Estate of Edgar, Matter of

• Citation: 425 Mich. 364,389 N.W.2d 696
• Decision Date: 11 July 1986
• Docket Number: BANK-DETROIT,Docket No. 75155
• Parties: In the Matter of the ESTATE OF Clinton Goodloe EDGAR, Deceased. Lansing J. ROY, Trustee in Bankruptcy of the Estate of William H. Edgar, Petitioner-Appellee, v. COMERICA(Formerly The Detroit Bank & Trust Company), Trustee Under the Will of Clinton Goodloe Edgar, Deceased, Respondent-Appellant. 425 Mich. 364, 389 N.W.2d 696
• Court: Supreme Court of Michigan

Page 696

389 N.W.2d 696

In the Matter of the ESTATE OF Clinton Goodloe EDGAR,

Deceased.

Lansing J. ROY, Trustee in Bankruptcy of the Estate of William H. Edgar, Petitioner-Appellee, v. COMERICA BANK-DETROIT (Formerly The Detroit Bank & Trust

Company), Trustee Under the Will of Clinton

Goodloe Edgar, Deceased,

Respondent-Appellant.

Docket No. 75155.

425 Mich. 364, 389 N.W.2d 696

Supreme Court of Michigan.

Argued Feb. 7, 1986.

Decided July 11, 1986.

Frank X. Fortescue, Bloomfield Hills, for petitioner-appellee.

Donovan Hammond Ziegelman Roach & Sotiroff, P.C. by Frank W. Donovan, Thomas E. Reiss, Thomas G. Good, Detroit (Butzel, Long, Gust, Klein & Van Zile, P.C. by Donald B. Miller, of counsel), for respondent-appellant Comerica Bank-Detroit.

Warner, Norcross & Judd, Grand Rapids, for amicus curiae Michigan Bankers Assn.

Mark C. Meyer, Wyoming, Robert Baer, Lansing, Gary L. Kohut, Troy, Gayle A. Spillard, Pontiac, Michael A. Stevenson, Detroit, for UAW-GM Legal Services Plan UAW-Ford Legal Services Plan and UAW-Legal Services Plan.

Harold A. Draper, Flint, for amicus curiae Probate and Trust Law Section State Bar of Michigan.

WILLIAMS, Chief Justice.

The issue in this case is whether a spendthrift trust which purports to give the same beneficiary an interest in both the income and the principal is valid in Michigan.

More particularly, the issue appears to be whether the language in Rose v. Southern Michigan Nat'l Bank, 255 Mich. 275, 281, 238 N.W. 284 (1931), "The gift to the donee must be only of the income" (followed in In re Ford Estate, 331 Mich. 220, 229, 49 N.W.2d 154 [1951] ), prevails or whether Michigan should follow the rule of the Restatement Trusts, 2d, Sec. 153(1), p. 318, comment b:

"Where a beneficiary of a trust is entitled to receive the principal at some future time, a restraint on the voluntary or involuntary alienation of his interest is valid, whether or not he is entitled to receive the income in the meantime." (Emphasis added.)

We hold that a spendthrift trust giving the same beneficiary an interest in both the income and the principal is valid. We reverse the decision of the Court of Appeals.

I. FACTS

In a will dated June 7, 1932, Clinton Goodloe Edgar set up a trust, the income from which was to be distributed to his wife and children. Upon the death of his wife, one-half of the trust income was to be given to his daughter, Katharine Edgar Byron, or her issue, and one-half to his son, James Edgar, or his issue. When the trust terminates upon the death of the survivor of Clinton Goodloe Edgar's grandchildren born before his death, the principal is to be divided into two equal shares, one of which is to go to the issue of Katharine and the other to the issue of James. According to appellant, both the daughter and the son are deceased, but two grandchildren are still alive and are presently the measuring lives of the trust (Appellant's Brief, p 4). When the trust terminates, the principal is to be divided into two equal shares, one of which is to go to the issue of Katharine, and the other to the issue of James. James' only child, William Edgar, born after the death of his grandfather, currently receives one-half of the income generated by the trust and, if the trust terminates before his death, will receive one-half of the principal.

In paragraph 16 of his will, the testator purported to subject all trust property to a spendthrift provision. ¹ The validity of this provision became important when grandson William Edgar filed a voluntary bankruptcy petition in Florida on May 5, 1978.

Under the then-applicable bankruptcy act, property which a bankrupt could have transferred before the declaration of bankruptcy became vested in the trustee of the estate of the bankrupt. 11 U.S.C. Sec. 110(a). ² Property which cannot be transferred under state law is considered nontransferrable under the act. Eaton v. Boston Safe Deposit & Trust Co, 240 U.S. 427, 36 S.Ct. 391, 60 L.Ed. 723 (1916). Therefore, if the spendthrift trust is valid under Michigan law, the interest of the bankrupt in the trust is not subject to attachment by the bankruptcy trustee.

