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

19-Jan-19

Michigan Uniform Directed Trust Act- Drilling Down , Part II

Take-Away: While the new Michigan Uniform Directed Trust Act is closely based on the Uniform Directed Trust Act, the version that Michigan adopted departs is several respects from the Uniform Act to afford greater protection to the directed trustee.

Background: While the overriding goal of a Uniform Act is to have consistency across multiple jurisdictions that adopt the same model legislation, each state is free to depart from the provisions of the Uniform Act to adapt it to local practice or the strong public policies of each individual state. Thus, it should come as no surprise that Michigan’s version of the Uniform Directed Trust Act (the UDTA) is not a wholesale adoption of the UDTA. What follows is a summary of some of the key provisions where the Michigan Uniform Directed Trust Act (for convenience referred to simply as the Michigan Act) departs from the UDTA.

Narrower Definition of Trust Director: Both the UDTA and the Michigan Act permit a settlor to grant a power of direction to a trust director, which subjects the trust director to the personal jurisdiction of Michigan courts, and to fiduciary duties in respect of their powers of direction. Both the UDTA and the Michigan Act define a trust director as a person granted a power of direction, and both define person to include legal entities such as corporations. The concern is that the use of the broad definition of person to include legal entities might be viewed as an authorization for nonbanking organizations to exercise trust powers pursuant to the terms of a power of direction, thus, permitting corporations or other legal entities to exercise trust powers that they could not otherwise exercise under Michigan’s current laws that restrict what entities may act as a trustee. The fear with adopting the UDTA is that businesses may be created for the sole purpose of serving as a trust director. Example: Under the UDTA a thinly capitalized LLC could be formed for the sole purpose of serving as a trust director.

The Michigan Act expressly disavows any intent to augment the class of legal persons currently permitted under Michigan law to exercise trust director powers. This is accomplished by a provision added to the Michigan Act which provides: trust director is defined as ‘an organization permitted to exercise trust powers in this state as described in section 1105(2) of the Banking Code of 1999, 199 PA 276, or an individual, if that person is granted a power of direction.’  The Michigan Act thus limits the entities to which a settlor can grant powers of direction.

  • Change: Only individuals and those legal entities that are presently authorized under Michigan law to hold trust powers may serve as trust directors.

Different Definition of Power of Appointment: The UDTA defines power of appointment to be a “power that enables a person acting in a non-fiduciary capacity to designate a recipient of an ownership interest in or another power of appointment over trust property.” This definition is circular since the definition of a power of appointment in turn refers to a power of appointment. The Michigan Act does not use the term-of-art to describe itself.

  • Change: The Michigan Act simply refers to a power of appointment as “a power that enables the holder to create a power of appointment.”

Rules of Construction- Presumed Fiduciary powers: As a broad generalization, the UDTA excludes a non-fiduciary power of appointment (along with non-fiduciary powers to create powers of appointment) from its application as general a rule of construction. This provides the presumption that any power of appointment that is granted to a non-trustee is a non-fiduciary power of appointment and therefore does not constitute a power of direction. While that sounds clear, what if the trust instrument that confers the power to direct on a person does not also expressly state that it is a power to be exercised in a non-fiduciary capacity? Under that scenario, the trustee’s exposure to liability turns on a ‘default’ legal presumption that the person who holds the power is not a fiduciary, which leaving the trustee “holding the bag.”

Example: The power to decant the assets held in a trust is a power of appointment. The trust instrument gives a person the power to direct the trustee to decant the assets held in the trust. The trust instrument is silent whether that power to direct the trustee to implement a decanting of trust assets is held by the power holder as a fiduciary, or whether is it held in a non-fiduciary capacity. If the person directs the trustee to decant the assets, that direction is subject to the UDTA’s presumption, which means the trustee is not a directed trustee and thus the trustee not protected from breach of trust claims merely by following that direction. In short, the UDTA presumes, as a rule of construction, that a power of appointment is held as a non-fiduciary power, and therefore it does not constitute a power of direction to the trustee, and a power of direction is the primary source of the trustee’s limitation of liability.

