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George F. Bearup, J.D. Senior Legal Trust Advisor

17-Jan-20

Who is a Qualified Trust Beneficiary and Why Does It Matter?

Take-Away: Michigan adopted the Uniform Trust Code’s (UTC) terminology of a qualified trust beneficiary although the UTC uses the slightly different term qualified beneficiary. The significance is that a qualified trust beneficiary is entitled to receive information with regard to a trust’s administration, such as annual trustee accountings. In addition, a qualified trust beneficiary also possesses legal standing to file a petition to challenge the trustee’s decisions with respect to a trust’s administration. While some qualified trust beneficiaries are easily identified, that definition can be vague in one definitional category, which sometimes leads to competing judicial interpretations of who is, and who is not, a qualified trust beneficiary with respect to enforceable rights under a trust.

Background: Michigan follows the Uniform Trust Code’s concept of a qualified [trust] beneficiary and specifies the rights to go along with that classification. For example, a trustee “shall 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).] Consequently, while many provisions of the Michigan Trust Code refer to a trust beneficiary others refer solely to a qualified trust beneficiary, which is why its definition is important.

Qualified Trust Beneficiary Defined: Michigan’s technical definition of a qualified trust beneficiary, MCL 700.7103(g), follows:

“Qualified trust beneficiary means a trust beneficiary to whom 1 or more of the following apply on the date the trust beneficiary’s qualification is determined:

  • The trust beneficiary is a distributee or permissible distributee of trust income or principal. [viewed as a current beneficiary who may currently receive a distribution from the trust]
  • The trust beneficiary would be a distributee or permissible distribute of trust income or principal if the interests of the distributees under the trust described in subparagraph (i) terminated on that date without causing the trust to terminate. [viewed as the next-in-line beneficiaries after the current beneficiaries]
  • The trust beneficiary would be a distributee or permissible distributee of trust income or principal if the trust terminated on that date.”

It is when ‘the trust terminates’ that has caused confusion among courts around the country when having to deal with which beneficiaries meet that final (iii) definition. This prospective definition of when the trust terminates in the future is used to determine who is a qualified trust beneficiary, today with specific rights, which is where the problem arises.

Permissible Distributee: The Michigan Court of Appeals, not the Michigan Trust Code, has defined the technical term permissible distributee, to mean a person who is permitted to receive trust property from the trust, other than a creditor or purchaser who is not entitled to receive trust property. In re Rhea Brody Living Trust dated January 17, 1978 (August 7, 2018.)

Who is Covered as a Qualified Trust Beneficiary?: As a generalization, what this technical definition includes are (i) current trust beneficiaries who are eligible to receive distributions; (ii) what are called ‘first line’ remainder beneficiaries of the trust who are entitled to receive trust property after the current trust beneficiaries; and (iii) terminal remainder trust beneficiaries. However, this last generalization with regard to a terminal distributee when the trust terminates can be deceiving, or at least it seems to be confusing to probate courts around the country.

Powers of Appointment: The Michigan Trust Code’s definition excludes a power of appointment holder as a qualified trust beneficiary. That said, a power of appointment holder is entitled to the rights of notice as a qualified trust beneficiary. A person who is a potential appointee of a power of appointment is neither a trust beneficiary nor a qualified trust beneficiary under the Michigan Trust Code just because they are within the class of individuals in whose favor a power of appointment could be exercised by the power holder.

Trust Termination: The challenge to identify who is a qualified trust beneficiary on the trust’s termination seems to bedevil courts around the country.

  • Example: A trust instrument directs the trustee to pay income to Alex for life [current trust beneficiary], then the trustee is directed to pay income to Ben for life [first line remainder trust beneficiary], then ‘it’s principal is to be distributed to Charlie’ [but the trust does not say ‘terminate’]. Does the trust ever terminate? It seems obvious to most of us, but some courts might actually say ‘no.’

Question:  In the example, Alex is a qualified trust beneficiary under (i). Ben is a qualified trust beneficiary under (ii). Whether Charlie is a qualified trust beneficiary under (iii) is more difficult to determine as it turns if/when the trust terminates, since the trust instrument does not say ‘terminate.’ In addition, sometimes a trust can terminate ‘early’ upon some intervening circumstances. For example a trust can be terminated ‘early’ under the Michigan Trust Code due to unforeseen circumstances [MCL 700.7412] or because it is uneconomic [MCL 700.7414]. In these situations, the trust’s assets are distributed either pursuant to the order of the probate judge, or possibly solely to the current trust beneficiaries, or consistent with the purposes of the trust, or in proportion to the actuarial interests of the beneficiaries. In short, there is no guaranty that the last-in-line named trust beneficiary in the trust instrument will ever be entitled to receive the trust’s assets. Yet the Michigan Trust Code assigns the rights [and the trustee’s affirmative duties] to a qualified trust beneficiary with reference to a trust’s termination, which can be elusive.

Dynasty Trust: What if the trust is a dynasty trust for Alex, Ben, and Charlie where the trust’s termination is remote (or never if established in a jurisdiction that repealed the rule against perpetuities?) The UTC’s identification of a qualified beneficiary, or Michigan’s qualified trust beneficiary, either of which is tied to the trust’s termination was written before dynasty trusts became popular.

What is a Trust?: When confronted with the question of when a trust terminates, which effectively identifies who is a qualified trust beneficiary who is entitled to information with regard to the trust’s administration, or who has legal standing to challenge the trustee’s actions, courts have not consistent as to what trust we look to in order to identify the qualified trust beneficiary under (iii) of the statutory definition.

