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George F. Bearup, J.D. Senior Legal Trust Advisor

23-Sep-20

Governing Law and Situs of Trusts

Take-Away: Modern trusts expressly give to the trustee the authority to change the governing law of a trust, or the situs of a trust.  Some trusts are silent on the trustee’s ability to change the governing law or situs of the trust. As states engage in competition to attract trust ‘business’ by changing their trust laws to permit more flexibility, there is more ‘shopping’ for a favorable trust jurisdiction. Most important to promote this flexibility to change a trust’s governing law or situs is whether the trust instrument expressly gives to the trustee the discretion to change the trust’s governing law and its situs without the involvement of the probate court.

Background: The Michigan Trust Code, as has been covered in the past, provides essentially a set of default rules that apply when the trust instrument is silent on a topic or question. [MCL 700.7105(1).] Only a select few of the Michigan Trust Code provisions cannot be overridden by the terms of the trust. [ See MCL 700.7105(2).]

  • Default Provisions: MCL 700.7105 starts with the phrase, Except as otherwise provided in the terms of the trust, this article governs the duties and powers of a trustee, relations among trustees, and the rights and interests of a trust beneficiary. The change in a trust’s governing law and its principal place of administration, which are covered by other sections of the Michigan Trust Code, are not excepted from this default treatment, which means the trustee can be given the sole discretion to change a trust’s governing law or its principal place of administration without any probate court involvement.

Governing Law: The governing law of a trust essentially deals with three separate issues: (i) the law that governs the validity of the trust; (ii) the law that governs the meaning of the trust’s terms, i.e. how the trust’s terms are construed or interpreted; and (iii) the law that governs the administration of the trust.

(i) Technical provisions of the Michigan Trust Code determine the validity of a trust. [MCL 700.7403.]

(ii) The Michigan Trust Code’s provision that addresses the meaning and effect of the terms of a trust is admittedly pretty vague. It provides that the law of the jurisdiction designated in the terms of the trust apply, unless the designation of that jurisdiction’s laws is contrary to a strong public policy of the jurisdiction that has the most significant relationship to the matter at issue. In the absence of the controlling designation in the terms of the trust i.e. the trust instrument is silent, the law of the jurisdiction that has the most significant relationship to the matter at issue will control. This means that the settlor can generally specify the law that determines the meaning and effect of the trust’s terms. Public policy, however, is not defined in the Michigan Trust Code, which leaves that an open question on whether the choice of law that governs the trust will conflict with Michigan’s elusive public policy, which is only identified by Michigan courts on a case-by-case basis. [MCL 700.7107]

(iii) The provisions of the Michigan Trust Code that addresses a trust’s place of administration are easier to understand.

The terms of a trust may designate the principal place of administration if: (i) the trustee’s principal place of business is located in, or trustee is a resident of, the designated jurisdiction; or (ii) the trust director’s principal place of business is located in, or a trust director is a resident of, the designated jurisdiction; or (iii) all or part of the trust’s administration occurs in the designated jurisdiction. [MCL 700.7108(1).]

The trustee is under a continuing duty to administer the trust at a place that is appropriate to its purposes, administration, and the interests of the qualified trust beneficiaries. [MCL 700.7108(2).]

Unless a probate court directs otherwise, a trustee, in furtherance of its duty to administer the trust at an appropriate place, may transfer the principal place of trust administration to another state or to a jurisdiction outside the United States. [MCL 700.7108(3).]

The statute extensively addresses how the trustee exercises its authority to change the principal place of trust administration. The trustee is required to notify the qualified trust beneficiaries in writing of the proposed transfer not less than 63 days before initiating the transfer. That written notice must include the name of the jurisdiction to which the principal place of trust administration is to be transferred; (ii) the address and telephone number at which the new trustee can be contacted; (iii) an explanation of the reasons for the proposed transfer; (iv) the date on which the anticipated transfer is to take place; and (v) in a conspicuous manner, the date by which a qualified trust beneficiary must notify the trustee in writing of an objection to the proposed transfer. [MCL 700.7108(4).] The ability of the trustee to change the principal place of a trust’s administration without court approval is thus contingent on a qualified trust beneficiary timely written notice of objection given to the trustee. [MCL 700.7108(5).]

What is important to remember, though, is that this elaborate statutory procedure on how the trustee goes about changing a trust’s principal place of administration [MCL 700.1708(5)] is a default provision of the Michigan Trust Code that can be overridden by the express terms of the trust instrument.

Controlling Trust Provisions: A fairly recent Michigan Court of Appeals decision addressed whether the trustee had to provide notice to the trust beneficiaries of the trustee’s intent to change the governing law and situs of a Michigan trust to Florida.

