Take-Away: Transfers to irrevocable trusts are completed gifts. Some settlors have second-thoughts on the gifts that they made, and they turn to ‘creative’ attempts to unwind their prior gifts.

Background: On several occasions we have covered the basic principles behind a completed gift for Michigan property law . Other missives will soon identify factors when a gift is incomplete for federal gift tax reporting purposes. A recent Michigan Court of Appeals case took the occasion to identify the various property law principles that are associated with transfers of real property to an irrevocable trust that were ‘completed,’ which could not be ‘recovered’ by the trust’s settlor with misgivings. A summary of those principles associated with a lifetime gift relied upon  by the Court in its decision follow.

Elements of a Gift: There are three elements necessary to constitute a gift: (i) the donor (settlor) must possess the intent to pass gratuitously title to the donee; (ii) actual or constructive delivery of the property must be made; and (iii) the donee must accept the gift. Osius v. Dingell, 375 Mich 605 (1965.) However, there is more needed to prove that  a lifetime gift has been made than beyond just reciting intent, delivery, and acceptance.

  • Whether the lifetime gift is made is a question of fact, the determination of which rests on the credibility of witnesses. Ruch v First National Bank of Three Rivers, 326 Mich 52 (1949.)
  • Once a lifetime gift has been made, it is not subject to revocation. Kwiatkowski v Antonecki, 329 Mich 32 (1950.)
  • No exchange of consideration is necessary in light of the fact that a ‘gift’ is gratuitous by its very nature. Buell v Orion State Bank, 327 Mich 43 (1950.)
  • Although delivery of the gifted property can be either actual or constructive, it is essential that title passes to the donee.
  • A gift need not be delivered to the donee directly; it may be delivered to some person for the donee, or to a trustee for that purpose. For that disposition to be treated as a gift it must be made in favor of the donee, as the effect is that the object is placed beyond the power of the donor to recall. Love v. Francis, 63 Mich 181 (1886.)
  • The donee of the gift is presumed to have accepted the gift where it is beneficial. This presumption is even stronger in a case that involves the transfer of real estate, since interests in real estate are generally beneficial to those who own them. Osius; Defreeze v Lake, 109 Mich 415 (1896.)
  • Whether the donor acted with donative intent is a question of fact. In re Rudell Estate, 286 Mich App391 (2009.)
  • Donative intent does not need to be expressed in any particular form and it may be proven through oral testimony.
  • Donative intent requires less positive and unequivocal testimony to establish the delivery of a gift from a father to his children than it does between persons who are not related. In cases where there is no suggestion of fraud or undue influence, very slight evidence will suffice to demonstrate delivery.
  • “A gift from a parent to a child is more easily proved than in instances where a transaction is between persons not so related.” Ruch.
  • The presence of a filed gift tax return is not conclusive evidence that a gift was made, but the existence of a gift tax return can serve as evidence that tends to show that a gift has been made.

All of these legal principles were applied in the recent Court of Appeals decision In re JCP Trust, Michigan Court of Appeals, Nos. 352367, 353970, 356467, (July 14, 2022.) This decision is 34 pages long and it covers several important issues with regard to probate court’s jurisdiction (versus circuit court), the subtle but important distinction between a probate court proceeding v civil action filed in the probate court, the equitable remedies available to a probate court including constructive trusts (independent of a quiet title action, in the circuit court), the termination of a trust when its purpose is purportedly fulfilled, and when the decision of a probate court can be appealed. What follows is only that part of the Court’s decision that dealt with the settlor’s attempt to retrieve real property he previously transferred to an irrevocable trust.

Facts: Back in 1991 Peter and Lois, husband and wife, created and funded an irrevocable trust for the benefit of their 9 living children. Peter and Lois transferred multiple real properties to this irrevocable trust (the Trust). At the time of litigation, title to over 21 real properties were involved, and 9 in dispute, dealing with millions of dollars. [While Lois testified at trial, she died in 2021.] In 1992. a general partnership, O’Dovero Properties was formed by the Trust, and Paul and Lois’ revocable trusts, to act  as a nominee title holder for all of the real properties that were beneficially owned by the Trust; the partners were Peter and two of his sons. In 2000, the trustees of the Trust hired Peter’s business, O’Dovero Development, as a property manager for the Trust’s portfolio of real estate. Peter was paid a management fee based on a percentage of the ‘gross rental income’ that he received from the managed properties.

Things started to get a bit messy when the partnership agreement was amended a couple of times. In 1994, the first amendment signed by the Trust’s trustees, initially required that two of the three partners could authorize and approval any action taken on behalf of the partnership without obtaining the consent of the third partner. A second amendment to the partnership agreement in 2006  not singed by the trustees of the Trust, provided that Paul could take action on behalf of the partnership without obtaining the consent of the other two partners. In addition, this second amendment to the partnership also provided that Paul’s decisions with regard to the partnership could be without any requirement or authorization or instructions from the trustee of the Trust (or the trustees of Paul and Lois’ revocable trusts.)

