George F. Bearup, J.D. Senior Legal Trust Advisor

Trusts: The “Public Policy” Constraint

Take-Away: A trust provision that encourages divorce, or constrains marriage is invalid, albeit sometimes.

Background: As has been previously covered, a trust in Michigan is valid so long as it’s terms do not violate the state’s public policy. “A trust may be created only to the extent its purposes are lawful, not contrary to public policy, and possible to achieve.” [MCL 700.7404.] Unfortunately, the Michigan Trust Code does not identify what public policies are implicated by the terms a trust, leading to a lot of guesswork. One common law public policy often cited is a provision that either is a restraint on marriage, or one that tends to encourage a beneficiary’s divorce is invalid.

Uniform Trust Code: The Comments to the Uniform Trust Code, on which MCL 700.7404 is based, provides only slightly more direction on when a state’s public policy may become implicated.

“For an explication of the requirement that a trust must not have a purpose that is unlawful or against public policy, see Restatement (Third) of Trusts, Sections 27-30, and Restatement (Second) of Trusts, Sections 59-65. A trust with a purpose that is unlawful or against public policy is invalid. Depending on when the violation occurred, the trust maybe invalid at its inception or it may become invalid at a later date. The invalidity may also affect only particular provisions….Purposes violative of public policy include those that tend to encourage criminal or tortious conduct, that interfere with freedom to marry or encourage divorce, or which are frivolous or capricious. See Restatement (Third) of Trusts, Section 29; Restatement (Second) of Trusts Section 62.”

Restatement (Third) of Trusts: The Restatement Section 29, referred to above, that addresses public policy notes: “A trust or a condition or other provision in the terms of a trust is ordinarily….invalid if it tends to encourage disruption of a family relationship or to discourage formation or resumption of such a relationship.” The Comments to this Section 29 provide some examples of trust provisions that constitute invalid restraints against marriage or which encourage divorce.

Restatement (Second) of Contracts: Similarly, Section 189 of this Restatement (Second) of Contracts also addresses the public policy implications of a restraint on marriage: “..a promise is unenforceable on grounds of public policy if it is unreasonably in restraint of marriage.”

With these statutory provisions and presumed restatements of the common law with regard to the public policy of preserving or encouraging marriage, one would easily conclude that a trust provision that treats the beneficiary differently if he/she is married would be invalid as contrary to established public policy. That conclusion would be incorrect in light of a recent decision from the Indiana Supreme Court.

Rotert v. Stiles, Indiana Supreme Court, 174 N.E. 1067 (2021)

Facts: Marcille created a trust in 2009. On her death her trust provided that the trust assets were to be distributed between her son Roger, her daughter Connie, and her four stepchildren. Roger’s share included cash and real property. The trust provision with regard to Roger’s share of the trust provided: “In the event that [Roger] is unmarried at the time of my death, I give, devise and bequest his share of my estate to him outright and the provisions of this trust shall have no effect. However, in the event that he [Roger] is married at the time of my death, this trust shall become effective as set out below.” Roger’s trust share named is sister Connie as the trustee. Thus, if unmarried, Roger received his share of his late mother’s trust outright, and if was then married, Roger’s share of that trust remained in trust, administered by his sister, Connie.

While Roger was married at the time his mother created her revocable trust in 2009, his wife had filed for divorce which was then pending. When Roger’s mother died in 2016, Roger had reconciled with his wife. So he was married at the time of his mother’s death, resulting in the continuing trust for his benefit.

Roger and Connie quarreled over whether Roger’s share of his mother’s estate had to be held in the ‘continuing’ trust for his benefit. The two ultimately agreed that Connie would distribute the cash to Roger, but not the real estate. Roger later filed suit that claimed that Marcille’s trust provision (described above) constituted an unlawful restraint against marriage and was therefore void as a matter of public policy. Connie disagreed.

Trial Court: The trial judge held for Connie, not Roger, but did more so on some procedural missteps made by Roger.

Indiana Court of Appeals: The Court of Appeals found that Marcille’s trust provision was a condition in restraint of marriage and therefore it was void.