  • Court Decision: In re Elizabeth Doll Trust, Michigan Court of Appeals,  No. 341788  (October 16, 2018)
  • Terms of Trust: The express terms of Ms. Doll’s trust instrument gave to the trustee the discretion to change the governing law and situs of the trust. The trust instrument specifically provided:

This trust shall not be subject to the registration requirements imposed by any State and shall be administered free from active supervision of any court. Trustee is directed to take any and all action, if any is necessary, to exempt the Trust from registration. Michigan law shall be applied to interpret this document and the situs of this Trust shall be in Michigan, provided, however, Trustee may change the situs and governing law in Trustee’s sole discretion. [Emphasis added.]

  • Dispute: The dispute was whether the trustee ever gave timely notice to one of the qualified trust beneficiaries of the trustee’s decision to change the situs and governing law of the trust from Michigan to Florida. The trust beneficiary claimed to have provided a written objection to the proposed change to the trustee, however the trustee denied receiving the written objection. A couple of years after the trust had been moved to Florida and was being administered in that state, the beneficiary then filed a petition in Michigan to remove the trustee for failing to follow the Michigan Trust Code’s procedures for the change in the trust’s situs and principal place of administration.
  • Probate Court: The probate court denied the petition to remove the trustee on the grounds that since the trust’s situs had been removed to Florida, the Michigan probate court no longer had subject-matter jurisdiction over the dispute.
  • Appeal: The question on appeal before the Michigan Court of Appeals was the ability of the trustee to unilaterally change the governing law and situs of the trust. The trust beneficiary claimed that because the trustee had improperly given her notice of the intent to change the place of trust administration to Florida, the removal and change of situs to Florida was invalid, and thus the Michigan probate court continued to have jurisdiction over the trust and possessed the authority to rule on the petition.

The Court of Appeals gave scant attention to the question of whether notice was, or was not, given, or whether the qualified trust beneficiary’s written objection was timely delivered to the trustee.

Rather, the Court found that because the trust instrument expressly addressed the change of the trust’s situs, and governing law, the probate court was correct to conclude that the trustee was not required to provide the qualified trust beneficiaries notice of her intent to move the trust’s situs. The [trustees] “were empowered by the Trust agreement to change the principal place of administration of the trust to Florida at their sole discretion. Because the proceeding involved a trust ‘that has its principal place of administration in another state’ the probate court properly concluded that it could ‘not entertain’ the proceeding and dismissed [the beneficiary’s] petition for instruction and removal. [MCL 700.7205(1).]

The procedures set forth in the Michigan Trust Code with regard to how the situs of a trust is changed by the trustee are applicable only if the trust instrument is silent on the topic, inasmuch as MCL 700.7105(1) starts out with Except as otherwise provided in the terms of the trust….which means that the notice procedure statute is only applicable if the trust instrument is silent on the question.

Default Provision Interpreted: Another reported decision, however, which came to a different result, was a change of trust situs from Florida to Michigan under Florida’s version of MCL 700.7108. In Seneker v JP Morgan Chase Bank, NA, Nos 317003 and 317096 (Michigan Court of Appeals, February 26, 2015)  the Michigan Court of Appeals noted that like Michigan, Florida’s change of situs statute provides a default rule. However, the Michigan Court felt that the Florida trust’s terms had not explicitly provided that the requirements of Florida’s trust laws and statutes did not apply. Consequently, the Court of Appeals found that the situs of the Florida trust had been improperly changed to Michigan. This decision is problematic since it implies that relying on the Except as otherwise provided in the terms of the trust language in the Trust Code’s MCL 700.7105(1), which connotes that most of the following provisions are default provisions that apply only if the trust instrument is silent, is not enough. The Court that the trust instrument must expressly mention and then expressly opt out of the Trust Code provision. The Trust Code’s Commentator, Mark Harder’s remarks with regard to this case decision instructive:

“ Although decided with respect to a trust governed by Florida law, this is a questionable and potentially troublesome decision to the extent it reflects how Michigan courts will treat trusts governed by Michigan law and containing provisions different from the MTC’s [Michigan Trust Code] default provisions. It was not the intent of the MTC drafting committee that trust scriveners include express statements that the settlor intended to override default statutory provisions every time the trust instrument addresses an issue differently than the MTC does.”

Conclusion: The ability to change the governing law and the situs of an irrevocable trust is one of the hallmarks of a modern trust with the objective of making the trust as flexible as possible to respond to changes in circumstances of both the trust beneficiaries, the trust’s assets, creditor rights, and the taxation of trusts. If the trust instrument gives the trustee the discretion to change the trust’s governing law and the situs of trust administration, the trust can quickly respond to those changing circumstances without the need to petition the probate court for permission.  If the trust instrument is silent in this regard, the trustee may still change the trust’s governing law and situs, but only after written notice to qualified trust beneficiaries, and if those beneficiaries timely object to the proposed change, then the trustee cannot change the governing law and situs without the permission of a Michigan probate court. Therefore, this is one of the boilerplate provisions that should be identified in each trust that is to be accepted by a trustee.