Take-Away:  A nonjudicial settlement agreement under the Michigan Trust Code is a device that is generally  used to resolve administrative matters that are associated with a trust and, by default, conserve probate court resources. A nonjudicial settlement agreement is not, however,  normally used to resolve disagreements among parties, like competing trust beneficiaries over the division of a trust’s assets. An agreement among parties to resolve a contest, controversy, or interpretation of a trust provision is not, consequently,  a nonjudicial settlement agreement, but often a trust modification agreement, that must be approved by the probate court. A probate court can also be asked to approve  a nonjudicial settlement agreement among interested parties that relates to the trust’s administration. Clarifying these two different roles of a probate court, approving a nonjudicial settlement agreement vs a trust modification agreement is important when an agreement is presented to the court for  approval. A lot may depend on how the probate court views the word modify, and the implications of the proposed modification (if any) to the trust’s material purposes.

Background: When a nonjudicial settlement agreement can be used is unfortunately often vague. The agreement cannot be used to modify the terms of a trust instrument. But the nonjudicial settlement agreement can be used for the interpretation or construction of a trust, which seems to be a fine-line distinction, certainly to most trust beneficiaries.

  • Statute- MCL 700.7111: The nonjudicial settlement agreement statute initially notes that interested persons can enter into a binding nonjudicial settlement agreement with respect to any matter involving a trust. That scope seems pretty broad on its face. [MCL 700.7111(1).]  Note that the use of the terms interested persons means anyone whose consent would be required to achieve a binding settlement if the settlement agreement was submitted to the court for approval.
  • No Modification or Termination: But then the following provision states that a nonjudicial settlement agreement shall not be used to accomplish the termination or modification of the trust [MCL 700.7111(2)] presumably because there are other provisions of the Michigan Trust Code [MCL 700.7411 et seq.] that expressly deal with a trust’s modification and termination. Thus, while a nonjudicial settlement agreement can be used with respect to any matter involving a trust, it cannot be used to modify the trust. [Maybe you can tell me what the difference is between the two.]
  • Ambiguity: While the Comments to this section of the Michigan Trust Code and the one reported court decision pertaining to its use refer to it being restricted to administrative matters, that is not how the statute reads- it says any matter not any administrative matter.
  • Material Purposes Preserved: A nonjudicial settlement agreement is valid only to the extent that it does not violate a material purpose of the trust, which  includes terms and conditions that could properly be approved by the probate court. [MCL 700.7111(2).]

Nonexclusive List of Uses: The same statute sets forth those topics that may be resolved by a nonjudicial settlement agreement, which non-exclusive list of uses:

  • The interpretation or construction of the terms of the trust instrument;
  • The approval of a trustee’s report or accounting;
  • The direction to the trustee to perform or refrain from performing a particular act, or to grant or withhold from a trustee any power;
  • The resignation or appointment of a trustee, and the determination of the trustee’s compensation;
  • The transfer of the trust’s principal place of administration; and
  • The liability of the trustee for an action that relates to the trust. [MCL 700.7111(3).]

Example: An example of where a nonjudicial settlement agreement could be useful is when the interested parties all agree that that a mistake was made in the trust instrument, which mistake requires that the trust instrument be reformed. Rather than pursue a formal action in the probate court to reform the trust instrument to correct the obvious mistake, a nonjudicial settlement agreement could be used for that purpose to avoid the costs and delays of a formal judicial reformation action. (You will recall that a probate court is not required, only it may, approve a nonjudicial settlement agreement.) But that then boils down to whether the change is a trust reformation (mistake from the beginning), or a trust modification (the correct terms no longer work due to a change in circumstances), which cannot be achieved without probate court approval. Less clear is a nonjudicial agreement  used to interpret the trust instrument in such a way as to possibly alter its purposes- apparently there is no bright line test that can be applied for when MCL 700.7111 can be used, and when the parties must proceed with a formal court proceeding to modify the trust under other provisions of the Michigan Trust Code [MCL 700.7411 et seq.]

