Trust Material Purposes: In the Eye of the Beholder

Take-Away: Under Michigan’s Trust Code, the presence of a spendthrift provision in the trust instrument is generally considered to be a material purpose of the trust, thus controlling to some extent any efforts to subsequently modify the trust. Modifications, or terminations, of a trust must be consistent with the trust’s material purposes. What the trust’s material purpose(s) is can be subject to debate.

Background: Much of Michigan’s Trust Code is based upon the Uniform Trust Code (UTC.) There are, though, some departures, making some of Michigan’s provisions unique to Michigan. The Michigan Trust Code, following the UTC, does indicate that a modification or termination of an irrevocable trust must not interfere with the trust’s material purposes. [Nonjudicial settlement agreements, MCL 700.7111(2); modification or termination, MCL 700.7411(1)(a); modification or termination on unanticipated circumstances, MCL 700.7412(2).]

Restatement (Third) of Trusts: Much of the UTC, and thus Michigan’s Trust Code,  is based upon the Restatement (Third) of Trusts.  That Restatement asserts that a trust’s material purpose is not to be readily inferred. Rather the trust instrument must exhibit a ‘particular concern or objective’ of the settlor to qualify as its material purpose. The Restatement seems to encourage a settlor to include language in the trust instrument that summarizes the settlor material purposes so that a probate judge will not have to determine (or guess) if an material purpose exists: In this regard, the Restatement makes the following observation:

“The line is not always easy to draw between a ‘material purpose’ on the one hand, and, on the other, specific intentions that are deemed less important so that the Claflin doctrine does not protect them. Occasionally, a settlor expressly states in the will trust agreement, or declaration of trust that a specific purpose is the primary purpose or a material purpose of the trust. Otherwise, the identification and weighing of purposes under this Section frequently involve a relatively subjective process of interpretation and application of judgment to a particular situation, much as the purposes or underlying objectives of settlors in other respects are often left to be inferred from specific terms of a trust, the nature of the various interests created and the circumstances surrounding the creation of the trust.” [Restatement, Section 65, comment (d).]

Other comments from the Restatement suggest that some common provisions found in a trust instrument will not rise to the level of a trust’s material purpose, yet other provisions might suffice as a material purpose  that would be sufficient to prevent a modification or termination of an irrevocable trust.

Spendthrift Provision: The Restatement does not readily infer a trust’s material purpose with respect to the presence of a spendthrift provision. Specifically, the Restatement’s comments seem to dismiss the  importance of a spendthrift provision in a trust:

“Nevertheless, spendthrift restrictions are not sufficient in and of themselves to establish, or to create, a presumption of, a material purpose that would prevent termination by consent of all beneficiaries… A spendthrift clause may be included as a routine or incidental provision of a trust (unimportant or even unknown to the settlor) as a part of a trust established for tax purposes, merely to provide successive enjoyment, or for other reasons not inconsistent with allowing premature termination upon application of all beneficiaries. Thus, for example, the fact that a lawyer had explained the effect and advised the inclusion of a spendthrift provision is not alone sufficient to establish that it represents more than an advantage that the beneficiaries are free to relinquish by consenting to the termination of the trust.” [Restatement 65, comment e.]

Discretionary Trusts for Support: With respect to a discretionary trust for the beneficiaries’ support, the Restatement notes:

“Similarly, discretionary provisions, like other provisions involving successive enjoyment may represent nothing more than a settlor’s plan for allocating the beneficiaries of his or her property flexibility among various beneficiaries rather than revealing some significant ‘concerns or protective purposes’ of the settlor that would prevent the beneficiaries from joining together to terminate a trust and divide or distribute the property as they wish under the rule of this section. This is particularly so when the trust is created to provide, as needed, for the life beneficiary’s support and care, with remainder to others….The mere fact that the settlor has created a trust for successive beneficiaries does not prevent the beneficiaries from terminating or modifying the trust to reallocate the beneficial interests among themselves if they wish to do so. A trust plan to provide successive enjoyment is not itself sufficient to indicate, for example, that the settlor had a material purpose of depriving the beneficiaries of the property management or otherwise of protecting them from the risks of their own judgment. In the absence of additional circumstances indicating a ‘further purpose’, the inference is that the trust was intended merely to allow one or more persons to enjoy the benefits of the property during the period of the trust and to allow the other beneficiary or beneficiaries to receive the property thereafter.’ [Restatement 65, comment d.]

