Source: http://www.michbar.org/journal/article.cfm?articleID=38&volumeID=6&viewType=archive
Timestamp: 2015-03-30 01:04:23
Document Index: 680158521

Matched Legal Cases: ['§ 8110', '§ 8101', '§ 2718', '§ 1104', '§ 2', '§ 2504', '§ 2504', '§ 2', '§ 3715', '§ 3715', '§ 3', '§ 3', '§ 7408', '§ 7401', '§ 7303', '§ 7303', '§ 1104', '§ 3715', '§ 7401']

Article: EPIC Drafting
EPIC Drafting
by John E. Bos*
*These materials are intended to provide the reader with guidance in estate planning.The materials do not constitute, and should not be treated as, legal advice regarding the use of any particular drafting technique or the tax consequences associated with any such technique. Although every effort has been made to assure the accuracy of these materials, the author does not assume responsibility for any individual’s reliance on the information provided in this article. Each reader should independently verify all statements made in the materials before applying them to a particular fact situation, and should independently determine both the tax and nontax consequences of using any particular drafting technique before recommending that technique to a client or implementing it on a client’s behalf.
We all face challenges in our practice every day. However, we are rarely presented with the challenge of a new law that makes sweeping changes in an area of the law where we all felt comfortable and knowledgeable. The Estates and Protected Individuals Code (EPIC) presents such a challenge. EPIC will significantly impact all of our estate planning documents, and a complete review and revision of existing documents is essential and needs to be done now.
When drafting estate planning documents, keep the following in mind:
•EPIC applies to all governing instruments executed by a decedent dying after the effective date, irrespective of when the instrument was executed [§ 8110(2)(a)].
•Rules of construction and presumptions apply to governing instruments executed before the effective date, unless a contrary intent is clearly indicated, except for the ‘‘by representation’’ rule [§ 8101(2)(e)].
•The rule of construction for taking ‘‘by representation’’ is applied only to instruments executed subsequent to the effective date, unless the instrument is amended to use the phrase ‘‘by representation.’’ In this event, the rule applies to the entire instrument [§ 2718(1)].
•EPIC applies not only to wills and trusts, but to all governing instruments, including: deeds, insurance and annuity policies, POD accounts, TOD registered securities, retirement plans, instruments creating or exercising a power of appointment, power of attorney documents, and any similar dispositive, appointive, or nominative instrument [§ 1104(j)].
Sections 2402 and 2404 provide that the homestead and exempt property allowances for a spouse or minor children are in addition to the share passing by will, unless otherwise provided. If you want to include the homestead and exempt property allowance for the spouse and minor children in the share passing by will, then you need to draft for that result. The following is a sample will provision providing that the homestead and personal property allowances are to be included in the share passing by will:
2.3 Homestead Allowance and Exempt Property Allowance. The homestead allowance and the exempt property allowance provided my spouse pursuant to MCLA 700.2402 and 700.2404 shall be included in the share of my estate passing to my spouse and/or minor children under this will, and shall not be in addition to such share.
The comment to § 2-504 of the Uni-form Probate Code (UPC) explains the reasons for and advantages of using a self-proved will:
A self-proved will may be admitted to probate as provided in Sections 3-303, 3-405, and 3-406 without the testimony of any subscribing witness, but otherwise it is treated no differently from a will not self-proved. Thus, a self-proved will may be contested (except in regard to signature requirements), revoked, or amended by a codicil in exactly the same fashion as a will not self-proved. The procedural advantage of a self-proved will is limited to formal proceedings because Section 3-303, which deals with informal probate, dispenses with the necessity of testimony of witnesses even though the instrument is not self-proved under this section....
Section 2504(1) sets forth the form of acknowledgement to be used when the will is simultaneously executed, attested, and made self-proved; § 2504(2) sets forth the form of acknowledgement to be used when the will is made self-proved at a time after its execution; § 2504(3) sets forth the form of acknowledgement to be used when a codicil to the will is simultaneously executed, attested, and made self-proved. All you need to do is copy the statutory provisions and add them to your will instruments.
