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Give Courts Authority for Long Term Trusts for Minors

October 1, 2010

Originally published in Michigan Lawyers weekly and republished with permission.

On an early spring morning, a father is killed in an automobile accident on his way to his place of business. The accident was clearly not his fault, and a wrongful death action ensued. The father had been a successful surgeon, and the litigation resulted in a significant settlement to the doctor’s family. It is only after the settlement is reached that the surviving spouse realizes a large portion of the settlement will be allocated to accounts for her two minor sons, currently 16 and 12. This causes her great alarm.

Her distress is not over the fact that her own portion would be diminished by the large allocation to her children – she and her husband had built up a sizable estate and his life insurance coverage was significant. Instead, she is troubled to learn that under Michigan law as applied in her local county each child will be granted unrestricted access to the litigation award upon reaching age 18. She is particularly frustrated by the knowledge that she and her husband had discussed this very issue with their estate planning attorney who had drawn for them a plan which called for any child’s inheritance to be managed in trust until the child’s 35th birthday.

Michigan statutory law does not provide an explicit path to the creation of a trust to manage assets for a minor beyond age 18. Nevertheless, some Michigan probate courts have found implied powers within the statute to do just that. The authors agree with those courts. Powers which are intended to allow a judge broad leeway to promote and protect the best interests of a minor and his or her family, when aggregated, give our courts ample authority to create long term trusts for minors.

As the statute’s name implies, one of the primary goals of Michigan’s Estates and Protected Individuals Code (“EPIC”) is the appropriate care for “protected individuals,” or those under a legal disability. MCL 700.1101 et seq. Minority falls within EPIC’s definition of disability – essentially, any person for whom a protective order may be entered is “disabled.” MCL 700.1103(o), 5401. EPIC grants courts several powers which may be exercised with respect to a protected individual’s estate or business affairs. For the most part, minority and other forms of disability are treated in the same fashion. There are, however, some provisions which are specific to minority.

The area of EPIC which some courts cite as limiting a judge’s ability to create longer term trusts for minors appears in section 5407(2)(c) which states that when the court determines there is basis for a protective order with respect to “an individual for a reason other than minority,” the court has the power “to create a revocable or irrevocable trust of estate property that may extend beyond the disability or life of a protected individual.” MCL 700.5407(2)(c). While it is indisputable that this subsection doesn’t allow for the creation of a long term trust for a minor, subsection (c) should not be read as disallowing the creation of such a trust. Instead, courts should recognize that subsection (c) deals specifically with adults, not minors.

The preceding subsection of EPIC, section 700.5407(2)(b), is specific to minors, and it includes no such limit on the creation of trusts. In fact, the court is authorized to enter virtually any order affecting the minor’s estate where such order is “necessary for the best interests of the minor and members of the minor’s immediate family.” Under this section, once a court determines the basis for a protective order exists, this “best interests” limitation appears to be the only limitation on the court’s discretion. Moreover, the court is required to consider the best interests of the minor’s immediate family as well as the minor. Clearly the legislature intended for courts to take account of the interests of the minor’s parents in evaluating the use of the court’s various powers. The EPIC Reporter, in his comment to section 700.5407(2)(b), states that this very broad authority “can be read to permit, in appropriate cases, the creation of a trust of conservatorship assets that will extend beyond age 18.”

While the authors believe section 700.5407(2)(b) provides sufficient authority to protect a child’s assets past minority, there is another line of reasoning on which our courts can rely when dealing with the specific issue of wrongful death proceeds. When a wrongful death action nears its conclusion, among the final steps is the duty of the personal representative and the court to finalize the distribution of the proceeds among various potential takers. Until that process is completed, the minor children do not have a “vested” interest in the proceeds. After all, the court is authorized to distribute proceeds among many family members other than the children. The authors of the Michigan Probate Benchbook, opine that “a trust may be created for a minor that would postpone enjoyment beyond minority for assets not presently vested in the minor, as long as the assets are transferred directly to the trust.” Michigan Probate Benchbook (2008 Supp), §8.3. Settlement proceeds paid to a trust as a condition of settlement is highlighted as a specific example.

At least one state has addressed this issue by statute. Ohio’s probate courts are permitted to create trusts for beneficiaries of wrongful death proceeds when the beneficiary is under the age of 25. ORC 2125.03. While such a law would provide certainty and consistency among the jurisdictions, the authors believe Michigan statutory law provides superior authority and flexibility. Rather than handling this issue by statute, we urge Michigan’s probate judges to study this issue and work to create consistency among the jurisdictions and to abide EPIC’s admonition that they use their broad powers to protect the best interests of minors and their families.

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