Failure to Follow Withdrawal Trust Conditions – A ‘Non-Disclaimer?’

Take-Away: While the Uniform Probate Code has a ‘substantial compliance’ exception to following the rigid rules with regard to a Will’s execution formalities, a court may not be as accommodating with regard to conditions that are attached to the testamentary gift that is from a trust. An interesting Court of Appeals decision echo’s this principle.

In re John R. Adams Trust, Michigan Court of Appeals, No. 354677, 356119 (January 27, 2022)

Background: There were a couple of appeals arising from the same probate court proceeding. One of the decisions dealt with jurisdiction between the probate court, the circuit court, and which court had appropriate venue. It is pretty technical, so that decision will not be covered. The second decision dealt with the decedent’s spouse complying with the withdrawal terms of a trust, and her failure to follow the conditions imposed on the withdrawal.

Facts: John created a Trust in 2005. John’s Trust named his wife Ruth as trustee and beneficiary. John’s daughter Jackie was a ‘potential beneficiary’ of the trust. (While EPIC does not provide a definition for a ‘potential beneficiary’ suffice it to say that Jackie was a contingent beneficiary.) John’s Trust named Highpoint Bank as successor co-trustee with Ruth on his death. John died later in 2005, survived by Jackie and her step-mother Ruth. If John’s Trust existed after his death, then Ruth was the lifetime beneficiary and Jackie and her children were the remainder beneficiaries of John’s Trust

Key Trust Provision: John’s Trust had an interesting provision for Ruth that was at the center of the legal dispute. That Trust section provided: “3.3(e) Spouse’s Right. My Spouse shall have the right to receive free from trust all or any portion of the property which otherwise would have been held by Trustee under this Agreement after my death, but only by filing, with the court which has (or would have had if my estate were probated) domiciliary jurisdiction of my estate, a writing evidencing of that right. The writing shall make specific reference to this provision of this Agreement, be signed by my Spouse personally, and shall be filed with the court after my death and not later than 5:00 pm, current local time, one moth prior to the initial due date for filing the federal estate tax return in my estate. Failure of my Spouse to file the writing shall constitute an irrevocable disclaimer of any rights under this paragraph.” [The emphasized portion is by me.]
Disclaimer?: In effect of Section 3.3(e) was that this was a back-handed non-disclaimer provision. Rather than give Ruth the right to all of John’s Trust assets, with her having to make an intentional disclaimer of some or all of her interest in John’s Trust within 9 months of his death, instead Ruth had to affirmative exercise a withdrawal right, the failure of which would leave the assets in John’s Trust for the balance of Ruth’s lifetime, ultimately passing to Jackie and her children.
Purported Exercise of Non-Disclaimer: Within the 8 month period specified in John’s Trust, Ruth signed a document that exercised her right to withdraw all of the property in John’s Trust, and in which she directed the trustee to transfer the property to her. This document also stated that Ruth was not filing the document with the Barry County Probate Court “because my lawyers have advised me that the Probate Court may not accept this for filing because no estate or trust proceedings are pending in that Court.” The Bank co-trustee was then directed by Ruth to transfer three parcels of real estate in Ingham County to Ruth. It was disputed if Ruth’s letter was mailed to Jackie’s ‘divorce attorneys.’
Ruth’s Death: Ruth died in 2019 unmarried and without children. Ruth’s sister was appointed by the court to serve as Ruth’s estate’s PR. The three parcels of real estate transferred from John’s Trust to Ruth in 2006 were titled in Ruth’s revocable trust.
Jurisdictional Jockeying: The jurisdictional nightmare arose when Jackie filed a claim against Ruth’s probate estate, which was denied. Jackie then filed a lawsuit in the Ingham County Circuit Court seeking a return of the three parcels or real estate. The Bank co-trustee of John’s Trust then filed a petition in the Barry County Probate Court, because there was one remaining parcel of real estate that remained titled in the name of John’s Trust; the Bank sought direction from the Barry Count probate judge what to do with the remaining parcel in light of Ruth’s 2006 non-disclaimer letter. The Ingham County Circuit Court then transferred Jackie’s complaint to the Barry County Probate Court. The probate court then ordered Jackie to pay to it a transfer fee. [Did I mention the jurisdictional issues were a nightmare that the Court of Appeals had to sort through?]
Barry County Probate Judge: The judge side-stepped the issue of Ruth’s letter not being filed with the probate court. However, it did award the remaining parcel of real estate in John’s Trust to Jackie, since it had remained titled in the name of John’s Trust.
Disputed Issue: Ruth’s estate appealed claiming that the probate court should have ordered the last parcel of real estate in John’s Trust to be distributed to Ruth’s Trust.
Appeals Court: The Appeals Court reversed the probate court’s decisions.

“Although Ruth executed a document in an attempt to exercise the Spouse’s Right, she did not file a writing to that effect with the probate court as required by John’s trust. Ad per the trust’s unambiguous terms, this failure constitutes ‘an irrevocable disclaimer of any rights under’ section 3.3(e). Accordingly, Ruth had no right to receive trust property pursuant to this provision and her estate has no claim for any remaining property…..However, Ruth’s failure to validly exercise the Spouse’s Right compels us to reverse the probate court’s ruling that trust property was properly distributed to Ruth during her lifetime pursuant to the Spouse’s Right. Morehouse [Ruth’s estate’s PR] has provided no persuasive argument or authority as to how those distributions can be deemed proper, given the lack of a court filing evidencing Ruth’s exercise of the Spouse’s Rights.”

Not only were the three parcels or real estate found to have been invalidly transferred to Ruth, Jackie’s Circuit Court claim was held to have been erroneously dismissed and was not precluded by the legal doctrine of collateral estoppel, and was deemed to still hold a viable claim despite the passage of 13 years since John’s death and Ruth taking title to the contested parcels.

Conclusion: Ruth’s failure to follow the letter of the condition imposed on her withdrawal right in John’s Trust by filing her letter with the probate court, even if that failure was based upon her lawyer’s advice, was sufficient to cause her estate to lose title to the real estate held in John’s Trust. Cutting corners or playing ‘fast and loose’ with conditions imposed by a trust on the right to receive assets or distributions from the trust may not be well received if later challenged in a court proceeding.