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Introduction. Trusts are becoming ever more popular, especially Revocable Living Trusts. While the
Settlor/Grantor is alive and well, there are generally no problems because that person retains both the control
and enjoyment of the trust property, acting as Trustee. Problems arise when the Settlor/Grantor dies or
becomes incapacitated. What are the challenges for the Successor Trustee?
Duties. Michigan law basically says that "the general duty of a Trustee (is) to administer a trust expeditiously
for the benefit of the beneficiaries". However, the Successor Trustee faces many pitfalls. Lawsuits against
trustees are proliferating. Some of the causes of these expensive lawsuits are:
1) Personal profiteering by the trustee
2) Failure to protect the interest of one or more beneficiaries
3) Losses on investments or trust property
4) Failure to comply with trust formalities, including taxes, providing information and
failure to file accounts
Let’s look at some of these traps so you can be mindful, as advisors, to warn clients who find themselves
acting as trustee.
Profiteering. A trustee is "fiduciary". MCLA 700.1214 provides that a fiduciary in her personal capacity "shall
not personally derive a profit in the purchase, sale or transfer of the estate’s property". Self-dealing by a
Trustee always opens the Trustee to challenge. Where a Trustee is also a beneficiary, special care is
required. Where fees are involved, a Trust should have specific provisions about the trustee taking
"reasonable" fees. In the event of a dispute, "reasonable" can be decided by a Court. A trustee’s special skills
or expertise is taken into account. A trustee who personally profits at the expense of other beneficiaries
through fees or asset allocations is subject to challenge, and often is.
Asset Allocation. Disputes and litigation often arise by trustee’s allocation of specific assets to the shares of
individual beneficiaries. These allocations can be challenged on the basis of market value, preferences,
appreciation potential, etc. Failure to get appraisals, or updated appraisals, is a frequent source of
contention. We generally recommend that trustees get releases from all beneficiaries before distributing trust
assets. Failing that, a Trustee should get Court approval of asset distributions, where there is no specific
allocation directed.
Investments. Michigan’s new probate statute, EPIC, effective April 1, 2000, adopted new investment rules for
trusts, expressly requiring that a Trustee evaluate risk tolerance and diversify trust investments. Failure to
diversify is a common cause for complaint, even when a trust directs or authorizes retention of a particular
asset. Diversification is a especially touchy subject under the new laws. If there is no express language
referring to farmland, for example, a trustee could be liable for failure to diversify trust assets rather than
concentrating in real estate. These disputes and lawsuits become especially common after a period of stock
market declines.
Information. Michigan law requires a Successor Trustee to give notice within 28 days after accepting trustee
duties, or the death of the Settlor. This notice has to go to all beneficiaries. The notice must also inform the
beneficiaries that they have the right to receive a copy of the Trust and "relevant information about Trust
property". Failure to provide information is one of the most common complaints we hear from family
members about the administration of family trusts after the death or incapacitation of a Settlor. Many trustee’s
don’t get professional counsel, thinking that they will save money on professional fees or that they "already
know how to do these things". The result is often expensive litigation and possible financial personal liability.
Trustee protection demands recognition of the statute of limitations on suits against the trustee. MCL
700.7307 provides a one year limitation on suits against trustees under certain conditions, which are quite
narrow. If the one year statute doesn’t apply, the normal statute is five years for a suit by a beneficiary against
a trustee for a breach of trust. That’s a long time for a trustee to hold himself open to litigation for any one of a
variety of alleged misdeeds.
Other Problems. Failure of a Settlor to keep the Trust up to date is another common cause of family disputes.
We have seen expensive lawsuits over changes in circumstances not contemplated by the Trust document.
These would include sale of a family company, sale or disposition of a farm, farms or other real estate, or
satisfaction of bequests, either with the specific property or other property. We always recommend that there
be court protection for trustee decisions in these matters. Sometimes designated trustees refuse to serve
when the problems are particularly contentious. If the interested parties can’t agree on who will serve as
trustee, a probate court may be called upon to appoint a trustee. You can be sure in those circumstances that
a trustee’s fees will not be nominal.
Conclusion. Trust litigation is increasing. The old adage "an ounce of prevention is worth a pound of cure" is
certainly appropriate in these circumstances. "Cure" can get to be extremely expensive, to say nothing of
destruction of family relationships. All advisors should be mindful of potential pitfalls and advise clients,
where there is trouble on the horizon, to get professional help. If you clients can benefit from professional
guidance, and "an ounce of prevention", please call Jim Modrall or Dave Appleford 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.