  • Court Approval: In sum, confusion may  come from the opportunity to have the nonjudicial settlement agreement approved by the probate court, i.e. its optional,  [MCL 700.7111(4)] while the probate court’s approval is required with a modification of the trust instrument that is agreed upon by the interested parties, or the trust’s termination.

‘Routine Administrative Issues:’ One reported decision shows the fine-line between trust settlement agreements and nonjudicial settlement agreements. In  Draves v. Draves (In re Draves) 298 Mich. App. 745 (2012) the probate court found that an earlier settlement agreement was covered by the nonjudicial settlement agreement statute. This interpretation was rejected by the Court of Appeals. The Court found that MCL 700.7111 was intended to allow trust beneficiaries to resolve routine administrative issues free from court supervision. In contrast, the settlement agreement before the Court had been the product of protracted litigation, to which MCL 700.7111 did not apply. Instead, that agreement sought to modify the trusts  in question under MCL 700.7411. The Court noted:

“Specifically, MCL 700.7111 allows beneficiaries to resolve administrative issues without court involvement, freeing the probate court from supervisory control. Section 7111 promotes extrajudicial resolution of trust issues and falls within the statutory framework for relieving interested parties and the courts of the burdens and costs associated with continued court supervision and control. The case at bar is not one involving the routine administration of a trust as contemplated by MCL 700.7111. In fact, the parties were involved in protracted litigation with cases pending in the Macomb and Oakland County Probate Courts at the time the settlement agreement was entered into. It is obvious that the parties intended that settlement agreement resolve  all pending matters. The settlement agreement provides: “That the Petitioners and Respondents wish to settle the issues as raised in the above captions causes of action as follows [terms deleted]…..The probate court was presented with the settlement agreement, the parties indicated their desire to have the settlement agreement entered into the record, numerous pending actions were dismissed as a result of the settlement agreement, and the probate court retained jurisdiction to administer any disputes with respect to the performance or compliance of a party under the settlement agreement. It must be stressed that the parties’ settlement agreement was not simply an extrajudicial alteration of the trusts, but was the result of active litigation: as such MCL 700.7111 was inapplicable…..By entering into the settlement agreement, the parties clearly entered into a contract to resolve all pending disputes. As such, MCL 700.7111(2) was inapplicable to this case and the probate court erred by allowing for the sale of the Cedar Rest Resort in contravention of the parties’ settlement agreement.”

Now I  struggle to discern the difference between what the Court termed a simple extrajudicial alteration of the trusts  with a settlement agreement to modify the trusts through agreement of the litigants.

Possible Interpretation: By implication it seems that what the Court of Appeals concluded in Draves is that a probate court can always modify the terms of a nonjudicial settlement agreement  reached among the interested parties, perhaps overlooking the use of the words binding nonjudicial settlement agreement used  in MCL 700.7111(1),  but the same probate court is not permitted to modify (only enforce) the terms of a binding settlement agreement that modified the terms of two separate trusts.

Trustee’s Peril?: Interestingly the Reporter’s Comments to MCL 700.7111 warn a trustee to be cautious when entering into a nonjudicial settlement agreement in light of the trustee’s ongoing fiduciary duties to act in the best interests of all trust beneficiaries (current and remainder.)

Conclusion: To be on the safe side, it is probably best to restrict the use of nonjudicial settlement agreements to only purely administrative matters that pertain to an irrevocable trust. While MCL 700.7111((3)(a) refers to nonjudicial settlement agreements that involve the interpretation and construction of the terms of a trust instrument,  it is unclear if that construction or interpretation will be later viewed as a modification which requires more formal notice to all interested parties, their consent, and the approval of the probate court of that proposed modification.  It would be better to avoid that slippery slope of what is, and what is not, a trust modification,  and follow the formal steps described in MCL 700.7411, that include judicial approval of that proposed trust modification. Finally, a trustee that is asked to participate in a nonjudicial settlement agreement should proceed with caution, and when in doubt as to its liability exposure, demand that the nonjudicial settlement agreement be approved by the probate court. In sum, the utility of the nonjudicial settlement agreement option is somewhat questionable. Hopefully the appellate courts will provide over time a clearer ‘bright-line’ test as to when a nonjudicial settlement agreement can be comfortably be used by the trustee and interested parties.