Take-Away: Former Governor Snyder signed into law what is informally called the Michigan Divided Trustee Act, the (Uniform)Directed Trust Act, and replaced the term trust protector with a new term, trust director. Many of the changes are now part of the Michigan Trust Code, located at MCL 700.7704B. Three separate House Bills [6129, 6130, and 6131] were involved to implement these changes to the Michigan Trust Code and the Michigan Estates and Protected Individuals Code (EPIC):

  • (i) HB 6129 authorizes the use of separate, or divided, trustees in a trust instrument, who, generally speaking, will not be treated as cotrustees;
  • (ii) HB 6130 amends EPIC to incorporate a modified version of the Uniform Directed Trust Act, which relieves the trustee of the duty to monitor its trust director; and
  • (iii) HB 6131 amends EPIC to replace references to trust protector with a new term-of-art, trust director yet, like with the old trust protector provisions, it specifies EPIC will take precedence in specific situations over the terms of the trust instrument, e.g. a trust director must always serve as a fiduciary which cannot be modified by the trust settlor.

All three of these Bills were tied together as a ‘package’ legislative changes. A long summary of these changes follows. I apologize in advance for its length and complexity, but these are major changes in Michigan’s trust law that affect all trustees. (My comments are often in italics.)

I.DIVIDED TRUSTEES: Several changes are permitted to a trust instrument with regard to the implementation of a divided trustee, or separate trustee provision. Key is that a trust instrument can now use multiple, separate, trustees, each with their own narrowly defined set of duties, responsibilities (and liabilities) yet not treat them as cotrustees who would be jointly liable for the acts of other cotrustees.