Drafting to Change the Antilapse Default Rule
Section 2603 sets forth the antilapse rules applicable to wills. Section 2603 is a rule of construction, and therefore, it is subject to being overridden by a finding of a contrary intent in the will. Section 2603 carries out a presumed intention. Where the decedent devises property to an individual who is a grandparent, a descendant of a grandparent, or a step-child, it is presumed that the decedent’s will also says, ‘‘and if individual does not survive me, I give the property to the individual’s descendants who survive.’’
Subsection (1)(c) says,
...words of survivorship, such as in a devise to an individual ‘‘if he survives me’’ or in a devise to ‘‘my surviving children,’’ are not, in the absence of additional evidence, a sufficient indication of an intent contrary to the application of this section.
To override the antilapse rule, the Comment to § 2-603 of the Revised Probate Code (RPC) makes the following suggestions:
•Add to the devise the phrase ‘‘and not to [the devise’s] descendants.’’
•In the case of a power of appointment, the phrase ‘‘and not to the appointee’s descendants’’ can be added by the donor of the power in the document creating the power of appointment.
•In addition, (1) adding to the residuary clause a phrase such as ‘‘including all lapsed or failed devises,’’ (2) adding to a nonresiduary devise a phrase such as ‘‘if the devise does not survive me, the devise is to pass under the residuary clause,’’ or (3) adding a separate clause providing generally that ‘‘if the devisee of any nonresiduary devise does not survive me, the devise is to pass under the residuary clause’’ makes the residuary clause an ‘‘alternate devise.’’ An alternate devise supersedes a substitute gift.
•Of course, you can also name an alternate devisee such as ‘‘and if the devisee does not survive, I devise the property to [another named devisee].’’
Remember that the antilapse provisions also apply to ‘‘other governing instruments.’’ (Drafting to Provide For or to Avoid Supervised Administration.) Section 3501(3) provides that the court shall order:
1.Supervised administration if the will directs supervision unless the court finds circumstances have changed and that supervised administration is not necessary. The following is a sample will provision directing supervised administration:
4.3 Supervised Administration. I direct supervised administration of my estate.
2.Unsupervised administration if the will directs unsupervised, and the court shall only order supervision if it is necessary for protection of persons interested in the estate. A sample will provision directing unsupervised administration should provide as follows:
4.3 Unsupervised Administration. I direct unsupervised administration of my estate.
3.In all other cases, supervised administration if the court finds it necessary.
You will need to review your will instruments and delete any references to ‘‘independent probate’’ and substitute the term ‘‘unsupervised administration.’’
Section 3715 provides:
Except as restricted or otherwise provided by the will or by an order in a formal proceeding, and subject to the priorities stated in section 3902, a personal representative, acting reasonably for the benefit of interested persons may properly do any of the following....
There follows 32 specific powers. Unlike the RPC, the powers set forth in § 3715 apply to all personal representatives. Comparing the powers listed in § 3715 with the powers contained in my will form (which is the will form published by ICLE and contained on the disk accompanying the Michigan Revocable Grantor Trusts publication), I discovered that I could eliminate most of the powers provisions from the will. Consider replacing the personal representative powers provision in your will form with the following:
4.1 Personal Representative’s Powers. Subject to ¶ 4.1(b), every personal representative of my estate may serve without bond, may use unsupervised probate administration, and may exercise without court order any of the following powers and any other powers that are granted by law:
(a)General Powers of Administration.
(1)Petition for the appointment of, or actually appoint, an ancillary estate fiduciary and pay the expense of ancillary administration.
(2)Enter into any transaction with my estate without the necessity of the consent or approval of any interested person or a court, and enter into any transaction with the trustee of any trust or the personal representative of any other estate in which any beneficiary or distributee has any interest, even though the other trustee or personal representative is also personal representative of my estate.
(3)Allot different kinds or disproportionate portions or undivided interests in property among beneficiaries; and determine the value of any allotted property, without compensating adjustment, even if the basis for federal income tax purposes of property allotted to any beneficiary is not fairly representative of all property available for distribution.
(4)Make any distribution or division of my estate in cash or in kind or both.
