
Statute of Limitations: A person can commence a judicial proceeding in Michigan to contest the validity of a trust that was revocable at the settlor’s death within a specified period of time. [MCL 700.7604(1).] The time limit is either two years after the settlor’s death, or six months after the trustee sends the person a notice informing the person of: (i) the trust’s existence; (ii) the date of the trust instrument; (iii) the date of any amendments to the trust; (iv) a copy of relevant portions of the terms of the trust that describe or affect the person’s interest in the trust, if any; (v) the settlor’s name; (vi) the trustee’s name and address; and (vi) the time allowed for commencing a proceeding. [[MCL 700.7604(1).] The trustee can thereafter distribute trust assets, unless a potential contestant has notified the trustee in writing of a possible judicial proceeding to contest the trust and a judicial proceeding is commenced within 63 days after the contestant has sent the notification. [MCL 700.7604(2).] In short, this Michigan Trust Code section provides a statute of limitations in which to contest the validity of a trust that was revocable until the time of the settlor’s death
Duty to Inform Trust Beneficiary: Under the Michigan Trust Code, a trustee has the duty to keep qualified trust beneficiaries reasonably informed about the administration of the trust and the material facts necessary for them to protect their interests. [MCL 700.7814.] That includes upon a reasonable request of a trust beneficiary, promptly furnishing to that beneficiary a copy of the terms of the trust that describe or affect that trust beneficiary’s interest and relevant information about the trust property within 63 days after accepting the trust. [MCL 700.7814(2)(a).] This obligation to inform beneficiaries cannot be eliminated by the terms of the trust. [MCL 700.7105(2)(i).]
Challenges to Trust’s Validity: A legal proceeding to challenge the validity of a trust can be limited to challenging the validity of certain trust amendments. Dice v. Zimmerman, Michigan Court of Appeals, No. 342608, July 20, 2019.
Affect: Affect is a verb. It means to have an effect on, or to make a difference, or to act upon.
Trustee’s Discretion: It is in the trustee’s discretion to determine what constitutes relevant portions of the trust, relevant information about the trust assets, and what provisions of the trust affect an individual, all of which are critical to protecting the trust instrument from challenges to its validity. A recent Nevada Supreme Court decision demonstrates this burden placed on the trustee, or how difficult it can be to stop a challenge to a trust.
Case: In the Matter of the Estate of Ella E. Horst Revocable Trust, u/s/d 05/21/91, Nevada Supreme Court No. 77964, December 31, 2020
- Facts: After Ella’s death, her successor trustee Patricia sent notice of the trust’s irrevocability to the trust’s beneficiaries in accordance with Nevada’s statutes, which is much like Michigan’s notice statutes, but which uses a different word. That notice included copies of Ella’s original 1991 Trust and the first three amendments to that Trust. None of the trust beneficiaries filed any objections to the trustee’s notice. Sixteen months later Patricia as trustee petitioned the local court to confirm a purported fourth amendment to Ella’s Trust.
Ella lived with Patricia and Patricia’s partner in Las Vegas. Ella contributed 50% funds to the purchase of their mutual home, for which Ella held as a 50% tenant in common (first trust amendment.) The second trust amendment dealt with conveying Ella’s tenant in common interest in that home to Patricia on Ella’s death and it also named Patricia as successor trustee. The third trust amendment provided for an additional gift of real estate owned by Ella to Patricia on Ella’s death. Later on, Patricia’s partner, who also owned a 25% tenant in common interest in the home, conveyed her interest to Ella’s Trust; the last, fourth, trust amendment added a specific gift of that recently acquired 25% tenant in common interest in the home to Patricia.
