Does a Settlor’s Incapacity Always Lead to the Trust’s Irrevocability?

Take-Away: In the past we have noted that even if the settlor of a trust becomes incapacitated, the trust is still considered to be a revocable trust under the Michigan Trust Code. However, if the trust instrument expressly states that the trust becomes irrevocable upon the settlor’s incapacity, that trust provision will override the Michigan Trust Code default rule of construction that the trust remains revocable.

Background: Many trust instruments that I have reviewed over the past few years recite that the revocable trust ‘becomes irrevocable upon a determination of the settlor’s mental incapacity or the settlor’s becoming incapable of managing his/her affairs.’ Such a provision, which makes the trust irrevocable upon the settlor’s incapacity, is inconsistent with the Michigan Trust Code.

• Michigan Trust Code: With regard to a trust’s revocability, the Trust Code provides: [r]evocable, as applied to a trust, means revocable by the settlor without the consent of the trustee or a person holding an adverse interest. A trust’s characterization as revocable is not affected by the settlor’s lack of capacity to exercise the power of revocation, regardless of whether an agent of the settlor under a durable power of attorney, a conservator of the settlor, or a plenary guardian of the settlor is serving.[MCL 700.7103(h).] Consequently, even when the settlor is determined to be mentally incapacitated, his/her trust is still to be considered revocable, modifiable, or subject to their decision to terminate the trust.
• Trust Instrument Trumps Trust Code: Yet another provision of the Michigan Trust Code provides that, with only a few exceptions, the terms of the trust generally will take precedence over the Trust Code’s default The Michigan Trust Code governs the duties and powers of a trustee, relations among trustees, and the rights and interests of a trust beneficiary, except as otherwise provided in the terms of the trust. This priority of the terms of the trust instrument was confirmed when the Court of Appeals held that the terms of a trust prevail over any provision of [the MTC] unless one of the exceptions enumerated in the Code apply. In re Pollack Trust, 309 Mich App 125, 164 (2015.)

These two statutory provisions collided at the end of July in a Court of Appeals unpublished decision, with the express terms of the trust instrument prevailing over the presumed revocability of a trust.

Case: Dice, et al v Zimmerman et al, No. 342608 (July 30, 2019, Unpublished)

Facts: Esther created a revocable trust after the death of her husband. The trust held real estate and a closely held business. Esther was the initial trustee of her trust. The trust provided that if Esther ever was incapacitated and her incapacity was certified by two physicians, any further actions taken by her with respect to the trust would be void “and during such period of time the trust shall be irrevocable and not amendable.” 

Beginning in 2002 Esther made multiple amendments to her trust. The problem was that in 2007 a geriatric assessment found Esther to experience memory loss, the onset of dementia, and that she ‘needed help with her finances and medications.’ A year later, in 2008,  another physician noted that Esther was ‘not capable of participating in business affairs.’ Soon after the second physician’s assessment, a letter was written to Esther by her son on behalf of the successor named trustee of Esther’s trust, in which the successor accepted Esther’s trust.

Nevertheless, despite Esther’s ostensible incapacity and the letter of the successor trustee’s accepting the trust, Esther continued to make multiple amendments to her trust. The key amendment that triggered the litigation after Esther’s death was a trust amendment signed by her, in which her son (the defendant) was given voting stock in the closely held business and her 3 daughters (the plaintiffs) were given non-voting stock in the same business, thus giving her son in control of the business after Esther’s death.

Long after Esther’s death her daughters filed a lawsuit challenging the validity of the trust, with its multiple amendments, the key amendment being the one that left Esther’s son in control of the family business. Esther’s daughters claimed that their mother was unduly influenced by her son, that the trust amendments were void because Esther did not have capacity to execute the trust amendments, and the typical predictable claims in most trust contests of fraud, misrepresentation, breach of fiduciary duties, conversion of trust assets, and the removal of the named successor trustees. Esther’s son, and the other defendants, responded that the daughters’ claims that the trust was invalid were time barred due to the two year statute of limitations under the Michigan Trust Code in which to challenge the validity of a trust.

Issues: The questions at issue in this litigation were-  #1: Whether the Trust Code’s rule of construction, that Esther’s trust remained revocable despite her incapacity,  prevailed over the language used in her trust instrument where she directed that if she later became incapacitated, her trust would become ‘irrevocable and not amendable’; and #2: Esther died in May, 2014, yet her daughters’ claims that her trust was invalid was not filed until February 2017, and thus their claim was ‘too late’ in light of the two year statute of limitations in which to challenge the validity of a trust.