(5)When more than one person is serving as personal representative, each, unless expressly limited in the letters of authority, may bind my estate by executing any document, including, but not limited to, checks, contracts, assignments, sales agreements, deeds, notes, and mortgages. If co-personal representatives disagree, a decision by a majority of them shall control.
(b)Limitation on Powers.
(1)When more than one person is serving as personal representative, and at least one of them is not beneficially interested in the exercise or nonexercise of a power or election, the beneficially interested personal representative shall not participate in the exercise or nonexercise of the power or election.
(2)No power shall be exercised in a way that would adversely affect a marital or charitable tax deduction unless it clearly would benefit the beneficiaries of my estate.
The powers set forth in ¶s 4.1(a)(3) and (4) above override a portion of the provisions contained in § 3-906 and give the personal representative broader control over distributions. The Comment to § 3-906 in the UPC explains the concept of that section as follows:
This section establishes a preference for distributions in kind. It directs a personal representative to make distributions in kind whenever feasible and to convert assets to cash only where there is a special reason for doing so...It is implicit in Sections 3-101, 3-901 and this section that each residuary beneficiary’s basic right is to his proportionate share of each asset constituting the residue.
Accordingly, consider carefully whether you want to follow the statutory scheme or give the personal representative broader control of the method and manner of distribution.
Section 3717 provides that if two or more persons are appointed personal representatives (PR), except in specialized situations, and unless otherwise provided in the will, the unanimous agreement of all is required for administration and distribution decisions. This is a good reason to avoid multiple PRs, unless you provide otherwise in the will. The language set forth in ¶ 4.1(a)(5) above permits multiple PRs to act independently.
Section 7406 sets forth the rules for multiple trustees and provides as follows:
(1)If there are more than two trustees and the trust instrument expressly makes provision for the execution of any of the trustees’ powers by all of them or by one or more of them, the provisions of the trust instrument govern.
(2)If there is no governing provision in the trust instrument, co-trustees may provide, by written agreement signed by all of them and filed with and approved by the court where the trust would be registered, as determined in accordance with section 7101, that any one or more of the powers designated in section 7401 may be exercised by any designated one or more of the trustees.
(3)Subject to subsection (1), if two or more trustees own securities, their acts with respect to voting have one of the following effects...
(4)Subject to subsections (1) to (3), all other acts and duties shall be performed by both of the trustees if there are two or by a majority of the trustees if there are more than two....
The division of the duties and powers of the trustees is significantly more complex than drafting for multiple personal representatives. The factors to be considered include: (1) use of an independent trustee for certain powers, such as, discretionary distributions and other tax-sensitive powers; (2) delegating specific decisions, such as investment decisions, to a single trustee; (3) use of a committee of trustees to be responsible for certain trustee duties, such as management of a business or commercial rental property; and (4) nomination of a ‘‘special trustee’’ to deal with special property, such as life insurance, business property, or farm property. It is beyond the scope of this article to attempt to treat this complex topic, other than to offer some drafting solutions that would be applicable to situations where family members are serving as co-trustees in fairly straightforward trust administration matters.
Following is a sample trust provision requiring unanimous consent.
4.4 Action by Co-Trustees. When more than one person is serving as Trustee, all of them, acting by unanimous consent, must exercise any power and authority of Trustee.
Next is a sample trust provision permitting co-trustees to act independently. This provision comes from the sample trust agreement contained in the ICLE publication Michigan Revocable Grantor Trusts.
4.4 Action by One Trustee. When more than one person is serving as Trustee, any one of them, acting alone, may exercise any power and authority of Trustee except that I am the only Trustee who may make discretionary distributions of income and principal to myself or my estate as a beneficiary without the concurrence of all incumbent co-Trustees; provided, that if a corporate co-Trustee is serving, only the corporate Trustee may make discretionary distributions of income and principal.
Section 7401 provides:
(1)A trustee has the power to perform in a reasonable and prudent manner every act that a reasonable and prudent person would perform incident to the collection, preservation, management, use, and distribution of the trust property to accomplish the desired result of administering the trust legally and in the trust beneficiaries’ best interest.
(2)Subject to the standards described in subsection (1) and except as otherwise provided in the trust instrument, a trustee possesses all of the following specific powers....
