Take-Away: The Michigan Probate and Estate Planning Council recently approved and recommended the Legislature’s adoption of the Uniform Directed Trust Act as an addition to the Michigan Trust Code. The Council also recommended the adoption of a fiduciary coordination concept called a divided trusteeship. Finding a legislative sponsor is now the focus of the Council’s efforts. The result of these proposed changes to the Michigan Trust Code is to modify the scope of the statutory imposition of a fiduciary constraint on persons who possess powers under a trust instrument to direct the actions of the trustee. The proposed legislation would also address a co-trustee’s fiduciary role and duties.  In addition, this proposed legislation would have a material impact on trustees and trust protectors and the scope of their fiduciary duties, while providing the release of a directed trustee from liability under certain circumstances. Finally, the proposed legislation would alter some of the familiar terminology that we are accustomed to, specifically changing the term trust protector to trust director to be consistent with the terminology that is used in the Uniform Directed Trust Act.

Sampler of Possible Changes: Some of the changes that would result if the Legislature adopts the bill that the Probate and Estate Planning Council has proposed include the following:

  • Trust Director (formerly Trust Protector): Trust director means that term as defined in section 7703(1)(e). [MCL 700.7103(n).] The same term, i.e. trust director, would replace trust protector throughout the Michigan Trust Code, e.g. a trust beneficiary means the person who holds a power of appointment over trust property in a capacity other than that of either trustee or trust director.
  • Divided Trustees (heavily paraphrased): A trust instrument may include a separate trustees When a separate trustees provision applies, the whole trusteeship of the trust is divided, along the lines created by the designation of the separate trustees, into discrete sets of separately accepted fiduciary responsibilities, each set separately allocated to one or another of the trust’s different separate trustees. With one exception [they are treated as co-trustees to take and defend title to assets held in the name of the trust and thus they are liable for income or property taxes attributable to the trust], the separate trustees will not be treated as co-trustees in their relationship to one another.
  • Limited Liability for Separate Trustees: While the separate trustees accept common title to the trust property, they do so only for the task or the responsibility that they formally accept. Example:  the investment trustee asserts title solely to perform the investment functions on behalf of the trust;  the distributions trustee accepts title only for the purpose of administering the discretionary trust provisions for the benefit of the beneficiaries who are affected by the discretionary trust provision;  the resultant (administration) trustee accepts title only to perform all of the other trustee functions that are not allocated by the trust instrument to either of the separate investment trustee (if any) or the separate distributions trustee.
  • Each Functions Independently: Generally each separate trustee acts as to its separate function upon its own authority without the need for approval from any other separate trustees of the same trust. These separate trustees are not co-trustees for purposes of the need to add all necessary parties in court proceedings when claims of breach of trust arise. By way of example, if the investment trustee is sued for self-dealing by the trust beneficiaries, neither the distribution trustee nor the resultant (administration) trustee would be required to participate in that litigation nor have to hire attorneys to defend themselves; only the investment trustee would be a party to the self-dealing breach of trust litigation. For fiduciary liability purposes a separate trustee does not accept any other separate trust (or delegated responsibility) under the trust instrument. Similarly, a separate trustee neither participates in,  nor provide advice with regard to,  the performance of another separate trustee under the same trust instrument.
  • Co-Trustees: Except as otherwise provided in the Michigan Trust Code [Section 700.7703] or the trust instrument,  co-trustees over the same trust will act by majority decision. The terms of the trust instrument may relieve a co-trustee from duties and liabilities with respect to another co-trustee’s exercise or non-exercise of a power delegated under the trust instrument to the other co-trustee, to the same extent that a directed trustee [described in proposed MCL 700.7703a] may be relieved from duties and liabilities with respect to a trust director’s [formerly trust protector’s] power of direction.

Conclusion: The concept of a directed trustee is just one more way in which to bring flexibility to a trust, especially a trust that is expected to continue for a long duration. Many long-term trusts do not want the trustee  to be constrained by the prudent investor rule with regard to trust investments,  and the trust settlor may want to waive the obligation to comply with that trust investment’s diversification standard. Many settlors may also want to waive the rule against self-dealing, e.g. a co-trustee child independently owns stock in a closely held company that is also held in the parent’s trust managed by a professional co-trustee. Professional trustees fully understand what is required by the prudent investor rule and the prohibition against self-dealing, and thus they may be reluctant to accept trusts which ‘go off book.’ All of which is why the directed trust statute would be a welcome addition to Michigan law where the advantages of using a professional trustee as a directed trustee for trust administration purposes are otherwise balanced against the greater flexibility in investments sought by the trust’s settlor, or the trust’s beneficiaries. While not yet the law in Michigan, the concept of directed trustees is beginning to take hold across the country, as indicated by the creation of the Uniform Directed Trust Act.