Important changes coming to Michigan Trust Code
When the Michigan Trust Code was adopted in 2010, it provided a comprehensive, modern body of law governing how trusts are created and administered.
In the nine years since I chaired the committee that wrote the Michigan Trust Code, relatively few changes have been made to the laws governing trusts. At the end of March, two important changes to the Michigan Trust Code will take effect and create new options for designing the trustee provisions of trust agreements.
What is changing?
For years, many lawyers and their clients have desired to authorize certain individuals to give binding directions to trustees, commonly referring to these individuals as trust protectors. In addition, lawyers and clients have looked for ways to divide trustee responsibilities among multiple trustees, so that one trustee could be assigned the duty to handle investments, for example, while another trustee would have responsibility for distribution or other decisions.
As enacted in 2010, the Michigan Trust Code recognized and provided for “trust protectors” but was silent about dividing trustee duties among trustees. This left many important questions unanswered or the answers unclear.
In December, then-Gov. Rick Snyder signed legislation to incorporate the Uniform Directed Trust Act into the Michigan Trust Code and also expressly allow so-called “divided trusteeships.” These new laws will take effect March 29.
Change 1: directed trusts
Most of Michigan’s new directed trust provisions are default rules, which the settlor of the trust is free to vary or depart from. However, there are “nonmodifiable provisions” to ensure some minimum fiduciary obligation always exists.
The new law enables a “trust director” to give instructions to the trustee. Unless they determine the instructions were outside the trust director’s authority, trustees are required to abide by the direction and have no liability for doing so — at least in the absence of fraud or collusion.
Other provisions of this statute ensure that a trust director has an obligation to act in the interests of the beneficiaries of the trust and ensure that both the trustee and trust director have access to the information required in order to carry out their respective roles.
The new law also addresses important issues such as the statute of limitations, the effect of trust accountings, defenses and personal jurisdiction of the court. The new law will apply to all trusts that incorporate arrangements in which a person is given the power to give binding direction to trustees.
Change 2: divided trusteeships
This new law is a uniquely Michigan statute with no comparable uniform law or statute in any other jurisdiction. Conceptually, the new provision creates a regime of trustees who operate in silos separate from one another — each with a different area of powers, duties and potential liability. The statute allows a settlor to designate:
A trustee who will have authority with respect to investments, distributions or both.
A “resultant trustee” who will possess all residual powers, duties, and potential liability with respect to the trust.
Importantly, by creating “separate trustees” rather than co-trustees, the new law separates liability for each of the trustees, which was not possible before. Previously, all co-trustees were responsible for the acts of the other trustees — if one trustee breached a fiduciary duty, all trustees were liable. The old rules discouraged people or institutions from serving in trusteeships that sought to divide trustee responsibilities. The new rules will increase the likelihood these people will be willing to serve as trustee in a more limited, narrowly defined role.
The statute contemplates up to three types of “separate trustees,” including investment, distribution and resultant trustees.
This new law also makes it clear that under a divided trusteeship, a separate trustee:
Is not liable for the acts or omissions of other separate trustees.
Does not have a duty to monitor the other separate trustees.
Does not have a duty to notify or warn settlors or beneficiaries of a breach or possible breach of trust by another separate trustee.
This change will make trust design easier and more flexible for families who would like to have the investment and/or distribution functions provided by a particular trustee while keeping other trustee functions with another trustee. By clearly spelling out the divided trustees’ respective liabilities, rights to information and other aspects of the arrangement, the new law will make these arrangements more feasible.
Mark. K. Harder is a partner with Warner Norcross + Judd LLP who concentrates his practice in trusts and estates law. He chaired the committee that modernized the Michigan Trust Code in 2010. He can be reached at firstname.lastname@example.org.