Trust Modifications: The Material Purpose Limitation

September, 2017

Modern trust statutes provide several ways in which to modify an irrevocable trust. For example, in Michigan an irrevocable trust can be decanted to move its assets to a new trust that is created by the trustee. MCL 700.7820a. Additionally, Michigan’s version of the Uniform Trust Code also offers several other procedures that can be used to modify or terminate an irrevocable trust. An irrevocable trust that is created after April 1, 2010 can be modified in one of three ways: (i) by the probate court upon the consent of the trustee and all of the qualified trust beneficiaries if the probate judge concludes that the proposed trust modification is consistent with the trust’s material purposes; (ii) all of the qualified trust beneficiaries and a trust protector who is given the power under the trust instrument to approve or veto a trust modification consent to the proposed trust modification; or (iii) by a trustee or trust protector if the power of trust modification is given to either fiduciary under the trust instrument. MCL 700.7411.

The Michigan Trust Code thus gives to consenting qualified trust beneficiaries and the trustee the ability to modify the provisions of an irrevocable trust instrument, but only if the probate judge concludes that the proposed modification is consistent with the trust’s material purpose. The grant of that authority, however, seems to beg the question: What is a trust’s material purpose?

The Michigan Trust Code is primarily based upon the Uniform Trust Code, which in turn is mostly based upon the Restatement (Third) of Trusts. The Comments to that Restatement with regard to a trust’s material purpose provides only limited insight into the scope of that concept:

“Material purposes are not readily to be inferred. A finding of such a purpose generally requires a showing of a particular concern or objective on the part of the settlor, such as concern with regard to the beneficiary’s management skills, judgment, or level of maturity. Thus a court may look for some circumstantial or other evidence indicating that the trust arrangement represented to the settlor more than a method of allocating the benefits of property among multiple beneficiaries or a means of offering to the beneficiaries (but not imposing on them) a particular advantage. Sometimes, of course, the very nature or design of a trust suggests its protective nature or some other material purpose. “Restatement (Third) of Trusts, Section 65, comment (d).

Consequently, before an irrevocable trust can be modified by the qualified beneficiaries’ consent, the trust’s material purposes must first be identified.

Consider that much of the Michigan Trust Code consists of default provisions that apply only if the trust instrument is silent or the trust instrument itself does not provide for alternate provisions. Only a few of the Michigan Trust Code provisions cannot be altered or ignored by a trust settlor; those limited topics where a provision of Michigan’s trust law will prevail over the inconsistent terms of a trust instrument are listed in MCL 700.7105(2). Examples of statutory trust law provisions that prevail over the contrary terms of a trust instrument include: (i) a trust protector must always act in a fiduciary capacity; (ii) a trust must have a lawful purpose and not be contrary to Michigan public policy; and (iii) the trustee must provide beneficiaries with the terms of the trust and information about trust assets. But other than 16 topics identified in that Michigan ‘prevailing trust law’ statute, the balance of the Michigan Trust Code’s multiple provisions are optional and will not apply to a trust instrument unless the trust instrument is silent on the subject matter. If a trust instrument is silent on a topic which results in the Michigan Trust Code supplying the ‘default’ provision, can that ‘default’ statutory trust requirement morph into a material purpose implicitly availed of by the settlor and thus act to limit the ability to trust beneficiaries to consent to a trust modification? While the ability of the trust beneficiaries to consent to a modification of the trust instrument appears to have few, if any, limitations i.e. the proposed modification must only be consistent with the trust’s material purposes, there might be situations where other implied constraints exist to preclude the beneficiaries’ ability to consent to a trust modification even when the proposed modification appears to be compatible with the material purposes arguably expressed in the trust instrument.