Probate Court: The probate judge found that Esther’s trust remained revocable, in light of the default rule of construction found in MCL 700.7103(h). Therefore, Esther could continue to amend her trust, including the amendment that added the voting stock/non-voting stock allocation among her children. The probate judge also found that the Michigan Trust Code’s two year statute of limitations in which to challenge the validity of a trust, precluded the daughters’ challenge to the validity of their mother’s revocable In sum, the daughters lost their claim, and Esther’s son prevailed in the probate court on motions for summary disposition, i.e. on affidavits filed with the probate court,  and not after a trial with evidence admitted.

Appeals Court: The probate judge was reversed on both of the issues. The case was sent back to the probate court for an evidentiary hearing.

Statute of Limitations: The Court of Appeals had to do some maneuvering to deal with the two year statute of limitations. The relevant statute provides that a person may commence judicial proceedings to contest the validity of a trust that was revocable at the settlor’s death within the earlier of two years after the settlor’s death or six months after the trustee sent the person a notice informing the person of all of the following: (i) the trust’s existence; (ii) the date of the trust instrument; (iii) the date of any amendments known to the trustee; (iv) a copy of the relevant portions of the terms of the trust that describe or affect the person’s interest in the trust; (v) the settlor’s name; (vi) the trustee’s name and address; and (vii) the time allowed for commencing a proceeding. [MCL 700.7604(1).]

The daughters argued that the two year statute of limitations did not apply since the statute only applies to challenging a revocable trust that became irrevocable on the settlor’s death, and in this situation, Esther’s trust became irrevocable way back in 2008. Rather than adopt the daughters’ argument, the Court noted that after Esther’s death, the successor trustee’s was egregiously slow in getting the required information to Esther’s daughters.  It was only in the summer of 2016 [Esther died in May 2014] that the trustee referred to the trust, and only in September 2016 were copies of the trust were provided to Esther’s daughters. The daughters’ complaint was filed 5 months after their receipt of the copies of the trust, thus beating the six month limitation period. In a footnote, the Court also observed that the communications from the trustee “did not inform plaintiffs of the time allowed for commencing a proceeding” as required by MCL 700.7604(1)(b)(vii).] As such, the daughters’ complaint alleging invalid trust amendments were not time-barred by the normal 2-year or 6-month statute of limitations.

Amendments Invalid: The appellate panel found that Esther’s trust became irrevocable back in 2008 when she was determined to be incapacitated. In short, the probate judge’s application of MCL 700.7103(h), which describes the revocability of a trust as ‘not affected by the settlor’s lack of capacity,’ was incorrect since the probate judge ignored MCL 700.7105(1) which requires that the terms of the trust take precedent over the default provisions of the Michigan Trust Code, in this instance, MCL 700.7103(h). Since there was no proof, nor any formal determination that Esther had regained her capacity after the 2008 physician determination that she was incapable of participating in her business affairs, the Court found that all of Esther’s subsequent efforts to amend her trust were in vain.

We conclude that this language rendered the Trust irrevocable upon Esther’s incapacity and in viewing the evidence in a light most favorable to plaintiffs, Esther was indeed incapacitated in 2008. In 2007, Dr. Hough indicated that Esther had been diagnosed with dementia and ‘needed held with her finances and mediations.’ On May 6, 2008, Dr. Miller indicated that Esther was ‘not capable of participating in business affairs’. Zimmerman then sent Esther a letter of acceptance on behalf of Yeo [CPA firm named as successor trustee] indicating that Yeo accepted its position as trustee….The language of the trust plainly indicates that so long as Esther remained incapable of managing her affairs, the Trust remained irrevocable, and notably, there have been no allegations that Esther’s condition improved after 2008 such that she again became capable of managing her affairs, let alone allegations that two doctors certified that improvement.

Esther’s son tried to argue that Dr. Hough’s geriatric assessment did not constitute the ‘certifications of incompetency’ required by Esther’s trust. The Court simply noted that the trust instrument did not impose any particular requirements on the certificates, other than that they be delivered to the successor trustee. Thus, the probate judge would have to determine if Dr. Hough’s geriatric assessment and Dr. Miller’s dementia note were sufficient under the terms of the trust to constitute the required certificates of incompetency.

Conclusion: In most cases, the Michigan Trust Code is a set of default rules that apply only if the trust instrument is silent on a topic. The handful of exceptions where the Trust Code’s provisions prevail are located at MCL 700.7015(2). In this case, Esther’s statement in her revocable trust that a future determination of her incapacity would automatically cause her trust to become irrevocable prevailed over the terms of the Michigan Trust Code. [MCL 700.7103(h).] Additionally, this case is a helpful reminder that if a challenge to a trust and its provisions is anticipated, all of the information that the trustee is required by statute to send to trust beneficiaries must be sent to the beneficiaries in order to start the Trust Code’s relatively 2-year statute of limitations. In this case, a non-professional trustee did not follow the Trust Code, with the result that the ‘late’ challenge to the trust was kept alive.