Take-Away: One court recently held that a deems advisable discretionary trust distribution standard permitted the trustee to require the production of the trust beneficiary’s business records. This standard is frequently used when an asset-protection discretionary trust is created for the trust beneficiary, as provided under Michigan’s Trust Code, the beneficiary does not possess any property interest in the trust.

The court also noted the circumstances that justified the removal of an individual co-trustee.

Reported Case: Matter of T.R. Potter Jr. Exempt Trust, _S.W.3d _ 2019 WL 5700287 (Missouri Court of Appeals, E.D. 2019)

Trust Instrument: The terms of the trust instrument provided that the trust share established for the settlor’s son, Potter, was to be a discretionary trust. Corporate and individual co-trustees were named to administer Potter’s trust share. The trust share directed the co-trustees were to “use and apply so much of the net income as they may deem neccessary or advisable for the benefit of” Potter. Potter also held a testamentary non-general power of appointment over the trust corpus; in the event that power of appointment was not exercised, the contingent remainder beneficiary of the trust was Potter’s minor child.

Facts: In 2012 Potter requested income distributions from the corporate trustee in order to provide cash-flow for Potter’s real estate business. The corporate trustee agreed to make distributions, but it did not consult with the individual co-trustee, even though the trust instrument required both trustees to consent to a trust income distribution. This error was not detected for two years, although during that two year period the corporate trustee sent semi-annual statements to the individual co-trustee which reflected the income distributions to Potter. Apparently the individual co-trustee never filed any objection with the corporate co-trustee. The corporate co-trustee formally asked for the individual co-trustee’s formal consent to those prior income distributions to Potter. The individual co-trustee refused to provide the consent unless Potter first furnished his financial information for the individual co-trustee to review. The corporate co-trustee and Potter both refused to turn over the financial information believing that the individual co-trustee did not have the authority under the trust’s terms to request such information. The corporate co-trustee filed a petition for instructions from the local probate judge. The individual co-trustee then counterfiled, claiming that the corporate trustee had breached its fiduciary duties to the remainder beneficiaries with the ‘unauthorized’ distribution of trust income to Potter.

Trial Court: The judge found that the terms of the trust instrument did not authorize the co-trustees to request Potter’s financial information. Consequently, the judge found no breach of fiduciary duty, it granted the corporate co-trustee’s motion for summary judgment, it removed the individual co-trustee, and it assigned attorneys fees and court costs to the individual co-trustee.

Appellate Court: Part of the trial judge’s decision was reversed and part was affirmed.

Requesting Beneficiary’s Financial Information is Permitted: The Court held that the co-trustees must use their discretion in making income distributions, because the trust’s terms directed them to “make distributions as they may deem necessary….The trustees therefore may request the beneficiary’s financial information but need not do so, and the beneficiary is not obligated to supply it, although the trustees may take the refusal into account in making decisions.” 

Distributions for the Beneficiary’s Business Permitted: The Court, relying on the Restatement (Third) of Trusts, Section 50 comment d(3), noted that distributions to aid the beneficiary in carrying on a business are permissible under the trusts terms because they are “for the ‘benefit’ of the beneficiary.”

Removal of Individual Co-trustee Permitted: The Court sustained the trial judge’s removal of the individual co-trustee, but not on the grounds of the trial judge that the individual co-trustee had an incorrect interpretation of the trust instrument. Rather, the individual co-trustee was removed because of his failure to raise a question about the income distributions to Potter even though they were clearly indicated on the semi-annual statements that he had received. This Court concluded that that was a ‘failure to effectively administer the trust, and thus a ground for his removal under Missouri’s Trust Code. [Based on UTC 706.]

Co-trustee Hostility: In passing, the Court also noted there was hostility between the individual co-trustee and Potter. Apparently they did not, and still do not, communicate at all. In addition, the individual co-trustee also claimed that he mistrusted the corporate trustee. Based solely on those facts, the Court was convinced that the individual co-trustee should be removed.

Removal of Co-Trustee in Michigan: Michigan’s version of UTC 706 is found at MCL 700.7706. The Michigan Trust Code’s version provides that a settlor, cotrustee, or qualified trust beneficiary may request the probate court to remove a trustee if either (a) the trustee commits a serious breach of trust; or (b) there is a lack of cooperation among cotrustees which substantially impairs the administration of the trust; or (c) because of unfitness, unwillingness, or persistent failure of the trustee to administer the trust effectively, from which  the court determines that removal of the trustee best serves the purposes of the trust; or (d) there has been a substantial change of circumstances from which the court finds the removal of the trustee best serves the interests of trust beneficiaries and is not inconsistent with a material purposes of the trust.

Conclusion: We might expect more requests from trust beneficiaries in light of the recent damage done to small businesses for a discretionary distribution from existing trusts.

I am not sure the Missouri court was all that helpful when it found that additional financial information can be requested by the trustee in responding to a requested distribution,  the beneficiary can expressly refuse to provide that requested financial information, and if refused, the trustee can then take that refusal ‘into consideration.’ Not sure where that leaves the trustee in providing guidance as to what is reasonable (or not.)

I also wonder if a Michigan court would have removed the individual co-trustee for not reviewed or objecting to the semi-annual statements for two years, or concluding that such omission was a ‘failure to effectively administer the trust.’ Michigan’s statute uses the qualifier persistent, which I am not sure would apply to a failure to review or comment on 4 semi-annual accountings. More likely the individual co-trustee would be removed for the complete failure to communicate with the trust beneficiary, which then begs the question why that person was named as co-trustee to begin with?