Coverston v. Kellogg, Docket No. 65688

• Decision Date: 09 November 1984
• Docket Number: Docket No. 65688
• Citation: 136 Mich.App. 504,357 N.W.2d 705
• Parties: Mary C. COVERSTON, (Formerly Kellogg), Plaintiff-Appellee, v. Gerald P. KELLOGG, Defendant-Appellant, and Michigan National Bank and Herbert Elzinga, Personal Co-Representatives of the Estate of Edith Kellogg, Deceased, Defendants, Garnishee.
• Court: Court of Appeal of Michigan — District of US

Page 705

357 N.W.2d 705

136 Mich.App. 504

Mary C. COVERSTON, (Formerly Kellogg), Plaintiff-Appellee, v. Gerald P. KELLOGG, Defendant-Appellant, and Michigan National Bank and Herbert Elzinga, Personal

Co-Representatives of the Estate of Edith Kellogg,

Deceased, Defendants, Garnishee.

Docket No. 65688.

Court of Appeals of Michigan.

Submitted Aug. 1, 1983.

Decided Aug. 7, 1984.

Released for Publication Nov. 9, 1984.

Saukas, Bush & Idema, P.A. by Michael L. Idema, Grand Rapids, for plaintiff-appellee.

Freihofer, Oosterhouse, DeBoer & Barnhart, P.C. by Robert J. DeBoer, Grand Rapids, for Gerald P. Kellogg.

Before V.J. BRENNAN, P.J., and SHEPHERD and QUINNELL ^*, JJ.

PER CURIAM.

Defendant Kellogg appeals as of right from a trial court order dated June 28, 1982, directing defendant cotrustees of the Gerald Kellogg Trust to pay $10,000 to plaintiff as a lump sum alimony payment.

The plaintiff and defendant Kellogg were divorced by a judgment dated November 2, 1972. The parties had two children, Kristine Marie, born May 2, 1965, and Karyn Mary, born July 10, 1968. Pursuant to the judgment of divorce, plaintiff was awarded $10,000 as alimony in gross to be paid on or before November 2, 1976. The sum has not been paid to plaintiff.

Under a will dated October 21, 1977, Edith Kellogg, defendant Kellogg's mother, established a testamentary trust for defendant Kellogg. Mrs. Kellogg died on July 26, 1978. Her will was subsequently admitted to probate and defendants Herbert Elzinga and Michigan National Bank were appointed cotrustees by order of the probate court.

On July 7, 1980, the Kent County Friend of the Court filed a petition for an order to show cause and an order for attachment which were issued in an attempt to enforce support provisions of the parties' divorce judgment. (Since 1973, several petitions had been filed and resolved for enforcement of the divorce judgment.) The trial court cancelled the order to show cause and, on its own motion, issued an order to show cause dated April 13, 1981, ordering defendants to show why the Friend of the Court should not be appointed as receiver of the trust fund for the arrearages in child support and alimony payments.

On December 22, 1981, the trial court issued an opinion finding that the trust established by Edith Kellogg was not a discretionary trust. Citing Hurley v. Hurley, 107 Mich.App. 249, 309 N.W.2d 225 (1981), lv. den. 413 Mich. 890 (1982), and the cases therein, the trial court impliedly found that the trust was a spendthrift trust and that Michigan allowed invasion of spendthrift trusts in order to enforce child support and alimony payments. Therefore, the trial court concluded that the income and the corpus of the trust were subject to payment of child support and the payment of alimony. In accord with its opinion, the trial court issued an order on June 28, 1982, ordering defendant cotrustees of the Gerald Kellogg Trust to pay from the trust assets previously ordered child support and alimony as well as the statutory oversight fee to the Friend of the Court. Defendant Kellogg appeals only from the order directing the cotrustees to pay $10,000 from the trust fund as a lump sum alimony payment.

The issue for our determination is whether the trial court erred in concluding that the trust was a spendthrift trust and that the income and corpus of the trust were subject to the payment of alimony. Defendant Kellogg argues that the trust is a discretionary trust and as such it is not subject to a claim for alimony by the former spouse of the beneficiary.

Restatement Trusts, 2d, Sec. 155(1), p. 323 states:

" * * * if by the terms of a trust it is provided that the trustee shall pay to or apply for a beneficiary only so much of the income and principal or either as the trustee in his uncontrolled discretion shall see fit to pay or apply, a transferee or creditor of the beneficiary cannot compel the trustee to pay any part of the income or principal."

