Secret Trusts: Coming to Michigan Soon?

Take-Away: I learned this past week that part of an Omnibus EPIC Amendment Bill that is floating around the Legislature in Lansing is a provision that would authorize secret trusts. It is not clear if this proposed addition that authorizes secret trusts will ever be adopted by the Michigan Legislature. In the past when the topic of secret trusts has come up at the Probate and Estate Planning Council, it has been quickly shot-down. No surprise, most probate judges generally abhor the idea of a secret trust.

Background: As a rule, Michigan (unlike Delaware) does not permit a secret trust. Michigan’s law requires that trust beneficiaries be informed about the trust after the settlor’s death. [MCL 700.7814(1) (2) (3).] A secret trust would suspend the trustee’s obligation to communicate with the trust beneficiary for a finite period, thus withholding information with regard to the existence of the trust and withholding information with regard to the amount or value of assets held in the trust.

Why a Secret Trust?: The reasoning behind a secret trust is that the settlor does not want the trust beneficiary, usually a minor or young adult, to learn of the magnitude of assets held in trust, which knowledge might deter that beneficiary from leading a productive and self-fulfilling life. In other words, if the trust beneficiary is unaware of the trust or the amount held in trust for that beneficiary, the beneficiary is less likely to become or develop the habits of a trust-fund-baby.

Contrast to an Undisclosed Trust: As it was described, the proposed legislation is not the same thing as an undisclosed trust, where no person is even aware that the trust exists. Rather, a secret trust is disclosed to a third party, just not to the trust beneficiaries.

Suspension of Trustee Duties: This proposed legislation would suspend the trustee’s duty and obligation to provide notice of the trust, or annual accountings to the qualified trust beneficiaries, for up to 25 years.

Limitation: Trust Decantings and Modifications: Obviously, if there is a subsequent need to modify the trust or to decant the trust’s assets to a new trust, the existence of the trust would then be disclosed to the beneficiary, either because the beneficiary’s consent would be required to the trust modification [MCL 700.4711], or notice would have to be given to the trust beneficiary prior to a formal decanting of the trust’s assets by the trustee to the ‘new’ trust. [MCL 700.7820a (7)]

Drawbacks: One obvious drawback to the use of a secret trust is the trustee’s exposure to liability if no reports are filed with the trust beneficiary. If there are no annual accountings or reports provided to the trust beneficiary, and the existence of the trust is finally disclosed to the beneficiary after the full 25 years have passed, the trustee will be exposed to liability going back all 25 years. Restated, no statute of limitations runs that protects the trustee if there is no formal reporting by the trustee to the trust beneficiary. [MCL 700.7905(1) (a)] In addition, it is hard to imagine a trust being administered for an extended number of years without the trust beneficiary being aware of the trust. This is especially so if distributions are actually made from the trust to or for the trust beneficiary, either to meet specific needs of the beneficiary, or simply to expose the income generated by the trust’s assets to a lower marginal income tax bracket (the beneficiary’s.) Maybe holding a legacy asset in the secret trust, like the family cottage, would work to keep the trust beneficiary in the dark for an extended period, but for other income producing assets, keeping the trust a secret from the trust beneficiary seems almost to be an illusory benefit.

Conclusion: Those ‘in the know’ are optimistic that the Omnibus EPIC Amendment Bill will be successfully be adopted and become law sometime this year (with many modernization features e.g. increasing the size of a decedent’s estate that qualifies for a small estate probate proceeding, going from $23,000 to $100,000. However, the adoption of a secret trust authorization remains in doubt given the historic opposition to it by the probate judges around the state.