There follows 34 specific powers, plus § 7408 sets forth a number of powers relating to tax matters. Comparing the powers listed in § 7401 with the powers contained in the sample trust agreement contained in the ICLE publication Michigan Revocable Grantor Trusts, I discovered that I could eliminate most of the powers provisions from the trust instrument. Consider replacing the trustee powers provision in your trust with the following:
5.1 Powers of Trustee. Subject to ¶ 5.1(c), every Trustee may exercise any of the following powers, and any others that are granted by law, without court order:
(a)Insurance Powers.
(1)Receive, apply for, own, pay premiums on, and borrow upon any insurance policy held by the trust.
(2)Exercise, as absolute owner, all of the options, benefits, rights, and privileges under any insurance policies held by the trust.
(b)General Powers of Administration.
(1)Purchase assets from my Spouse, or from a so-called marital or QTIP trust or trusts for the benefit of my Spouse, or from a combination of them, and give as consideration a private annuity for the benefit of my Spouse.
(2)Enter into any transaction with the personal representative of my estate without the necessity of the consent or approval of any interested person or a court, and enter into any transaction with the trustee of any trust or the personal representative of any other estate in which any beneficiary or distributee has any interest, even though Trustee also is the other trustee or personal representative.
(3)Release all or any part of a general power or special power, even if a special power is not presently exercisable or is exercisable in a fiduciary capacity that requires the exercise of the power, if Trustee, in its sole discretion, determines that the release is necessary to qualify a trust (1) for the marital or charitable deductions for federal estate or gift tax purposes or (2) as an eligible shareholder of an S corporation (as defined in IRC 1361(b)).
(e)Limitation on Powers.
(1)When more than one person is serving as Trustee and at least one of them is not beneficially interested in the exercise or nonexercise of a power or election, the beneficially interested Trustee shall not participate in the exercise or nonexercise of the power or election.
(2)Trustee shall exercise no power in a way that would affect adversely a marital or charitable tax deduction unless it clearly would benefit the beneficiaries. Thus, assets allocated to a trust qualifying for the marital deduction, other than personal residences, must produce reasonable income within a reasonable time.
(3)When exercising discretion relating to distribution of income or principal, Trustee shall consider all other income and liquid assets of the beneficiary known by Trustee.
(4)I am the only person who, when serving as Trustee, may exercise any incident of ownership, alone or with others, over any policy of insurance on the life of the person.
Keeping Trust Beneficiaries Informed: Who is Entitled to Receive Trust Accounts?
Section 7303 provides:
(1)Subject to subsection 2, the trustee of a revocable trust shall keep the settlor reasonably informed of the trust and its administration and, unless otherwise provided in the trust instrument, the trustee of a revocable trust does not have a duty to inform a trust beneficiary of the trust and its administration, other than the settlor or, if the settlor is an incapacitated person, settlor’s designated agent.
(2)Unless otherwise provided in the trust instrument, if trustee reasonably believes the settlor of a revocable trust is an incapacitated person and has no designated agent, trustee shall keep each beneficiary, who, if the settlor were then deceased, would be a current trust beneficiary, reasonably informed of the trust and its administration. Notwithstanding the provisions of the trust instrument, upon good cause shown, the court may order the trustee to keep other beneficiaries reasonably informed of the trust and its administration.
(3)For a revocable trust, within 28 days of acceptance of trust or the death of the settlor, whichever is later, and for all other trusts, within 28 days of acceptance of the trust, trustee shall inform in writing each trust beneficiary of the trust’s existence, of the court in which the trust is registered, if it is registered, of trustee’s name and address, and of the beneficiary’s right to request and receive both a copy of the trust’s terms that describe or affect the beneficiary’s interest and relevant information about the trust property. In addition, all of the following apply:
(a)Upon reasonable request, the trustee shall provide a beneficiary with a copy of the terms of the trust that describe or affect the beneficiary’s interest and with relevant information about the trust property.
(b)Unless the settlor directs or requests in the trust instrument that the trustee provide accounts to less than all interested trust beneficiaries, all of the following apply:
(i)At least annually and on termination of the trust or a change of the trustee, the trustee shall provide a statement of account to each current trust beneficiary and shall keep each current trust beneficiary informed of the trust and its administration.
