Take-Away: A trustee’s duty to annually communicate and account seems to be expanding to potentially peripheral persons, called potential distributees, who may or may not, ever benefit from a Trust.

Background: There is increasing discussion in some estate planning circles that Michigan should amend its Trust Code to permit silent or secret trusts, comparable to what is offered in other trust-haven states like South Dakota or Delaware. To that end, the State Bar Probate and Estate Planning Council has been looking at some proposed legislative changes to the Michigan Trust Code that would authorize some form of a silent or secret trust that would enable the trustee to keep trust beneficiaries ‘in the dark’ for an extended period of time before they learned of the existence of the trust or the value of assets held in the trust established for their benefit. While there is no assurance that Michigan will some future day authorize silent trusts, Michigan courts continue to find that trustees have an expansive duty to  communicate to trust beneficiaries or distributees of the existence of the Trust and its administration- more communication, not less.

Michigan Trust Code: In Michigan, a trustee is required to “keep the qualified trust beneficiaries reasonably informed about the administration of the trust and of the material facts necessary for them to protect their interests.” [MCL 700.7814(1).]

Non-modifiable: This is one of the rare provisions of the Michigan Trust Code that cannot be altered by the terms of the Trust. [MCL 700.7105(2)(i).]

Nonqualified Trust Beneficiaries: In addition, a trustee is required to promptly respond to a nonqualified trust beneficiary’s request for information that is reasonably related to the administration of the trust. As such, this statute that compels a trustee to communicate covers both (i) qualified trust beneficiaries- [defined at MCL 700.7103(g)]; and (ii) nonqualified trust beneficiaries, for which there is no statutory definition, i.e. a person who does not fit within the three described subcategories in the qualified trust beneficiary definition.

Distributees: Moreover, a trustee’s statutory duty to communicate extends to more than just the trust’s beneficiaries- it also includes a duty to communicate with (iii) distributees from the trust [defined at MCL 700.1103(o)] and (iv) permissible distributees from the trust, for which there is no statutory definition.

“A trustee shall send to the distributees or permissible distributees of trust income or principal, and to other qualified or nonqualified trust beneficiaries who request it, at least annually and at the termination of the trust, a report of the trust property, liabilities, receipts, and disbursements, including the source and amount of the trustee’s compensation, a listing of the trust property and, if feasible, their respective market values and, if applicable, any disclosure required under section 7802(5). In the trustee’s discretion, the trustee may provide the report to any trust beneficiary…” [MCL 700.7814(3).]

Four Classes: To reiterate, there are four classes of persons who are entitled to some form of accounting from a trustee under MCL 700.7814: (i) distributees (defined); (ii) permissible distributees (not defined); (iii) qualified trust beneficiaries (defined); and (iv) nonqualified trust beneficiaries (not defined.)

Rhea Brody Trust: However, in a 2018 Michigan Court of Appeals decision, In re Rhea Brody Living Trust (on remand) 325 Mich App 476 (2018), the Court interpreted a permissible distributee to mean a person who is permitted, but not entitled, to receive trust property from the trustee other than as a creditor or purchaser.

These four categories that apply to a trustee’s duty to communicate were at the forefront of a recent Michigan Court of Appeals decision, where the trustee was found to have failed to comply with the Michigan statute with respect to communications delivered to permissible distributees.

In re Henry Hawkins Memorial Family Educational Trust, Michigan Court of Appeals No. 359029 (November 17, 2022)

Facts: In 1995 Mr. Hawkins executed a Will  under which he established a $100,000 from his estate as a testamentary Trust. The Trust was to be for the use and benefit of lineal descendants of three of Mr. Hawkins’s family members- the number that fell within this class was not described in the Court’s decision. Specifically the testamentary Trust  was to be used for “the purpose of giving financial assistance to qualified lineal descendants who wish to obtain a post-high school education, either at a trade or technical school, a two year college, a 4-year college, or a graduate or professional school.” The trustee was given broad discretion to administer the funds, including to whom the educational distributions would be awarded, how much, and when. Mr. Hawkins died in 2001. This testamentary Trust was to continue for a fixed 20 years after Mr. Hawkins’s death, at which time the Trust was to terminate. For the next 20 years this Trust was administered by the trustee and distributions were periodically made to  some lineal descendants in the trustees’ discretion for their education. When the Trust finally terminated in 2021, some of the lineal descendants within the described class, sought an accounting-on-termination from the trustees, claiming that they never received any accountings during the 20-year existence of the Trust.

Probate Court: The probate judge denied the petitioners’ claim for an accounting from the trustee on the grounds that the petitioners were qualified trust applicants but not qualified trust beneficiaries.

Appeals Court: The Michigan Court of Appeals reversed the probate court decision. The case was returned to the probate court with the direction to the trustees to provide an accounting to the petitioners.

MTC Liberally Construed: The provisions of the Michigan Trust Code must be liberally construed and applied to promote its underlying purposes and policies, including to discover and make effective a decedent’s intent in distributing the decedent’s property.

Permissible Distributee: Because one of the lineal descendants [Sierra] was not entitled to a distribution (although she received a couple of distributions for her education from the Trust) she was therefore a permissible distributee. [MCL 700.7814(3).] As a permissible distributee Sierra “was supposed to receive annually and at the termination of the Trust a report of the trust property, liabilities, receipts, and disbursements, including the source and amount of the trustee’s compensation, a listing of trust property and, if feasible, their respective market values.

“Both appellants [petitioners] are permissible distributees under the Trust, as well as qualified trust beneficiaries. First, appellants are ‘trust beneficiaries’ under MCL 700.7103(l)(i) because they have a contingent present or future beneficial interest in the Trust. See In re Rhea Brody Living Trust (defining beneficial interest as ‘a right or expectancy in something such as a trust or an estate, as opposed to legal title to that thing.’) Appellants’ interest was contingent and not vested, because their request for assistance had to be approved by the trustees. Moreover, as explained above, appellants are permissible distributees under MCL 700.7814(3), thus making them qualified trust beneficiaries under MCL 700.7103(g)(i).”

“Although appellants received some documentation of the Trust in the form of bank records, there is no dispute that appellants did not receive, at a minimum, the ‘disbursements’ made by the trustees to other financial assistance applicants.”

Observation: Consider how the Trust instrument in Hawkins did not identify individuals by name who might benefit from the Trust for 20 years. Instead, they were described as within a class, i.e. lineal descendants of three named individuals. Since any member of the class might have received a distribution from the Trust for their education, each member of that class was within the definition of permissible distributee, and thus each member of the class was entitled to an annual accounting from the trustee, which would include an annual  disclosure of what other members of the class had received as an educational distribution from the Trust. The trustee thus had a duty to determine, not only at the settlor’s death, but an on-going duty to determine, who is within the class, whether or not a distribution is made from the Trust to that member, as well as send an annual accounting to each of those class members. More burden is thus imposed on the trustee to monitor and verify the growing (or shrinking) members of the class of potential distributees, as well as more expense incurred in administering the Trust if annual accountings must be mailed to each member of the class who is a potential distributee.

Conclusion: As some members of the Michigan bar now seek to curtail a trustee’s duty to disclose the terms of a Trust and hide the Trust’s administration from beneficiaries for some period of time, e.g. impressionable grandchildren of a multi-million dollar dynasty trust, Michigan Courts are going in the opposite direction to expand the group of individuals who are entitled to annual accountings from the trustee with regard to the Trust’s administration. It will be interesting to see how this all plays out in the next few years. My guess, for what it is worth, is that we won’t see silent trusts come to Michigan in the near future.