What I know now as a corporate that I didn’t know as a practicing attorney

A presentation by George Bearup, J.D., Senior Legal Trust Advisor at Greenleaf Trust and ACTEC fellow with over 42 years of practical experience as an attorney.

Presented August 4, 2021

BACKGROUND I prepared trusts for close to 40 years. Those trust instruments were notoriously long (so my legal assistant, and law partners regularly reminded me, and more than one client accused me of ‘billing by the word.’) However, I thought the trusts that I drafted were comprehensive and clearly communicated the settlor’s intent. I edited and revised the trust’s ‘boilerplate’ provisions every six months with the goal to make the instrument readable and internally consistent. Those efforts were solely to put the words on paper, and seldom on how a trustee would be called upon to carry out the responsibilities assigned by those words. My blind assumption was that I was giving clear guidance to the on how to administer the trust from the settlor’s perspective, but not the trustee’s. With hindsight, that was a big mistake on my part!

My perspective broadened when I began to work for Greenleaf Trust as its Senior Trust Advisor. Only then when I started to get questions from trust officers with regard to the trust documents before them was I able to observe, first-hand, the time and attention that a trustee must give to administering a trust and some of the headaches an imprecise trust provision can cause.

TAKE-AWAY A proposed trustee should be provided a copy of a draft of the trust with the request that the trustee review the instrument before it is signed by its settlor in order to gain the insight and perspective of the fiduciary that will be charged to administer the trust. The trustee is not the enemy of the drafting attorney. The proposed trustee’s goal, just like the estate planning attorney’s goal, is to assure that the trust instrument not only reflects, but also carries out, the settlor’s intention. The two fiduciaries are partners, not adversaries, when it comes to make sure that the trust works as anticipated.

800.416.4555 greenleaftrust.com What I know now as a corporate trustee that I didn’t know as a practicing attorney continued

PROVISIONS AND CONSIDERATIONS Without sounding too cynical, some of the things that I learned from gaining the trustee’s perspective after over five years working for Greenleaf Trust follow:

Trustee’s Duty of Impartiality (and other Fiduciary Duties): Trusts are often drafted with the lifetime beneficiary in mind, with the remainder beneficiaries viewed as either an after-thought, or worse yet, mere place-holders. Yet the trustee must follow the fiduciary duty to treat all trust beneficiaries impartially, either in making trust investments or in making trust distributions. Observation: If the settlor wants special emphasis to be given to the needs and desires of the current trust beneficiary, to the exclusion of the trust remainder beneficiaries, the trust instrument needs to expressly relieve the trustee from the fiduciary duty of impartiality. A trustee will not rely upon an implication to favor the current or lifetime beneficiary without clear direction to deviate from the impartial treatment of all the beneficiaries. This fiduciary duty of impartiality which guides the trustee often causes confusion or dismay of the current beneficiary who thinks that he or she should be the sole focal point of the trustee.

No Duty to the Settlor: It comes as a surprise to many settlors of irrevocable trusts that the trustee does not owe any fiduciary duties to the settlor. While the trustee will certainly listen to the settlor, there is no obligation to share information with regard to the trust’s administration with the settlor, nor follow the settlor’s thoughts on how the trust’s assets are to be invested by the trustee. Observation: Not too many estate planning attorneys take the time to clearly tell the trust’s settlor to whom the trustee’s fiduciary duties are owed.

Material Purpose Provision: Many trusts lack a material purpose provision even though several provisions of the Michigan Trust Code refer to a trust’s material purpose. Implicit is the expectation that the trustee and the trust beneficiaries, will all divine the settlor’s intent with the established trust. Observation: A material purpose provision is helpful to both the trustee and the trust beneficiaries as it acts as a guide to the trustee when making administrative decisions with regard to the trust (investments, distributions, when to exercise discretion) while also help to explain to the trust beneficiaries why a trust was used to transmit their expected inheritance. Such a provision will also assist a judge if the trust instrument is to be judicially modified. Certainly the Michigan Trust Code contemplates that a trust will have a material purpose to guide in the trust’s administration and construction, so why not use a material purpose provision to reflect the settlor’s intended purpose and goals for the trust, and thus avoid a lot of guesswork.

