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By Phillip E. Harter posted 10-26-2015 10:14

  

 

Is there a noncourt procedure available to make a material modification to a trust?
(REF. sections .7111, .7412, .7820a, MCL 556.115a)

QUESTION

The trust became irrevocable before April 1, 2010. The trust contains a spendthrift clause. It does not contain any trust protector provisions. It is silent as to its material purposes. It does not grant the trustee the power to modify.

The trust allows discretionary distributions to be made to the beneficiary for the beneficiary’s health, education, and support. After the death of the trust’s settlor, the beneficiary is given partial rights of withdrawal at various ages. Due to the beneficiary’s changed circumstances, the trustee of the trust would like to convert the trust into a supplemental needs trust (SNT) for the beneficiary’s life to allow the beneficiary to qualify for public assistance.

A decanting to accomplish this objective would be a prohibited material change to the beneficiary’s interest under MCL 700.7820a.

Can a nonjudicial settlement agreement (NJSA) under MCL 700.7111(3)(c) be used to give the trustee either (a) the general power to decant the trust or (b) the specific power to decant the trust to an SNT?

Can an NJSA be used to grant the trustee either (a) a general power to modify the trust under MCL 700.7411(1)(c) or (b) a specific power to modify the trust to an SNT underMCL 700.7820a?

Are there any noncourt solutions available other than accessing the more permissive decanting laws of other states to accomplish the objective?

ANSWER

The panel does not believe a nonjudicial settlement agreement can be used in this situation; the parties will need to resort to judicial modification under MCL 700.7412 to change the terms of the trust.

MCL 700.7111(2) states: “A nonjudicial settlement agreement shall not be used to accomplish the termination or modification of the trust.” The Michigan Trust Code (MTC) Reporter’s Comment quotes the Restatement (Third) of Trusts §62 comment, which states that a modification involves a change in—a departure from—the true, original terms of the trust, which this appears to be. It does not appear to be a reformation, interpretation, or construction, which would be possible under MCL 700.7111.

The questioner states that decanting is not available under the MTC decanting provision, MCL 700.7820a, because it would be a material modification of the beneficiary’s interest. As a result, it appears that the proposed change almost certainly would be a modification of the trust that is prohibited by the terms of MCL 700.7111.

The panel noted that although decanting under the MTC was ruled out by the questioner, it might be possible to decant under the Michigan Powers of Appointment Act, MCL 556.111 et seq. From the question, it is not clear whether the distribution power is a presently exercisable discretionary distribution power described in MCL 556.115a. The panel suggests the questioner consider the terms of the trust and the decanting provision of the Michigan Power of Appointment Act and whether decanting the trust assets to a new trust would achieve the client’s objectives.

The Probate and Estate Planning Section has created an archive of questions and answers (reviewed by a panel of judges, registers, and attorneys) on EPIC and MTC.  If you belong to the Section and want to see the other 800 questions and answers, go to ICLE’s Probate Resource Section Area. If you aren’t a section member, think about signing up through the State Bar.

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