Then, in 2007, Paul executed an Assignment of his partnership interest in O’Dovero Properties to his revocable trust. Paul claimed that he intended to transfer all the interests over all the properties previously held by O’Dovero Properties to Paul’s grantor trust, since he was delegated all decision-making that concerned such properties under the second partnership amendment, which he claimed included the sole authority to decide who initially purchased the real properties held in the name of the partnership. Apparently, during these intervening years, some of the income from the Trust was used to purchase other real properties, but rather than take title to the real property in the name of the Trust, title was taken directly in the name of the nominee partnership (of which Paul and Lois’s revocable trusts were also then partners, which led to a lot of confusion of ‘who owned what?’.)

Claims: The litigation began when the Trust’s trustees sought to terminate Paul and O’Dovero Properties as the manager of the numerous real  properties that were owned by the Trust, either legally, beneficially, or in both respects, because of their suspicions that Paul was mismanaging the commercial properties and attempting to divert money from the Trust to himself. Paul, in turn, sought to terminate the Trust by raising several technical arguments, among which was that due to the tax law changes in the interim, the purposes of the trust had been fulfilled or frustrated, and that no gift had actually been made to the Trust.

Probate Court: After a 7-day trial the probate judge issued a 106-page decision and ruled in favor of the trustees. The probate court found that the Trust was an irrevocable trust, it refused to terminate the Trust as Paul had requested, it concluded that O’Dovero Properties held ‘bare legal title’ to the 21 real properties in question as nominee,  the Trust had beneficial ownership of all of these properties, and it imposed a constructive trust on Paul to hold the 21 properties for the Trust. Specifically,  the probate court found that the transfers of each of the disputed properties, either to the Trust or to the partnership, had been made with a present donative intent to make a completed, irrevocable, lifetime gift to the Trust, even if legal title was to be delivered to and held by the partnership on behalf of the Trust as its agent.

Court of Appeals: The Michigan Court of Appeals affirmed the probate court’s decision in every respect. In so doing, the Court made several observations with regard to Paul’s funding of the Trust, the role of the partnership taking title to several parcels of real estate directly,  and the Trust’s purpose.

Completed Gifts and Implied Acceptance:

  • The language of the Trust expressly indicated that its purpose was to receive gifts from Paul and Lois for the benefit of their family.
  • The quitclaim deeds conveying the disputed properties to the partnership supported the finding that the properties were deeded to the partnership on behalf and for the benefit of the
  • The partnership agreement expressly stated that its ‘sole purpose’ and business was to hold in the name of the partnership and otherwise deal with such property, and only such property, as the partnership may be requested so to do by the trustees (of the revocable trusts) and the trustees of the
  • The drafting attorney of the partnership testified that as nominee, the partnership was intended to hold only legal title- not any beneficial interests, in trust assets.
  • Paul testified that the properties identified on the Form 709 gift tax return filed when the Trust was created and funded were intended to be gifted by he and Lois to the

“For these reasons, we find no error in the probate court’s determination that Lois and Paul made completed inter vivos gifts of the 9 disputed properties at issue here to the Trust by transferring legal title for those properties to O’Dovero Properties as nominee title holder. And given the undisputed value of the properties in question (in land, improvements, or rental value) we find no error in the probate court’s determination that acceptance of the properties [by the Trusts in question was properly presumed.”

Paul’s Motives: With regard to Paul’s actions and possible motivations, the Court made the following observation [paraphrasing, trying to keep it short:]

“ The probate court found that Paul had used his position as a partner to convey properties held by the partnership as a nominee to his own revocable trust, including properties that he had previously gifted to the Trust or in which that Trust held a beneficial interest. The evidence supports the probate court’s findings. The record reveals that Paul acknowledged that he refused to cede control over the disputed properties, continued to manage them and receive rents associated with them, and attempted to convey some of the disputed properties to himself or his revocable trust. Moreover, when questioned concerning his ultimate goal in this litigation, Paul indicated that he wanted to ‘fix’ the Trust, to ‘get rid of some of the trustees’ and to regain control over deciding to whom his assets would be disbursed. Further, by the time of trial, the Trust’s monthly stream of rental income had decreased by approximately 75%.”

Trust’s Purpose: Paul argued that the Trust should be terminated because “it is clear that a gift can never take place because of the retained control” by Paul, and also because the intended tax purposes were impossible to achieve through the Trust. Specifically Paul argued that the amended partnership agreement gave to him ‘sole control’ to determine where the beneficial interest of the ‘partnership property’ was to be allocated, which in turn “frustrated the purpose of the trust.” The Court found that since the purpose of the Trust was to receive gifts for the benefit of the family, specifically Paul’s children, the Trust still had a viable purpose. As for Paul’s claim that the Trust should be terminated since its tax purposes were impossible to achieve, the Court pointed out that avoiding tax liability was not a ‘stated purpose’ of the Trust, and that future potential tax ramifications did not warrant the termination of the Trust at this time.

Conclusion: The In re JCP Trust decision is an interesting read on several different topics. It provides a helpful discussion on gifts, when they are complete, and how a completed gift can be made when title does not even transfer to the intended donee. What it probably best stands for is yet another example of ‘donor’s remorse’ and a desperate attempt to revoke an irrevocable gift.