(ii)Upon reasonable request, the trustee shall provide a statement of account to each interested trust beneficiary who is not a current trust beneficiary and shall keep each of those persons reasonably informed of the trust and its administration.
(iii)The trustee shall provide a statement of account and other information to a beneficiary as the court directs.
(iv)In the trustee’s discretion, the trustee may provide a statement of account and other information to any beneficiary.
(c)If the settlor requests or directs the trustee in the trust instrument to provide accounts and information to less than all interested trust beneficiaries, the trustee shall provide statements of account and other information as provided in the trust instrument. At the court’s direction, the trustee shall provide statements of account and other information to persons excluded by the settlor’s request or direction to the extent and in the manner the court directs.
Your trust instrument does not need any provisions for accountings if you want the provisions of § 7303 to control. Keep in mind that any instructions in the trust instrument that conflict with the statutory provisions will supersede the statutory provisions. Draft very carefully to avoid ambiguity and confusion.
Following are several sample trust provisions with differing requirements for providing accountings to trust beneficiaries.
1)Accountings to all beneficiaries at all times.
5.4(g) Accountings. During the term of this Agreement, Trustee shall furnish, at least annually, to each beneficiary, a complete inventory of trust property held in trust in which the beneficiary has an interest, and shall furnish quarter-annually to each beneficiary an accounting of all receipts, disbursements, and transactions in a manner required by MCLA 700.7303(3).
The above provision could be easily converted to a provision that only takes effect after the death of the settlor by deleting During the term of this Agreement and adding Following my death.
2)Accountings only to the surviving spouse.
5.4(g) Accountings. Following my death and during the lifetime of my Spouse, Trustee shall furnish, at least annually, to my Spouse a complete inventory of trust property held in trust for my Spouse and shall furnish quarter-annually to my Spouse an accounting of all receipts, disbursements, and transactions in a manner required by MCLA 700.7303(3). During any period that my Spouse is an incapacitated person, Trustee shall furnish the inventory and accountings to my Spouse’s designated agent; or if there is no agent, to such person that my Spouse shall select; or if there is no such person selected by my Spouse, then Trustee may, in its discretion, provide the inventory and accountings to a person selected by Trustee. During the lifetime of my Spouse, Trustee shall not provide any accountings or information about the trust administration or trust property to any other beneficiary.
3)Accountings to the surviving spouse and another person.
5.4(g) Accountings. Following my death and during the lifetime of my Spouse, Trustee shall furnish, at least annually, to my Spouse and to [name of other person] a complete inventory of trust property held in trust for my Spouse and shall furnish quarter-annually to my Spouse and to [name of other person] an accounting of all receipts, disbursements, and transactions in a manner required by MCLA 700.7303(3). During any period that my Spouse is an incapacitated person, Trustee shall furnish the inventory and accountings to [name of other person.] During the lifetime of my Spouse, Trustee shall not provide any accountings or information about the trust administration or trust property to any other beneficiary.
4)Accountings to the surviving spouse and adult children.
5.4(g) Accountings. Following my death and during the lifetime of my Spouse, Trustee shall furnish, at least annually, to my Spouse and to my adult children who are trust beneficiaries, a complete inventory of trust property held in trust for my Spouse and shall furnish quarter-annually to my Spouse and to my adult children who are trust beneficiaries an accounting of all receipts, disbursements, and transactions in a manner required by MCLA 700.7303(3). During any period that my Spouse or an adult child is an incapacitated person, Trustee shall furnish the inventory and accountings to such incapacitated beneficiary’s designated agent; or if there is no agent, to such person that the incapacitated beneficiary shall select; or if there is no such person selected by the incapacitated beneficiary, then my Trustee may, in its discretion, provide the inventory and accountings to a person selected by my Trustee. During the lifetime of my Spouse, Trustee shall not provide any accountings or information about the trust administration or trust property to any other beneficiary.
5)Accountings only to current trust beneficiaries.
