28-Jul-17
Acceptance of a Trust: Some Vague Standards to Contend With
Take-Away: Greenleaf Trust may be named as successor trustee of a Trust instrument that it learns about only after the settlor has died. Greenleaf Trust can take some steps with respect to the Trust and its assets without a formal acceptance of the Trust. The unanswered question, however, is just how far Greenleaf Trust can go when it assumes some responsibilities for the trust assets before an acceptance will be deemed to have occurred? The Trust Code is not very helpful when it uses the vague phrase ‘or the trustee otherwise indicates its acceptance of the trusteeship.’
Background: Often as is the case, a named successor trustee will not be asked to sign an Acceptance of Trust. An initial trustee named will normally sign an Acceptance of Trust at the time the settlor signs the Trust instrument, but not the named successor trustee. Thus, the initial trustee will know of the Trust as indicated by the signed Acceptance, but frequently the named successor trustee is completely unaware of their appointment until sometime later when it is alerted to that fact, often after the settlor’s death. Consequently there exists a legal question of whether (or when) the named successor trustee has actually accepted the powers and duties of that office by its actions.
Affirmative Duties: The situation that the named successor trustee finds itself in is much like an Agent who is named under a Durable Power of Attorney. The big difference, however, is that the Agent named under a Durable Power of Attorney is free to exercise, or not exercise, some of the powers that are conferred on the Agent under that instrument; restated, there is no affirmative duty or responsibility imposed on the Agent under a Durable Power of Attorney to exercise delegated powers and to act on behalf of their principal. Yet the named successor trustee of the settlor’s Trust is faced with affirmative duties to protect trust assets and to administer an accepted Trust. There are only a few occasions where the named successor trustee can accept only a part of a trusteeship. In short, either the named successor trustee is ‘in’ or ‘not in’ by it rejection of the Trust- there is no middle ground when it comes to accepting a trust.
Trust Code: Some help for the named successor trustee can be found in the Trust Code. The Code spells out exactly how a Trust is formally accepted by the trustee. One approach is obvious, the other not quite as obvious. The first, obvious approach, is to substantially comply with the method of acceptance that is provided for in the Trust instrument. The not-so-obvious approach, if the Trust instrument is silent on the method of acceptance by the trustee, is for the named successor trustee to accept delivery of the trust property, exercise powers or perform duties as a trustee, or it otherwise indicates its acceptance of the trusteeship. MCL 700.7701(1).
- ‘Otherwise Indicates’: Of some discomfort is the vague phrase “or otherwise indicates its acceptance of trusteeship” manner in which a trusteeship is accepted. What exactly does this phrase mean? If an heir drops the decedent’s stock certificates off at the named successor trustee’s reception desk (accepting a delivery?), does the entity’s retention of the share certificates constitute an acceptance of the Trust? However, maybe taking delivery of the certificates is not as big a trap as the example suggests.
- Deemed Rejection of Acceptance: The Trust Code provides a helpful ‘out’ to a named successor trustee that is surprised to learn that it was named as a successor trustee of a Trust. MCL 700.7701(2) provides that a designated trustee that does not accept the Trust ‘within a reasonable time after knowing of the designation is deemed to have rejected the trusteeship.’ But that deemed rejection does not completely address the vague otherwise indicate acceptance of the trusteeship manner in which a named trustee might inadvertently find itself to have accepted a Trust which does not contain specific provisions that describes just how the named successor trustee goes about formally accepting the Trust.
- Statutory Protection: Yet there is probably little risk to the named successor trustee due to one other provision in the Trust Code that makes it clear that a person [which is defined to include a professional trustee] designated as trustee, without accepting trusteeship, may act to preserve the trust property if, within a reasonable time after acting, the person then sends a rejection of trusteeship to either the settlor, if living, or to the qualified trust beneficiaries of the Trust if the settlor is dead. MCL 700.7701(3). The named successor trustee can also inspect assets held in the Trust to determine its potential liability before it formally makes a decision to accept or reject a trusteeship. Now, if we only had a good sense of what constitutes a reasonable time in which, after inspection (or accepting delivery?) the named trustee communicates its decision to reject the trusteeship.
Fiduciary Duties: Fortunately the Trust Code specifically provides that the acceptance of a trusteeship is a prerequisite to the trustee assuming any duty to administer the Trust. MCL 700.801 provides: “Upon acceptance of a trusteeship, the trustee shall administer the trust in good faith, in accordance with its terms and purposes, and the interests of the beneficiaries.” Consequently, in the absence of a legal duty, there can be no breach of such duty. Most of the reported decisions in Michigan deal with the scope of trustee’s duties, and the implications of a trustee that is required to always act in good faith since that is a concept that is not defined in the Trust Code. But there is very little in the way of any discussion either in the Trust Code or from the probate courts of when, or how, a named successor trustee accepts or rejects the Trust, or what is a reasonable time in which the named successor trustee accepts delivery of assets before it must communicate its rejection of the trusteeship.
Conclusion: Hopefully most Trust instruments that we see will contain a specific process for the formal Acceptance of Trust. For those Trust instruments that are silent on the manner in which a named successor trustee manifests its willingness to serve as trustee, there is some statutory protection for what might appear to be an inadvertent acceptance of the Trust just so long as the trustee acts to communicate its rejection within a reasonable time. In sum, if you are asked to review a Trust instrument, make sure it clearly spells out how the Trust is formally accepted by the designated successor trustee.