SENATE BILL No. 978

 

 

February 23, 2012, Introduced by Senators SCHUITMAKER and JONES and referred to the Committee on Judiciary.

 

 

 

     A bill to amend 1998 PA 386, entitled

 

"Estates and protected individuals code,"

 

by amending sections 7103, 7401, 7602, 7603, and 7815 (MCL

 

700.7103, 700.7401, 700.7602, 700.7603, and 700.7815), sections

 

7103 and 7401 as amended and sections 7602, 7603, and 7815 as added

 

by 2009 PA 46, and by adding section 7820a.

 

THE PEOPLE OF THE STATE OF MICHIGAN ENACT:

 

     Sec. 7103. As used in this article:

 

     (a) "Action", with respect to a trustee or a trust protector,

 

includes an act or a failure to act.

 

     (b) "Ascertainable standard" means a standard relating to an

 

individual's health, education, support, or maintenance within the

 

meaning of section 2041(b)(1)(A) or 2514(c)(1) of the internal

 

revenue code, 26 USC 2041 and 2514.

 

     (c) "Charitable trust" means a trust, or portion of a trust,

 


created for a charitable purpose described in section 7405(1).

 

     (d) "Discretionary trust provision" means a provision in a

 

trust, regardless of whether the terms of the trust provide a

 

standard for the exercise of the trustee's discretion and

 

regardless of whether the trust contains a spendthrift provision,

 

that provides that the trustee has discretion, or words of similar

 

import, to determine 1 or more of the following:

 

     (i) Whether to distribute to or for the benefit of an

 

individual or a class of beneficiaries the income or principal or

 

both of the trust.

 

     (ii) The amount, if any, of the income or principal or both of

 

the trust to distribute to or for the benefit of an individual or a

 

class of beneficiaries.

 

     (iii) Who, if any, among a class of beneficiaries will receive

 

income or principal or both of the trust.

 

     (iv) Whether the distribution of trust property is from income

 

or principal or both of the trust.

 

     (v) When to pay income or principal, except that a power to

 

determine when to distribute income or principal within or with

 

respect to a calendar or taxable year of the trust is not a

 

discretionary trust provision if the distribution must be made.

 

     (e) "Interests of the trust beneficiaries" means the

 

beneficial interests provided in the terms of the trust.

 

     (f) "Power of withdrawal" means a presently exercisable

 

general power of appointment other than a power that is either of

 

the following:

 

     (i) Exercisable by a trustee and limited by an ascertainable

 


standard.

 

     (ii) Exercisable by another person only upon consent of the

 

trustee or a person holding an adverse interest.

 

     (g) "Qualified trust beneficiary" means a trust beneficiary to

 

whom 1 or more of the following apply on the date the trust

 

beneficiary's qualification is determined:

 

     (i) The trust beneficiary is a distributee or permissible

 

distributee of trust income or principal.

 

     (ii) The trust beneficiary would be a distributee or

 

permissible distributee of trust income or principal if the

 

interests of the distributees under the trust described in

 

subparagraph (i) terminated on that date without causing the trust

 

to terminate.

 

     (iii) The trust beneficiary would be a distributee or

 

permissible distributee of trust income or principal if the trust

 

terminated on that date.

 

     (h) "Revocable", as applied to a trust, means revocable by the

 

settlor without the consent of the trustee or a person holding an

 

adverse interest. A trust's characterization as revocable is not

 

affected by the settlor's lack of capacity to exercise the power of

 

revocation, regardless of whether an agent of the settlor under a

 

durable power of attorney, a conservator of the settlor, or a

 

plenary guardian of the settlor is serving.

 

     (i) "Settlor" means a person, including a testator or a

 

trustee, who creates a trust. If more than 1 person creates a

 

trust, each person is a settlor of the portion of the trust

 

property attributable to that person's contribution. The lapse,

 


release, or waiver of a power of appointment shall not cause the

 

holder of a power of appointment to be treated as a settlor of the

 

trust.

 

     (j) "Spendthrift provision" means a term of a trust that

 

restrains either the voluntary or involuntary transfer of a trust

 

beneficiary's interest.

 

     (k) "Support provision" means a provision in a trust that

 

provides the trustee shall distribute income or principal or both

 

for the health, education, support, or maintenance of a trust

 

beneficiary, or language of similar import. A provision in a trust

 

that provides a trustee has discretion whether to distribute income

 

or principal or both for these purposes or to select from among a

 

class of beneficiaries to receive distributions pursuant to the

 

trust provision is not a support provision, but rather is a

 

discretionary trust provision.

