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Introduction. The subject of this month’s newsletter is dull!! If you don’t advise clients about their trusts and if
you are not a professional trustee, you may not want to read any further.
The Michigan Uniform Principal and Income Act (UPIA) was signed by the Governor June 18, 2004 and goes
into effect September 1, 2004 and is reported as Act No. 159, Public Acts of 2004. It repeals the earlier statute
of the same title adopted in 1965.
Why Is UPIA Important To Clients? Clients who are the beneficiaries of trusts that are now irrevocable
because a spouse or relative has died will be interested in the new statute because it may affect the amount
of money that they receive currently (as income beneficiaries) or may receive in the future as "principal
beneficiaries".
A common example is a spouse who is the beneficiary of a Marital Trust established at the death of a
deceased spouse. Typically, a Marital Trust requires a surviving spouse to receive all "net income" from the
Trust. "Net income" typically meant interest and dividends, rentals from real estate net of expenses, net farm
income, etc. So what’s the problem?
As we know from the past few years, interest and dividends have been but a small percentage of principal
value (to say nothing of farm income in certain cases). Spouses receiving returns of 1-2% are not happy.
Does UPIA provide help? Read on.
Trustees’ Dilemma. How to manage investments to keep spouses happy, with adequate income, and still
protects interests of the principal beneficiaries in the recent investment environment has been a challenge to
say the least. As you all know, the new Michigan Probate law adopted the Prudent Investor Rule, effective April
1, 2000, permitting a trustee to invest trust assets for total return. That only got trustees to second base. UPIA
was supposed to bring them home, completing the picture, permitting trustees to adjust distributions to
"income" beneficiaries consistent with the prudent investor rule. This makes sense when you think about it.
Does UPIA Really Help? In response to the adoption of the Prudent Investor Rule, some states adopted a
safe-harbor for trustees, permitting distributions of 3-5% of principal to an "income" beneficiary, unless there
is clear trust language to the contrary. Michigan has taken another tack, however. The new Michigan UPIA is
not the clearest statute. It purports to give trustees discretion to make adjustments and provides that trustees
(subject to the specific terms of the trust) by providing that "a fiduciary may adjust between principal and
income to the extent the fiduciary considers necessary and in Section 104(3) provides broadly that a
professional trustee:
- "may adopt a policy that applies to all trusts and estates, or a policy that applies to individual trusts or
estates or classes of trusts or estates, stating whether and under what conditions it will use the
adjustment power and the method of making adjustments."
There are certain conditions on applying the policy which might be detrimental to a beneficiary or class of
beneficiaries in specific cases.
Are Trustees Better or Worse Off Than Before? The new Michigan UPIA is at best a two-edged sword. There
is no safe harbor. Trustees can make broad or detailed policies to apply to existing trusts. The problem, of
course, is that most existing trusts were drafted without reference to any sort of discretion like this and often
can be interpreted to benefit one class of beneficiaries as opposed to another.
Court Relief. Where there are distinct interests such as a second spouse and children from an earlier
marriage as remainder beneficiaries, trustees, professional or individual, would be well advised to ask for a
protective court order if they want to deviate from the old "net income" standard. Professional trustees
especially have to mindful of liability to an "income" beneficiary if the trustee does not make adjustments. A
professional trustee’s policy may be to obtain a court order in every case. Or, a professional trustee may be
comfortable with some overall guideline and provide a limited number of cases where a court order will be
sought.
IRS Regulations. The new Michigan UPIA does bring Michigan under the umbrella of new Treasury
Regulations which in the case of the marital deduction, for example, permits adjustments that are in
accordance with State law. One alternative for professional trustees would be to adopt their own safe harbor
as a "policy" under Michigan law, and make annual adjustments for income beneficiaries in the range of 3-
5%, for example, depending on investment circumstance in effect in a particular year. For example, a trustee
could decide that using a safe harbor policy it would distribute 4% of principal to income beneficiaries one
year across the board and a similar determination in each succeeding year according to investment
environment at the time.
One certainty from the standpoint of this observer is that the Michigan UPIA does not make a trustee’s life any
easier, and does not necessarily make a draftsman’s life any easier. All trusts should be reviewed to
determine whether adjustment is desirable for purposes of equalizing the interests of beneficiaries. Marital
deduction Unitrusts may become more popular under the Michigan law so that a 6Settlor can determine,
within a reasonable range, what percentage distribution shall be made to an income beneficiary.
Conclusion. All trusts need to be reviewed in light of the new law where qualification for the marital deduction
is important from an estate tax standpoint, and where there are likely to be competing interests between
income and remainder beneficiaries. Trustees need to establish policies and address the trustee’s power to
adjust, confirming or negating it. The bottom line is that life has not become any simpler in the writer’s
estimation (for that matter, there aren’t many new laws that really make life "simpler"). For assistance in
evaluating trusts in light of the new law, or trustees’ policies, please contact Jim Modrall at 231-941-9660.
©BRANDT, FISHER, ALWARD & ROY, P.C.
This newsletter is provided for informational purposes and should not be acted upon without professional
advice.
| WEALTH CONSERVATION: PROFESSIONAL ALERT Brandt, Fisher, Alward & Roy, P.C. |
| July 2004 TRUSTEES’ TRANQUILIZER OR NIGHTMARE - UPIA by James R. Modrall III, J.D., C.P.A. |
| If you would like to receive future editions of the monthly Wealth Conservation Newsletter directly to your e-mail account, please e-mail our office using the following link: Estate Planning Newsletter |
| Brandt, Fisher, Alward & Roy, P.C. Attorneys at Law |