Boilerplate: Unlike my clients who only claimed that they read the boilerplate portion of their trust (I used to jokingly threaten them with a ‘true and false’ quiz just prior to their execution of the trust), the trustee actually reads the trust instrument, from cover to cover, including the boilerplate provisions!

800.416.4555 greenleaftrust.com What I know now as a corporate trustee that I didn’t know as a practicing attorney continued

Observation: Proofreading the boilerplate provisions often reveals inconsistencies and ambiguities within the trust. The trustee creates a summary of each of the distribution provisions, key definitions (if there are any) and summarizes important boilerplate provisions, e.g. is the trustee is relieved from following the default Uniform Principal and Income Act or the Prudent Investor Rule?; are capital gains to be treated as trust accounting income for purposes of distributing income to beneficiaries? These technical boilerplate provisions may not mean much to the trust beneficiaries (which is why they are skipped when the trust is read) but are critical to the allocation of income and principal and how the trustee administers the trust.

Redundancies and Extraneous Words: attach significance to each word that is used in the trust instrument, just like a probate judge does when called upon to construe the terms of a trust. Redundant phrases will be read together and (when possible) reconciled in an attempt to understand the directions the trustee must follow. Sometimes words and phrases are added to the trust instrument that are either not important, or seem to distract from the purpose of the trust. Observation: While the estate planning attorney may wax eloquently in the trust that they have drafted, i.e. pride in authorship, there are no ‘throw-way’ provisions or terms that the trustee can conveniently ignore as mere surplusage or just ‘nice sounding.’ It is important to eliminate unnecessary words and ‘throw-away’ provisions.

Flexibility Can Be Illusory: Just because the Michigan Trust Code gives extraordinary powers to the trustee to modify or decant the assets of a trust does not necessarily mean that a trustee will eagerly resort to those tools to modify the trust’s terms to accommodate a beneficiary’s wishes, or to add flexibility to a perceived inflexible trust instrument. Considerable judgment must go into the trustee’s decision to modify the terms of the trust. Just because a remedial tool exists at law does not mean that it will be used every time an ambiguity arises. More to the point, did the settlor know or contemplate the possible future modification of what they considered to be their irrevocable trust? Example: When would the trustee disclaim a transfer to the trust, if the trustee has the fiduciary duty to always act in the trust beneficiaries’ best interests, or the fiduciary duty to preserve and enhance trust assets? Another example is with regard to a trust’s spendthrift provision. The Michigan Trust Code departs from the Uniform Trust Code in that it provides by implication that the presence of a spendthrift provision is a material purpose of the trust, which in turn prevents a modification or termination of the trust under MCL 700. 411(1)(a) and limits the utility of a nonjudicial settlement agreement under MCL 700.7111(2). Observation: If the settlor wants to give the trustee and beneficiaries the ability to modify the terms of the trust instrument, just say so. The same with the presence of a spendthrift provision, declaring that it as not a material purpose of the trust. Also, it might be wise to expressly give the trustee the power to decant the trust assets and not rely on the two Michigan decanting statutes.

800.416.4555 greenleaftrust.com What I know now as a corporate trustee that I didn’t know as a practicing attorney continued

Determination of Incapacity or Substance Abuse: Subjective determinations of sobriety and incapacity are a challenge for the trustee. A trustee that is required to monitor substance abuse will spend a lot of time, expense, and intrusion into the day-to-day life of the trust beneficiary, which often leads to the inevitable tension with the trust beneficiary, especially if the trustee withholds a discretionary distribution or it imposes conditions on a distribution to the beneficiary to receive treatment, counseling, or some other type of medical intervention. Observation: It is helpful if the trust instrument provides some examples of the frequency and manner of monitoring the beneficiary, and it indemnifies the trustee if the trustee chooses to withhold a distribution in light of the beneficiary’s behavior or refusal to cooperate with the trustee’s imposed conditions.

