What Is Your Trust’s Material Purpose?

If you read the Michigan Trust Code (admittedly not a particularly riveting read!), you will frequently encounter the terms material purpose. A trust’s material purpose will guide a trustee in the administration of the trust. If a probate judge is called upon to interpret the trust instrument, or the judge is asked to order a formal modification of the trust instrument, the judge’s authority will be limited to assure that the trust’s material purposes are preserved. In short, the trust instrument’s administrative and dispositive provisions can be altered, long after the trust becomes irrevocable, through a formal modification that must be approved by the probate judge, but only if the proposed modification (or termination) preserves the trust instrument’s material purposes.

For example, the Michigan Trust Code permits a nonjudicial settlement agreement to be used by the trust beneficiaries and the trustee to alter the trust’s administrative terms, but only so long as their agreement does not violate a material purpose of the trust. An irrevocable trust can be modified or terminated by the agreement of the trustee and the trust beneficiaries, and approved by the probate court, but only if the proposed modification or termination is consistent with the material purposes of the trust. Similarly, a probate judge can modify the administrative or the dispositive terms of a trust when the trustee and trust beneficiaries are confronted with unanticipated changes in circumstances that warrant the trust’s alteration, but only if the proposed trust modification or termination will further the settlor’s [creator’s] stated purpose, or if there is no stated purpose, the settlor’s probable intention.

The purposes of a trust are also critical to the trustee’s administrative decisions. For example, a trustee is required to diversify the investments of the trust, unless the trustee reasonably determines that, because of special circumstances, “the purposes of the trust are better served without diversification.” Consider the authority given by statute to trustees to transfer trust assets to a new trust created by the trustee, an administrative power called decanting. Many state decanting statutes permit the trustee’s exercise of the decanting power but only if the decanting of the trust’s assets is “in accordance with the purposes of the first trust.” For example, a recent court decision from New Hampshire denied a trustee’s attempt to decant trust assets because the trustee had ‘failed to consider the purposes of the trust.’ [Hodges v. Johnson, 177 A.3d 86, 97 (N.H. 2017)]

Unfortunately, many trust instruments do not expressly identify the trust’s purposes when the instrument is signed. In the absence of a material purpose provision, or a clear statement of the purposes that explain the use of a trust, a trustee must discern those purposes by following the language that is used in the trust instrument (words selected by the drafting attorney and not his or her client). Along the same lines, a probate judge will have to look to the words used in the trust instrument in order to identify its apparent material purposes when a petition is filed with the court to interpret, or modify, the trust’s terms.

The summary of the common law with regard to trusts, upon which Michigan’s Trust Code is indirectly based, is not particularly helpful in a search to identify a trust instrument’s material purposes. That summary notes:

Material purposes are not readily to be inferred. A finding of such a purpose generally requires a showing of a particular concern or objective on the part of the settlor, such as concern with regard to the beneficiary’s management skills, judgment, or level of maturity. Thus, a court may look for some circumstantial or other evidence indicating that the trust arrangement represented to the settlor more than a method of allocating the benefits of property among multiple beneficiaries, or a means of offering to the beneficiaries (but not imposing on them) a particular advantage. Sometimes, of course, the very nature or design of a trust suggests its protective nature or some other material purpose.” Restatement (Third) of Trusts, Section 65, comment (d).

Examples of what the material purposes of a trust instrument might include some of the following:

The purpose of this trust is

• To provide to me the full control over the trust assets while I am alive and able to manage those assets;
• To provide for the professional management of my financial affairs by the successor trustee when I am no longer mentally able to make those management decisions and avoid the need for the appointment of a probate conservator;
• To avoid probate on my death and avoid the costs of probate and the publicity otherwise attendant to a probate proceeding on my death;
• To reduce or eliminate federal and state estate taxes to the greatest extent possible on my death;
• To reduce or eliminate federal, state, and local income taxes to the greatest extent possible after my death;
• To protect the trust beneficiaries’ inheritances from being seized by their judgment creditors;
• To protect the trust beneficiaries’ inheritances in a divorce or marriage annulment proceeding;
• To provide for the well-being of a trust beneficiary in the event of his or her mental disability or addiction;
• To preserve the governmental benefits to which a trust beneficiary might otherwise qualify;
• To provide flexibility to any beneficiary to enable them, or their descendants, to retain their inheritance in trust;
• To allow the trust to qualify as a designated beneficiary under IRS Regulations in order to receive, over an extended period of time, my IRAs and my other qualified retirement assets made payable to the trust;
• To promote the education of the trust beneficiaries in the management of financial assets, demonstrating over time the benefit of investment diversification and cash-flow budgeting; or
• To hold assets in trust for the identified beneficiary’s lifetime, as that beneficiary has not demonstrated an ability to manage money and/or has demonstrated addictive behavioral traits that warrant the use of a professional trustee that can hold that beneficiary’s inheritance in trust and make distributions consistent with that beneficiary’s needs and welfare.
• To hold my collection of antique automobiles as a whole, without a sale or destruction of the collection as a whole, and regardless of the expense incurred to maintain and protect that collection, so that my collection may be enjoyed by trust beneficiaries for multiple generations despite the collection not generating any income.

A trust’s purpose can be identified if its creator provides to the trustee a contemporaneous letter of wishes that explain the reasons why a trust arrangement was selected and the creator’s goals for the trust to address the specific needs of the trust beneficiary. However, the danger with the use of companion letters of wishes is that they are normally precatory in nature. That means that the reasons for the trust provided in the letter of wishes are not legally binding on the trustee and those wishes may not be admissible as evidence in a later probate court proceeding to determine the purpose of the trust.

If the occasion arises to amend an existing trust, that would be a good time to consider adding a provision to the trust instrument that includes the creator’s material purposes for the trust. Adding such a provision will assist the trustee in the administration of the trust when questions arise and identifying the trust’s material purposes will guide a probate judge if the need later arises to modify the trust instrument to respond to future changes in the beneficiaries’ circumstances.