5.4(g) Accountings. Following my death, Trustee shall furnish, at least annually, to current trust beneficiaries a complete inventory of trust property held in trust in which the current trust beneficiary has an interest, and shall furnish quarter-annually to each current trust beneficiary an accounting of all receipts, disbursements, and transactions in a manner required by MCLA 700.7303(3). During the lifetime of a current trust beneficiary, Trustee shall not provide any accountings or information about the trust administration or trust property to any other beneficiary.
6)Exclude a specific beneficiary. Add the following to ¶s 1 or 5 above:
Provided, however, Trustee shall not provide any accountings or information about the trust administration or trust property to [name excluded beneficiary].
7)Exclude a group of beneficiaries. If the trust provides for tangible personal property distributions, or cash gifts to charities or persons, settlor may not want such beneficiaries to receive accounts. Add the following to ¶s 1 and 5 above:
Provided, however, Trustee shall not provide any accountings or information about the trust administration or trust property to those beneficiaries whose only distribution consists of tangible personal property.
Provided, however, Trustee shall not provide any accountings or information about the trust administration or trust property to those beneficiaries who receive a distribution of trust property pursuant to ¶ [identify the ¶ that makes gifts].
8)Exclude beneficiaries that receive a distribution of trust property with a value of less than a determined amount. Add the following to ¶s 1 or 5 above:
Provided, however, Trustee shall not provide any accountings or information about the trust administration or trust property to those beneficiaries who receive a distribution of trust property with a value of less than [insert the amount, such as $20,000].
9)Accountings only to adult children.
5.4(g) Accountings. Following my death, or my Spouse’s death, whichever is later, Trustee shall furnish, at least annually, to my adult children, who are trust beneficiaries, a complete inventory of trust property held in trust for my adult children and shall furnish quarter-annually to my adult children who are trust beneficiaries an accounting of all receipts, disbursements, and transactions in a manner required by MCLA 700.7303(3). During any period that an adult child is an incapacitated person, Trustee shall furnish the inventory and accountings to such incapacitated beneficiary’s designated agent; or if there is no agent, to such person that the incapacitated beneficiary shall select; or if there is no such person selected by the incapacitated beneficiary, then my Trustee may, in its discretion, provide the inventory and accountings to a person selected by my Trustee. During the lifetime of my adult children, Trustee shall not provide any accountings or information about the trust administration or trust property to any other beneficiary.
When excluding trust beneficiaries from receiving trust accountings, keep in mind that § 7303(1) provides that a claim against a trustee for breach of trust can be barred within one year if the claimant beneficiary was provided an accounting.
DRAFTING PROVISIONS COMMON TO BOTH WILLS AND TRUSTS
It is not uncommon to have an alternate distribution provision in a will or trust, in the event that the designated beneficiaries in the instrument are not surviving, that provides for a distribution to the heirs of the decedent, and/or the heirs of the spouse of the decedent. Pursuant to §§ 1104(m) and 2720, the term ‘‘heirs’’ is defined to include the state, as in ‘‘Michigan.’’ This could result in the state taking one-half of the estate as an heir. Anytime you designate ‘‘heirs’’ as a potential beneficiary in a trust instrument, or as a devisee in a will, draft to exclude the state from the definition. A sample provision excluding the state as an heir follows:
In the event that the state is determined to be my heir (or my Spouse’s heir) any distribution that would have been made to the state, but for this provision, shall be added to and distributed as part of the shares being distributed to living individuals.
Representation under EPIC
Section 2718 deals with the concept of property that is to be distributed ‘‘by representation.’’ Under EPIC, representation is to be determined as a ‘‘per capita at each generation’’ distribution. The RPC treats representation as a ‘‘per stirpital’’ distribution, which results in an initial division of shares at the first generation with a living member. In most circumstances, this will be a difference without a distinction. The difference between the EPIC and the RPC can be illustrated by the following example:
A single parent is survived by two daughters, one grandchild of a deceased daughter, and three grandchildren of a deceased son. Under the existing law, the two daughters each take 1/4, the one grandchild of the deceased daughter takes 1/4, and the three grandchildren of the deceased son each take 1/12. Under EPIC, the surviving daughters will each take 1/4 and the four grandchildren will take 1/8 each.
