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

2-Jun-21

Material Purpose- Again!

Take-Away: The Michigan Trust Code frequently refers to a trust’s purpose, or material purpose, to guide trustees and probate courts to carry out the settlor’s intent. Trust settlors should consider the use of a more detailed material purpose clause in their trust instrument to provide better direction to the trustee and a probate judge when questions arise with regard to the construction or interpretation of a trust.

Background: This topic is not new.  I have regularly harped on my concern that not many trusts contain a material purpose clause, even though the Michigan Trust Code makes frequent reference to that concept of a trust’s purpose or material purpose. Consider the following examples following some of the Michigan Trust Code provisions:

  • A trust may be created only to the extent its purposes are lawful, not contrary to public policy, and possible to achieve. [MCL 700.7404.]
  • A charitable trust may be created for any…purpose described in section 501(c)(3) of the internal revenue code or other purposes the achievement of which is beneficial to the community. [MCL 700.7405(1).]
  • A trust terminates to the extent…no purpose of the trust remains to be achieved, or the purposes of the trust have become impossible to achieve or are found to be unlawful or contrary to public policy. [MCL 700.7410.].
  • The court may modify the administrative or dispositive terms of a trust, or terminate the trust if, because of circumstances not anticipated by the settlor, modification or termination will further the settlor’s stated purpose, or if there is no stated purpose, the settlor’s probable intention. [MCL 700.7412(2).]
  • A non-judicial settlement agreement is valid only to the extent it does not violate a material purpose of the trust. [MCL 700.7111((2).]
  • The trustee shall administer the trust in good faith, expeditiously, in accordance with its terms and purposes for the benefit of the beneficiaries. [MCL 700.7801.]
  • The court, on the consent of the trustee and qualified trust beneficiaries, may modify the trust ‘if the court concludes that  the modification or termination of the trust is consistent with its material purposes or that the continuance of the trust is not necessary to achieve any material purpose of the trust.’ [MCL 700.7411(1)(a).]

The Michigan Trust Code makes no attempt to define a trust’s purpose or material purpose, on the assumption that it is up to the settlor to identify and communicate the trust’s purpose.

Material Purpose: The Restatement (Third) of Trusts, provides only limited insight into what the concept of material purpose entails:

“Material purposes are not readily to be inferred. A finding of such a purpose generally requires a showing of a particular concern or objective on the part of the settlor, such as concern with regard to the beneficiary’s management skills, judgment, or level of maturity. Thus, a court may look for some circumstantial or other evidence indicating that the trust arrangement represented to the settlor more than a method of allocating the benefits of property among multiple beneficiaries or a means of offering to the beneficiaries (but not imposing on them) a particular advantage. Sometimes, of course, the very nature or design of a trust suggests its protective nature or some other material purpose.” [Section 65, comment (d).]

As such, often a probate judge is left to search for a trust’s material purposes, which is why a trust provision providing some insight to the settlor’s intent would be helpful to the trustee, the trust’s beneficiaries, and at times the probate judge.

Examples: Often the purpose of a trust is left to guesswork if there is neither a statement of intent, nor a summary of the trust’s material purpose(s.) If there is a material purpose clause in the trust, it is often overly vague and not of much help in providing direction or answers.

Example #1: Material Purpose: My purpose in creating this Trust is to avoid probate with its attendant publicity, expense and delays, keep my financial affairs confidential from the general public, and distribute my assets to the named beneficiaries in accordance with the terms outlined in this Trust in a tax efficient manner. This type of statement does not provide much guidance other than the desire to avoid probate with its costs and delays and publicity.

I recently ran across a much more comprehensive material purpose provision in a discretionary trust instrument that provides more direction and guidance to the trustee, the trust’s beneficiaries, and possibly to a probate judge if called upon to construe, interpret, modify or terminate the trust or the trustee’s decisions under the trust.