  • SEPARATE TRUSTEES AUTHORIZED: A trust instrument may now include a separate trustee provision that specifies that certain conditions would apply to the trust and its administration when a separate trustee provision is used. This permits a trust instrument to designate, or provide a method to designate, both a separate ‘resultant trustee’ and a separate investment trustee or one or more separate distribution trustees. Think of the ‘resultant trustee’ as a conventional trustee but without certain powers or duties.  The traditional role of the single trustee can now be divided among many different trustees, who are not treated as cotrustees with general responsibilities over the entire trust and its administration.
  • ALLOCATION OF RESPONSIBILITIES: If a separate trustee provision applies to a trust instrument, the trust instrument must determine the circumstances that pertain to the performance of the specific trustee’s responsibilities. If there is a separate trustee provision, the whole trusteeship of the ‘aggregate trust’ is divided, with separately accepted fiduciary responsibilities that apply to each discrete set of trustees. With respect to each of its separate trustee functions, a separate trustee will act on its own authority and it will not need the approval from any of the other separate trustees. The separate trustees would not (generally) be treated as cotrustees in their relationship with one another, thus reducing each separate trustee’s exposure to liability.
  • Limited Cotrustee treatment: However,  the separate trustees will be treated cotrustees, but only for the following purposes: (i) to take, hold, transfer and defend title to the property that is held in the trust; (ii) to determine venue and  interested persons in a legal proceeding with regard to the ‘aggregate trust;’ (iii) to determine liability, if any, for income, property or other taxes that are attributable to the property that is held in the trust; and (iv) to retain the privileges and immunities of cotrustees under general legal and equitable principles to make comments to the settlor of the trust, or to a beneficiary of the trust, or others on another separate trustee’s performance with regard to their respective fiduciary duties. Thus, for these limited purposes- protecting title to trust assets, paying taxes, communicating with the settlor and beneficiaries, all of the separate trustees will still be treated as cotrustees with regard to rights (protecting title) and liabilities (paying taxes) and communications with those who are interested in the trust and its administration.
  • Not Necessary as a Litigant: Since the separate trustees will generally not be treated as cotrustees, all will not be required to be joined as a ‘necessary party’ defendant in a breach of trust legal proceeding. Therefore, if one separate trustee is sued for breach of trust, the other separate trustees are not roped into that litigation, thus saving legal fees and liability exposure simply by having a ‘deep pocket.’
  • Limits on Beneficiary Serving as Separate Trustee: If the ‘aggregate trust’ had only one beneficiary, that beneficiary could be a separate trustee only under very limited conditions.
  • No advice: A separate trustee cannot accept the separate trust that is associated with, or except as otherwise provided, participate in or provide advice with regard to the performance of another separate trustee’s function of the ‘aggregate trust.’ Consequently, one separate trustee has no obligation to comment upon, or give advice to, another separate trustee.
  • Vacancies: A separate trustee has no independent duty to ensure that a vacancy in, that or any other separate trusteeship, is filled.  Even if it seeks to do so, it will not be considered to have accepted the separate trusteeship in which there is a vacancy. Merely pointing out that there is a vacancy in another separate trustee position does not cause the observant separate trustee any liability or duty to fill (even temporarily) that vacancy.
  • ‘Resultant trustee’: The statute uses the concept of a resultant trustee. The definition is that it is one that would be responsible for the custody of the ‘aggregate trust’s’ assets.
  • ‘Aggregate trust’:  As the term suggests, this is what we would call or treat as the entire trust, ignoring the separate duties and responsibilities of multiple separate trustees who act under it. The technical definition of aggregate trust means the ‘inclusive set of separate relations of a trust to be separately accepted by the separate trustees under a given separate trustee’s provision.’ [Note: this is not my definition!]
  • Investment Trustee: If there is a separate investment trustee, he/she will perform the trustee investment function. In addition, the investment trustee provision must address whether that investment trustee, or the separate ‘resultant trustee’, will determine the ‘aggregate trust’s’ asset allocation for investment statement purposes.
  • Distribution Trustee: If there are more than one distribution trustee, they must exercise their discretion under one (or more) of the discretionary trust standards that are specified in the trust instrument;
  • Identify Which Trustee Has What Responsibilities: The trust instrument must identify which of the separate trustees of the ‘aggregate trust’ is responsible for: (i) the allocation of receipts and disbursements, or distributions that are affected by that separate trustee’s separate functions for fiduciary accounting periods during which the trust is not a unitrust; (ii) prepare and file tax and information trusts for the ‘aggregate trust’ and respond to inquiries from the government; (iii) respond in a legal proceeding that challenges the purposes or the validity of the trust; and (iv) determine whether cash or property will be loaned to the beneficiaries or to a business enterprise in which the a beneficiary, or the ‘aggregate trust,’ possesses an ownership interest.
  • Must Seek Advice of Director: A separate trustee is required to seek or to consider the advice of a designated trust director in the same circumstances as would a trustee, or in a cotrusteeship, that is not a separate trustee.
  • DUTY TO INFORM SEPARATE TRUSTEES AND BENEFICIARIES: If a separate trustee provision applies, the trust instrument must specify that each separate trustee has a duty to inform and report to trust beneficiaries and to the other separate trustees on each of the separate trustee’s functions. An exception to this duty to report is for those reports that the separate trustee knows are duplicative. The reporting to other separate trustees seems to be restricted to only that information that is reasonably necessary for that other separate trustee to perform his/her duties under the trust instrument.
  • NO DUTY TO MONITOR OR WARN: If a separate trustee provision applies, the separate trustee will not have a duty to monitor or review the actions of any other separate trustee. A separate trustee has no duty to warn the settlor or a beneficiary of a breach of trust or possible breach of trust on the part of another separate trustee. In the event that a separate trustee actually did notify the settlor of the trust or a beneficiary of the trust of a suspected breach of trust, he/she will not be considered to have accepted the separate trustee’s duties and will not have a separate duty to warn of breaches of trust by any other separate trustee.
  • EXONERATION: A separate trustee is exempt from liability for the acts or omissions of another separate trustee. Without any clear and convincing evidence of collusion in the breach of trust, a separate trustee will not be liable for the act or omission of any other separate trustee. Only the separate trustee is obliged to defend or otherwise respond in a legal proceeding brought by a trust beneficiary in a breach of trust action that is directed to that separate trustee’s acts or omissions; other separate trustees can sit on the sidelines and watch that litigation. Only that separate trustee will be liable to trust beneficiaries for breach of that trustee’s duty as if that separate trustee was the sole acting trustee of the ‘aggregate trust.’
  • VACANCIES: Different provisions from the normal provisions of the Michigan Trust Code apply to filling the vacancy of a separate trustee. Under current law, if one or more cotrustees remains in office, a vacancy in the trusteeship need not be filled. Because the relationship between separate trustees is not treated as a cotrusteeship, the remaining separate trustee(s) will not automatically inherit those other responsibilities, although separate trustees(s) could comprise a common trusteeship e.g. two people could serve as the single investment trustee.

