Termination of Trust? Nope!

Take-Away: The Michigan Court of Appeals had a recent opportunity to reverse a probate judge’s decision to terminate a trust, since the termination would frustrate the settlor’s intent and the court order failed to follow the statutory notice procedure.

Background: The Michigan Trust Code contains a couple of provisions where a probate judge can terminate a trust earlier than its provisions would otherwise require.

• MCL 700. 7412: (2) A probate court is authorized to modify the administrative or dispositive provisions of a trust, or terminate the trust, if, because of circumstances not anticipated by the settlor, modification or termination will further the settlor’s stated purpose or, if there is no stated purpose, the settlor’s probable intent. (3) If the trust is terminated, the trustee must distribute the trust property as ordered by the probate court. (4) Notice of any proceeding to terminate or modify the trust must be given in the manner specified in MCL 700.7411(3).
• MCL 700. 7411(3): Notice of any proceeding to terminate or modify a trust must be given to the settlor, the settlor’s representative if the petitioner has a reasonable basis to believe the settlor is an incapacitated individual, the trust director, if any, a powerholder described in subsection (1)(b) or (c) of MCL 700.7411, if any, the trustee, and any other person named in the terms of the trust to receive notice of such a proceeding.

In a recent Court of Appeals decision, a totally frustrated probate judge abruptly ordered the termination of a trust while the settlor was incapacitated, but his order failed to comply with the notice provisions of MCL 700.7411(3). The probate judge’s order of termination was reversed primarily because the termination of the trust rendered the settlor intestate, thus frustrating her probable intent, i.e. it failed to preserve specific devises in the trust instrument.

In re Edward & Elaine Jaye Trust, No. 355321, (February 24, 2022)

Facts: The facts leading up to the probate judge’s decision are complex, so I’ll attempt to simplify them as best as possible (but no doubt will fail despite that effort.)

• Trust: Elaine and her late husband Ed established a revocable trust to provide for them in old age and to direct the distribution of their assets on their deaths. Apparently at one time their trust held $5.0+ million in assets, including businesses operated by the Jayes and their son Chris, along with several parcels of real estate. The trust instrument provided for specific devises to individuals who were not the Jayes’ heirs, with the remaining assets after those specific devises were satisfied to the Jayes’ three children- each child to receive one-third of the residue. However, daughter Karen’s one-third of the remainder was to continue to be held in trust for her benefit. Ed died in 2013. In 2010 son Chris was appointed guardian for his mother by a Nevada court. Later, Elaine moved to Michigan where she lived with her daughter Karen. Karen was then appointed as successor guardian and conservator for Elaine.
• Let the Games Begin!: In 2016 Karen filed a petition to remove the trustees of Elaine’s trust, including her brother Chris. Karen accused Chris of spending large amounts of trust assets for his personal benefit, and paying excessive Nevada attorney’s fees. Chris responded that Karen only wanted control of Elaine’s trust assets for her own benefit. This sibling battle continued for over 4 years, with considerable attorneys fees incurred. By 2017 the siblings reached a stipulated resolution of their dispute to cover attorney and CPA fees, including the fees of a bankruptcy trustee that were in connection with one of the businesses held in trust that had filed for bankruptcy. Despite the stipulation, the professional fees were not paid, so the wrangling continued. By mid-2018 the probate court appointed a neutral trustee, Byron Gallagher Jr., to fill that fiduciary role. By 2019, the trustee’s own attorney fees which the trustee sought to get paid from the trust exceeded $100,000.
• Gallagher as Trustee: When Gallagher sought approval to sell real estate held in the trust, both Karen and Chris objected, even though the offers received were well above the real estate’s assessed value. In addition, Karen and Chris objected to the attorneys fees incurred by Gallagher, but not (of course) their own legal fees. Karen ultimately petitioned the court for Gallagher’s removal as trustee, claiming a breach of fiduciary duty, and she also formally sought to have the trust ‘dissolved.’ Chris opposed his sister’s petition, claiming that she simply wanted to remove the protections of the trust, so that she could invade the trust’s assets (recall that Karen’s interest in the trust was to continue to be held in trust.)