 

     (l) "Trust beneficiary" means a person to whom 1 or both of the

 

following apply:

 

     (i) The person has a present or future beneficial interest in a

 

trust, vested or contingent.

 

     (ii) The person holds a power of appointment over trust

 

property in a capacity other than that of trustee.

 

     (m) "Trust instrument" means a governing instrument that

 

contains the terms of the trust, including any amendment to a term

 

of the trust.

 

     (n) "Trust protector" means a person or committee of persons

 

appointed pursuant to the terms of the trust who has the power to

 

direct certain actions with respect to the trust. Trust protector

 


does not include either of the following:

 

     (i) The settlor of a trust.

 

     (ii) The holder of a power of appointment.

 

     Sec. 7401. (1) A trust may be created by any of the following:

 

     (a) Transfer of property to another person as trustee during

 

the settlor's lifetime or by will or other disposition taking

 

effect upon the settlor's death.

 

     (b) Declaration by the owner of property that the owner holds

 

identifiable property as trustee.

 

     (c) Exercise of a power of appointment in favor of a trustee.

 

     (d) Exercise of a power described in section 7820a.

 

     (e) (d) A promise by 1 person to another person, whose rights

 

under the promise are to be held in trust for a third person.

 

     (2) The instrument establishing the terms of a trust is not

 

rendered invalid because property or an interest in property is not

 

transferred to the trustee or made subject to the terms of the

 

trust concurrently with the signing of the instrument. Until

 

property or an interest in property is transferred to the trustee

 

or made subject to the terms of the trust, the person nominated as

 

trustee has no fiduciary or other obligations under the instrument

 

establishing the terms of the trust except as may have been

 

specifically agreed by the settlor and the nominated trustee.

 

     Sec. 7602. (1) Unless the terms of a trust expressly provide

 

that the trust is irrevocable, the settlor may revoke or amend the

 

trust. This subsection does not apply to a any of the following:

 

     (a) A trust created under a trust instrument executed before

 

the effective date of the amendatory act that added this

 


section.April 1, 2010.

 

     (b) A trust created by the exercise of a power described in

 

section 7820a.

 

     (c) A trust created by the exercise of a power of appointment

 

held by a trustee in a fiduciary capacity.

 

     (2) If a revocable trust is created or funded by more than 1

 

settlor, all of the following apply:

 

     (a) To the extent that the trust consists of community

 

property, the trust may be revoked by either spouse acting alone

 

but may be amended only by joint action of both spouses.

 

     (b) To the extent that the trust consists of property other

 

than community property, each settlor may revoke or amend the trust

 

with regard to the portion of the trust property attributable to

 

that settlor's contribution.

 

     (c) Upon notification by the settlor of the revocation or

 

amendment of the trust by fewer than all of the settlors, the

 

trustee shall promptly notify the other settlors of the revocation

 

or amendment.

 

     (3) The settlor may revoke or amend a revocable trust in any

 

of the following ways:

 

     (a) By substantially complying with a method provided in the

 

terms of the trust.

 

     (b) If the terms of the trust do not provide a method or the

 

method provided in the terms is not expressly made exclusive, in

 

either of the following ways:

 

     (i) If the trust is created pursuant to a writing, by another

 

writing manifesting clear and convincing evidence of the settlor's

 


intent to revoke or amend the trust.

 

     (ii) If the trust is an oral trust, by any method manifesting

 

clear and convincing evidence of the settlor's intent.

 

     (4) Upon revocation of a revocable trust, the trustee shall

 

deliver the trust property as the settlor directs.

 

     (5) A settlor's powers with respect to revocation, amendment,

 

or distribution of trust property may be exercised by an agent

 

under a durable power of attorney only to the extent expressly

 

authorized by the terms of the trust or the power of attorney.

 

     (6) A conservator or plenary guardian of the settlor may

 

exercise a settlor's powers with respect to revocation, amendment,

 

or distribution of trust property only to the extent expressly

 

authorized by the terms of the trust and with the approval of the

 

court supervising the conservatorship or guardianship.

 

     (7) A trustee who does not know that a trust has been revoked

 

or amended is not liable to the settlor or the settlor's successors

 

in interest, including the trust beneficiaries, for distributions

 

made and other actions taken on the assumption that the trust had

 

not been amended or revoked.

 

     Sec. 7603. (1) Subject to subsection (2), while a trust is

 

revocable, rights of the trust beneficiaries are subject to the

 

control of, and the duties of the trustee are owed exclusively to,

 

the settlor. This subsection does not apply to either of the

 

following:

 

     (a) A trust created by the exercise of a power described in

 

section 7820a.