A trust containing this type of provision is known as a "discretionary trust". Comment b on Sec. 155(1) Restatement Trusts, 2d. See also II Scott on Trusts (3d ed.), Sec. 155, pp. 1180-1181, and Bogert, Trusts and Trustees (2d ed.), Sec. 228, pp. 508-518. However, "[t]he trustee must have complete discretion to pay or apply or to totally exclude the beneficiary, if the trust is to be called 'discretionary' in a technical sense". Bogert, supra, pp. 509-510. The rule stated in Sec. 155(1) applies only in a situation where the trustee "may in his absolute discretion refuse to make any payment to the beneficiary or to apply any of the trust property for his benefit". Comment c on Sec. 155(1) Restatement Trusts, 2d, pp. 323-324. (Emphasis added.)

Likewise, the rule:

" * * * is not applicable where the trustee has discretion merely as to the time of payment, and where the beneficiary is ultimately entitled to the whole or to a part of the trust property.

"If by the terms of the trust the trustee must pay to or apply for the beneficiary the whole or any part of the income or principal, the interest of the beneficiary can be reached by his transferee or creditor, unless the trust is a spendthrift trust or a trust for the support of the beneficiary." Comment c on Sec. 155(1), Restatement Trusts, 2d, p. 324; see also Scott, supra, pp. 1182-1183. (Emphasis added.)

Although paragraph 3(a) of the instant trust contains terminology purporting to vest the trustees with the absolute unfettered discretion to use the income and, if necessary, the principal for the benefit of Gerald Kellogg's welfare and maintenance during his lifetime, our examination of the remainder of the trust reveals that the settlor, Edith Kellogg, did not grant to the trustees the power to refuse to apply trust funds for the benefit of her son. Furthermore, under the terms of the trust, defendant Gerald Kellogg is ultimately entitled to the whole or part of the trust property.

Paragraph 3(b) vests the trustees with broad discretionary powers. Although they are not required to do so, they can elect to terminate the trust when the beneficiary attains the age of 50. However, the assets must then be distributed to Gerald Kellogg. If the trustees deem it to be in Gerald Kellogg's best interests, the trustees may hold the property in trust for the remainder of the beneficiary's lifetime or pay over and distribute such amounts to the beneficiary as they deem to be in his best interest. The trustees may also terminate the trust at a later date and pay over the assets to the beneficiary. Although the trustees have almost unlimited discretion with respect to termination of the trust, we do not read this paragraph as a right of the trustees to refuse any payments for the benefit and maintenance of Gerald Kellogg during his lifetime. Again, this paragraph establishes that Gerald Kellogg will ultimately receive the whole of the trust property and only the manner of distribution and time for distribution of the trust assets are left to the discretion of the trustees.

Paragraph 3(f) also provides that the remaining balance of the trust shall be disposed of by the will of Gerald Kellogg. Alternately, if he did not dispose of the remainder, Kellogg's children would inherit the assets in equal shares, held in trust until each attains the age of 30. Thus, we conclude that the beneficiary, Gerald Kellogg, or his estate is ultimately entitled to most, if not all, of the trust income and corpus.

For the reasons set forth above, in our opinion, the testamentary trust created by the settlor is not a "discretionary trust". Therefore, the rule as stated in Restatement Trusts, 2d, Sec. 155(1) does not apply as defendant Kellogg claims.

Paragraph 3(e) of the will contains the following provision which is commonly known as a spendthrift clause establishing a restraint on a beneficiary's right to alienate his interest in the trust:

"(e) To the extent permitted by law, no interest hereunder, except as expressly permitted hereunder, shall be subject to anticipation, or to pledge, assignment, sale or transfer in any manner, nor shall any beneficiary have the power in any manner to charge or encumber such interest, nor shall such interest be liable or subject in any manner for the liabilities of any beneficiary, whether such liabilities arise from his debts, contracts, torts or other engagements of any type."

The requisite elements for a valid spendthrift trust were set forth in Rose v. Southern Michigan National Bank, 255 Mich. 275, 238 N.W. 284 (1931):

" 'In order to create a spendthrift trust certain prerequisites must be observed, to wit: first, the gift to the donee must be only of the income. He must take no estate whatever, have nothing to alienate, have no right to possession, have no beneficial interest in the land, but only a qualified right to support, and an equitable interest only in the income; second, the legal title must be...