II.UNIFORM DIRECTED TRUSTEE ACT (as modified): This incorporates a modified version of the Uniform Directed Trust Act. It attempts to parallel the provisions and uses the same headings that are used in the Uniform Directed Trust Act. It relieves a trustee from most (but not all) legal responsibility for following the directions of a trust director.

  • TRUST DIRECTOR: The terms of the trust instrument are permitted to delegate a power of direction to a trust director.
  • POWER OF DIRECTION: This term of art means a power over a trust that is granted by the terms of the trust to the extent the power is exercisable while the person to whom it is granted is not then serving as the trustee of the trust. Defined: A power over a trust granted by the terms of the trust to the extent the power is exercisable while the person to whom it is granted is not serving as a trustee. Power of direction would include a power over the investment, management, or distribution of trust property or other matters of trust administration. Conceivably a trustee could be required to follow the directions of several trust directors, one for investments, one for disbursements, and other activities under the trust instrument, e.g. tax return preparation, accountings, etc.
  • DIRECTED TRUSTEE: A directed trustee must take action to comply with the exercise or nonexercise of a power of direction.
  • The directed trustee will not be liable for taking a required action.
  • However, the directed trustee cannot comply with the direction if the exercise, or nonexercise, was obtained by the directed trustee’s collusion or fraud or its compliance would be in pursuit of the collusion or fraud.
  • A directed trustee must provide information to the trust director when the information is reasonably related to the power of the duties of both the trustee and the trust director. The same applies to the trust director. However, trust directors will also have to provide the listed information to and about another trust director.
  • The directed trustee has no duty to monitor a trust director or inform or give advice to the settlor of the trust, a beneficiary, another trustee, or another trust director concerning an instance in which the trustee might have acted differently than the trust director. If the directed trustee chooses to monitor, inform, or provide advice, the directed trustee will not be deemed to have assumed any duty to monitor, inform, or provide advice.
  • If a directed trustee relies on information that is provided by a trust director, the trustee is not liable for a breach of trust as long as the reliance was not in bad faith.
  • NONFIDUCIARY POWERS EXCLUDED: This law with regard to trust directors does not apply to some nonfiduciary powers that are often associated with, and used in, a trust. The Act does not apply to: “(i) a power of appointment that is held by the donee in a nonfiduciary capacity; (ii) a power that enables the holder to create a power of appointment; (iii) a power to appoint or remove a trustee or a trust director; (iv) the power retained by a settlor to the extent the exercise or nonexercise of the power affects the beneficial interests of a beneficiary.” Thus, the power that is intended to be held in a nonfiduciary capacity would not be subject to fiduciary constraint and could be exercised by the holder of the power in any manner that is consistent with the scope of the power and any express requirements or limitations on its exercise imposed by the trust instrument. The trustee must take action to comply with the exercise or nonexercise of a power that is identified in the statute. The trustee would not be liable for taking a required action, excluding only when the exercise, or nonexercise, by the trustee was obtained by the trustee’s collusion, fraud or if its compliance would result in the pursuit of that collusion or fraud. Other powers that would be intended to be held in a nonfiduciary capacity if granted to a person other than the trustee include: (i) a power that enables the holder to create a power of appointment; (ii) a power of appointment, including one to adjust between principal and income; (iii) to convert to, or from, a unitrust; (iv) to modify, reform, or terminate the trust; and (vi) to distribute assets in further trust- but, powers (ii through vi) would be intended to be held in a fiduciary capacity if the holder of the power otherwise did not possess a beneficial interest in the trust. [Explanation: a trustee is deemed to hold a power of appointment. Trust beneficiaries can also be given powers of appointment. The law attempts to distinguish between a power of appointment holder (trustee) that is directed and a power of appointment holder (beneficiary) who is not subject to direction by the trust director.]