If you want to use the per capita at each generation distribution, use the following sample provision for a trust:
3.4 Distribution to Family. When I die, Trustee shall distribute the remaining trust property, including additions from any source, to my surviving descendants by representation.
or the following sample provision for a will:
2.2 Residuary Estate. I give the residue of my estate (my residuary estate) to my surviving descendants by representation.
Use of the terms ‘‘by representation’’ or ‘‘by right of representation’’ will not result in a per stirpital distribution, but rather will result in a per capita at each generation distribution. If you want to have a per stirpital distribution, then you need to draft for that result. Use the following sample provision for a per stirpital distribution from a trust:
3.4 Distribution to Family. When I die, Trustee shall divide the remaining trust property, including additions from any sources, into separate trusts, equal in value, one for each living child of mine and one for the then living descendants, collectively, of each deceased child of mine. Trustee shall distribute each trust set aside for each living child of mine and each trust for the descendants of a deceased child of mine to the beneficiary free from trust. (This is a provision from the ICLE publication Michigan Revocable Grantor Trusts.)
2.2 Residuary Estate. I give the residue of my estate (my residuary estate) in equal shares, one share for each living child of mine, and one share for the then living descendants, collectively, of each deceased child of mine.
Michigan’s Prudent Investor Rule
If your will or trust instrument incorporates by reference the powers of a personal representative (§ 3715) or the powers of a trustee (§ 7401) as recommended above, you have automatically provided that the fiduciary’s investment activities are governed by the prudent investor rule. Section 1502(2) provides:
The Michigan prudent investor rule is a default rule that may be expanded, restricted, eliminated or otherwise altered by the provisions of the governing instrument....
If you want to modify the prudent investor rule, you can (1) specify the types of permissible investments, (2) specify prohibited investments, or (3) use a combination of both. Following is a sample trust provision that specifies permissible investment assets, starting with the most conservative, and you can pick and choose those that are acceptable to your client:
5.1 Investments.
(a)My Trustee shall only invest trust assets in the following approved investments: (1) deposits in federally insured financial institutions; (2) direct obligations of the United States Treasury; (3) obligations of federally sponsored institutions; (4) obligations secured by first mortgages which are pass-through-securities; (5) corporate bonds rated grade A or better; (6) common and preferred stocks of domestic corporations which have a median market value of $5 billion; (7) common and preferred stocks of corporations listed on the Standard & Poor’s 500 Composite Stock Price Index; and (8) mutual funds that limit their investments to any of those specified above.
(b)My Trustee shall not: (1) invest more than 20% of the trust assets in any one industry; (2) invest more than 5% of trust assets in any one corporation; (3) invest more than 60% of trust assets in corporate securities or mutual funds that invest in corporate securities; or (4) invest more than 70% of trust assets in bonds or mutual funds that invest in bonds.
(c)My Trustee shall not invest in futures, derivatives, collateralized mortgage obligations, commodities, securities of foreign corporations, foreign currency, precious metals, oil and gas ventures, limited partnerships, real estate, or corporations that manufacture, distribute, advertise, or are in any way involved in tobacco, alcohol, or firearms.
(d)Any investments in securities of foreign corporations must be through a mutual fund with at least 5 years foreign investment experience, and Trustee shall not invest more than 15% of the trust assets in such mutual funds.
There are obviously many possible variations of the above provisions.
This article only begins to address the drafting issues that attorneys are going to contend with. Failure to address the changes being introduced by EPIC will be a disservice to your clients and result in increased liability for yourself. Review your trust and will forms, study the new provisions of EPIC, and become prepared to develop innovative planning and drafting solutions to meet your client’s goals and needs.
John E. Bos is associated with the Lansing firm of Bernick, Omer & Radner, P.C., where he practices in the areas of estate planning, probate and trust administration, and elder law. He is a past chair of the Probate and Estate Planning Section and a fellow of the American College of Trust and Estate Counsel. He is a graduate of Michigan State University (B.A.), the University of Michigan Law School (J.D.), and is currently an adjunct faculty member, teaching a seminar in estate planning, at the University of Michigan.