Such was the result in a recently reported case from the Pennsylvania Supreme Court. In Trust Under Agreement of Edward Winslow Taylor, No. 15 EAP 2016, decided July 17, 2017, the Pennsylvania Supreme Court refused to grant a trust modification consented to by the trust beneficiaries, saying one thing yet implying another with respect to that trust’s material purposes. The facts dealt with a trust instrument that had been established 1928 and through the exercise of a power of appointment was extended to exist for 100 years. Over the decades the corporate trustee changed through multiple mergers and consolidations that ended in Wells Fargo Bank serving as the trustee at the time the beneficiaries’ modification was sought. The 1928 trust instrument was silent on the removal of the acting corporate trustee. The trust instrument only required that any successor trustee had to be a corporation that was authorized to conduct trust business in Pennsylvania. In their motion the trust beneficiaries did not expressly seek to remove Wells Fargo Bank as trustee, only to add a proposed administrative provision that would enable the beneficiaries to remove Wells Fargo Bank without cause. The beneficiaries sought to modify the existing trust instrument to add the following provision:

“From time to time and without cause the income beneficiaries who are then sui juris may remove any corporate trustee acting hereunder by a writing delivered to such corporate trustee stating the effective date of the removal….If the sui juris income beneficiaries exercise their power to remove a corporate trustee the sui juris income beneficiaries who consented to the removal shall thereupon appoint in writing a substitute corporate trustee.” (edited in part)

Pennsylvania, like Michigan, adopted its own version of the Uniform Trust Code. Unlike Michigan, which requires the consent of the trustee, Pennsylvania adopted the Uniform Trust Code’s model provision which permits trust modifications by unanimous consent of the trust beneficiaries [but no consent of the trustee] so long as the proposed modification is consistent with the trust’s material purpose (for ease, this will be referred to as Section 411.) This consent to modify the trust instrument was objected to by Wells Fargo Bank.

Also, like Michigan, Pennsylvania adopted another model Uniform Trust Code provision that addresses the removal of an acting trustee and the bases upon which a judge can remove an acting trustee. Both state statutes are based on the Uniform Trust Code Section 706 (for ease this will be referred to as Section 706.) The key section in both Pennsylvania and Michigan statutes reads as follows:

Section 706(2): The court may remove a trustee if 1 or more of the following occurs: (a) The trustee commits a serious breach of trust; (b) Lack of cooperation among cotrustees substantially impairs the administration of the trust; (c) Because of unfitness, unwillingness, or persistent failure of the trustee to administer the trust effectively the court determines that the removal of the trustee best serves the purposes of the trust; (d) There has been a substantial change of circumstances, the court finds that the removal of the trustee best serves the interests of the trust beneficiaries and is not inconsistent with a material purpose of the trust, and a suitable cotrustee or successor trustee is available. (See MCL 700.7706(2) for Michigan’s version.)

Wells Fargo Bank argued that the 1928 trust instrument could not be modified by beneficiary consent under Section 411 to give the trust beneficiaries the power to remove a trustee without a showing of good cause because that proposed trust modification was not permitted by the terms of Section 706. The Pennsylvania Supreme Court concluded that its Legislature, in adopting Section 411, did not intend that the ability of trust beneficiaries to modify a trust instrument by consent could negate the express trustee removal provisions of Section 706. The Court noted that if it permitted the trust beneficiaries to agree to modify their trust instrument as was proposed, that modification would “nullify or cancel the effectiveness of Section 706” which the Court noted contains “more onerous requirements for a trustee’s removal.” To reach this conclusion the Court stressed that it was required to read all statutory sections of Pennsylvania’s trust code harmoniously with one another, and that statutory sections are not to be construed in such a manner that one section operates or can be operated to nullify, exclude, or cancel another section, unless the statute expressly says so.

The Court also addressed another argument raised by the trust beneficiaries. Two states, Iowa and Ohio, have expressly added to their versions of Section 411 the optional Uniform Trust Code provision that prohibits trust beneficiaries to consent to modify an existing trust instrument to remove a trustee, which optional limitation under the Uniform Trust Code was missing in Pennsylvania’s version of Section 411 (nor is it in Michigan’s version of Section 411.) The beneficiaries argued that by not adopting that optional version of Section 411 with the added limitation that clearly restricts the trust beneficiaries’ ability to modify their trust instrument to remove a trustee without cause, the Pennsylvania legislature must have implicitly intended trust beneficiaries to hold that power via a Section 411 modification by beneficiary consent. The Court refused to adopt that reasoning and instead it concluded that the specific causes for removal of a trustee that are identified in Section 706, as determined by a judge, signified that the removal and replacement of a specifically acting trustee by consent would be inconsistent with a trust’s material purpose. Thus, the Court seemed to find a material purpose not emanating from the actual terms in the trust instrument the beneficiaries sought to modify, but from the explicit language included in the Pennsylvania ‘default’ statute that dealt with the removal of an acting trustee.

