New Michigan Trust Code impacts family businesses
Trusts are widely used in planning for the succession of ownership of family businesses. In June 2009, the Michigan State Legislature passed and Gov. Jennifer Granholm signed Michigan’s first comprehensive statute for the creation, modification, administration and termination of trusts. The Michigan Trust Code takes effect April 1, 2010, and affects all existing trusts as well as newly created trusts. Based on the Uniform Trust Code, which was proposed in 2000 and enacted in some form by 22 other states, the Michigan Trust Code preserves much of the existing statutory and common trust law in Michigan. Because of the widespread use of trusts in planning for family businesses, families will need to consider the impact of the MTC on their family businesses.
As a comprehensive body of law affecting trusts, the MTC provides default rules that serve to fill gaps in existing trust law. The default rules of the MTC provide an important foundation for any trust, but can be varied by the person establishing the trust. However, the MTC includes 15 rules that cannot be modified by provisions included in a specific trust.
In light of this significant new legislation, family businesses should review and possibly update their planning. Several of the most important aspects of trusts that will be affected by the MTC and that should be reviewed include: 1) provisions of trusts that involve Trust Protectors, 2) provisions of trusts dealing with conflicts of interest between trustees and the trust or the trust beneficiaries, and 3) provisions limiting the liability of trustees and trust protectors. In addition, family business owners should review with counsel the current goals and purposes for their trusts and whether the trust agreements adequately describe them.
Trust protectors are often used in trusts holding interests in family businesses, and their use has become more common in recent years. A trust protector may have the power to remove or appoint trustees, approve distributions, terminate or modify a trust, or make changes for tax-related reasons.
Despite their frequent and growing use, Michigan has had no law concerning trust protectors. The MTC defines a trust protector as anyone, with limited exceptions, who has the power to direct actions with respect to the trust.
In general, the MTC requires that most trust protectors be fiduciaries, act in good faith, act in accordance with the terms of the trust agreement, and be liable for their actions. The standard of conduct required of trust protectors under the new statute may be different from the standard required by the terms of some trusts. More importantly, this standard of conduct cannot be lowered or waived in the terms of the trust. Therefore, a family that relies upon trust protectors will need to consider the effect of the definition and the standard of conduct and whether the use of a trust protector still meets the family’s and the business’s needs and how to respond to the change in the law.
Under the code, when a trust protector is serving, the trustee must follow the proper directions given by the trust protector. However, the trustee must follow the terms of the trust or seek court approval if an instruction is contrary to the terms of the trust and would result in a breach of duty. When the trust protector’s directions are within the scope of the protector’s authority and are consistent with the protector’s duties, the trustee is protected from liability for compliance with the protector’s directions. The trustee also is protected for not taking actions that require the trust protector’s approval if the trustee has sought, but not received, timely approval. The trustee is also protected if it seeks court approval regarding the propriety of a trust protector’s directions. Finally, the MTC ensures that the trust protector is subject to the jurisdiction of Michigan courts.
Conflict of Interest Rules
A key underlying principle of trusts is that the trustee is a fiduciary. As a fiduciary the trustee must exercise care, account to the beneficiaries of the trust, and place the interests of the trust and the trust beneficiaries ahead of personal interests. This last requirement, frequently referred to as the duty of loyalty, often presents challenges when a family business is held in trust.
If a trust owns interests in a business and the person nominated as trustee also is a shareholder, director, or officer of the business, conflicts of interest will inevitably appear. The default rules of the MTC make certain sales or other transactions between a trustee and the trust and involving trust property voidable by a beneficiary. In some cases, beneficiaries also can void transactions between the trust and members of a trustee’s family. In all cases, exceptions exist that will permit the transactions to occur if they are permitted by the terms of the trust. With thoughtful and careful drafting, the terms of the trust can address the conflicts of interest in a way that meet the needs of a family and the family business.
As a result, the terms of new trusts should be carefully designed to consider likely transactions involving the family business that the trust will engage in. Existing trusts should be reviewed with legal counsel to determine whether changes are needed and whether they can be made to permit anticipated transactions that may occur between the trust and members of the family. Persons establishing trusts also may wish to provide a separate or special trustee to deal with the family business interests and who will not face conflicts of interest.
Michigan law has long recognized the right to include provisions in trusts that limit the liability of trustees. The MTC also recognizes and permits enforcement of clauses that relieve trustees from liability for breaches of trust. In addition, the MTC contains a special recognition of the needs of family businesses. It expressly recognizes provisions of a trust that limit liability and that direct the acquisition and retention of particular assets at the direction of the Settlor. These provisions are especially important for trusts holding “legacy” assets, such as interests in a family-held or closely held business. Under volatile market conditions where values fluctuate, these provisions can be helpful or harmful and care should be taken to ensure that they don’t contribute to inadequate monitoring of trust investments.
The Family Business Alliance will host its annual Family Business Forum Oct. 7. Mark Harder of Warner Norcross & Judd LLP and Scott Carano of Plante Moran Financial Advisors will discuss the impact on family businesses of the new MTC and other recent and proposed legislation.
More information about the Family Business Alliance and the upcoming Family Business Forum can be found at www.fbagr.org
Dr. Paul Mudde is professor of management at the GVSU Seidman College of Business and is director of the Family Owned Business Institute. Mark K. Harder is a partner with Warner Norcross & Judd LLP and serves as chair and reporter for the Michigan Trust Code Committee of the Probate and Estate Planning Section of the State Bar of Michigan.