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

29-Jan-20

Keeping Trust Beneficiaries Informed – The Debate Over Silent Trusts

Take-Away: The Michigan Trust Code imposes several distinct duties on a trustee to inform trust beneficiaries. Currently the State Bar’s Probate and Estate Planning Council is looking at possible changes to those duties, exploring the possible use of a silent or quiet trust in Michigan.

Background: The Michigan Trust Code (MTC) adopted one of the Uniform Trust Code’s (UTC) provisions Duty to Inform and Report, but not all of that uniform law section. This MTC provision is located at MCL 700.7814 [not to be confused with the UTC’s version at UTC Section 813.] This MTC section sets-forth several duties with regard to communicating with trust beneficiaries. Some of these duties to inform are directed to trust beneficiaries, while other communication duties are directed to qualified trust beneficiaries. Keeping that distinction between the types of beneficiaries in mind can prove to be confusing to inexperienced trustees.

Duties to Inform: Some of those duties to inform and report can be modified by the terms of the trust instrument, while others cannot. [MCL 700.7105(2) (i)] These trustee duties include:

  • A duty to keep beneficiaries reasonably informed [MCL 700.7814(1)- subject to modification in the trust instrument
  • A duty to respond to requests for information related to the administration of the trust [MCL 700.7814(1)]- subject to modification in the trust instrument
  • A duty to promptly furnish a copy of the terms of the trust instrument that describe or affect the beneficiary’s interest [MCL 700.7814(2)(a)] [MCL 700.7814(2)(c)]- not subject to modification
  • A duty to promptly furnish relevant information about the trust property [MCL 700.7814(2)(a)- not subject to modification
  • A duty to notify within 63 days after acceptance of the trusteeship the trustee’s name, address, telephone number and the court where the trust is registered, if registered [MCL 700.7814(2)(b)]- not subject to modification
  • A duty to notify in advance if there is any change in the method or rate of the trustee’s compensation [MCL 700.7814(2)(d)]- subject to modification in the trust instrument
  • A duty to inform that a revocable trust has become irrevocable on the death of the trust settlor and to provide the identity of the trust settlor [MCL 700.7814(2)(c)]- not subject to modification, and
  • A duty to provide reports of the trust property, liabilities, receipts, disbursements, and source and amount of the trustee’s compensation [MCL 700.7814(3)] –subject to modification in the trust instrument

In sum, unlike other states, Michigan’s version of the UTC makes mandatory the duty to provide beneficiaries, upon request, with the terms of the trust that describe or affect the trust beneficiary’s interest and information about the trust property, and also the duty to affirmatively notify qualified trust beneficiaries of the existence of the trust and the identity of the trustee.

Waiver: A trust beneficiary can waive the right to receive a trustee’s report or other information required in the Michigan Trust Code; however, that waiver can be withdrawn at any time.

[MCL 700.7814(5).]

Silent Trusts: The topic of the trustee’s duty to inform trust beneficiaries was discussed at length prior to Michigan’s adoption of its version of the UTC back before 2010. The decision, then, was not to permit silent trusts. Yet the Michigan Probate and Estate Planning Council is once again looking at a modification to the Michigan Trust Code to permit some form of a silent trust.

  • Definition of Silent Trust: A silent trust is one which the settlor overrides state law and direct the trustee not to inform certain beneficiaries of the existence of the trust, or information about the trust that the trustee would otherwise have a duty to provide.
  • Arguments for Silent Trusts: Those who support the use of silent trusts advocate it as just another means to carry out the settlor’s intent. They note that the settlor should be able to engage in trust planning yet still maintain confidentiality about their estate plan, including keeping that knowledge from trust beneficiaries. Restated, if the settlor can choose to include or exclude a child or grandchild as a beneficiary of their trust, the settlor should also be able to include that person but not inform him/her. A more practical and less philosophical reason to permit silent trusts is that limits on disclosures can be appropriate for younger or immature trust beneficiaries who may not have the maturity or sufficiently ingrained values to properly deal with that information.
  • Arguments Against Silent Trusts: The obvious legal argument against permitting silent trusts is that the trust beneficiary needs to have access to information with regard to the trust, its assets, and its administration to understand their rights under the trust and to either enforce the terms of the trust, or to hold the trustee accountable for perceived breaches of trust or fiduciary duties to the trust beneficiary. In the absence of that information, the trust relationship could be permanently abused. A more practical argument against the use of silent trusts is that if one of the material purposes of the trust is to encourage family communication and education about wealth and the values that are used to create that wealth, then a silent trust frustrates that trust purpose.

UTC: The Commentary to UTC 813 notes: The duty to keep beneficiaries reasonably informed of the administration of the trust is a fundamental duty of the trustee…this section limits the duty to keep the beneficiaries informed to qualified trust beneficiaries…The result of this limitation is that information need not be furnished to beneficiaries with remote remainder interests unless they have made a request to the trustee. The Uniform Trust Code takes the position that a settlor can negate the trustee’s duty to disclose, but only for beneficiaries who have not reached the age of 25 years.  Michigan did not adopt this UTC permissive provision.

