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

3-Apr-19

Qualified Trust Beneficiaries: An Expanded Definition?

Take-Away: A trustee is obligated to keep qualified trust beneficiaries reasonably informed about the administration of the trust and of the material facts necessary to protect their interests in the trust. In addition, a trustee is normally required to promptly respond to a trust beneficiary’s request for information that is related to the administration of the trust. These trustee reporting obligations turn on the definition of a qualified trust beneficiary. While that term is defined in the Michigan Trust Code, it is possible that a court might find reasons to extend that statutory definition.

Background: A qualified trust beneficiary is entitled to notice of various actions taken by a trustee in order to possess the opportunity to object to the trustee’s action to protect their interest in the trust. Consequently, a trustee must  keep a qualified trust beneficiary reasonably  informed of the trust’s administration, e.g. accountings, and promptly respond to a qualified trust beneficiary’s requests for information with regard to the trust. [MCL 700.7814(1).] There is a distinction, however, between a qualified trust beneficiary and a trust beneficiary, under the Michigan Trust Code and thus the obligation of a trustee to inform individuals.

  • Trust Beneficiary: A trust beneficiary means a person to whom one or both of the following apply: (i) the person has a present or future beneficial interest in a trust, vested or contingent; (ii) the person holds a power of appointment over trust property in a capacity other than that of a trustee. [MCL 700.7103(l).]
  • Qualified Trust Beneficiary: A qualified trust beneficiary means a trust beneficiary to whom one or more of the following apply on the date the trust beneficiary’s qualification is determined: (i) the trust beneficiary is a distributee or permissible distributee of trust income or principal; (ii) the trust beneficiary would be a distributee or permissible distributee of trust income or principal if the interests of the distributees under the trust described in subparagraph (i) terminated on that date without causing the trust to terminate; (iii) the trust beneficiary would be a distributee or permissible distributee of trust income or principal if the trust terminated on that date. [MCL 700.7103(g).]
  • Distinction: A qualified trust beneficiary is thus a subset of all of the beneficiaries of the trust, i.e. those who have the most immediate, or perhaps better stated, the least remote interest, in the trust. In a sense a qualified trust beneficiary virtually represents the interests of the more remote trust beneficiaries.
  • Appointees: The Reporter Comments to these statutory definitions note that a person who is a potential appointee of a power of appointment is neither a trust beneficiary nor a qualified trust beneficiary solely by virtue of being within the class of persons in whose favor the power of appointment might be exercised.

Expanded Scope of Statutory Definition: A question that recently was litigated was the scope of the definition qualified trust beneficiary, on which the trustee’s duty to account hangs. Specifically, the question was the relationship between the beneficiaries of a trust that was to be created out of an existing trust and that existing trust where individuals were not permissible distributees of income or principal of that existing trust. Rachins v. Minassian, WL 3387236 (Fla. Ct. App. 4th Dist.).

  • Facts: The decedent’s trust was established for the sole benefit of the decedent’s surviving spouse. That trust was to terminate on the death of the surviving spouse. The trust provided that on the survivor’s death the remaining trust principal was to be distributed to new separate trusts that were established for the benefit of the decedent’s children. The step-children brought a court action claiming the trustee ignored them and that the original trust never came into existence because the step-mother was the sole trustee and the sole beneficiary of the trust (the legal and equitable titles were merged) and thus the step-children challenged the step-mother’s administration of the trust.
  • Courts: The trial court dismissed the step-children’s petition. The appellate court reversed and found the step-children were qualified trust beneficiaries because of their interest in whatever trust principal remained after the death of the step-mother. The appellate court also held that even an unlimited power of invasion held by a trustee-beneficiary “is subject to implied limitations to protect remainder beneficiaries.”
  • Result: The step-children were treated as qualified trust beneficiaries of the decedent’s existing trust, even though their interests in that trust come from their interests in the trusts that were yet to be created from the trust property that remains at the termination of the existing trust, i.e. the death of their step-mother.

Conclusion: The duty to account, the duty to promptly answer questions, turns on the definition of who is a qualified trust beneficiary. Ignoring a trust beneficiary’s questions or request for information about the trust is a sure-fire way to invite a petition filed with the probate court. As such, determining who is, and who is not, a qualified trust beneficiary is the first step a trustee needs to take in administering a trust. But if courts are inclined to expand the statutory definition, the safer course might be to respond to all requests for information pertaining to a trust and its administration.