Public Policy and Trust Limitations (or Conditions)

Take-Away: Each state applies its own public policy when it comes to whether a Trust’s provisions are enforceable void. Often this public policy analysis evolves into the arcane of whether a trust provision imposes an unenforceable condition or a legally enforceable limitation. 

Background: The Michigan Trust Code requires that for a Trust to be valid, it must not be contrary to Michigan public policy. MCL 700.7404 provides:

“A trust may be created only to the extent its purposes are lawful, not contrary to public policy, and possible to achieve.”  

Mandatory Provision: This is one of the mandatory provisions the Michigan Trust Code that cannot be altered by the terms of the Trust. [MCL 700.7105(2)(c).]

What’s Public Policy: However, the Michigan Trust Code does not attempt to define what Michigan’s public policy is that a Trust could violate, leaving that up to Michigan’s common law and judges to figure out.

Restraint of Marriage: However, the Comment to MCL 700.7404 refer to the Restatement (Third) of Trusts, Section 28, comment a, and Section 29 comments d-h, which note that a Trust’s purpose that violates public policy include “those that tend to encourage criminal or tortious conduct, those that interfere with freedom of marriage or that encourage divorce, that limit religious freedom, or that are frivolous or capricious.”

Mardigian Decision: The notion of a Trust violating public policy was recently addressed by the Michigan Supreme Court in In re Mardigian Estate, 502 Mich. 154 (2018). In the case the Court decided that it was not against Michigan policy policy for an attorney to draft a trust for his friend where the trust provided substantial gifts to the drafting attorney and his friends, even though doing so was a direct violation of one of the Michigan Rules of Professional Conduct, that could lead the attorney to lose his license to practice law. The Court found that the purpose of the Trust, to benefit a friend and his family, ‘trumped’ the implied public policy in the Michigan Rules of Professional Conduct.

Each state has its own position when it comes to a Will or Trust violating that state’s public policy. This was demonstrated with an Indiana decision published earlier this month.

Roger D. Rotert v Connie Stiles, Indiana Supreme Court, Case No. 2021S-TR-452 (October 8, 2021)

Facts: In 2009 Marcille Borcherding executed her revocable Trust. In that Trust Marcille divided her property between her son Roger, her daughter Connie, and four step-children. Connie was named as successor trustee. Marcille died in 2016.

Marcille’s Trust instrument created a subtrust for Roger. Specifically that subtrust provided: “In the event [Roger] is unmarried at the time of my death, I give, devise, and bequeath his share of my estate to him outright and the provisions of this trust shall have no effect. However, in the event that he is married at the time of my death, this trust shall become effective as set out below.”

Roger had been married to his 3rd wife for at least 8 years when Marcille executed her Trust. Just before the Trust was executed, Roger’s wife had filed for divorce. However, Roger and his wife later reconciled and they were married at the time of Marcille’s death.

Dispute: Roger and his sister Connie, the successor trustee, disagreed as to whether Roger’s share of their late mother’s estate had to be held in trust.

Roger: Roger claimed that he was entitled to an outright distribution from the Trust, and that the Trust’s condition of his being unmarried when his mother died was void against Indiana’s public policy since it encouraged his divorce. In support of this principle, Roger cited the Restatement (Third) of Property (Wills and Donative Transfers) Section 10.1, comment c.

Trustee: Connie claimed that since Roger was married at the time of their mother’s death, his share of the Trust had to be held in a continuing trust (administered by her) and that this Trust provision was a permissible limitation on Roger’s interest, not an impermissible condition. 

[I’ll bet Roger and Connie’s families don’t get together for Thanksgiving anymore, but I digress.]

Trial Court: Both Roger and Connie filed competing motions for Summary Judgment. The trial judge held that Marcille’s Trust terms were not contrary to Indiana’s public policy, and thus the imposed continuing trust to hold Roger’s inheritance was legally permissible.

Appellate Court: The intermediate appellate court panel reversed the trial judge. the panel found that the “challenged provision was an impermissible restraint against marriage.”

Indiana Supreme Court: This Court reinstated the trial judge’s decision that the continuing trust to hold Roger’s inheritance was valid. In doing so, the Court held that revocable trusts in Indiana are not subject to the general prohibition against restraints on marriage.

Condition vs. Limitation: In reaching its decision, the Court side-stepped many of the technical arguments made in the lower court proceedings, including whether the Trust’s provision for Roger was an unenforceable condition or a legally enforceable limitation. The Court expressly refused to address whether a condition (impermissible) or a limitation (permissible) was involved with Marcille’s Trust.

Even some conditions are enforceable at common law. If the condition is one imposed on the acquisition of an interest, it is permissible. In contrast, a condition subsequent imposed on the interest bequeathed is impermissible and thus unenforceable.

The Court noted the technical distinction between a limitation and a condition. A limitation is a durational restriction, while a condition is one that defeats the estate that is otherwise to be distributed.

Concluding its dissertation on the difference between condition v limitation, the Court ulimately punted to a much earlier Indiana court decision where a justice remarked, in passing: “The distinction between a condition and a limitation is wholly without merit.”

So much for an incisive judicial analysis over several pages leaving everyone still guessing ‘why even bring it up?’

Probate Code Provision Limited: The Indiana Probate Court contains a provision that expressly states that ‘a devise to a spouse with a condition in restraint against marriage shall stand, but the condition shall be void.’ [Subsection 29-1-6-3.]

Accordingly, the Indiana Probate Code expressly prohibits restraints against marriage, but only if the restraint is a devise to a spouse.

The Court narrowly interpreted ‘devise’ to mean to dispose of either real or personal property, or both, by Will only, not by a revocable Trust.

“We hold that the statutory prohibition of restraints against marriage applies only to dispositions to a spouse by a Will, and not to dispositions by Trust…Here we have neither a testamentary devise nor a devise to a spouse, but a disposition by a revocable trust to a child. The statutory prohibition under our probate code does not apply.”

Settlor’s Intent Prevails: The Court also found that the Indiana Trust Code does not expressly prohibit conditions in restraint of marriage. What it does prohibit, according to the Court, is ignoring the settlor’s intent, and where relevant, the Trust’s purpose, as manifested in the Trust’s ‘plain terms.’ Thus, the Court found that the settlor’s intent was clear from the terms of her Trust, and her intent should prevail over Roger’s claims of public policy and due process violation.

Conclusion: Some states, like Indiana, identify what its public policy is, while Michigan simply refers to public policy leaving it up to the courts to figure that out. Yet, as indicated in the Indiana Supreme Court decision, its express public policy is restricted to Wills, and only with regard to surviving spouses. It is difficult to discern which approach is better. I guess in either case, the courts will ultimately tell us what the state’s public policy is, but that means that settlor’s are at their peril when they want to impose some conditions (or limitations, take your pick) on a trust provision.