Natalia Chi
On January 12, 2023, the Michigan Court of Appeals issued its decision In re Claeys Revocable Living Trust2023 Westlaw 175242, no. 360054 (Mich Ct App January 12, 2023), which assessed whether a trust beneficiary was entitled to in-kind distributions of real estate owned by the trust.
Loraine and Thomas were the surviving children of Bernard and Terese, who had created a joint trust. Following the death of their parents, Loraine and Thomas were appointed successor co-trustees of the trust. The brothers as co-trustees could not agree on the trusteeship and the probate court eventually removed Loraine, leaving Thomas as the sole trustee. For five years, the brothers repeatedly took their disagreements over the trust to the probate court for resolution.
One of the disputes involved the distribution of four lakefront lots. Loraine wanted these lots distributed as part of his trust share. However, Loraine and the trustee, Thomas, could not agree on the fair market value of the lots. Thomas believed that Loraine was undervaluing lots and that lots could sell for much more on the open market. At one point the brothers decided to put all four lots up for sale. Thomas believed the four lots were worth $750,000, but offered to give them out in kind to Loraine at a discounted value of $600,000. Loraine declined this offer, deeming the four lots to be worth no more than $548,000.
When Thomas entered into a purchase agreement to sell two of the lots for $420,000, Loraine petitioned the probate court to order the trustee to distribute the two lots to her in-kind share, valued at $420,000. Loraine had previously valued these two lots at $318,000. The probate court refused to order in-kind distribution to Loraine and instead authorized Thomas to conclude the sale to the third-party buyer for $420,000. Loraine appealed.
Initially, the Court of Appeal noted that the trust agreement granted the trustee broad discretion to decide whether to distribute the trust assets in kind or in cash. Loraine had no right under the trust agreement to receive the distribution of the lots in kind. Loraine said MCL 700.3906(1) supported her request for in-kind distribution. This statute provides: “Unless the will [or trust] indicates a contrary intention, the distributable ownership of the estate of the deceased will be distributed in kind to the extent practicable…” (The rules of construction of wills also apply to the construction of trusts.) The Court of Appeal noted that the statute deferred to the terms of the trust agreement (“Unless the will [or trust] indicates a contrary intention…”), and the statute also indicated that distribution in kind was to be preferred only “to the extent practicable”. Given the siblings’ chronic disagreements and the trustee’s discretion under the trust agreement, the Court of Appeal found that the probate court had not erred in authorizing the sale to a third party. Furthermore, the appeals court found that the trustee had acted in good faith by offering Loraine the option to take all four lots at a discounted price, which she declined. Furthermore, Loraine’s case was undermined by her earlier agreement to put the four parcels on the market.
Based on the information available from the decision, it appears that Loraine likely could have obtained the lots in kind had she pursued a different strategy in dealing with Thomas. When the parties make everything related to trusteeship as difficult as possible, the probate court can be forgiven for choosing the simpler, more stark outcome.