Example#2 : Material Purposes of This Trust: The following statement of intent shall apply to my descendants. It is my desire that the trust estate provide a safety net for my descendants that enhances the life and well-being of my descendants without removing any descendant’s ability to become and remain a mature, independent, productive member of the world’s community, capable of making his or her own living. In addition:

Goal: I do not intend for any beneficiary to have an expectation of any kind from any trust created by or pursuant to this Trust that could cause that person to become dependent on the Trust’s resources and fail to pursue an education or career that would otherwise have enabled that person to become industrious and self-supporting, or otherwise become a productive member of society. However, it is not my intent that the distribution trust director with regard to discretionary distributions from this Trust place undue emphasis on the amount a descendant earns if he or she is actively engaged in a worthwhile pursuit. The distribution trust director’s sole, absolute, and uncontrolled judgment, rather than any other parties’ determination, is intended by me to be the criterion by which disbursements from this Trust are made by the trustee.

Marriage: I support the institution of marriage and I hope that my descendants have happy, healthy marriages. I also recognize the potential risk to the trust estate if a beneficiary’s marriage ends in divorce. Accordingly, it is my desire that a descendant of mine who wishes to marry (i) enter into a legally binding agreement prior to marriage, e.g. a Prenuptial Agreement, or a Postnuptial Agreement if already married,  with his or her betrothed or spouse which provides that (a) all property that the descendant receives from this Trust (including any increase, appreciation, income, dividends, or residuals from such property) and any reinvestments thereof, shall maintain its character as separate property and (b) such of my descendants’ betrothed , or spouses, waives any and all rights that he or she may have to any portion of the trust estate and to all distributions under this Trust by virtue of his or her marriage to my descendant, and (ii) deliver to the distribution trust director a signed copy of the Prenuptial Agreement or Postnuptial Agreement as the case may be. Where any doubt exists as to the specific language or requirements of the Prenuptial Agreement or Postnuptial Agreement, the sole discretion of the distribution trust director shall control and be final and binding. In the event that my descendant fails to enter into a Prenuptial Agreement or Postnuptial Agreement, or in the event my descendant who has executed a Prenuptial Agreement or Postnuptial Agreement repudiates it or otherwise attempts to cause any portion of it related to this Trust to be void, the distribution trust director may immediately suspend all discretionary distributions to such descendant otherwise authorized to receive distributions under this Trust. Such distributions may remain suspended until such time as the distribution trust director is satisfied, upon a written opinion of legal counsel, that the descendant’s betrothed, or spouse,  has no legal claim whatsoever to any portion of the trust estate or to any distribution under this Trust.

Creditors: I do not want the trust estate to be eroded by the creditors of a descendant nor do I want public or private benefits or services to be unavailable to such descendant, or terminated, or made a resource secondary to the trust estate.  This Trust is not for the primary support of my descendants; it is intended only to supplement such descendants’ care and needs only. Accordingly, none of my descendants have any entitlement to the income or principal of the trust estate, except as the distribution trust director shall, in his or her sole, absolute and uncontrolled discretion elect to direct the trustee to disburse. The distribution trust director’s exercise of his or her sole, absolute and uncontrolled discretion is the direction of the trustee to make noon-support disbursements as provided in this Trust is final as to all interested parties, including any local, State, Federal, or other governmental entity or entities.

Letter of Wishes: I may provide the distribution trust director with a ‘Letter of Wishes’ (which may be modified, amended, supplemented, restated, and/or revoked from time to time) that will provide the distribution trust director with additional guidance with regard to discretionary distributions to this Trust’s beneficiaries.

No Legal Obligations: I realize that distributions will be made by the distribution trust director in its sole and absolute discretion, and it is not my intent that the statements contained in this Material Purpose provision of this Trust create or impose any legal obligations or binding standards for the distribution trust director in the performance or fulfillment of his or her duties under this Trust.

Additional provisions could be added to this admittedly lengthy Material Purposes trust provision. The settlor might want to address the reasons why the discretionary trust was created, e.g. the primary beneficiary is a spendthrift, or it might include examples of how the settlor expects the beneficiaries to conduct themselves if an incentive trust is contemplated, or how and when distributions should be made by the trustee to the beneficiary.

Conclusion: A material purpose trust provision is not a ‘throw-away’ clause that merely tells why a trust instrument is used to hold and distribute assets. The provision should act as a lodestar to guide the trustee, and a probate judge, as to what is important to the settlor and why certain provisions are important enough to be used in the trust instrument.