Probate Court: At a scheduled court hearing to address implementing the 2017 stipulation and the payment of attorneys fees, along with several other petitions that Karen and Chris had filed that dealt with trust assets, it was pretty clear that the judge had had enough of this sibling dispute and ‘lawyer feeding frenzy.’ The probate judge noted on the record that what had once been $5.0 million estate had dwindled to $1.5 million. After inferring that Gallagher had engaged in formal litigation discovery against the trust owner, the judge continued:

“[I}t has ben a debacle to say the least. I really feel like, although you all have been polite and followed the decorum of a courtroom, in terms of substance you’ve treated this court and me like a rube that can just continue to churn and churn and churn and churn. That’s changing today. I find that there has been nothing of substance brought to this court. There have been representations made that, oh, we’re so close to a settlement…[T]hen I get this one-inch this settlement agreement. And within months I get motions to modify the settlement. Objection to the settlement. It’s… been completely unnecessary….Everybody is here now, when I’ve had enough of the case, to get paid. Okay. I guess we’ve taken [Judge] Dignan as far as we can possibly take him. Let’s cash in and get a check…I warned everybody…..But the bottom line is, on my own motion, right now I’m—I’m going to dissolve and distribute the body of the trust. This will go no further other than to the Court of Appeals if you are interested.”

Dispute: And so it did. The probate judge appointed another person to serve as Elaine’s conservator, and it removed Gallagher as trustee although the judge did note that there was no evidence that Gallagher did anything wrong. Gallagher appealed the decision to dissolve the trust and remove him as trustee, claiming the judge had failed to follow the statutory notice requirement when the trust was terminated.

Court of Appeals: As noted earlier, the Court of Appeals reversed the probate court’s decision to terminate Elaine’s trust.

• Dissolution of the Trust: While the Trust Code allows for the termination of a trust if it is necessary to further the settlor’s intent in light of circumstances that were not anticipated by the settlor, admittedly the Jayes could not have foreseen this extensive litigation and ever-mounting attorneys fees related to the management of the trust’s property. That said, the probate court failed to comply with the statute’s requirement that “termination will further the settlor’s stated purpose.”

While the probate judge’s order to use all of the assets for Elaine’s health, support and maintenance for the rest of her lifetime, that was not the sole purpose of the trust. Another purpose of the trust was to specifically devise assets to non-family members. With the probate court’s order, Elaine was rendered intestate, and she lacked mental capacity to execute a new Will to carry out her wishes. “Absent the notice and failing to further Elaine’s plainly stated intent in the trust, the probate court could not dissolve the trust as it did.”

• Removal of Gallagher as Trustee: The Michigan Trust Code allows a probate judge to remove a trustee on its own motion. But that power is not absolute. MCL 700.7706(2) provides the limited grounds for the removal of a trustee. With regard to the decision to remove Gallagher, the Court noted: “The court may have believed that Gallagher had been pushed around by the competing parties and that a change would serve Elaine’s best interests. However, the court made no record findings to that effect. On remand, if the court decides to relieve Gallagher of his post, the court must refer to MCL 700.7706(2) and support its ruling.”
• Judicial Disqualification: Both Chris and Gallagher asked that Probate Judge Dignan be disqualified when the litigation returned to the probate court. The Court refused to find that the probate judge’s frustration and comments warranted his removal as the presiding judge when the case is remanded back to the probate court:

“Judge Dignan made several strong comments at the September 30, 2020 hearing when he terminated the trust. The comments were directed at all the parties and attorneys, no one was singled out. Reviewing the voluminous record in this lengthy and highly contentious matter, we can understand Judge Dignan’s frustrations and concerns. The glut of lawyers making substantial claims in this dwindling estate undoubtedly perturbed the court and complicated the proceedings. A strong hand was needed to control the proceedings and put it back on track. Judge Dignan’s language demonstrated that he was strengthening his hand. We do not believe that Judge Dignan’s comments revealed an inability to fairly judge and control the proceedings on remand.”

Conclusion: Coming as a surprise to many, it is more difficult to terminate a trust than many believe to be the case, merely because the trust’s beneficiaries do not like the trust’s terms. It should come as no surprise that the settlor’s intent should always prevail as indicated by the terms used in the trust. Similarly, it is easy to identify with a frustrated probate judge when the litigation in his courtroom seems to be endless, initiated by feuding siblings, but then extenuated by a “glut of lawyers making substantial claims” against a dwindling trust estate. There is no real ‘take-away’ from this judicial decision other than it is one more sad example of probate litigation creating a ‘life of its own’ and the need for someone to ‘take control’ when that litigation spins out of control.