 

     (b) A trust created by the exercise of a power of appointment

 


held by a trustee in a fiduciary capacity.

 

     (2) If the trustee reasonably believes that the settlor of a

 

revocable trust is an incapacitated individual, the trustee shall

 

keep the settlor's designated agent or, if there is no designated

 

agent or if the sole agent is a trustee, each beneficiary who, if

 

the settlor were then deceased, would be a qualified trust

 

beneficiary informed of the existence of the trust and reasonably

 

informed of its administration.

 

     (3) While a trust is not revocable and while a person has a

 

currently exercisable power of withdrawal over the entire principal

 

of the trust, the duties of a trustee are owed exclusively to the

 

person.

 

     (4) A person who succeeds to the position of trustee of a

 

revocable trust upon the death, resignation, or incapacity of a

 

trustee who was also the trust settlor is not liable for an action

 

of the settlor while the settlor was serving as trustee.

 

     (5) With respect to a predecessor trustee who was also the

 

settlor, the successor trustee has no responsibility to investigate

 

a transaction by the predecessor trustee, to review an account, to

 

review an action of the predecessor trustee, or to take action for

 

a breach of trust by the predecessor trustee.

 

     Sec. 7815. (1) A beneficiary of a discretionary trust

 

provision as described in section 7505 has no property right in a

 

trust interest that is subject to a discretionary trust provision,

 

and has no right to any amount of trust income or principal that

 

may be distributed only in the exercise of the trustee's

 

discretion. However, except as provided in subsection (2) and

 


notwithstanding the breadth of discretion granted to a trustee in

 

the terms of the trust, including the use of such terms as

 

"absolute", "sole", or "uncontrolled", a trustee abuses the

 

trustee's discretion in exercising or failing to exercise a

 

discretionary power if the trustee does any of the following:

 

     (a) Acts dishonestly.

 

     (b) Acts with an improper motive, even though not a dishonest

 

motive.

 

     (c) Fails to exercise the trustee's judgment in accordance

 

with the terms and purposes of the trust.

 

     (2) Unless the trust instrument expressly provides otherwise,

 

a trustee is not liable to a beneficiary for failure to exercise

 

the power described in section 7820a or the power described in

 

section 5a of the powers of appointment act of 1967, 1967 PA 224,

 

MCL 556.115a.

 

     (3) (2) Subject to subsection (4), (5), the following rules

 

apply to a trustee's exercise of a power unless the terms of the

 

trust expressly indicate that the rule does not apply:

 

     (a) A person other than a settlor who is a trust beneficiary

 

and trustee of a trust that confers on the trustee a power to make

 

distributions pursuant to a discretionary trust provision to or for

 

the trustee's benefit may exercise the power only in accordance

 

with an ascertainable standard.

 

     (b) A trustee may not exercise a power to make distributions

 

pursuant to a discretionary trust provision in a manner to satisfy

 

a legal obligation of support that the trustee personally owes

 

another person.

 


     (4) (3) A power whose exercise is limited or prohibited by

 

subsection (2) (3) may be exercised by a majority of the remaining

 

trustees whose exercise of the power is not so limited or

 

prohibited. If the power of all trustees is so limited or

 

prohibited, the court may appoint a special fiduciary with

 

authority to exercise the power.

 

     (5) (4) Subsection (2) (3) does not apply to any of the

 

following:

 

     (a) A power held by the settlor's spouse who is the trustee of

 

a trust for which a marital deduction, as defined in section

 

2056(b)(5) or 2523(e) of the internal revenue code, 26 USC 2056 and

 

2523, was previously allowed.

 

     (b) Any trust during any period that the trust may be revoked

 

or amended by its settlor.

 

     (c) A trust if contributions to the trust qualify for the

 

annual exclusion under section 2503(c) of the internal revenue

 

code, 26 USC 2503.

 

     Sec. 7820a. (1) If an irrevocable trust includes a

 

discretionary trust provision, the trustee of the trust may, unless

 

the terms of the first trust expressly provide otherwise,

 

distribute by written instrument all or part of the property

 

subject to that provision to the trustee of a second trust,

 

provided that both of the following conditions are satisfied:

 

     (a) The terms of the second trust do not materially change the

 

beneficial interests of the beneficiaries of the first trust.