Discretionary Distributions and Other Resources: Discretionary trusts are gaining in popularity due to the creditor protection that they afford the trust beneficiary under the Michigan Trust Code. Unfortunately, many discretionary trusts are silent whether the trustee must take into consideration in making a discretionary distribution other resources then available to the trust beneficiary. The Restatement (3rd) of Trusts [Section 50 comments] notes that the general approach at is for the trustee to take into consideration other resources that may be available to the trust beneficiary. Yet the Restatement (2rd) of Trusts generally provides that the trustee need not take into consideration other financial resources then available to the trust beneficiary prior to making a discretionary distribution. Which Restatement does the settlor intend to apply to the trust and its administration? Observation: The trust instrument needs to be explicit, particularly due to the divergence of case law on this issue, whether the trustee needs to take the beneficiary’s other financial resources into account when making trust distributions, either income, principal, or both.

Words of Degree: Trust instruments will often use words like ‘necessary,’ or ‘appropriate.’ It is hard for the trustee’s distribution committee to determine the settlor’s intent from the use of these subjective terms. Observation: There is no harm in including examples in the trust instrument (or accompanying precatory letters of intent) as what the settlor intends when these subjective terms are used to reflect when discretionary distributions are to be made to the beneficiary, or the conditions the trustee may impose prior to making a distribution and the magnitude of the distribution.

Actual Knowledge of the Trustee: Confusion often arises when the trustee is supposed to act to carry out the settlor’s intent, which is particularly the case with incentive-type trusts. Observation: Rather than vaguely assign the trustee some responsibility to take action, e.g. ‘the trustee shall determine when it is appropriate to make a distribution in light of the beneficiary’s substance abuse, the actions of the trustee should be required only when the trustee has actual knowledge or notice of the issue or activity in question, e.g. determining if the beneficiary continues to abuse substances, or

800.416.4555 greenleaftrust.com What I know now as a corporate trustee that I didn’t know as a practicing attorney continued continues to gamble. The trust instrument should indicate that the trustee is under no duty to inquire into the beneficiary’s acts or conduct until or unless the trustee has actual knowledge or notice of the proscribed behavior, act, or failure to perform as identified by the trust. If an incentive type of trust is involved, the trust should require that the trustee have actual knowledge of the trust beneficiary’s frivolity before withholding distributions.

Caution on the Use of Trust Directors: Many trust instruments created these days contain trust director provisions, along with a ‘laundry list’ of powers that the trust director may exercise. Just because a trust can have a trust director(s) does not mean that there should be a trust director in each trust. For example a trust that is to be terminated three years after the settlor’s death probably does not need a trust director with the power to amend the trust. Often those enumerated trust director powers duplicate the powers given to the trustee either under the trust instrument or the default powers given a trustee under the Michigan Trust Code. That then creates confusion as to which fiduciary possess the power, to the exclusion of the other fiduciary. Observation: The trust instrument needs to align the powers and responsibilities between the trustee and the trust director. The trust instrument should anticipate how the two fiduciaries will interact with one another. Trust director provisions should not be added to the trust instrument as some ‘fail-safe’ provision if there is no perceived need to use a trust director in the trust’s administration. Alternatively the trust instrument could give to the trustee the authority to name a trust director if, or when, the circumstances warrant the use of a trust director to change the terms of the trust.

Compensation of Others: Often a trust director is given the authority to hire third parties to carry out the trust director’s responsibilities under the trust. However, the trustee is required to then use trust assets to pay the third party hired by the trust director. Observation: Rather than simply say that the trustee must pay to an advisor hired by the trust director, e.g. attorney, accountant, appraiser, reasonable compensation, where the trustee must decide what is reasonable compensation, it is better if the trustee is directed in the trust instrument to pay the third party “as agreed upon by the trust director.”

Co-Trustees: Do co-trustees really help in the administration of a trust or simply cause delays in the need to coordinate and jointly make all decisions pertaining to the trust and its administration? Co- trustees can be helpful, but they can also cause delays and more expense if they are unfamiliar with the multiple aspects of estate settlement, taxes, trust accounting rules, and trust administration responsibilities. Observation: If the settlor is uncertain about the corporate trustee acting as the lone trustee, a trust director can be given the unilateral right to remove the serving corporate trustee, without the need to create in the trust instrument a co-trustee to act as a ‘check and balance’ against the corporate trustee.