The bankruptcy case proceeded from the initial filing in bankruptcy court in Florida to the Eleventh Circuit, with all courts involved assuming that the spendthrift trust was valid under Michigan law. In re Edgar, 11 B.R. 853 (N.D.Fla., 1981), rev'd 728 F.2d 1371 (C.A. 11, 1984). Before a decision had been reached by the bankruptcy court on remand, the trustee in bankruptcy brought a suit in Michigan, challenging directly the validity of the spendthrift trust. The suit initially was filed in the United States District Court and dismissed for lack of jurisdiction. On December 29, 1980, the action then was commenced in the Wayne Probate Court. That court sustained the validity of the spendthrift provision of the trust and granted summary judgment in favor of Comerica, trustee under the will, on March 22, 1982. The Court of Appeals reversed, finding the provision invalid under prior Michigan cases, namely Rose v. Southern Michigan Nat'l Bank, supra, and In re Ford Estate, supra. In re Edgar Estate, 137 Mich.App. 419, 357 N.W.2d 867 (1984). We granted leave to appeal. 422 Mich. 937 (1985).

II. PERTINENT MICHIGAN CASE LAW

The concept of a spendthrift trust has been long recognized by Michigan courts. In In re Peck Estates, 320 Mich. 692, 699, 32 N.W.2d 14 (1948), this Court acknowledged that a trust which restricted the ability of the beneficiaries

"to assign, convey, pledge, hypothecate or anticipate the payment of any sum ... which may at any time be or become due or payable by way of income or principal, under the terms of this will"

was a spendthrift trust. See also Roberts v. Michigan Trust Co, 273 Mich. 91, 108, 262 N.W. 744 (1935).

In Rose v. Southern Michigan Nat'l Bank, supra, 255 Mich. 281, 238 N.W. 284, this Court quoted a definition from a case in Missouri.

" '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 vested in a trustee; third, the trust must be an active one.' " (Quoting Kessner v. Phillips, 189 Mo. 515, 524; 88 S.W. 66 [1905] ). ³

This language is dicta because in reaching its decision the Rose Court relies on the fact that a spendthrift trust cannot be terminated by the beneficiaries. The agreement before the Court which terminated the trust was held invalid because a beneficiary had received only an inalienable gift of income under the will.

In a subsequent case, this Court again considered a settlement agreement which purported to resolve a dispute involving the interpretation of a will. In re Ford Estate, supra. In that case, the testator directed that "on the death of my wife, [ ] or should [she] predecease me," trusts were to be set up for his sons. The income from the trusts was to be paid to the sons and the principal distributed to them in thirds when they reached the ages of thirty, thirty-five, and forty. The will also provided that

"18. Should either or both of my sons at any time or times develop spendthrift or disorderly habits, my trustees are authorized and empowered to withhold from such son any part of the income and any part of the distributable corpus provided herein directed to be paid to any beneficiary.

"19. The trustees shall not be permitted nor authorized to recognize any assignment of interest or principal herein directed to be paid to any beneficiary."

The beneficiaries agreed among themselves that the testator did not intend that the trust distribution was to be suspended during the lifetime of the testator's widow. A challenge was brought to this agreement, based in part upon an argument that the will set up spendthrift trusts which could not be terminated by the beneficiaries. This Court in reviewing the agreement held that it was valid and that the trusts created were not spendthrift trusts. This Court appears to have reached the latter conclusion for two reasons: 1) the trusts gave the beneficiaries an interest in both income and principal, thus violating the Kessner rule as stated in Rose, and 2) paragraphs 18 and 19, quoted above, did not create a spendthrift trust. Because of this partial reliance on the Kessner rule, we are unable to conclude that the Ford Court's use of the quote from Kessner is solely dicta.

The Court of Appeals later interpreted the potentially broad scope of the Ford definition narrowly in Preminger v. Union Bank & Trust, 54 Mich.App. 361, 367, 220 N.W.2d 795 (1974). In that case, there was an attempt by the remaindermen under the trust to transfer their interest to one of the income beneficiaries. Both the income and the principal were protected by a spendthrift provision, but the interests were given to different beneficiaries. The Court determined that while the transfer was invalid because it would give an interest in both principal and income to the same beneficiary, a settlor could validly restrict the alienation of the principal of the trust. Thus, after Preminger, Michigan law was interpreted as allowing

"a settlor [to] validly restrict the voluntary or involuntary alienation of principal during the life interest of the income beneficiary, provided that the right to principal does not vest in the income beneficiary." 54 Mich.App. at 367, 220 N.W.2d 795.

Most recently, in Fornell v. Fornell Equipment, Inc., 390 Mich. 540, 548, 213 N.W.2d 172 (1973), ⁴ this Court stated that a spendthrift trust is a trust

"created to provide a fund for the maintenance of the beneficiary and at the same time to secure it against his improvidence or incapacity. In a narrower and more technical sense, a spendthrift trust...