  • SPECIFIC RULES OF CONSTRUCTION: This law provides specific rules of construction that will apply to powers under the trust instrument. Several rules of construction apply if a trust director serves the trust.  Since this law is based upon the Uniform Directed Trust Act, weight will be given to the goal to promote uniformity of the law on directed trusteeships among the states. Trust directors with joint powers must act by majority decision. A trust director can exercise any further power that is appropriate to the exercise, or nonexercise, of the director’s power of direction. To the extent that questions exist as to the effect of these provisions, deference will be given to the Uniform Act and its construction by courts in other states. Where confusion, and possible litigation will arise, will be the scope of implied powers that are deemed attributable to a trust director.
  • DUTIES AND LIMITATIONS ON TRUST DIRECTOR: A trust director is subject to the same rules as a trustee in a similar position and under similar circumstances with regard to the exercise or nonexercise of a power of direction or further power with regard both to ‘payback’ provision necessary for compliance with Medicaid reimbursement requirements and a charitable interest in the trust. Some of the duties and limitations of a trustee that works in conjunction with a trust director are identified in the statute. Key provisions include:
  • The trust director has the same fiduciary duty and liability in the exercise, or nonexercise, of a power of direction or further power as a similarly situated sole trustee with the power held individually;
  • A term in a trust instrument that attempts to relieve a trust director from liability for breach of fiduciary duty will not be enforceable to the extent that it would relieve the trust director from liability for acts committed in bad faith or with reckless indifference to the purposes of the trust or the interests of the trust beneficiaries, or if the term was inserted in the trust instrument as an abuse by the trust director;
  • But if the trust director is licensed or otherwise authorized to provide health care, the trust director will have no duty or liability for acts committed in that ‘health care’ capacity; [the physicians’ lobbyist was awake apparently]
  • An exercise of a power of direction under which a trust director could release a trustee or another trust director from liability for breach of trust is not effective if it involved bad faith or reckless indifference or if it was induced by the trustee’s or director’s improper conduct or if, at the same time of release, the director did not know material facts that related to the release;
  • A trust director who relies upon information provided by the trustee, or another trust director, is not liable for a breach of trust as long as the reliance is not in bad faith.
  • An action against the trust director for breach of trust will have to be commenced within the same limitations period as an action for breach of trust that would be brought against a similarly situated trustee. A report or an accounting given to trust beneficiaries would have the same effect on the limitation period for an action against the trust director for breach of trust that it would have against a similarly situated trustee.
  • If an action is brought against the trust director for breach of trust, the trust director can use the same defenses that a similarly situated trustee could raise.
  • By accepting appointment as a trust director, the trust director submits personally to the jurisdiction in Michigan with regard to matters that are related to his/her powers as a trust director.
  • All EPIC rules that are applicable to a trustee, like acceptance, provision of a bond, reasonable compensation, resignation, removal, appointment of successor, also will apply to a trust director.
  • EFFECTIVE DATE: If the trust was created prior to the Act, the Act will apply to decisions or actions that are taken on or after the date of change. If the trust’s principal place of administration is changed to Michigan on or after the Act becomes effective, the Act will only apply to decisions or actions taken on or after the date of change

III.SEVERAL CHANGES TO EPIC: ‘Trust director’ replaces ‘trust protector.’ A trust director must serve in a fiduciary capacity. A trust director’s place of business can be used to establish governing law of the trust.