800.416.4555 greenleaftrust.com What I know now as a corporate trustee that I didn’t know as a practicing attorney continued

Releases: The right to ask for releases and indemnifications from trust beneficiaries should be authorized in the trust instrument, especially in incentive trust situations where the trustee may have to play ‘hard-ball’ with the incented beneficiary. Observation: If the trustee can be expected to withhold distributions or impose conditions on the trust beneficiary, leading to a strain in that relationship (if not out-right ill will) the trustee should be authorized by the trust instrument to require a release from the trust beneficiary as a condition to making a distribution subject to imposed restrictions or subjective conclusions.

HIPAA Release: If a corporate trustee is named as successor trustee, the corporate trustee may be called upon to determine the settlor’s incapacity when the corporate trustee replaces the settlor as initial trustee of the trust, sometimes over the settlor’s forcible objections. Observation: The trust instrument should contain a HIPAA release that provides access to the settlor’s health, medical, and mental health information, and the health information of the trust beneficiary where the beneficiary’s health is a ascertainable standard for discretionary distributions. The same with regard to distributions to or for the benefit of the trust beneficiary’s health, by making a HIPAA release given to the trustee a condition to the receipt of discretionary distributions. The trust instrument needs to address how the determination of incapacity will be handled and to whom that information and/or decision will be communicated to and by the corporate trustee.

Tangible Personal Property: Often tangible personal property is treated as a boilerplate provision. However, anyone who has been involved in probate litigation knows that often it is the small ‘stuff’ that triggers acrimonious and expensive litigation. More often the trustee does not even have possession or control of the settlor’s tangible personal property, but it becomes the trustee’s responsibility to track, insure, and protect tangible personal property assigned to the trust until it actually takes custody. Observation: The trust instrument should name the person in possession of the item of tangible personal property as a special trustee. Alternatively, the trust instrument should give the trustee a release for such tangible personal property that is not under the trustee’s control.

Gifts on Behalf of the Settlor: A few revocable trusts give the trustee the ability to make gifts from the trust during the period that the settlor is incapacitated. How does the trustee determine who should receive distributions, and in what manner? Observation: If the trustee is given the ability to make gifts, comparable to an agent who acts under a financial durable power of attorney, the trust instrument needs to limit the scope of the gift-power, e.g. only annual exclusion gifts; only to minor children; only marital deduction gifts; only to carry out and honor charitable pledges made by the settlor prior to his or her incapacity.

800.416.4555 greenleaftrust.com What I know now as a corporate trustee that I didn’t know as a practicing attorney continued

Loans to Beneficiaries:The ability to make loans using trust assets is often a power that is given to the trustee. Beneficiaries often look at the trustee’s authority to make loans as a way to circumvent a health, education, support or maintenance (HEMS) trust and its inherent limitations or the beneficiary’s available resources that prevent a distribution from being made. Trust remainder beneficiaries often view such loans as a breach of trust. Observation: Loans from the trustee to the trust beneficiary need to be covered. If loans to trust beneficiaries are to be permitted, then the terms and conditions of loans should be spelled out in the trust instrument, e.g. the number of loans outstanding, the amount, terms of the note, the interest rate charge to preserve trust principal, the need for collateral, remedies if there is a default, etc. In addition, if loans can be made to the trust beneficiary, then an exception needs to be spelled out in the trust’s spendthrift provision to enable the trustee to withhold distributions pending the repayment of the loan, or directly apply a required distribution in satisfaction of the beneficiary’s outstanding loan balance.

Income-Only Trusts and the Power to Adjust: An income-only trust is difficult to administer in a period of low interest rates. While the trustee possesses the power to adjust under the Michigan Uniform Income and Principal Act (reclassifying trust principal as trust income under the circumstances), powers to adjust are a lot of work for the trustee. Each year the trustee must document the exigent circumstances and the factors that the trustee relied upon to exercise its authority to adjust principal to income decision. Often the exercise of this power by the trustee will anger remainder beneficiaries. Observation: More thought should be given to the use of a unitrust, which is much easier to administer while it enables the lifetime (income) beneficiary to budget anticipated distributions from the trust for the coming year.