Other States: Many states have different provisions with regard to the trustee’s duty to inform beneficiaries. A couple of examples follow:

  • Florida: Florida added another provision to UTC 813 that allows virtual representation provisions of its trust code to apply with respect to rights of qualified beneficiaries. [Fla Stat. 736.0813(e) (3).] This includes the appointment of a designated representative who can ‘represent and bind a beneficiary and receive any notice, information, accounting or report.’ [Fla. Stat. 736.0306] Florida has also added provisions that detail the required content of a trust accounting. [Fla. Stat. 736.08135]
  • Delaware: Delaware expressly allows silent trusts and exculpates the trustee of such a trust to the maximum extent reasonable. Delaware statute 3303(a) provides, in part: Notwithstanding any other provision of this Code or other law, the terms of a governing instrument may expand, restrict, eliminate, or otherwise vary any laws of general application to fiduciaries, trusts and trust administration, including but not limited to any such laws pertaining to: ..(1) The rights and interests of beneficiaries, including but not limited to, the right to be informed of the beneficiary’s interest for a period, as set forth in subsection (c) of this section…. Delaware, like Florida, uses the concept of an information delegate or qualified representative who is designated to receive information on behalf of the trust beneficiary. Presumably, this mechanism enables the trustee to manage risk and still fulfill its fiduciary duties, while shifting liability to the qualified representative.

Michigan Common Law: Individual trustees seldom understand their statutory duties to inform trust beneficiaries. They probably are not even aware of the different rights assigned to qualified trust beneficiaries and trust beneficiaries. The common law favors full reporting by the trustee to a trust beneficiary. One Michigan court decision addressed a trustee’s duty to inform, although this court decision is pre-Michigan Trust Code.

  • Court Decision: Welch v. Weiner, 2007 Mich App LEXIS 2704 (December 4, 2007)
  • Facts: Alice established a Trust in 1976. The Trust was later amended to make Alice’s husband a trustee, and purportedly a partial co-settlor of the Trust for all of the Trust’s assets, except those assets described in Article 5 of the Trust. Patricia was the beneficiary of Article 5 of the Trust. Alice died in 2003 leaving her husband as the trustee. The husband-trustee, through his attorney, sent Patricia a check for $50,000 drawn on the Trust’s account, which was accompanied by a letter that informed Patricia that she was one of the contingent trust beneficiaries and that the trustee was making an advance payment to her. The letter to Patricia also indicated that the trustee would continue to make annual distributions to Patricia ‘until her future legacy was paid in full.’ Patricia sought additional information from the trustee about Alice’s trust but she was denied a copy of the trust instrument.  Patricia then filed a petition with the probate court, seeking an accounting, a copy of the trust instrument, the removal  of the husband-trustee, and sanctions/surcharge of the trustee.
  • Probate Court: The probate court dismissed Patricia’s claims.
  • Appeals Court: The Court of Appeals reversed the probate court’s denial of Patricia’s requested relief. The Court found that Patricia was entitled to a copy of Alice’s Trust instrument and an accounting from the trustee. The Court reasoned that Alice had not overridden the trustee’s disclosure obligations under the ‘old’ Revised Probate Code and Michigan common law, in the Trust instrument. In addition, the Trust was irrevocable because Alice had died and her husband was not a settlor of Article 5 of the Trust instrument under which Patricia held an interest. Finally, Patricia was a current beneficiary of the Trust because the trustee had already made a distribution to her from the Trust. The Court also ordered the probate judge, on remand (before a new judge), to remove the husband-trustee for his failure to disclose information to Patricia. Because the Court still did not have a copy of Alice’s Trust instrument, the case was remanded to the probate judge to deal with Patricia’s claims for surcharge of the trustee.

Conclusion: It remains to be seen if Michigan ultimately amends the Michigan Trust Code to permit some form of silent trust, or if the reasons for not doing so 10+ years ago still hold true. Many individual trustees are totally unaware of their duties to inform and disclose to trust beneficiaries, as indicated in the Welch decision. A legitimate concern may be that the authorization to adopt silent trusts in Michigan might empower individual trustees to become even more secretive in their administration of a trust. Even under the current Michigan statute, will an individual trustee be able to discern the different duties to report owed to qualified trust beneficiaries as opposed to trust beneficiaries? It is apparent, given how many states have altered in some fashion UTC 813, that there are many different views and approaches to a trustee’s duty to communicate with trust beneficiaries, and no doubt those variations will continue. It is also important to remember, though, that a trustee can manage the trustee’s risks through disclosures and periodic accountings to trigger the relatively short statute of limitations on possible claims of breach of trust. Stay tuned for updates.