Update on Estate Planning in Michigan

Take-Away: The Michigan State Bar Journal devoted its November issue to an update of several estate planning topics, addressing: Asset Protection Trusts, Financial Powers of Attorney, the proposed Uniform Directed Trust Act, Exempt Property Allowances to surviving children, and Litigating the Presumption of Undue Influence. A few key points extracted from these articles are summarized below.

Asset Protection Trusts (Rob Tiplady, Ann Arbor): Rob points out that while a qualified dispositions in trust is a helpful tool in an estate planner’s toolbox, not every client will either need or want an asset protection trust. Individuals have to understand that they will be giving up considerable control over the assets that they transfer to an asset protection trust, and if they are unwilling to relinquish that requisite high level of control, e.g. the settlor can neither serve as trustee nor direct distributions from the trust, then an asset protection trust is not appropriate. Rob points out three important trust drafting suggestions:

Continuing Trusts: Only a few basic requirements are needed to establish an asset protection trust in Michigan. The trust must incorporate Michigan law, it must be irrevocable, it must have a qualified trustee, and it must contain a statutory spendthrift provision that references the bankruptcy code’s restrictions on involuntary transfers from an irrevocable trust. Rob points out that even if a trust does not start out as an asset protection trust, the trust instrument might be drafted (governing law, statutory spendthrift clause) so as to meet the Act’s requirements after the settlor’s death, in order to provide the trust beneficiaries additional protection from the beneficiary’s creditors- meaning the continuing trust for beneficiaries will be classified as a qualified dispositions trust. That opportunity to furnish trust beneficiaries with asset protection features will require some additional provisions to the trust instrument.
Restricting Settlor’s Rights: The statute limits the rights, powers and interests that the transferor of property to the trust, or those who are related or subordinate to the transferor, may hold. The related or subordinate to prohibition primarily means a family member or employee of a business where the transferor is an executive or owner. The statute’s restrictions are vaguely drafted, unfortunately. The transferor (or those related persons) may not hold a power to consent, approve or veto investment decisions. But the transferor (or those related persons) may direct investments. Additionally, the transferor (or those related persons) may not hold the power to direct, consent, or approve distributions decisions, but they may veto distribution decisions. Because of these express provisions in the Qualified Dispositions in Trust Act, the trust instrument must clearly state that the individual may only direct investment decisions (not veto) and may only veto distribution decisions (not direct.)
Illegal Activity: Rob raises one final interesting observation. As a general rule the individual who creates an asset protection trust should file a qualified affidavit of solvency. One of the statute’s requirements is that the affidavit must attest that the assets to be transferred to the asset protection trust are not the product of any illegal activity. One activity that may be legal under Michigan law, but remains illegal under federal law, is operating a medical marijuana dispensary. There is no statutory definition of what constitutes an illegal activity.

Financial Durable Powers of Attorney (Nancy Little and Molly Petitjean, East Lansing): The powers granted under a durable power of attorney are strictly construed; general powers are limited to those necessary to effectuate the specific purposes described in the power of attorney instrument. As a result, powers granted to the agent need to be carefully drafted so that the powers the principal intends to include are specifically enumerated or can be implied as ‘necessary to effectuate’ the enumerated powers. This is particularly important when it comes to the ability to make gifts. In Michigan, but not in all states, the power given to the agent to make gifts must be expressly granted- it will not be implied. This general rule was on full display last year in the infamous Powell Tax Court decision, where the agent’s transfer of $10 million of the principal’s assets to a charitable lead trust was set-aside because the agent only possessed the power under his mother’s durable power of attorney to make annual exclusion gifts. This article contained a couple of references to Michigan’s Estates and Protected Individuals Code [MCL 700.5501 to 5505] of clarification:

Disclaimers: One statutory exception to the general rule of strict construction of a durable power of attorney is the agent’s authority to disclaim. Unless the durable power of attorney instrument expressly denies the agent the right to disclaim, the right to disclaim by the agent under the durable power of attorney exists notwithstanding the existence of a spendthrift clause or similar restriction in the instrument in which the property interest is created. [MCL 700.2902(2).]
Self-Dealing: The agent who acts under a durable power of attorney is a fiduciary, and therefore must act with the standard of care of a fiduciary, except as otherwise expressly provided in the durable power of attorney. EPIC specifically prohibits any self-dealing on the part of a fiduciary absent an express authorization to the contrary in the governing instrument. [MCL 700.1214.] Consequently, if the principal intends to give the agent the power to make gifts to the agent using the principal’s assets, or to make the principal’s assets joint with the agent, or for the agent to name themselves as the beneficiary under the principal’s IRA or under a POD or TOD account, that self-dealing must be expressly authorized in the durable power of attorney instrument- otherwise the actions taken by the agent will be treated as a voidable transfer.

Proposed Uniform Directed Trust Act (Jim Spica, Detroit): This proposed Bill would adopt a version of the recent Uniform Directed Trust Act (UDTA.) If adopted, it will change the treatment of powers to direct trustees of express trusts by changing the scope of the Trust Code’s imposition of duties on the holder of such powers and by changing the circumstances in which a trustee who is subject to such direction can be liable for (i) doing as the power holder directs or (ii) for doing nothing (if that is what the trust instrument that creates the power contemplates) when directions from the power holder are not forthcoming. In general, a trustee acts at his/her own peril when following a trust protector’s direction if the direction constitutes ‘a breach of a fiduciary duty that the trust protector owed to the trust beneficiaries.’ [MCL 700.7809(4)(b).] The statutory duties include: (i) the trustee’s duty to second-guess the trust protector- MCL 700.7809(4)(b); (ii) the minimum duties of a trustee- MCL 700.7801; (iii) limiting exculpation from liability of trustees- MCL 700.7908(1)(a); and (iv) duties and limitations, imposed by MCL 700.7801 and 700.7908, not to be subverted by the terms of the trust- MCL 700.7105(2)(b) and (k). The proposal thus permits a settlor to decisively relieve a trustee who is subject to a power of direction from potential liability for failing to second-guess the power holder; therefore, it changes the scope of the Michigan Trust Code’s duties on holders of powers to direct a trustee, and it also changes the circumstances in which a trustee who is subject to direction can be held liable for doing as the power holder directs.

