Breach of Fiduciary Duty When Co-Trustee is also Beneficiary

Take-Away: When a co-trustee also is a trust beneficiary, actions taken by the co-trustee/beneficiary against the other co-trustee may not constitute a breach of trust.

Background: A breach of trust is defined under the Michigan Trust Code as ‘a violation of a duty the trustee owes to a trust beneficiary.’ [MCL 700.7901(1).] Several duties are covered under the Michigan Trust Code, including:

(i) the duty to administer the trust in good faith, expeditiously, in accordance with its terms and purposes, for the benefit of the trust beneficiaries [MCL 700.7801];
(ii) the duty of loyalty to the trust beneficiaries, which means the trustee ‘shall administer the trust solely in the interests of the trust beneficiaries’ [MCL 700.7802(1)]; and
(iii) the duty to take reasonable steps to take control of and protect trust property [MCL 700.7810].

Supplementing the Michigan Trust Code is Michigan’s common law with regard to trusts. It provides that a trustee owes trust beneficiaries the duties of honesty, loyalty, restraint from self-interest and good faith. In re Green Charitable Trust, 172 Mich App 298 (1988).

A recent Michigan Court of Appeals decision focused on several of these duties when the individual named as co-trustee also was one of the trust beneficiaries who filed petitions that were challenged as constituting a breach of trust. Were the petitions filed in the co-trustee’s capacity, or in the capacity as a disgruntled trust beneficiary? Is that a critical distinction?

In re Anne M. Spivak Revocable Trust, Michigan Court of Appeals, Nos. 354465 and 354466 (February 10, 2022)

Facts: Michelle was named as co-trustee of her mother (Anne’s) revocable trust. Another child, Frank (an attorney in the State of Washington) was named as the other co-trustee. Frank was also named as Personal Representative of their mother’s estate. There were 3 other children who seemed to align their beneficial interests with Frank. Both Anne’s Will and Trust emphasized that her children were ‘all equal insofar as their being beneficiaries of her estate.’ Anne’s Will also made reference to Anne’s intent that she did not want any of her children to give up or forfeit any interest in her estate. Anne’s Will also contained a no-contest clause.

Testamentary Trust: While Anne’s Will poured over her probate estate assets into her revocable living Trust, the Personal Representative, Frank, was also given the discretion to move the estate property to a new trust to be created by the PR, i.e. a testamentary trust, with terms that had to be consistent with the terms of Anne’s revocable Trust. Frank exercised this authority to create and fund a testamentary trust, and he then registered that testamentary trust in Washington. After some objections, the estate assets were then moved to Washington ‘sitused’ testamentary trust. Michelle declined to serve as co-trustee of the testamentary trust. Michelle also objected to the registration of the testamentary trust in Washington as a move designed to frustrate her ability to file probate court petitions in Michigan.
Annuity: Perhaps the initial source of the siblings’ acrimony was that Anne left an annuity of $60,700 which named Michelle as the sole beneficiary, which obviously passed outside of the probate process. Michelle’s siblings demanded, citing the “all equal” provision in the Will and Trust, that Michelle share the annuity with her siblings. Michelle declined to do so. Frank and a brother then threatened to off-set Michelle’s portion of her share of Anne’s estate by the amount of this annuity.
Petitions: Michelle filed several petitions with the Michigan probate court challenging the PR’s creation of the testamentary trust, its registration in Washington, the transfer of assets to Washington, and a separate petition challenging Frank’s actions as co-trustee of Anne’s revocable Trust. Michelle asked the probate court to remove Frank as co-trustee, and for the appointment of a neutral trustee. Unfortunately, some of Michelle’s petitions were filed after the testamentary trust was registered in the State of Washington, thus divesting the Michigan probate court of jurisdiction. (Much of the Court of Appeals decision dealt with the propriety and intent behind Michelle’s various petitions filed with the Michigan probate court.)

Probate Court: The probate court dismissed Michelle’s petitions finding that they were ‘not properly filed.’ (Michelle later filed her objections in the Washington Courts.)

Breach of Trust: The probate judge also found that Michelle had committed a breach of trust by filing her petitions. The probate judge found: “In bringing multiple petitions (one in the Estate and one against the Trust), without proper consultation with the other co-trustee, or at the very least, diligent investigation as to the viability and arguable legal merit of her claims, was a breach of trust according to MCL 700.7901(1) which caused the Trust to incur substantial and unnecessary attorneys fees and costs…. According to MCL 700.7901(2)(c) and MCL 700.7902(a), she, as a current co-trustee, now has duty to restore this property to the Trust and all its beneficiaries, as if this breach did not occur. The Trust must be made whole.”
Sanctions and Attorneys Fees: Frank then promptly sought sanctions against both Michelle and her legal counsel after his victory in the probate court, and also a judgement against Michelle for breach of trust (recall that she was co-trustee of Anne’s revocable Trust.) The probate judge sanctioned Michelle and her lawyer for $17,500 in the probate estate action, and another $23,500 in the trust proceedings in Michigan.

Appellate Court: The Michigan Court of Appeals reversed the probate judge’s decisions. Two separate claims were addressed on appeal.

Sanctions: The Michigan Court of Appeals found that the sanctions imposed by the probate judge against Michelle and her lawyer were unwarranted, and that her petitions were neither frivolous nor intentionally improperly filed by either Michelle or her lawyer. I’ll skip the balance of this part of the Court’s decision other than to underscore that sanctions authorized by Michigan Court Rules or statute [MCL 600.2591] are intended to address and deter egregious and intentional abuses of the judicial process. A claim is not frivolous merely because the party who advances the claim does not prevail on it.
Breach of Trust: As noted, the probate judge had held that Michelle breached the trust in her role as co-trustee of the revocable trust. This, too, was reversed by the Court of Appeals.

“Michelle was both co-trustee and a beneficiary of the [Trust.] In resolving whether Michelle committed a breach of trust, we must remember that Michelle had dual roles. Michelle could file suit in her role as co-trustee. A co-trustee ‘can maintain a suit against his co-trustee’ to challenge the other’s breach of trust and has a duty to ‘use reasonable care to prevent the [other co-trustees] from committing a breach of trust.’ [Citations omitted.] Although Michelle did not entitle her claims as ‘breach of trust’, the substance of her allegations was that [Frank and his brother] were not acting in the best interests of the trust, their fellow co-trustee, or the beneficiaries and their conduct needed to be supervised or their roles refilled…Moreover, Michelle’s co-trustees allegedly treated her inequitably in her beneficiary role. Had [Frank and his brother] threatened to reduce Peter S. or Jeffrey’s shares [other children and trust beneficiaries] of the trust distributions, Michelle would have every right in her role as trustee to protect their interests. Michelle as a trustee had the same right to protect her own interest as beneficiary.”

“Michelle had a legitimate argument that her mother intended to make a separate nonprobate transfer to her without affecting the probate estate; she was not seeking a windfall without any legal justification. The mere act of filing these petitions to protect the interests of a beneficiary (even though it was herself) did not amount to a breach of trust.

Conclusion: This case is an interesting study when there are dual roles held by a trust beneficiary who also acts a co-trustee. I suspect that the Court of Appeals reacted, in part, to the unrefuted claims by Michelle that her brother threatened to punish her for not sharing in the annuity that their mother gave solely to Michelle, by withholding from her an equal share of their mother’s estate. While the Court did not dwell too much on this fact, it periodically was cited by the appellate panel in finding justification for many of the petitions that Michelle filed with the Court.