Section 706’s more rigorous trustee removal requirements took priority over the beneficiaries’ ability to modify their trust instrument by consent to permit a removal of a trustee by the beneficiaries without a showing of good cause. While Section 411 was silent as to any limitations imposed on the beneficiaries’ ability to consent to a trust modification, other than that the change could not defeat the trust’s material purpose, the Court found an implicit limitation to that consent in Section 706 applied to the trust as the equivalent of a material purpose that “prohibited the beneficiaries from eviscerating a more explicit provision in the same Trust Code.”

This apparent tension between Trust Code Sections 411 (the beneficiaries’ ability to modify the trust instrument by consent) and 706 (the specific grounds for which a trustee can be removed) was formally addressed in the drafters’ Comments to Section 411 the Uniform Trust Code:

Subsection (b) similar to the Restatement Third but not Restatement Second, allows modification by beneficiary action. The beneficiaries may modify any term of the trust if the modification is not inconsistent with a material purpose of the trust. Restatement Third, though goes further than this Code in allowing beneficiaries to use trust modification as a basis for removing the trustee if removal would not be inconsistent with a material purpose of the trust. Under the Code, however, Section 706 is the exclusive provision on removal of trustees. Section 706 recognizes that a request for removal upon unanimous agreement of the qualified trust beneficiaries is a factor for the court to consider, but before removing the trustee the court must also find that such action best serves the interests of all the beneficiaries, that removal is not inconsistent with a material purpose of the trust, and that a suitable trustee or successor trustee is available.

Fortunately Section 706 is a ‘default’ provision under the Michigan Trust Code, not a ‘prevailing trust law’ provision under MCL 700.7105(2) that must be followed. A trust instrument can be drafted in such a manner to so as to give the trust beneficiaries (or a trust protector) the ability to remove an acting trustee without a showing of good cause and without the approval of a probate judge.

The analysis provided by the Pennsylvania Supreme Court does however raise some question though whether other more explicit provisions in the Michigan Trust Code might act to constrain the ability of trust beneficiaries to consent to modify their trust instrument, even if the proposed modification does not interfere with the trust’s purported material purpose. Clearly the trust beneficiaries could not consent to modify a trust instrument to avoid the 16 ‘prevailing trust law’ requirements found in MCL 700.7105. More may also be required in a proceeding brought by trust beneficiaries under Section 411 to modify an irrevocable Michigan trust by their consent than just a judicial finding that the proposed modification is consistent with the trust instrument’s stated material purposes. There might also be a required judicial finding that the proposed trust modification by beneficiary consent does not “eviscerate another, more explicit, provision of the Michigan Trust Code” that either applies to the trust as a ‘default’ provision furnished by the Trust Code. In sum, despite the definition of a trust’s material purposes as described earlier in the Restatement (Third) of Trusts Comments, a probate judge may look beyond the express terms contained in the trust instrument to possibly find an implied material purpose.

WRITTEN BY:

George F. Bearup

Senior Trust Advisor

Before joining Greenleaf Trust in 2016, George Bearup practiced law in Michigan for over four decades, gaining prominence in trusts and estate planning. A longstanding Fellow of the nationally recognized American College of Trusts and Estates Council (ACTEC), he has been included on Best Lawyers in America for over 30 years, and the Michigan Super Lawyer list for more than a decade. George is a frequent author and speaker for the Institute of Continuing Legal Education, as well as a chapter author and former co-editor of the ICLE publication, Michigan Revocable Grantor Trusts (2d and 3d editions). His articles have been published in Michigan Bar Journal and Michigan Probate and Estate Planning Journal. George earned a B.A. from the University of Michigan magna cum laude, and a J.D. from Northwestern University School of Law, after graduating with honors.