New Take on a Trust’s ‘Material Purpose’

Take-Away: A court recently refused the beneficiaries’ petition to remove the acting trustee. The court’s denial was because the trustee’s removal would be inconsistent with what the court perceived to be the trust’s material purposes. Once again, a court is guided by, or limited in the modification of, an irrevocable trust by the material purpose ‘concept.’

Background: We have frequently covered the topic of a trust’s material purposes, which limit the power of a court to modify a trust if the proposed trust modification would impede or contradict the trust’s material purposes. Identifying a trust’s material purposes is critical to several provisions of the Michigan Trust Code.

• Example: “A noncharitable irrevocable trust may be modified or terminated…by the court if the court concludes that the modification or termination of the trust is consistent with the material purposes of the trust.” [MCL 700.7411(1) (a).]

Michigan Cases: Only a couple of Michigan court cases have addressed the court’s obligation to preserve a trust’s material purposes.

• In Amor v. Schmoke (In re Estate of Larry Hutchinson Living Trust) No. 326511 (July 7, 2016) a termination of a trust and distribution of its real property (but not mineral interests) was deemed ineffective years after the purported termination, because a material purpose of the trust remained to be fulfilled in the opinion of the Court of Appeals- one perceived trust purpose was the distribution of the mineral rights that were associated with the previously distributed real property.
• In In re Pearl Franzel Irrevocable Trust, No 335447 (March 20, 2018) the Court of Appeals found that the probate court had effectively modified a trust and distributed its assets, even though the probate court did not follow MCL 700.7411(a) and formally approve the trust’s modification. The record reflected that the probate court had considered extrinsic evidence to identify the trust’s material purposes, which apparently was enough for the Court of Appeals to approve the trust’s modification, despite the probate court’s failure to follow the Trust Code’s modification statute.

In both cases, the court had to search for what it then determined was the trust’s material purposes, which were not readily apparent.

Nebraska Case: Earlier this year the Supreme Court of Nebraska affirmed a trial court’s refusal to remove the acting trustee of a trust because, in the opinion of the court, the trustee’s removal would violate the trust’s material purpose.

Reported Decision: In re Trust Created by Fenske, 303 Neb. 430 (2019)

Trust Terms: The testator died in 1998, creating a testamentary trust under his Will. Most of the decedent’s property was to be held in trust by a local bank. The trust required the payment of income to the testator’s grandnieces, as he had no children or spouse.  The trustee was authorized to invade trust principal to pay for the grandnieces’ educational expenses. The trust was to continue for the lifetimes of the grandnieces. Upon the death of the last grandniece, trust assets were to be distributed to the grandniece’s heirs.

Petition of Removal of Trustee: In 2017, the grandnieces filed a petition to modify the trust by removing the bank as trustee, and replacing the bank with a spouse of one of the grandnieces a trustee. The husband was an attorney who claimed he would not charge a fee. (A lawyer working for free? I’ll believe it when I see it!) The reasons given for the grandnieces’ removal petition was that: (i) all the qualified trust beneficiaries consented to the trust’s modification; (ii) the grandnieces had completed their education; and (iii) the bank’s fees had exceeded the trust’s income in recent years. At the time of the petition, the trust’s assets consisted of $52,000 in a money market fund, a $30,000 Note given by one of the grandnieces, and agricultural land worth $279,000.

Trial Court: After holding an evidentiary hearing, the trial judge refused to remove the bank as trustee finding that the bank’s removal would violate a material purpose of the trust.

Nebraska Supreme Court: The Court upheld the decision of the trial judge that that removal of the bank as trustee would violate the trust’s material purpose. Nebraska’s statute is identical to Michigan’s MCL 700.7411, both of which are based on the Uniform Trust Code’s (UTC) Section 411 and the comments to that UTC Section.

The Court observed that whether the proposed replacement of a trustee is inconsistent with a material purpose of the trust “depends on the significance to the settlor of the initial choice of trustee.”

The testator’s attorney testified in the trial court that the testator had wanted the trust assets ‘kept together’ as long as possible, and that the testator felt strongly about the need to retain the agricultural land in trust. [I’m am not sure how relevant this testimony was to the decision to retain the bank as trustee, but the Nebraska Supreme Court cited this testimony as an indicia of the trust’s material purpose.]

The testator’s attorney also testified that the testator wanted an independent trustee and expressly did not want family members to be in control of the trust’s assets.

The Court’s finding of the trust’s material purposes relied on the Restatement (Third) of Trusts, Section 56, comment d, on which UTC 411 is primarily based. According to the Court, the testator’s selection of the bank as the trustee was “more than what the Restatement describes as an incidental means to an end.” Rather, the selection of the bank as trustee was an important means to accomplish the testator’s ‘intention to make the administration of the trust independent from family members.’

Conclusion: As time passes, we can expect to read more court cases that attempt to identify a trust’s material purposes, which, in turn, impose a limit on subsequent efforts to modify an irrevocable trust. Hopefully, more trust instruments will be drafted that expressly to describe the trust’s material purposes so that probate judges will not have to take testimony in search of them.