Estate of Edgar, Matter of

• Decision Date: 09 November 1984
• Docket Number: Docket No. 63973
• Citation: 137 Mich.App. 419,357 N.W.2d 867
• 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-Appellant, v. The DETROIT BANK & TRUST COMPANY, Trustee Under the Will of Clinton Goodloe Edgar, Deceased, Respondent-Appellee. 137 Mich.App. 419, 357 N.W.2d 867
• Court: Court of Appeal of Michigan — District of US

Page 867

357 N.W.2d 867

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-Appellant, v. The DETROIT BANK & TRUST COMPANY, Trustee Under the Will of

Clinton Goodloe Edgar, Deceased,

Respondent-Appellee.

Docket No. 63973.

137 Mich.App. 419, 357 N.W.2d 867

Court of Appeals of Michigan.

Submitted Jan. 3, 1984.

Decided Sept. 17, 1984.

Released for Publication Nov. 9, 1984.

[137 MICHAPP 420] Frank X. Fortescue, P.C. by Frank X. Fortescue, Bloomfield Hills, for petitioner-appellant Lansing J. Roy.

Donovan, Hammond, Ziegelman, Roach & Sotiroff, P.C., by Frank W. Donovan and Thomas E. Reiss, and Butzel, Long, Gust, Klein & Van Zile, P.C. by Donald B. Miller, Detroit, for respondent-appellee The Detroit Bank & Trust Company.

Before CYNAR, P.J., and GRIBBS and KNOBLOCK, ^* JJ.

GRIBBS, Judge.

William H. Edgar is the beneficiary of a testamentary spendthrift trust set up by his [137 MICHAPP 421] deceased grandfather, Clinton Goodloe Edgar. Petitioner, Lansing J. Roy, is a trustee in bankruptcy for the estate of William H. Edgar. Roy filed a petition in the Wayne County Probate Court seeking to invalidate the spendthrift trust. The probate court ruled the spendthrift provisions valid and granted summary judgment to respondent the Detroit Bank & Trust Company. Petitioner appeals, contending that a spendthrift trust giving both income and corpus to the same beneficiary is invalid, and thus subject to attachment in bankruptcy. We agree and reverse the decision of the probate court.

Facts

Clinton Goodloe Edgar had two children, Kathryn Edgar Byron and James Edgar. His testamentary trust provides that the income generated by the trust is to be equally divided by the two branches of the family--the Byron branch and the Edgar branch. The period of the trust is for the lives of his wife, Mary, his son, James, and three grandsons, the sons of Kathryn. Upon the death of the last-named "measuring life", the trust expires and the corpus is to be divided between the two families, one-half to the issue of James Edgar and one-half to the issue of Kathryn Edgar Byron, per stirpes.

Mary Edgar, James Edgar and one of the Byron grandsons named by the testator are deceased. The other two Byron grandsons are alive. James Edgar left one son, William H. Edgar, whose interest in the trust is the subject of this suit. William H. Edgar, as sole representative of the Edgar branch in his generation, receives one-half of the trust income. He will receive half the trust corpus when the trust terminates upon the death of the two [137 MICHAPP 422] Byron grandsons. If he dies before the Byron grandsons, that half of the corpus passes to any other living issue of his father.

The trust language provides that no beneficiary has title or interest in the trust income or corpus until the beneficiary is in possession of the interest. The Edgar trust also contains a spendthrift clause which restrains the alienability of the income and corpus and which states that neither the income nor the corpus interest of the beneficiaries is liable to claims of creditors of the beneficiaries.

William H. Edgar filed for bankruptcy in Florida in 1978. While the present action was pending in the Wayne County Probate Court, the United States Bankruptcy Court for the Northern District of Florida ruled that, due to the spendthrift provision, William H. Edgar's anticipatory interest in the trust income was not available to the bankruptcy trustee. The court allowed attachment of income which had already been distributed to William H. Edgar.

The probate court reached the same conclusion and granted summary judgment in favor of respondent.

Discussion

Under the former Bankruptcy Act, Sec. 70a(5), applicable to this case, nonexempt alienable property is subject to attachment in bankruptcy. ¹ Property [137 MICHAPP 423] held under a valid spendthrift trust is generally exempt. First Northwestern Trust Co. of South Dakota v. Internal Revenue Service, 622 F.2d 387 (CA 8, 1980). Federal bankruptcy law defers to the state in determining what property is exempt from the estate of a bankrupt. First Northwestern Trust Co., supra.

