Filling the gaps in trust law

March 1, 2010
| By Pete Daly |
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The new Michigan Trust Code that takes effect April 1 was a long time in the making, as Mark K. Harder can attest.

Harder, a partner in the Holland office of Warner Norcross & Judd LLP, is chair and reporter of the Michigan Trust Code Committee of the Probate and Estate Planning Section of the State Bar of Michigan. As such, he led the group that worked on the proposed law, in conjunction with the Michigan Bankers Association Trust Counsel Committee and the Michigan Probate Judges Association.

Harder said the work began in the fall of 2003, and continued until they finished their draft in June 2008. Then they worked with key individuals in Lansing who eventually got it passed by the Legislature. It was signed into law by Gov. Jennifer Granholm in June 2009.

Previous Michigan law pertaining to trusts contained "a lot of unknowns," said Harder, noting that Michigan, like many other states, did not have comprehensive statutes regarding trusts.

"We had some statutes, some cases, and we had a lot of unknowns. We thought we knew how courts would decide things if they were faced with them, but generally there were a lot of areas where we simply didn't know what the rules were," he said.

Harder has had many years of experience in law revolving around estate planning and business succession planning for families.

He attended the University of Iowa for both his undergrad and law degrees, graduating from law school in 1986. He first went to work for a firm in Milwaukee doing corporate and tax work. He and his wife, Angie, are originally from the St. Joseph area in southwest Michigan; while living in Milwaukee, they shared a dream of returning to their home state to live in either the Holland or Grand Haven area.

That dream came true when Warner Norcross & Judd made plans to open an office in Holland and, in November 1990, started looking for an associate attorney to work there. Harder was selected and started in the Holland office in early 1991.

There were gaps aplenty in Michigan's body of trust law. Those thin areas included the appointment and removal of trustees, issues which "people generally deal with … in the terms of their trust. But there was no clear law in those areas," said Harder. Other gaps involved provisions relating to representation in trusts.

With the new Michigan Trust Code, Harder said, "We have a more complete body of law dealing with some of the duties of the trustee" and the trustee's power. "We didn't invent this out of whole cloth. We used the Uniform Trust Code as a guide."

Harder said the new code modernizes the law of trusts in several important respects by providing rules of trust law that cannot be overridden by the terms of the trust. It provides a comprehensive set of rules for trust modification and termination, dealing specifically with revocable trusts used as substitutes for wills, and defining the nature and status of trust protectors.

When the new Michigan trust laws take effect April 1, Michigan will effectively be adopting the Uniform Trust Code. According to a legal blog at thetrustadvisor.com, the UTC is a model code for states to use to create a uniform and comprehensive body of trust law. Some states use it as a default statute; others use it when supplementing and/or revising existing laws concerning trusts. It was written in 2000 by the Uniform Law Commissioners, part of the National Conference of Commissioners on Uniform State Laws,  and was amended in 2005. The UTC has the approval of the American Bar Association, American Bankers Association, and the AARP. Nearly half of the states have adopted it.

The difference in trust law from one state to another has long been a major issue.

"The law of trust has developed on a state-by-state basis, yet clients are very mobile," Harder said — which makes their trusts mobile, as people retire and move to different states.

There has been an element of competition going on among the states for years, in regard to trusts, said Harder. The competition has taken the form of new, flexible trust statutes, "designed in part to help attract trust business." States such as Delaware, South Dakota and Alaska are now on the cutting edge of trust laws, he said, and modernizing their statutes "so that they are friendly, to attract business."

Banks are typically named trustees, and a trustee need not be in the state where a person lives. Some of the largest banks in Michigan are based in other states such as Ohio and Pennsylvania, which may lead some Michigan residents to designate the out-of-state affiliate of their local bank to serve as their trustee.

"You could appoint a trustee, based in Delaware or South Dakota or Michigan," said Harder. "The trust would then be administered under the laws of that state where the trustee is based."

The Michigan Trust Code is actually the latest in a series of statute changes over the last 10 years, noted Harder. One of the first steps was Michigan's adoption of a new probate code in 2000, and a couple of years ago, Michigan "partially" repealed its law against perpetuity of trusts.

"You can now create a trust that, at least in theory, can run indefinitely," he said. That provides a major advantage for a properly designed trust, he said: Property placed in the trust will not be taxed in the future estates of the beneficiaries. The property is also protected from claims by the beneficiaries' creditors, "which can be important in a society that is as litigious as ours can be," said Harder.

Harder said he couldn't predict that more people would set up trusts in Michigan now, but the new code reduces the likelihood that Michigan residents would opt for a trust based in another state.

"It's certainly going to be a factor in keeping trust business from going elsewhere," he said.

Aside from the new Michigan Trust Code, one of the biggest impacts now on estate planning for the wealthy is uncertainty of the federal transfer tax rules pertaining to estates and gifts, according to Harder.

"If Congress does not act — which they don't seem inclined to do, at the moment — we will have had four very different estate tax rules in four consecutive years," he said.

In 2008, the amount an individual could pass on at death without it being subject to estate tax was $2 million, according to Harder. Last year, it was $3.5 million.

"If you pass away right now, there is no federal estate tax that is due, so it's an unlimited exemption," he added. But after this year, if Congress does not take action, the estate tax automatically reverts to an exemption limited to $1 million, with increased rates.

Harder said most estate tax experts expected Congress to extend the 2009 rules into 2010 and beyond, but "they didn't do it."

Now there is talk in Washington of a new estate tax bill, said Harder, and "most observers" feel it would exempt the first $3.5 million, as did the 2009 rules. However, "we don't know if that will be retroactive" to the first day of 2010, said Harder. If it is passed as retroactive to Jan. 1, "there will undoubtedly be litigation" brought in regard to estates set up during the first part of the year before the new law was passed, he said.

The lack of clarity about estate taxes makes it more challenging to plan clients' estates, he said. It also "makes it very frustrating for clients — and there doesn't seem to be any urgency in Washington to fix this problem."

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