Indiana Supreme Court: The Court of Appeal’s decision was reversed by the Indiana Supreme Court. The Supreme Court considered the arguments and the common law that the history of decisions that marriage restraints in a trust are a violation of public policy. However, it then “declined to restrict what the legislature does not forbid.” Rather, the Supreme Court found that while marriage restraints are not expressly forbidden in the Indiana Trust Code, disregarding the settlor’s intent is, in fact, expressly forbidden by the Trust Code. The Court seemed to take a ‘blind eye’ to the Indiana Trust Code’s other provisions to reach the conclusion that Marcille’s trust provisions for Roger were enforceable as written.

Indiana Statutes: Indiana has a probate code statute that expressly prohibits a devise to a spouse subject to a condition of a restraint of marriage, treating such a provision as void. But that statute only pertains to devises under wills, not to the provisions of a trust, even though such trusts are often viewed as ‘will substitutes.’ There is no comparable statutory prohibition in the Indiana Trust Code. As such, the presence of the marriage restraint prohibition in the probate code, but not the Trust Code, suggested that the legislature did not expressly intend to extend the marriage restraint prohibition to trusts. Indiana’s Trust Code does, however, have a general provision, much like Michigan’s, that a trust’s provisions cannot be contrary to the state’s public policy.
Rules of Law: “If the rules of law and the terms of the trust conflict, the terms of the trust shall control unless the rule of law clearly prohibits or restricts the article which the terms of the trust purport to authorize. Thus, a court must implement the settlor’s manifested intent unless doing so would clearly violate the ‘rules of law’ contained in the Trust Code.” The Indiana Trust Code mentions the constraint of existing public policy, but not specifically the restraint of marriage prohibition. Consequently, the settlor’s intent as manifested in the terms of her trust ‘trumps’ the state’s public policy.
Settlor’s Intent Prevails: Indiana’s statute, like Michigan’s, imposes the somewhat vague public policy limitation on the settlor’s intent. Yet the Court found the settlor’s intent was paramount: “What the Indiana Code prohibits is ignoring the settlor’s intent (and where relevant the trust’s purpose) as manifested in the trust’s plain terms. According to the statute, the ‘rules of law’ contained in the article-referring to the trust code- ‘shall be interpreted and applied to the terms of the trust so as to implement the intent of the settlor and the purposes of the trust’…..Had the legislature intended this section to contain this additional limitation [the public policy restraint against marriage], it could have added it. But it did not, and we will not rewrite the enactment.”

Observation: Perhaps the Indiana decision can be simply explained that the probate code section that expressly prohibited tying a devise to a spouse to his/her future remarriage was an indication that the legislature was fully aware of that public policy against marriage restraints, when it decided to expressly incorporate it into the state’s probate code. The fact that the Indiana Trust Code is silent with any comparable prohibition, would then lead to a conclusion of a conscious legislative decision to not impose that specific public policy prohibition on marriage restraints to trusts. But that reasoning is something of a ‘reach’ and arguably writes-out of the Indiana Trust Code that all trusts must be consistent with the state’s public policy. Consider the following:

Settlor’s Intent: The Michigan Trust Code directly addresses the settlor’s intent in its definition sections. “’Terms of a trust’ means the manifestation of the settlor’s intent regarding a trust’s provisions as expressed in the trust instrument or as may be established by other evidence that would be admissible in a judicial proceeding.” [MCL 700.7103(18).]
Public Policy Limitation: One of the ‘default’ and mandatory provisions of the Michigan Trust Code is that the terms of the trust do not prevail over the requirement that the trust and its terms be for the benefit of the beneficiaries and that the trust have a purpose that is lawful and not contrary to public policy. [MCL 700.7105 and MCL 700.7404.] As such, the trust’s settlor cannot intentionally waive the common law requirement that his/her trust cannot be contrary to the state’s public policy.

Conclusion- Settlor’s Intent vs. Public Policy: The Indiana Supreme Court concluded that the settlor’s intent was paramount to its Trust Code’s prohibition that the trust must not contravene the state’s public policy, which was probably manifested in its probate code statutory prohibition with regard to devises to spouses subject to restraints on remarriage. In Michigan, the state’s clear public policy against a restraint against marriage would be paramount to the settlor’s intent, and the provision that withheld Roger’s share of the trust from him because he was then married would be invalid, that is if the Court had followed MCL 700.7404. When individuals want ‘unique’ provisions in their trust, that seems to raise the question if those unique terms are contrary to public policy. Sadly the Michigan Trust Code does not provide any additional guidance on what public policy means and what it does not, leaving individuals (and their estate planning attorneys) guessing as to what provisions will be enforced, and what provisions will be held invalid.