The Michigan Act makes the same presumption of construction but only when the power of appointment is: (i) a power to adjust between principal and income; (ii) a power to convert to, or from, a unitrust; (iii) a power to modify or terminate the trust; or (iv) to distribute assets in further trust, but only if the non-trustee to whom the power is granted is a beneficiary of the same trust. Unlike the UDTA, the Michigan Act makes it clear that rules of construction that may affect the application of “certain other parts of the Michigan Act which will remain applicable regardless of the application of those other parts of the Michigan Act- “excepting the rules of construction in subsection (2) [of the Michigan Act] does not apply….” This exception attempts to avoid the broad and confusing rule of construction that is employed in the UDTA that powers of appointment are presumed to be held in a non-fiduciary capacity, thus exposing the trustee that follows those directions to liability, since the action taken by the trustee will not be treated as being taken pursuant to a power of direction as it is legally defined.

  • Change: A trust instrument grants a non-beneficiary/non-trustee a power of appointment, e.g. a decanting power, that is not expressly described in the trust instrument as either a fiduciary or a non-fiduciary power under the UDTA is presumed to be a non-fiduciary power and thus not a power of direction. The opposite is the case under the Michigan Act, where the power to direct, e.g. that the trust’s assets be decanted, will be presumed to be held by the power holder in a fiduciary capacity, which then results in it being a power of direction where the trustee that implements the direction, e.g. the decanting of the trust’s assets pursuant to that direction, will be classified as a directed trustee that will be protected from claims for breach of fiduciary duty.

Narrowed Liability Standard: Under the Michigan Act a directed trustee can only be liable for complying with an exercise or non-exercise of a power of direction when the exercise, or non-exercise is within the power holder’s authority under the terms of the trust “if the exercise or non-exercise was obtained with the directed trustee’s collusion or by the directed trustee’s fraud and compliance would be in pursuance of that collusion or fraud.”  The trustee’s own collusion or fraud are when a trustee must face liability.

The UDTA uses a different standard to hold the directed trustee liable: the directed trustee is liable if it engaged in willful misconduct.  The UDTA’s willful misconduct standard may consist entirely of the trustee complying with an egregious exercise or non-exercise of a power of direction by the trust director.

  • Change: Under the UDTA a trustee may be liable for failing to question or express reservations with regard to the appropriateness of a particular exercise or non-exercise of a power to direct that it is given, or the directed trustee fails to seek an order from the probate court that directs the trustee to comply with, or to resist, the questionable direction. Those failures might be treated as willful misconduct.  Under the Michigan Act, if the trustee follows a direction that was not procured by the trustee’s own affirmative misconduct, the directed trustee will never expose itself to liability for breach of trust. The directed trustee under the Michigan Act will not be liable for failing to do one or more of those things in the face of a claim that the trustee engaged in willful misconduct. In sum, it will be more difficult to hold a directed trustee liable under the Michigan Act.

Conclusion: The above summary is extracted from Jim Spica’s lengthy article in the winter Michigan Probate and Estate Planning Journal, “Used Not Only As Directed: Michigan’s Adaption of the Uniform Directed Trust Act.”  Quoting from that article as to the major distinction between the UDTA and Michigan’s Act:

That lack of guidance is bound to weigh on the deliberations of a professional trust-service provider who is being asked to reduce her standard fee in light of the settlor’s allocation of administrative responsibilities to ‘trust directors.’ To that extent, the [Michigan Act] compares favorably with the [UDTA] as an inducement for the professional trustee to take the settlor’s division of administrative labor seriously as a scheme of fiduciary-risk allocation: compared with the [Michigan Act] the [UDTA] is vague as to the circumstances in which a directed trustee can be liable to trust beneficiaries for doing exactly as directed by the trust director when the director is acting within her authority under the trust of the trust.

To conclude, the departures made under the Michigan Act from the UDTA are designed to provide more protection to the directed trustee by: (i) creating more situations where the directed trustee will be viewed as following a power of direction; and (ii) only the trustee’s own misbehavior, not that of the power holder, will expose the directed trustee to liability for claims of breach of trust.