A husband dies leaving a QTIP trust. It gives his second wife the income for the rest of her life, and whatever principal is left at her death goes to his two children from his first marriage. His wife is the trustee. This article is about administering that trust.

Nobody drafted a mistake. That is a common solution for a second marriage. But read it from each side and you can see why these administrations reach probate court so often. She writes the checks. They wait on her. Michigan law does not resolve that tension. What it does is tell the trustee which decisions are actually hers, and she often has less discretion than she was led to expect.

What a QTIP Trust Is and What It Requires of the Trustee

A qualified terminable interest property trust, or QTIP trust, gives the surviving spouse a lifetime interest while the deceased spouse keeps permanent control over who receives the principal at the end. It is a common choice for a second marriage where there are children from a prior one. Our guide to how QTIP trusts work covers the planning side; this one starts after the first death, with the trust funded and the surviving spouse holding the checkbook.

The structure matters because the trust has to satisfy federal requirements to keep its tax treatment, and those requirements are what remove most of the trustee’s discretion. This is not a pot of money she divides by her own sense of fairness. It is two entitlements, and only one of them involves judgment.

In a QTIP Trust the Income Is Mandatory. Only the Principal Is Discretionary.

The income is not a decision. A QTIP trust requires that all trust income go to the surviving spouse, and directs the trustee to pay her all of the net income at some interval. A trustee who accumulates income to preserve it for the remainder beneficiaries is not being prudent. She is breaching the trust.

Principal is different. A discretionary distribution of principal is a real decision, and it comes with a standard. A typical QTIP marital trust lets the trustee distribute principal in the amounts necessary for the health and support of the surviving spouse, taking into account the standard of living she had become accustomed to and resources otherwise available to her from any other source.

That last clause is the one that produces surcharge claims. A spouse-trustee who invades principal without documenting what she has outside the trust has skipped an element of her own standard, and that omission, not the size of the distribution, is what the children’s lawyer builds a case on.

The Michigan Limit on Distributing to Yourself and Its Two Exceptions

Michigan has a statute aimed at the trustee who is also a beneficiary. A beneficiary other than the settlor who serves as trustee, and whose trust lets her distribute to or for her own benefit, may exercise that power only in accordance with an ascertainable standard, meaning health, education, support, or maintenance. MCL 700.7815(3)(a); MCL 700.7103(b).

Two qualifications sit in the statute and both get left out of the usual summary. The first is that it is a default rule: it applies “unless the terms of the trust expressly indicate that the rule does not apply.”

The second is that one kind of marital trust is carved out entirely. Subsection (3) does not apply to a power held by the settlor’s spouse serving as trustee of a trust for which a marital deduction as defined in section 2056(b)(5) or 2523(e) of the Internal Revenue Code was previously allowed. MCL 700.7815(5)(a). Those are the general power of appointment marital trust and the lifetime marital deduction. A QTIP takes its deduction under a different subsection, so the carve-out is written to a different marital trust.

A well drafted QTIP already limits the spouse to health and support. The trusts that generate litigation are the ones that called her discretion absolute and left the standard out.

What the Children Are Owed and the Transactions They Can Undo

A trustee’s duties in a second marriage run to both sides of the family. She must administer the trust solely in the interests of the beneficiaries and act impartially among them. MCL 700.7802(1); MCL 700.1507. That includes the children. Remainder beneficiaries of a QTIP are qualified trust beneficiaries, because they would take if the spouse’s interest ended or the trust terminated. MCL 700.7103(g). So the duties run to them from day one: notice of the trust within 63 days of the death, MCL 700.7814(2)(c), then at least annually a report of trust property, receipts, disbursements, and the trustee’s compensation. MCL 700.7814(3).

Self-dealing is separate exposure. A transaction involving trust property that the trustee enters for her own account, or that is affected by a substantial conflict between her fiduciary and personal interests, is voidable by an affected beneficiary unless the trust authorized it, the court approved it after notice, the beneficiary consented or released her, or the claim is out of time. MCL 700.7802(2). And a transaction with her own spouse, descendant, sibling, or parent is presumed to be affected by a conflict. MCL 700.7802(3). So selling the lake house to her daughter starts from a presumed conflict even at a fair appraised price, which is why a sale like that should be authorized or court-approved before it closes rather than defended afterward.

Four Tools That Resolve a Blended Family Trust Dispute Without Litigation

• A neutral cotrustee for distributions. Where the power is limited because the trustee is also a beneficiary, the remaining unlimited trustees may exercise it by majority, and if all are limited the court may appoint a special fiduciary. MCL 700.7815(4). This removes the conflict instead of arguing about it.
• A binding agreement among the interested persons. A nonjudicial settlement agreement can direct the trustee to act or refrain from acting and approve her accounting, so long as it does not violate a material purpose of the trust. MCL 700.7111.
• A demand that unproductive property be made productive. This one is statutory and rarely invoked. Where a marital deduction is allowed and the trust holds substantially unproductive property, and what the trustee can shift from principal to income plus what the trust lets her distribute from principal still does not give the spouse the beneficial enjoyment the marital deduction requires, the spouse may require the trustee to act. MCL 555.813. The trustee picks the remedy: make the property productive, convert it within a reasonable time, or adjust between principal and income. The spouse can compel action, not the choice.
• Removal. A qualified trust beneficiary can petition to remove a trustee for a serious breach of trust or a persistent failure to administer effectively. MCL 700.7706.

Frequently Asked Questions About Michigan Blended Family Trust Administration

Talk to a Michigan Trust Administration Attorney

The trustees who end up in litigation are rarely the ones who took too much. They are the ones who did not know which decisions were theirs, and a trustee pays personally for what a court calls a breach. If the beneficiaries of the trust you are administering come from different marriages, have the distribution standard and the reporting schedule reviewed before the first check.

We do this work for surviving spouses and for the adult children on the other side of it, and trust administration fees are ordinarily an expense the trust pays. Trustees worried about personal exposure should read how trustee liability actually arises. To schedule a consultation, call Boroja, Bernier & Associates at (586) 991-7611.

About the Author

Daniel Boroja, Esq. is a founding partner of Boroja, Bernier & Associates PLLC, where he leads the firm’s estate planning, probate and trust administration, and elder law practice. He has practiced Michigan estate and trust law since 2013 (Bar No. P77079).