Trust’s Material Purpose Provision

Take-Away: More trusts, especially those that will continue for several years as a discretionary trust, should contain a material purpose clause to guide the trustee in the trust’s administration and a probate judge when called upon to modify the terms of the trust, or terminate the trust.

Background: The Michigan Trust Code makes frequent reference to a trust’s material purposes. For example, the trustee and the trust beneficiaries cannot enter into a nonjudicial settlement agreement if such an agreement violates a material purpose of the trust. [MCL 700.7111(2).] Similarly, a probate court can modify the terms of the trust, or terminate the trust, if the court concludes that that the proposed modification or termination of the trust is consistent with the material purposes of the trust. [MCL 700.7411(1)(a).] Or, a probate court can modify the dispositive terms of a trust, or terminate the trust, if the modification or termination of the trust will further the settlor’s stated purpose of the trust. [MCL 700.7412(2).] So too, a trustee is charged with administering a trust in accordance with its terms and purposes. [MCL 700.7801.] What is surprising is that many trusts do not contain a formal statement of purpose, thus leaving the trustee, or a probate judge, to search for the trust’s intended purpose. The presence of a material purpose clause can helpfully frame the trustee’s communication with the trust beneficiaries to explain why the trust is used to hold and distribute their inheritance.

Example: After a recent Breakfast Briefing I was asked what a trust’s material purpose clause might look like. What follows is an example of what a material purpose clause that reflects the settlor’s values and explains why a trust is used to implement those values in a discretionary trust.

Material Purposes of this Trust: This trust is used in lieu of a Will to avoid probate, along with the expense, delays, and publicity that is normally associated with probate court proceedings. This trust shall continue through the lifetimes of my children and grandchildren to implement the principles and values which are explained in the following paragraphs.

I prioritize the mental, emotional, and physical health of my children and grandchildren. Accordingly,  I support the open discussion, treatment, prevention and rehabilitation of any illness or substance abuse disorder borne by any descendant of mine using this trust’s assets. I do not seek to be punitive but rather supportive of those who struggle with health challenges. I thus intend that this trust shall be used to assist my descendants in meeting those health challenges.

To foster peace of mind for my descendants, I intend that this trust shall provide for any gap in medical expense coverage and their ability to live with their spouse and children in a safe neighborhood, regardless of the vocational path my descendant may choose. My intent is that this trust shall provide a baseline of fiscal and physical security justified as a financial supplement to a descendant’s earnings, e.g. a supplement to a schoolteacher’s salary, yet no supplement for a hedge fund manager.

I believe that people are happier when they are productive and doing something that is meaningful to them, such as through work or raising a family. For this reason, I intend that this trust be used to support the education of my descendants, to realize their vocational fulfillment, with no restriction on topic, scholastic major, or level of education. I intend to clarify this purpose with my children shortly after the execution of this trust to enable them to proactively identify their career-forming years. In light of the different interests of each trust beneficiary, e.g. a 4-year private college vs a 2-year skilled-trade certificate, for this principle to be fully realized given the variation of educational costs underwritten by the trust, in order to realize my value of individual fulfillment, this trust shall pay for such educational pursuits despite unequal dollar amounts spent per individual and family ‘branch’ with different numbers of descendants.

I recognize the value of entrepreneurship as an engine of economic growth and opportunity for others. The ability to take initiative and generate new solutions remains critical to catalyzing the growth of successful businesses, industries and communities. For this reason, I especially seek to foster and channel the entrepreneurial spirit of each of my descendants through the use of this trust, with the trustee making capital from this trust available to those descendants, either through investment or loans. Similarly, although each descendant’s request from this trust for capital varies by amount and sector, the trustee’s protocol to evaluate those capital distribution proposals shall remain consistent, thus reflecting fairness and consistency in approach despite unequal dollar amounts to be distributed to or for the benefit of the trust beneficiary or their business endeavor.

Conclusion: Note that there is nothing in the example that mentions a goal or purpose of saving taxes. That responsibility is inherent in the trustee’s fiduciary duty to preserve trust assets. A trust instrument should contain some reference to the settlor’s intent or the trust’s intended purpose, to direct the trustee in its administration of the trust identifying what is important, and also to guide a probate judge if the judge is later called upon to modify or terminate the trust.