Narrow No Contest Clauses: These clauses are added to most trusts these days. Clients view these clauses as stopping any probate litigation before it even begins. While they can be effective to deter probate litigation, often these provisions are so broadly drafted they become tools used by other trust beneficiaries as a weapon to enhance their own interests in the trust at the expense of another trust beneficiary who merely asked questions about the trust or its administration. The trustee is then asked by the other trust beneficiaries to act as a policeman to enforce either a vague or overly broad in terrorem clause. Observation: If a trust instrument is going to contain a no-contest provision, it should be narrowly drafted to precisely describe the actions that a trust beneficiary may not take without triggering the no-contest provision. Statements like ‘if such beneficiary takes any action to directly, or indirectly, frustrate this trust or its administration, or impede the use of assets held in this trust, then....’ are entirely too vague and often precipitate other beneficiaries pressuring the trustee to declare that the beneficiary has forfeited his or her interest in the trust, even though the trustee, like the probate judge, operates on the ‘equity abhors a forfeiture’ principle.

800.416.4555 greenleaftrust.com What I know now as a corporate trustee that I didn’t know as a practicing attorney continued

Post-Mortem Administration Trust: A trust for the beneficiary is not funded until the period of estate administration is concluded, i.e. debts paid, estate tax paid, etc. If the trust directs the trustee to pay the trust beneficiary income, how is the beneficiary to be treated during this period of estate/trust administration prior to the trust ultimately being funded. Example: “The trust beneficiary shall receive $3,000 a month from the trust.” Does the trustee make a ‘catch-up’ distribution once the trust is finally funded? Is the trustee to make estimated distributions to the trust income beneficiary during the period of estate administration? Or, is the beneficiary to receive nothing until the trust is actually funded? Observation: If the deceased settlor wants the lifetime beneficiary to receive benefits from the trust going back to the date of the settlor’s death, that intent needs to be clearly spelled out in the trust instrument. Otherwise, the trustee will view the estate administration period as one where the trust beneficiary is not entitled to any ‘advance’ income distribution from the trust.

FINAL THOUGHTS What would be helpful when working in conjunction with the proposed corporate trustee would be to:

1. Proofread Boilerplate Provisions: Take a look at your boilerplate language. Some of it may be tailored to an individual trustee, which can be inappropriate or misleading for a corporate trustee to follow.

2. Eliminate Internal Inconsistencies: Read the trust instrument with an eye toward clarifying any potential internal inconsistencies, e.g. mandatory income distribution provisions are spelled out, yet a discretionary ‘hold-back’ authorization is given to the trustee based on the beneficiary’s circumstances, e.g. divorce; addiction; incarceration.

3. Eliminate Competing Fiduciary Powers: Does the trust instrument really need a trust director (with a litany of powers) when the trust is scheduled to terminate within a short period of time? The same thought with regard to the need to name a co-trustee?

4. Don’t Over-Use a Trust Director: Use a trust director only when it is appropriate. If one is named, clearly articulate the trust director’s duties, responsibilities and accountability that are separate from the trustee’s. Confusion and delays arise when these ‘competing’ grants of authority overlap.

5. Indemnify Fiduciaries: Anticipate and address the liability issues that will be faced by both the trustee and the trust director and then indemnify them when appropriate, such as when the trustee is directed to hold non-income producing real estate or closely held business interests. For how long? Under what circumstances will the direction to hold the illiquid asset be overridden in order to be sold by the trustee.

800.416.4555 greenleaftrust.com What I know now as a corporate trustee that I didn’t know as a practicing attorney continued

6. Create Your Own Decanting Power. If a future decanting is contemplated, add a specific decanting power held by the trustee in lieu of relying upon Michigan’s decanting statutes which are hard to navigate and time-consuming to implement.

7. Review the Corporate Trustee’s Policies: Ask in advance for a trustee’s specific policies and procedures to identify if they are compatible with the settlor’s intent and the trust instrument as it is initially drafted.

ABOUT GREENLEAF TRUST With offices in Kalamazoo, Grand Rapids, Birmingham, Midland, Traverse City and Bay Harbor, Greenleaf Trust is an independent Michigan-chartered trust-only bank, exclusively focused on wealth management, trust and estate administration, and administration of company-sponsored retirement plans. Through our unique, client centric team approach, we provide highly personal and customized client service, with no conflicts of interest, to ensure our clients’ financial security from generation to generation.

800.416.4555 greenleaftrust.com