Sixteen months after Ella’s death the trustee provided a second notice with regard to the fourth purported trust amendment. Ella’s son, Brian, who was, a residual beneficiary of the Trust, filed an objection to the trustee’s petition in which he alleged that the second, third, and the purported fourth amendments were all the product of undue influence. The trial judge confirmed the validity of the original Trust and the second and third trust amendments, finding that Brian’s challenge to the Trust and the first three amendments were time-barred due to Nevada’s short 120 day statute of limitations. Brian appealed this decision that his challenge to the validity of the Trust and all of its amendments was precluded by virtue of Nevada’s 120 day statute of limitations. Note that the fourth trust amendment did not mention Brian. Was the fourth amendment pertinent to Brian’s interest in Ella’s amended trust? Did it affect Brian’s residuary interest in the Trust?
- Nevada Supreme Court: The Supreme Court reversed the trial court’s decision that Brian could not challenge the second and third trust amendments although 16 months had passed since he received notice from the trustee and he had registered no objections to the validity of his mother’s amended Trust at that time.
The Nevada statute requires that a trustee’s notice to beneficiaries include “any provision of the trust instrument which pertains to a beneficiary.” The Court found that in this context, “any means all.” Therefore, the trustee’s notice must include all trust provisions that pertain to the beneficiary in order to start the statute of limitations. Because the fourth purported trust amendment was omitted from the trustee’s original notice to the beneficiaries, [no explanation was provided why the fourth trust amendment was not included in the original trustee’s notice] the statute of limitations did not start to run with regard to challenges to Ella’s Trust. Therefore, Brian’s challenge to the Trust and all of its amendments was timely.
The Court spent several pages in its decision leading to its conclusion that the Nevada Legislature intended any to mean all, by relying on several dictionary definitions of any to support its conclusion.
The Nevada statute, like Michigan’s, requires a trustee to include in the trustee’s notice, all trust provisions that are pertinent to a beneficiary. Michigan’s statute requires those trust provisions that affect the trust beneficiary. The question for the Court’s was whether that statute only required substantial compliance by the trustee or strict compliance. “Here, NRS 164.021(2) uses mandatory language to describe the obligation of a trustee when he or she provides notice to beneficiaries. (‘The notice provided by the trustee must contain…’ )Furthermore, the legislative history of NRS 164.021 suggests that the Legislature desired an expedited and efficient system for trust administration. Because only a complete disclosure of all provisions of a trust instrument pertaining to a beneficiary will further the Legislature’s goals and give a beneficiary all the information he or she needs to decide whether to contest a trust we hold that NRS 164.021(2)(c) requires strict compliance.”
Observation: The Nevada Supreme Court did not make any effort to define what constitutes provisions of a trust that are pertinent to a trust beneficiary. Nor does the Michigan Trust Code attempt to define when a trust provision affects a trust beneficiary. The Reporter’s Comments to MCL 700.7814(2)(a) address the use of the word reasonable noting that the trustee is only required to provide a copy of the terms of the trust that describe or affect the beneficiary’s interest rather than the entire trust instrument. “Trustees may be tempted to deliver only the provisions of the trust instrument that contain the distribution provisions. However, many other provisions of a trust will “affect” the beneficiary. As a result, the safest and best means of complying with paragraph 2(a) will be to provide either the entire trust agreement or a copy of the trust with selected irrelevant provisions redacted.”
The use of words like reasonable, affect and pertinent all provide the trustee a great deal of latitude in what to communicate to a trust beneficiary. That said, these same terms are vague and susceptible to interpretation, which means that a trustee’s efforts to forestall future trust challenges by giving trust beneficiaries statutory notice of the trust and its provisions may not, with hindsight, trigger the goal of running the statute of limitations if a probate judge later finds that omitted trust provisions in some manner affected the disgruntled trust beneficiary’s interest in the trust.
Conclusion: While the Michigan Trust Code seems to give the trustee a fair amount of latitude in what information to provide to trust beneficiaries, it is best to provide a copy of the entire trust instrument, including all trust amendments, even those trust amendments that were later completely replaced by newer trust amendments, in order to be assure that the trust beneficiaries receive all information with regard to the trust, whether or not the disclosed Trust, and all trust amendment provisions, affect each trust beneficiary. Will redacted trust provisions simply invite a trust beneficiary’s challenge to the validity of the trust?