 

     (b) If the governing instrument of the first trust expressly

 

indicates an intention that the first trust qualify for a tax

 


benefit or the terms of the first trust are clearly designed to

 

qualify the first trust for a tax benefit, and if the first trust

 

would qualify for the intended tax benefit, the governing

 

instrument of the second trust is not inconsistent with the tax

 

planning that informed the first trust.

 

     (2) A distribution of property to the trustee of a second

 

trust under subsection (1) shall not result in any of the

 

following:

 

     (a) An increase in or a change in the method of determining

 

the compensation of a trustee, unless the increase or change has

 

been consented to in writing by all beneficiaries entitled to

 

receive reports regarding the first trust.

 

     (b) A charge of a fee or commission on the transfer of assets

 

from the first trust to the second trust, unless the fee or

 

commission has been consented to in writing by all beneficiaries

 

entitled to receive reports regarding the first trust.

 

     (c) A reduction in the standard of care applicable to the

 

trustee's actions or an expansion of exoneration of the trustee.

 

     (d) A diminution in the authority of a person who has a power

 

exercisable in a fiduciary capacity to direct or remove the

 

trustee.

 

     (3) For purposes of this section, all of the following apply:

 

     (a) In determining whether a trust is irrevocable, a settlor's

 

lack of capacity to exercise a power of revocation negates the

 

power unless an agent of the settlor under a durable power of

 

attorney, a conservator of the settlor, or a plenary guardian of

 

the settlor is serving and the agent, conservator, or guardian is

 


authorized to exercise the power of revocation.

 

     (b) An increase in the maximum period during which the vesting

 

of a future interest may be suspended or postponed under applicable

 

law does not constitute a material change in the interest of a

 

beneficiary.

 

     (c) An increase in compensation arising solely because the

 

duration of the second trust is longer than the duration of the

 

first trust does not constitute an increase in or a change in the

 

method of determining the compensation of the trustee.

 

     (4) The distribution power described in subsection (1) shall

 

not be exercised over any portion of the first trust as to which

 

the exercising trustee is the settlor, unless the exercising

 

trustee was acting in a fiduciary capacity when he or she created

 

the first trust.

 

     (5) The trustee of the second trust may be the trustee of the

 

first trust, the second trust may be a trust under the governing

 

instrument of the first trust or another governing instrument, the

 

governing instrument may be created by the trustee of the first

 

trust, and the governing instrument may be the instrument that

 

exercises the power described in subsection (1).

 

     (6) The second trust instrument may provide 1 or both of the

 

following:

 

     (a) That assets of the first trust discovered after exercise

 

of the power described in subsection (1) shall be property of the

 

first trust if that trust is to continue in existence after

 

exercise of the power, or that assets of the first trust discovered

 

after exercise of the power shall be property of the second trust

 


if the first trust terminates upon exercise of the power.

 

     (b) For indemnification of the trustee of the first trust,

 

except as limited by section 7908.

 

     (7) A trustee of the first trust may exercise the power

 

described in subsection (1) without the consent of that trust's

 

settlor, any beneficiary, or a court. However, the trustee shall

 

give written notice of an intended exercise of the power to the

 

settlors of the first trust, if living, and qualified trust

 

beneficiaries no later than 63 days before exercise of the power.

 

The notice required by this section shall include a copy of the

 

proposed instrument of exercise. If the living settlors and

 

qualified trust beneficiaries waive the 63-day notice period in

 

writing, a distribution under subsection (1) may be made before

 

expiration of the notice period.

 

     (8) The period during which the vesting of a future interest

 

may be suspended or postponed by the exercise of the power

 

described in subsection (1) is determined under the powers of

 

appointment act of 1967, 1967 PA 224, MCL 556.111 to 556.133,

 

treating the power under subsection (1) as a power of appointment

 

for purposes of this subsection.

 

     (9) This section shall not abridge the right of a trustee who

 

has a power to distribute trust property in further trust under the

 

terms of a trust instrument, any other statute, or the common law.

 

The provisions of this section shall not abridge any right of a

 

trustee who has a power to amend or terminate a trust.

 

     (10) As used in this section:

 

     (a) "First trust" means an irrevocable trust that has a

 


discretionary trust provision that is exercised as described in

 

subsection (1).

 

     (b) "Tax benefit" means a federal or state tax deduction,

 

exemption, exclusion, or other particular tax attribute. The term

 

tax benefit does not include grantor trust status. A trust has

 

grantor trust status to the extent that the assets of the trust are

 

treated, for federal income tax purposes, as owned by the grantor

 

or another person under sections 671 to 679 of the internal revenue

 

code, 26 USC 671 to 679.