Settlor/Grantor is alive and well, there are generally no problems because that person retains both the control
and enjoyment of the trust property, acting as Trustee. Problems arise when the Settlor/Grantor dies or
becomes incapacitated. What are the challenges for the Successor Trustee?
Duties. Michigan law basically says that "the general duty of a Trustee (is) to administer a trust expeditiously
for the benefit of the beneficiaries". However, the Successor Trustee faces many pitfalls. Lawsuits against
trustees are proliferating. Some of the causes of these expensive lawsuits are:
1) Personal profiteering by the trustee
2) Failure to protect the interest of one or more beneficiaries
3) Losses on investments or trust property
4) Failure to comply with trust formalities, including taxes, providing information and
failure to file accounts
Let’s look at some of these traps so you can be mindful, as advisors, to warn clients who find themselves
acting as trustee.
Profiteering. A trustee is "fiduciary". MCLA 700.1214 provides that a fiduciary in her personal capacity "shall
not personally derive a profit in the purchase, sale or transfer of the estate’s property". Self-dealing by a
Trustee always opens the Trustee to challenge. Where a Trustee is also a beneficiary, special care is
required. Where fees are involved, a Trust should have specific provisions about the trustee taking
"reasonable" fees. In the event of a dispute, "reasonable" can be decided by a Court. A trustee’s special skills
or expertise is taken into account. A trustee who personally profits at the expense of other beneficiaries
through fees or asset allocations is subject to challenge, and often is.
Asset Allocation. Disputes and litigation often arise by trustee’s allocation of specific assets to the shares of
individual beneficiaries. These allocations can be challenged on the basis of market value, preferences,
appreciation potential, etc. Failure to get appraisals, or updated appraisals, is a frequent source of
contention. We generally recommend that trustees get releases from all beneficiaries before distributing trust
assets. Failing that, a Trustee should get Court approval of asset distributions, where there is no specific
allocation directed.
Investments. Michigan’s new probate statute, EPIC, effective April 1, 2000, adopted new investment rules for
trusts, expressly requiring that a Trustee evaluate risk tolerance and diversify trust investments. Failure to
diversify is a common cause for complaint, even when a trust directs or authorizes retention of a particular
asset. Diversification is a especially touchy subject under the new laws. If there is no express language
referring to farmland, for example, a trustee could be liable for failure to diversify trust assets rather than
concentrating in real estate. These disputes and lawsuits become especially common after a period of stock
market declines.
Information. Michigan law requires a Successor Trustee to give notice within 28 days after accepting trustee
duties, or the death of the Settlor. This notice has to go to all beneficiaries. The notice must also inform the
beneficiaries that they have the right to receive a copy of the Trust and "relevant information about Trust
property". Failure to provide information is one of the most common complaints we hear from family
members about the administration of family trusts after the death or incapacitation of a Settlor. Many trustee’s
don’t get professional counsel, thinking that they will save money on professional fees or that they "already
know how to do these things". The result is often expensive litigation and possible financial personal liability.
Trustee protection demands recognition of the statute of limitations on suits against the trustee. MCL
700.7307 provides a one year limitation on suits against trustees under certain conditions, which are quite
narrow. If the one year statute doesn’t apply, the normal statute is five years for a suit by a beneficiary against
a trustee for a breach of trust. That’s a long time for a trustee to hold himself open to litigation for any one of a
variety of alleged misdeeds.
Other Problems. Failure of a Settlor to keep the Trust up to date is another common cause of family disputes.
We have seen expensive lawsuits over changes in circumstances not contemplated by the Trust document.
These would include sale of a family company, sale or disposition of a farm, farms or other real estate, or
satisfaction of bequests, either with the specific property or other property. We always recommend that there
be court protection for trustee decisions in these matters. Sometimes designated trustees refuse to serve
when the problems are particularly contentious. If the interested parties can’t agree on who will serve as
trustee, a probate court may be called upon to appoint a trustee. You can be sure in those circumstances that
a trustee’s fees will not be nominal.
Conclusion. Trust litigation is increasing. The old adage "an ounce of prevention is worth a pound of cure" is
certainly appropriate in these circumstances. "Cure" can get to be extremely expensive, to say nothing of
destruction of family relationships. All advisors should be mindful of potential pitfalls and advise clients,
where there is trouble on the horizon, to get professional help. If you clients can benefit from professional
guidance, and "an ounce of prevention", please call Jim Modrall or Dave Appleford 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. |
| 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 |
| September 2005 DO YOU REALLY WANT TO BE TRUSTEE? by James R. Modrall III, J.D., C.P.A., David R. Appleford, J.D., L.L.M. (Taxation) |