In Michigan, a valid spendthrift trust restricts the alienability of property in the trust and immunizes it from the claims of creditors. Rose v. Southern Michigan National Bank, 255 Mich. 275, 238 N.W. 284 (1931); Preminger v. Union Bank & Trust Co., N.A., 54 Mich.App. 361, 220 N.W.2d 795 (1974). A spendthrift provision restricting the trust income is valid. Rose, supra, 255 Mich. p. 281, 238 N.W. 284. A spendthrift restraint on the beneficiary of trust corpus alone is also valid. Preminger, supra, 54 Mich.App. p. 366-368, 220 N.W.2d 795. The precise question on appeal, however, is whether under Michigan law a valid spendthrift trust may be created which gives the trust income and corpus to the same beneficiary. Before addressing this issue, we must ascertain whether William H. Edgar has an interest in both the Edgar trust income and trust corpus which would be alienable (and thus subject to attachment in bankruptcy) absent the spendthrift clause.

There is no question that William H. Edgar is an income beneficiary. As sole representative of the Edgar branch in his generation, he receives one-half of the trust income. Only the spendthrift provision restricts the alienability of his interest in the future distribution of income.

William H. Edgar will also receive one-half of the trust corpus when the trust expires upon the death of the Byron grandsons. In other words, he [137 MICHAPP 424] has a future interest in the corpus. M.C.L. Sec. 554.10; M.S.A. Sec. 26.10; City of Holland v. Fillmore Twp., 363 Mich. 38, 44-45, 108 N.W.2d 840 (1961). ² Whether his future interest is vested subject to defeasance by his nonsurvival or is an interest contingent upon his survival until the termination of the trust is not important. See In re Jamieson Estate, 374 Mich. 231, 132 N.W.2d 1 (1965); Horton v. Moore, 110 F.2d 189 (CA 6, 1940), cert. den. 311 U.S. 692, 61 S.Ct. 75, 85 L.Ed. 448 (1940), reh. den. 311 U.S. 728, 61 S.Ct. 173, 85 L.Ed. 474 (1940). Both types of expectant interests are alienable absent a valid restraint. M.C.L. Sec. 554.8; M.S.A. Sec. 26.8, M.C.L. Sec. 554.35; M.S.A. Sec. 26.35.

Having ascertained that William H. Edgar is both an income and corpus beneficiary of the spendthrift trust, the question becomes whether such a trust is valid. The Michigan Supreme Court set out the following prerequisites for a spendthrift trust:

"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." (Emphasis added.) Rose, supra, 255 Mich. p. 281, 238 N.W. 284, citing Kessner v. Phillips, 189 Mo. 515, 88 S.W. 66 (1905).

See also In re Ford's Estate, 331 Mich. 220, 49 N.W.2d 154 (1951); Preminger, supra; Coverston v. [137 MICHAPP 425] Kellogg, 136 Mich.App. 504, 357 N.W.2d 705 (1984); Hurley v. Hurley, 107 Mich.App. 249, 309 N.W.2d 225 (1981), lv. den. 413 Mich. 890 (1982).

Under the plain meaning of the Kessner "income only" language adopted in Rose, supra, the spendthrift provisions of the Edgar trust are invalid. William H. Edgar has both an interest in the income and an interest in the corpus of the spendthrift trust.

The Supreme Court's subsequent holding in In re Ford's Estate, 331 Mich. 220, 49 N.W.2d 154 (1951), further supports this interpretation. After applying the Kessner "income only" definition, the Ford court found that the beneficiary of the Ford trust has a vested interest in both the income and corpus and found the spendthrift trust invalid. Ford, supra, 331 Mich. pp. 229-230, 49 N.W.2d 154; but see Taylor v. Richards, 153 Mich. 667, 117 N.W. 208 (1908).

This Court in Preminger also recognized that "[t]he decisions in Rose, supra, and Ford, supra, appear to prevent an income beneficiary from having a right to principal as well as income". Preminger, supra, 54 Mich.App. pp. 367-368, 220 N.W.2d 795. In Preminger, the Court upheld a spendthrift trust where the income beneficiaries were not the same as the beneficiaries of the corpus.

We distinguish Fornell v. Fornell Equipment, Inc., 390 Mich. 540, 213 N.W.2d 172 (1973), which the trial court relied upon, and which respondent contends redefines the spendthrift trust in Michigan. In Fornell, the Court distinguished between a spendthrift trust and a spendthrift guardianship. In deciding that the arrangement at issue was a guardianship, the Court quoted the following definition of a spendthrift trust:

" 'In a broad sense, a spendthrift, support, or other [137 MICHAPP 426] similarly protective trust is one 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 is one that restrains either the voluntary or involuntary alienation by a beneficiary of his interest in the trust, or which, in other words, bars such interest from seizure in satisfaction of his debts. The name 'spendthrift trusts' is poorly descriptive, since no spendthriftiness or profligacy of a beneficiary is requisite to, or open to inquiry in determination of, the existence of such a trust.' 54 Am Jur, Trusts, Sec. 148, p 123." Fornell, supra, p. 548, 213 N.W.2d 172.

The Court in Fornell was concerned with the purpose of a spendthrift guardianship. In contrast, the Court in Rose, supra, was concerned with the prerequisites for a valid spendthrift trust. Although the general spendthrift trust language in...