Trust Director’s Trust Amendment Void Due to Undue Influence

Take-Away: In Michigan a trust protector, called a trust director, serves in a fiduciary capacity. It is possible that the trust director’s amendment to a trust might, despite those fiduciary duties,  be voidable due to undue influence.

Background: The Michigan Bar’s Probate and Estate Planning Section is currently studying an update in the definition and implementation , i.e. shifting burdens of proof, of undue influence in Michigan judicial proceedings. It is unclear at this time if the proposed law change will appear as a proposed amendment to the Estates and Protected Individuals Code (EPIC) or an amendment to the Michigan Standard Jury Instructions. The scope of who is unduly influenced could be much broader when you consider how many trusts that are drafted these days give a trust director (protector) the ability to amend an irrevocable trust.

Trust Directors: A couple of years ago the Michigan Trust Code was amended to expressly authorize the use of a trust director. A trust director, formerly called a trust protector, is authorized under MCL 700.7703a (and defined at MCL 700.7103(m).) Often one of the powers given to a trust director is the ability to amend an irrevocable trust.

Question: Can a trust director who exercises an expressly delegated power to amend an irrevocable trust be the subject of undue influence?

Fiduciary: The Michigan Trust Code provides that a trust director has at least minimal fiduciary obligations which cannot be eliminated by the trust instrument’s express terms. [MCL 700.7105(2)(h); MCL 700.7703(5)(a).] As such, in Michigan but not in other states, e.g. Delaware, a trust director, or trust protector, has fiduciary duties to the trust beneficiaries that cannot be eliminated by the settlor.

A recent court decision in Arizona presented an interesting situation. The trust protector (called that in Arizona) amended an irrevocable trust. That amendment was subsequently voided by an Arizona appellate court because the trust protector was indirectly, and unduly, influenced by a trust beneficiary to amend the trust.

Reported Decision: Matter of ABB Trust, ___ P.3d___ 2021 WL 1884054 (Arizona Court of Appeals, Div. 1, 2021).

Facts: The facts were admittedly unusual. The settlor created the irrevocable trust one month prior to his divorce from his wife. Initially the trust instrument provided that on the settlor’s death the trust was to terminate and the trustee was to divide the trust corpus as follows: 45% to the settlor’s ex-spouse; 45% to the settlor’s children with his ex-spouse; and 10% to the settlor’s second spouse (who presumably he intended to marry after the divorce was final.)

Trust Protector: While the settlor’s trust was irrevocable and expressly provided that the settlor could not amend or revoke the trust, the trust instrument did authorize the trust protector to amend the trust and any such trust amendment would be ‘binding on all interested persons in the trust, unless there was a showing that the trust amendment had been made in bad faith.’ The trust instrument also provided that the trust protector’s role was to ‘direct and assist the professional trustee to achieve the settlor’s objectives’, while it required the trust protector ‘to make reasonable inquiry and seek any information on any decision whether to exericise the protector’s powers.’

Trust Amendments: The trust protector amended the irrevocable trust twice. The first trust amendment added a ‘no-contest’ clause to the trust.

The second trust amendment changed the dispositive provisions of the trust at the time of the settlor’s death. That change continued the trust after the settlor’s death and provided for the life of the settlor’s second spouse, who was named in the amendment as the sole income beneficiary and to whom the professional trustee could distribute trust principal for ‘any purpose.’ On the second spouse’s death, the amended trust specified that the remaining trust assets would then be distributed outright to the settlor’s children and to the second spouse’s children from her prior marriage, i.e.there was no preservation of the ex-spouse’s interest in the trust.

Petition to Invalidate the Trust Amendment: It is no surprise then that the settlor’s children and his ex-spouse filed a petition to invalidate the second trust amendment. The Petitioners claimed the second amendment was the product of undue influence. This is where their claim takes an interesting twist.

The Petitioners claimed that the settlor’s second spouse had indirectly caused the trust protector to adopt the second trust amendment when she unduly influenced the settlor, who was in poor health and depended upon his second spouse for his care. He apparently also suffered from diminished capacity. The settlor then, according to the Petition, in turn pressed the trust protector to execute the second trust amendment.

Trial Court: The trial judge granted the second spouse’s motion to dismiss the Petition. The trial judge found that the Petitioners had alledged that the second  spouse had only influenced her husband, the trust’s settlor, but he did not retain any authority to amend the trust. The judge also enforced the trust’s no-contest clause and the Petitioners were thus removed as trust beneficiaries. A big ‘win’ for the second spouse. Again, it is no surprise that the Petitioners appealed this decision.

Appellate Court: The appellate Court reversed the trial judge and vacated the enforcement of the trust’s no-contest clause. The Court reached this conclusion with several interesting observations:

Arizona Statute:  The phrasing of Arizona’s undue influence statute, according to the Court, used a passive voice, from which the Court concluded that the person alleged to exercise unde influence need not exercise it directly upon the person who has the authority to amend the trust. Accordingly the trust amendment can be ‘induced indirectly,’ which is exactly what the Petitioners alleged.

Accomplish Settlor’s Objectives: The Court also focused on the trust’s terms that required the trust protector to assist in accomplishing the settlor’s objectives, which made undue influence on the settlor’s expression of those objectives more relevant.

Inquire and Gather Information: The Court found the trust protector’s obligation to ‘inquire and gather information’ before exercising the authority to amend the trust raised the possibility of the protector’s inquiry of the settlor, which would then be tainted by the second spouse’s influence of her husband.

Case Remanded: Consequently,  the Court found that, with a trial and evidence admitted at that trial, it is possible for a jury to find that the second spouse unduly influenced her husband, the settlor, who in turn, asked the trust protector to amend the trust pursuant to the settlor’s directions. Thus,  the Court reversed the dismissal of the Petition that sought to invalidate the second trust amendment on the grounds that the amendment had been induced by undue influence exerted on the settlor, which lead the settlor to pressure the trust protector to amend the trust.

Conclusion: It is hard to say what the outcome would be if this case were litigated in Michigan. If a trust director has the same fiduciary duties as does the trustee [MCL 700.7703a((5)(a)], and a trustee’s fiduciary duty is to administer the trust solely in the interests of the trust beneficiaries [MCL 700.7802] one wonders if the trust director should even listen to the trust settlor when it comes to the exercise of the trust director’s powers, including a settlor’s request to amend the trust to accommodate the trust settlor’s wishes.

We often think about the trust director’s authority to amend the trust instrument as the equivalent of the power to ‘fix any problem’ the trustee (or the trust settlor) identifies. But if the trust director’s power of trust amendment is constrained by the trust director’s fiduciary duties to the trust beneficiaries- to act solely in the trust beneficiaries’ best interests, perhaps it is possible that the trust director can be unduly influence, even  by the trust settlor.

It will be interesting to see what the Probate and Estate Planning Council comes up with as a proposed definition of undue influence, and to whom it applies, and if it covers a trust director’s power to amend an irrevocable trust.