Adjusting the Professional Trustee’s Standard Fee: Jim’ article concludes: “By requiring trustees who are subject to direction to second-guess the holders of powers to direct regardless of what the terms of the trust say, the Michigan Trust Code currently forces professional trustees to discount the settlor’s divisions of fiduciary labor as schemes of fiduciary-risk allocations and thereby frustrates real market incentives for price differentiation. The proposal’s version of the UDTA will allow those market incentives to operate by letting settlors waive a directed trustee’s obligation to supervise power holders.” In short, the directed trustee that charges a standard fee may reduce that fee somewhat if fiduciary risk is allocated to the trust protector and away from the directed trustee.

Statutory Allowances (Nathan Piwowarski, Cadillac): Nathan’s article reminds us that sometimes a testator’s intent will not control a Will, despite what the common law otherwise tells us. The state legislature recently enacted an amendment to the Estates and Protected Individuals Code (EPIC) in response to the reported Court of Appeals decision In re Jaguga Estate, 312 Mich App 706 (2015.) That court decision held that the exempt property allowance of EPIC is a vested property right that supersedes a disinheritance clause in the testator’s Will. The remedial legislation, 2018 PA 143, effective August 8, 2018, permits a testator to exclude a child, if there is no surviving spouse, from receiving an exempt property allowance. [MCL 700.2404(4) was added.] This exempt property allowance, along with the homestead allowance and family allowance provided by statute, is paid even if the decedent’s estate has unsecured debts. The reason why this remedial legislation was pursued was because: (i) the child might have severe creditor problems; (ii) the child might have been expressly disinherited due to self-destructive behaviors; (iii) the child might have received assets on the decedent’s death ‘outside’ the Will, e.g. POD or TOD or IRA designations, such that giving the child an exempt property allowance ($15,000) would be a windfall; (iv) the child may have received substantial lifetime gifts, i.e. received their inheritance while the testator was still alive; or (v) the child might be the recipient of governmental benefits due to special needs, which means that the receipt of the exempt property allowance might jeopardize the child’s entitlement to continue to receive those governmental benefits. This statutory amendment applies to both minor and adult children.

Effective Date: Since an exempt property allowance vests at the moment of the decedent’s death [MCL 700.3101] this amendment will apply to estates of decedents who died on or after the act’s effective date- August 8, 2018.
Spousal Allowance: A testator still cannot exclude a surviving spouse from receiving an exempt property allowance. The legislative amendment only applies to children. Disinheriting a spouse will require compliance with the certification process described in MCL 700.7606(1.)
Drafting Suggestions: Nathan suggests that a best practice would be to specifically invoke MCL 700.2404(4)(b) when the decision is made to exclude a child from claiming an exempt property allowance. If a revocable trust is the centerpiece of an estate plan, a child might still open a probate estate for the sole purpose of claiming an exempt property allowance, which will then be certified to the trustee of the trust to satisfy as a claim against the decedent’s estate. In order to prevent that ‘back-door’ to claim an exempt property allowance using trust assets to satisfy, the statutory exclusion provision just suggested should also be added to the decedent’s pour-over Will to his/her trust.

Litigating the Presumption of Undue Influence (David Skidmore, Grand Rapids): David’s article is a reminder that establishing an evidentiary presumption of undue influence is not a ‘one-and-done’ approach when the validity of a Will or Trust is challenged. The existence of three evidentiary facts will give rise to a presumption of undue influence (an inference): (i) the existence of a confidential or fiduciary relationship between the grantor and a fiduciary; (ii) the fiduciary (or an interest which he/she represents) benefits from the transaction; and (iii) the fiduciary had an opportunity to influence the grantor’s decision in that transaction. A marital relationship is not a confidential relationship for purposes of applying this evidentiary presumption. Nor will undue influence be inferred from evidence of opportunity (to influence) standing alone. The key point to this article is that providing evidence that establishes a presumption of undue influence only affects the burden of production but it does not affect the contestant’s ultimate burden of persuasion. Thus, the person who challenges the validity of a Will or Trust by claiming that it was the product of undue influence still has the ultimate burden of proof or persuasion; it does not shift to the proponent-party (that the Will or Trust is valid) to disprove undue influence. Whether the presumption of undue influence is rebutted is a question that is resolved by the finder of fact (judge or jury.) Note that the contestant’s burden of persuasion can actually be satisfied by the proponent’s failure to meet its corresponding burden of production when the proponent responds to the contestant’s burden of production which is satisfied with the legal presumption (inference) of undue influence.

Other Evidence: Michigan has a history of reported court decisions that identify facts that have held undue influence which may be proven by other types of circumstantial evidence other than the three factors that give rise to the legal presumption of undue influence arising from a confidential relationship.
Jury Instruction Change: In 2014 the State Bar’s Committee on Model Civil Jury Instructions considered revisions to the standard jury instruction with regard to undue influence in Will and Trust contests. That Committee ultimately deleted the instructions with regard to the significant of the three factual elements, described above, that give rise to the presumption of undue influence in the context of fiduciary relationships. [M Civ JI 170.45, 179.25.] No replacement jury instructions were added.