It is true that a living revocable trust does not need to pass through the probate administration process for distribution of the settlor or grantor’s assets. However, it does NOT mean that the trust is immune to court involvement. A settlor, grantor, trustee, trustee beneficiary or an heir of the settlor or grantor who was disinherited can drag the trust into court and contest its terms. Generally, a trust can be contested for the same reasons that someone’s last will and testament can be contested. A contestant to a trust contest is often seeking to set aside a trust or a trust amendment so that the assets may be distributed according to a will, intestate succession or an earlier trust. The contestant may also look for the court to modify the terms of the trust itself.
WHO CAN CONTEST A TRUST?
The probate court “may intervene in the administration of a trust to the extent its jurisdiction is invoked by an interested person or as provided by law.” MCL 700.7201(1). Those “interested persons” include, but not necessarily limited to, the following:
- The grantor or settlor of the revocable trust.
- The current trustee(s) or trust director(s).
- Qualified trust beneficiaries affected by the contestant’s claim for relief.
- Holders of a power of appointment affected by the contestant’s claim for relief.
- If the grantor or settlor is an incapacitated person, those persons entitled to be reasonably notified.
- If necessary under the circumstances, the heirs and devisees of the grantor or settlor.
- If there are no heirs or beneficiaries, the Attorney General’s office may have to be notified.
WHAT GROUNDS MAY A TRUST BE CONTESTED?
A contestant cannot challenge the trust simply because he or she does not like its terms. A settlor or grantor is free to leave his or her property to whomever he pleases, and there is no requirement it must be left to any blood relatives or to anyone in equal proportions. A trust may be challenged on any of the following grounds:
- MENTAL INCAPACITY: “The capacity required to create, amend, revoke, or add property to a revocable trust, or to direct the actions of the trustee of a revocable trust, is the same as that required to make a will.” MCL 700.7601. “The contestant has the burden of proving by a preponderance of the evidence that at the time the settlor created, amended, or revoked the trust, he or she did not have sufficient mental capacity to do so.” M Civ JI 179.04. “An individual has sufficient mental capacity to make a [trust] if all of the following requirements are met: (a) The individual has the ability to understand that he or she is providing for the disposition of his or her property after death; (b) The individual has the ability to know the nature and extent of his or her property; (c) The individual knows the natural objects of his or her bounty; and (d) The individual has the ability to understand in a reasonable manner the general nature and effect of his or her act in [creating the trust].” MCL 700.2501(2). However, the threshold for testamentary capacity is lower than the capacity needed for making a contract or deed. In re Vallender’s Estate, 310 Mich 359; 17 NW2d 213 (1945). This means that a person hasn’t lost testamentary capacity just because he is eccentric or senile as long as the person knows what property he had and who he is giving it to.
- UNDUE INFLUENCE: A trust is void to the extent its creation was induced by undue influence. MCL 700.7406. The contestant has the burden of proving there was undue influence exerted on the settlor in the creation, amendment or revocation of the trust (M Civ JI 179.10):
- “To be ‘undue’, the influence exerted upon the settlor must be of such a degree that it overpowered the settlor’s free choice and caused him or her to act against his or her own free will and to act in accordance with the will of the person(s) who influenced him or her.”
- “The influence exerted may be by force, threats, flattery, persuasion, fraud, misrepresentation, physical coercion or moral coercion. Action that results from undue influence is action that the settlor would not otherwise have taken. It disposes of the trust property in a manner different from the disposition the settlor would have made had he or she been free of such influence.”
- “The word ‘undue’ must be emphasized, because the settlor may be influenced in the disposition of the trust property by specific and direct influences without such influences becoming undue. This is true even though the trust would not have been made but for such influence. It is not improper for a person to advise, persuade, argue, flatter, solicit, entreat, implore, or appeal to the decedent’s hopes, fears, prejudices, sense of justice, sense of duty, sense of gratitude, sense of pity, or ties of friendship, affection or kinship, PROVIDED the settlor’s power to resist such influence is not overcome and his or her capacity to finally act in accordance with his or her own free will is not overpowered. A trust that results must be the free will and purpose of the settlor and not that of other person(s).”
- “Mere existence of the opportunity, motive or even the ability to control the free will of the settlor is not sufficient to establish that the creation, amendment or revocation of the trust is the result of undue influence.”