Removal of Trustee: It is possible, however, that naming a particular trustee could be considered a trust’s material purpose. On this topic, the Restatement observes:

Many trusts, however, have a broader discretionary purposes and beneficiary classes. The nature of the interests and terms of trusts of this latter type may, without more, justify a finding that it was a significant or ‘material’ purpose of the settlor to secure the ongoing, flexible (and possibly expert) judgment of the trustee regarding the amount, timing, and recipients of distributions over the duration of the trust, as circumstances and opportunities might develop…”

The Restatement accordingly encourages a court to proceed with caution when it considers a proposed trust modification that would involve a change in trustee because the settlor’s choice of a trustee may, in fact, be a material purpose. This might be the case when the trustee is independent or the trustee possesses some qualities, or when the trust instrument fails to contain a ‘no-fault’ trustee removal provision. In this situation, the Restatement encourages the judge to scrutinize and be sympathetic towards the settlor’s initial choice of trustee. [Restatement, 65, comment t.]

Material Purpose Provision: All of the above is a prelude to my ‘pet peeve’ that all trust instruments should contain a material purpose provision, to help guide not only the trustee, but also a probate judge who may be called upon in later years to consider either trust modification or a premature termination of the trust.

• Definition: The trust instrument might define material purpose as:

Material purpose is significant or primary to me with regard to the creation and administration of this Trust. The material purposes listed in this Trust are not exclusive, and a court may determinate that any concerns or objectives of mine that are significant or primary to me with regard to the creation or administration of this Trust, or any sub-trust under this Trust, are a material purpose.

• List of Material Purposes: The trust instrument might then list several different material purposes. A few examples follow:

List of Material Purposes: Each of the following is a material purpose of this Trust: My objectives and material purposes under this Trust include:

• To treat each trust created and administered under this Trust as a spendthrift trust so that any beneficial interest in that trust will not be transferred voluntarily or involuntarily, will be free from the claims of a beneficiary’s creditors, and will not be treated as marital property subject to division on a beneficiary’s divorce, to the greatest extent permitted by applicable law.
• To prevent a beneficiary of a trust administered under this Trust from contesting the validity, construction, or administration of that trust, unless applicable law allows that contest.
• To have each trust created under this Trust exist for the entire life or lives of the beneficiary or beneficiaries of that trust.
• To eliminate or minimize the imposition of any transfer tax, capital gains tax, income tax, or any other tax on a trust created and administered under this Trust, or that trust’s assets upon the death of any beneficiary of that trust.
• To maintain the discretionary distribution standards and powers of appointment for each trust created and administered under this Trust, unless a modification or reformation would foster or enhance another material purpose that is applicable to that trust.
• To have the Trustee consider whether a beneficiary has complied with the Trustee’s requests to complete or to forego certain actions before the Trustee makes any distribution from a trust to or for that beneficiary.

Conclusion: If a settlor lists those material purposes in their trust instrument, that will avoid the time and expense of a probate court proceeding to construe the settlor’s intent as to whether the trust’s purpose is material under the Michigan Trust Code. Such a list might also go a long way in explaining to the trust beneficiaries why the settlor chose to use a trust to hold and disburse their inheritance. In short, trustees need all the help that they can get in administering a trust, and a list of the settlor’s objectives and material purposes can go a long way in assisting the trustee is carrying out its fiduciary duties under the trust.