  • TRUST DIRECTOR A FIDUCIARY: Some terms used in a trust instrument cannot ‘trump’ other provisions of the EPIC or the Michigan Trust Code- i.e. the Trust Code is more than just a set of default rules. The Michigan Trust Code imposes the law that governs a trust in certain areas, despite the settlor’s wishes to the contrary. The most important is that the trust director, formerly trust protector, serves as a fiduciary.
  • Definition: Trust director is now defined to be: “an organization permitted to exercise trust powers in this state as described in the Michigan Banking Code, or an individual if that person is granted a power of direction whether or not either of the following apply: (i) the terms of the trust refer to the person as a trust director; and (ii) the person is a beneficiary or settlor of the trust.”  This is a slightly different definition than what the Michigan Trust Code used for a ‘trust protector.’
  • EPIC PROVISION CHANGES:  While normally the terms of the trust instrument will prevail over EPIC provisions, some areas covered by EPIC cannot be negated by the trust instrument. Added to the list of topics under which EPIC will apply, regardless of the terms of the trust to the contrary, include: (i) the requirement to create a trust that the same person not be the sole trustee and the sole beneficiary; (ii) the obligations of a trust director which imposes the same rules, duties and liabilities on a trust director as they currently exist for a similarly situated trustee; (iii) the ineffectiveness of a release of a trustee or trust director if it involves their bad faith, reckless indifference, improper conduct, or lack of knowledge of a material breach of the trust; and (iv) the requirement and limitations with regard to the eligibility of a trust’s sole beneficiary to act as a separate trustee of his/her trust.
  • TRUST DIRECTOR CAN BE USED TO ESTABLISH TRUST SITUS: The terms of the trust instrument that designate the trust’s principal place of administration will control if the trust director’s principal place of business is located in, or if the trust director is a resident of, the designated jurisdiction. In other words, the trust instrument can use the trust director’s principal place of business or the trust director’s residence as the source of its governing law of the trust, both as to its legality and its administration.
  • TRUST DIRECTOR ENTITLED TO NOTICE IF TRUST MODIFIED OR TERMINATED: A notice is required to be given to the trust director and any person who is given a power under the terms of the trust if a proceeding is initiated to terminate or modify the trust. Thus, the trust director becomes an interested individual with regard to the trust.
  • NONLIABILITY OF TRUSTEE: Since the terms of the trust can relieve a trustee from the duty and liability of cotrustee with respect to another cotrustee’s exercise or nonexercise of a power to the other trustee, to the same extent the directed trustee may be relieved from any duty and liability with respect to another trust director’s exercise of a power of direction. The trust instrument can expressly relieve the trustee from the liabilities that are associated with the acts or omissions of other fiduciaries to the trust, which is also applied to trust directors.
  • VACANCY AUTHORITY MODIFIED: Eliminated is a prior provision under the Michigan Trust Code that allowed a remaining trustee or cotrustee to act for the trust if a vacancy in cotrusteeship in the trust occurred. A trustee does not automatically obtain the trust director’s powers if there becomes a vacancy in the trust director position.
  • REPEAL: MCLA 700.7809 which described the duties of a trust protector is repealed.

Conclusion: Those who have long advocated for the authority to use directed trusts in Michigan should be pleased with this new legislation. Candidly, however, it will take a lot of time to fully understand the implications of these three Bills which are now the law. These statutes will also require care and thought when drafting either adding a directed trustee, or a divided trustee, to an irrevocable trust. Old trusts that use the ‘trust protector’ terminology do not have to be amended to use the new ‘trust director’ term, but in light of the duties and responsibilities and limits on liabilities, assigned to a trust director or a directed trustee, it would be a good idea to review existing trusts that contain ‘trust protector’ powers. It will also be interesting to see over the next few years just how many settlors become enamored with the use of multiple ‘separate trustees’ each with their own discrete set of duties and responsibilities.  It’s a new world for trusts in Michigan, so take a big breath, and start to familiarize yourself with these new rules and opportunities.