- MISTAKE: “The court may reform the terms of a trust, even if unambiguous, to conform the terms to the settlor’s intention if it is proved by clear and convincing evidence that both the settlor’s intent and the terms of the trust were affected by a mistake of fact or law, whether in expression or inducement.” MCL 700.7415. A challenge based on mistake can be based on the claim that the grantor misunderstood the content of the agreement he or she signed. For example, a trust may be invalidated where it was executed by an illiterate grantor who did not understand the agreement he signed would cause him to lose control over an asset. Osterhof v Grand Haven State Bank, 239 Mich 313; 214 NW 178 (1927).
- FRAUD: A trust is void to the extent its creation was induced by fraud. MCL 700.7406. The contestant has the burden of proving that there was fraud in the making of the trust. “Fraud exists if there was a misrepresentation of material facts to the settlor, and the settlor relied on and was influenced by that misrepresentation in disposing of his or her property by trust.” M Civ JI 179.12.
- DURESS: A trust is void to the extent its creation was induced by duress. MCL 700.7406. Although similar to undue influence, duress exists when a person through an unlawful act induces a second person to act under circumstances that deprive the second person of his or her free will (“undue influence” does not require an illegal act). A contestant has the burden of proving duress in the creation, amendment or revocation of the trust by showing the grantor was “illegally compelled or coerced to act by fear of serious injury to [his or her] person, reputation, or fortune.” Farm Credit Servs, PCA v Weldon, 232 Mich App 662, 681–682; 591 NW2d 438 (1998), cert denied, 529 US 1021 (2000).
- NO INTENTION TO CREATE A TRUST: “A trust is created only if ALL of the following apply: (a) the settlor has capacity to create a trust; (b) the settlor indicates an intention to create the trust; (c) the trust has a definite beneficiary (or is a charitable trust or for the care of an animal); (d) the trustee has duties to perform; and (e) The same person is not the sole trustee and sole beneficiary.” MCL 700.7402(1). A trust is not required to be in writing (unlike a last will and testament), “but the creation of an oral trust and its terms may be established only by clear and convincing evidence.” MCL 700.7407. An arrangement may even qualify as a trust without using the specific word “trust” and without formalities such as witnesses or notary publics. Knights of Equity Mem’l Scholarships Comm’n v University of Detroit, 359 Mich 235, 242; 102 NW2d 463 (1960). A contestant has the burden of proving that the grantor had no intention to create a trust despite his words or actions.
- AMENDMENT OR REVOCATION MADE CONTRARY TO TERMS OF TRUST: For a trust created after April 1, 2010, a settlor or grantor may revoke or amend the trust unless its terms expressly say that the trust is irrevocable. MCL 700.7602(1)(a). A contestant may set aside the amendment or revocation of a settlor or grantor who amends or revokes the trust contrary to its terms (or the law). Otherwise, the settlor or grantor may revoke or amend a revocable trust in any of the following ways:
- “By substantially complying with a method provided in the terms of the trust.” MCL 700.7602(3)(a).
- “If the terms of the trust do not provide a method or the method provided in the terms is not expressly made exclusive”, then by EITHER: “(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”; OR “(ii) if the trust is an oral trust, by any method manifesting clear and convincing evidence of the settlor’s intent.” MCL 700.7602(3)(b).
WHEN CAN A TRUST BE CHALLENGED?
Unlike a will contest, a trust does not have to wait until the death of the grantor or settlor to be challenged. However, the time to challenge a revocable trust is subject to statutes of limitations that are different than those for challenging a last will and testament. According to MCL 700.7604(1), “[a] person may commence a judicial proceeding to contest the validity of a trust that was revocable at the settlor’s death within the earlier of the following:”
- “Two years after the settlor’s death.”
- “Six months after the trustee sent the person a notice informing the person of all of the following:
- (i) The trust’s existence.
- (ii) The date of the trust instrument.
- (iii) The date of any amendments known to the trustee.
- (iv) A copy of relevant portions of the terms of the trust that describe or affect the person’s interest in the trust, if any.
- (v) The settlor’s name.
- (vi) The trustee’s name and address.
- (vii) The time allowed for commencing a proceeding.”