  • Legal Standing: A Florida court held that a settlor could not eliminate the rights of successor beneficiaries by providing in the instrument that the trust ‘terminates’ before assets pass to the remainder beneficiaries. In Rachins v. Minassian, 251 So.3d 919 (Fla. Dist. Ct. App. 2018), the trust permitted distributions only to the settlor’s wife during her life. After the wife’s death, the ‘trust will terminate and any property remaining will be divided into separate trust shares for each of the settlor’s children.’ The children filed a complaint against the wife with regard to her administration of the trust as its trustee. The wife claimed that the children did not have legal standing because they were not qualified beneficiaries because the trust would terminate at the wife’s death. The wife even went so far as to appoint a trust protector to amend the trust to clarify that any property remaining in the trust on her death would be distributed to a ‘new trust’ to be created (at that time) for the benefit of the children. The children argued that the trust provision did not create a ‘new’ trust but instead created separate shares for each of them in the existing trust on the wife’s death. The trial judge found the children were qualified beneficiaries under Florida’s version of the UTC under subsection (iii) because they would be distributees of the trust principal if the trust terminated according to its terms. Therefore, the children had legal standing to challenge the actions of the trustee.
  • Legal Standing: In contrast, in a Kansas court decision, the successor beneficiary argued that the trust would terminate at the death of the current beneficiary and that subsection (iii) applied to entitle the successor beneficiary to be a qualified beneficiary. The judge rejected this argument. The trust provided for distributions to a Ms. Wills for life, then distributions to her son, Mr. Kastner for life. [Kansas’ statute omits (ii.)] Mr. Kastner claimed legal standing and he sought the removal of the trustee, or modifications of the trust. Unlike the children in the Rachins decision, Mr. Kastner argued that his mother’s trust would terminate on her death, which would make him a qualified beneficiary under (iii). The judge disagreed. The judge did not view Ms. Wills’ death, followed by the continuation of the trust for Mr. Kastner’s benefit as a ‘termination’ of the trust. In its decision, the court found that Mr. Kastner was entitled to distributions only after the death of his mother. “As such, [he] is not currently entitled to any distributions and [he] would not currently be eligible for a distribution if the trust terminated on this date…[He] contends that he would be entitled to distributions if the trust terminated with the death of Ms. Wills. However, the trust would not terminate on the death of Ms. Wills, but rather, it would continue on for [his] benefit.”  Kastner v. Intrust Bank, No. 10-1012-EFM, 2011 WL 2149432, 569 F. Appx 593 (10th Cir 2014). As a successor lifetime beneficiary, Mr. Kastner did not have legal standing to petition the court for the removal of his mother as trustee.
  • Right to an Accounting: How to determine when a trust terminates, when are there separate trusts created under the instrument, and when is there a single trust? In Hadassah v. Melcer, 268 So. 3d 759 (Fla Dist. Ct. App. 2019) three sisters were the current distributees of an irrevocable trust created by their mother for the lifetime benefit of their father. At their father’s death, the balance of the trust “was to be divided into three separate trusts for the benefit of [our] daughters. Upon the death of each daughter, her trust terminates and the balance of the principal and any undistributed income is redistributed to the trust(s) of the remaining living daughters. When the last daughter dies, the trust terminates, and passes to charities.”  The question before the court was whether the trustee had to account to the charities- were the charities qualified beneficiaries under the (iii) UTC and statutory definition of a qualified beneficiary, and thus entitled to the trustee’s accountings? The trial judge found that “Each daughter is the sole distributee or permissible distributee of her separate Trust. Upon the termination of each daughter’s separate trust, the only distributee or permissible distributee of the trust income or principal would be the Trusts created herein for grantor’s surviving daughters, in equal shares, of the Trust of the sole surviving daughter, as the case may be.” In other words, the charities would not fall within the subparagraph (iii) definition, as there was no trust termination. The appellate court disagreed and found the charities to be qualified beneficiaries under Florida’s version of the UTC. “If the interests of the distributees of the trust were simultaneously terminated, all of the daughters’ interests would terminate and the charities would be the distributees. Therefore, the charities are qualified beneficiaries under the statute.”

Conclusion:  What these reported cases suggest is that courts tend to struggle to determine what constitutes ‘the trust’ when applying subsection (iii) in order to identify who is a qualified trust beneficiary who possesses legal standing to challenge a trust’s administration and who is entitled to trustee reports and accountings with regard to the trust and it’s administration tied to when the trust ‘terminates.’ The judicial focus on the trust’s ‘termination’ suggests that how a trust instrument is drafted can also affect the question as to who (or what) is a qualified trust beneficiary. Apparently, some judges will look for the actual use of the word ‘terminate’ and use that word to then identify who fits within the classification as a qualified trust beneficiary. However, who is to receive the trust principal if the trust ‘terminates’ will depend as well on the circumstances that surround the reason for the trust’s termination. As simple a concept as ‘trust termination’ seems to be, apparently it is not so obvious to judges, or trustees, who must use a future ‘termination’ of the trust as the basis to identify who is a present qualified trust beneficiary for purposes of giving notices and furnishing annual accountings. Maybe when the Uniform Law Commissioners start their next review of the Uniform Trust Code later this year, this section defining qualified [trust] beneficiaries will be reconsidered.