Take-Away: The Michigan Court of Appeals recently confirmed the inability of creditors to attack a beneficiary’s interest in a discretionary trust under the Michigan Trust Code, notwithstanding the fact that the trust instrument used the words shall apply to or for the benefits of…. and that the beneficiary was then delinquent in his child support and spousal support obligations.

Reported Case: Linda Anton v Mary Ann Gualtieria and Maria Torres, Michigan Court of Appeals LC No. 2016-219737-TV (Unpublished, March 19, 2019)

Facts: Linda and Charles were former spouses. Charles was ordered to pay child support and spousal support incident to their divorce. Charles was also the beneficiary of a trust. Linda filed a petition to compel the co-trustees of the trust to distribute income from the trust to Charles, out of which Linda could then seek the payment of Charles’ child support and alimony arrearages.

Contested Issue: This litigation focused on the language used in the trust instrument.

  • Linda claimed that the trust was a support or spendthrift trust, which enabled her, as a creditor of the trust beneficiary, to force distributions made by the co-trustees, because the trust instrument provided that “The Trustee, in its sole and absolute discretion, shall apply to, or for the benefit of Charles, as much of the net income [or principal] from the trust as the Trustee deems advisable for his education, health, maintenance and support.” Key to this argument was the use of the words shall apply and the inclusion of the ascertainable standard of education, health, maintenance and support.
  • The co-trustees claimed that the trust was a discretionary trust as defined in MCL 700.7103(d) notwithstanding the appearance of the ascertainable standard, obviously focusing on the phrase in its sole and absolute discretion. A creditor of the beneficiary of a discretionary trust cannot compel the trustee to pay any part of the income or principal of a trust in order that creditors may be paid because the beneficiary has no ascertainable interest in the trust’s assets. In re Johannes, 191 Mich App 514, 517 (1991.)

Public Policy: The Court of Appeals dispensed with a public policy argument Linda raised that a father has a legal duty to support his minor children,  which outweighs the public policy that an owner of property may do with it as he pleases by imposing spendthrift restraints on the disposition of income from a spendthrift trust. Good v. Armstrong, 218 Mich App 1 (1996).  The Court simply observed that Good applies only to a spendthrift trust and not to a discretionary trust.

Trust Construction: To address the use of both shall and sole and absolute discretion in the same directive, the Court noted:

  • Shall is Read Out of Context: The Court found that the Trust instrument, notwithstanding its use of the words shall apply, was in fact a discretionary trust. While the use of the word shall typically denotes a mandatory provision or directive, if shall is immediately preceded by the words sole and absolute discretion, that instead indicates that the Trust is intended to be a discretionary trust.
  • Standards are Not Dispositive: The Court also took note of the formal definition of a discretionary trust used in the Michigan Trust Code. MCL 700.7103(d)(ii) defines it as “a provision in a trust, regardless of whether the terms of trust provide a standard for the exercise of the trustee’s discretion… that provides that the trustee has discretion or words of similar import, to determine… the amount, if any, of the income or principal or both of the trust to distribute to or for the benefit of an individual or class of beneficiaries.”
  • Other Indications of Discretionary Trust: In construing the instrument to find it to be a discretionary trust, the Court also focused on other provisions of the Trust titled “Guidelines for Discretionary Distributions” which included: (i) a desire that the trustee be conservative in exercising its discretion; (ii) the trustee consider other income or resources available to Charles outside of the Trust that are known to the co-trustees; (iii) the settlor’s express desire that the preservation of principal be a priority for purposes of the Trust; and (iv) a genuine need had to be shown by Charles before the co-trustees could make a discretionary distribution from the Trust. All of these provisions simply reinforced the settlor’s intent that Charles have no right to compel distributions to be made by the co-trustees from the Trust.

Conclusion: This decision provides a compelling argument for the use of a discretionary trust if the settlor is concerned that the trust beneficiary will have creditor problems well into the future. Had it been a support trust with a spendthrift provision, Linda would have been able to compel a distribution of income, or principal, from the Trust, in order to bring Charles’ support obligations to her and to his children current. [MCL 700.7504(1)(a).] In sum, as the beneficiary of a discretionary trust Charles had no ascertainable property interest in the Trust. [MCL 700.8715(1); In re Hertsberg Inter Vivos Trust, 457 Mich 430 (1998).] Just one more example of the important difference between a support trust and a discretionary trust under the Michigan Trust Code.