The trustee can be liable for damages for distributing property after the settlor’s death if he or she is aware of a pending judicial proceeding contesting the validity of the trust or the contestant had notified the trustee of the intent to challenge and a judicial proceeding is commenced within 63 days after such notice. MCL 700.7604(2). If a trust is later determined to be invalid, any beneficiary receiving a distribution is subject to returning that money or property. MCL 700.7604(3).
WHAT HAPPENS AT A TRUST CONTEST?
A trust contest is subject to a full trial, either before a judge or a jury. These proceedings can be lengthy and expensive because they involve discovery, depositions, motion hearings and several hours spent in court. Trust assets may be depleted by fiduciary fees and attorney fees incurred by the trustee in defense of the trust. Even if there is a verdict, the trust contest may continue in appellate proceedings for years to come.
However, “interested persons (e.g. trustees, trust beneficiaries) may enter into a binding nonjudicial settlement agreement with respect to any matter involving a trust.” MCL 700.7111(1). Due to the expenses of litigation, settlement is encouraged by the court and mediation may be ordered to facilitate it. A settlement can allow all parties to reach an agreement they can live with to save on the expense and emotional toll of a trust contest, but that agreement cannot include substantially changing or eliminating the trust. “A nonjudicial settlement agreement is valid only to the extent it does not violate a material purpose of the trust and includes terms and conditions that could be properly approved by the court under [the law]”. MCL 700.7111(2). “A nonjudicial settlement agreement shall not be used to accomplish the termination or modification of the trust.” Id.
If there is a resolution short of trial, “[a]ny interested person or trustee may request the court to approve or disapprove a nonjudicial settlement agreement.” MCL 700.7111(4). Once the judge determines that the agreement does not violate a material purpose of the trust, then the court may enter an order approving the agreement. Id.
However, potential contestants should be aware that there may be a provision in the trust they are contesting that penalizes any challengers. Known as in terrorem “no-contest” clauses, these provisions usually have the effect of cancelling a trust distribution to a beneficiary that challenges the validity of the trust. These in terrorem clauses do not apply if the trust beneficiary had “probable cause” to institute a proceeding related to the trust. MCL 700.7113. “Probable cause exists when, at the time of instituting the proceeding, there was evidence that would lead a reasonable person, properly informed and advised, to conclude that there was a substantial likelihood that the challenge would be successful”. Nacovsky v Hall (In re Griffin Trust), 281 Mich Ap 532, 540; 760 NW2d 318 (2008).
The Michigan Court of Appeals found a no-contest clause did not apply where a trust beneficiary sought declaratory relief to determine if probable cause existed to ask the court whether the grantor was unduly influenced. Perry v Perry (In re Miller Osborne Perry Trust), 299 Mich App 525; 831 NW2d 251 (2013). In that case, the trust beneficiary avoided the penalty provision by asking the court to answer a hypothetical question instead of launching a full trust contest. The Court of Appeals later ruled in a different case that a probate court should not consider hypothetical questions because they are nonjusticiable. The Michigan Court of Appeals also declined to extend forfeiture of distribution to a trust beneficiary under a “no-contest” clause when proceedings were brought to challenge the trustee’s administration of the trust, not the terms of the trust itself. In re Vogel, unpublished per curiam opinion of the Court of Appeals decided May 27, 2010 (Docket No. 288837).
IS IT WORTH CHALLENGING THE TRUST?
A trust contest can be a very lengthy and expensive proposition. An aggrieved heir or trust beneficiary must be sure that the proper evidence can be produced and presented to the court to prove mental incapacity, undue influence, fraud, duress, mistake, lack of intent, or a violation of trust terms. Even if successful, the heir or beneficiary must be aware of the consequences of being successful. If the trust is terminated and the assets are distributed according to Michigan’s intestate succession laws, then any beneficiaries not related to the grantor will receive nothing. If a trust or an amendment is set aside, the terms may fall back on a previous version of the trust that is unfavorable to the contestant. Should the trust contain an in terrorem clause, the trust beneficiary should be sure that there is probable cause to mount a challenge. The individual facts and circumstances of your case should be considered in consultation with a skilled probate lawyer.
If you or a loved one have questions about trusts or need legal representation, then do not hesitate to contact the experienced attorneys at Kershaw, Vititoe & Jedinak PLC for assistance today.