Johannes Trust, In re
| Decision Date | 21 October 1991 |
| Docket Number | Docket No. 124641 |
| Citation | 479 N.W.2d 25,191 Mich.App. 514 |
| Parties | In re JOHANNES TRUST. Mary Ann McKEON, Petitioner-Appellee, v. DEPARTMENT OF MENTAL HEALTH, Respondent-Appellant. |
| Court | Court of Appeal of Michigan — District of US |
Beier Howlett by Mary T. Schmitt Smith, Bloomfield Hills, for petitioner-appellee.
Frank J. Kelley, Atty. Gen., Gay Secor Hardy, Sol. Gen., and Alan F. Hoffman, Asst. Atty. Gen., for respondent-appellant.
Before GILLIS, P.J., and SAWYER and REILLY, JJ.
Respondent appeals from an order of the probate court establishing a trust agreement and appointing a trustee as requested by petitioner. We affirm in part and remand.
Petitioner is the guardian of her developmentally disabled sister, Martha Johannes. Martha resides in an apartment under a program administered by the Department of Mental Health's Macomb-Oakland Regional Center. Petitioner has been Martha's guardian since July 7, 1987, and the State of Michigan has been paying for the cost of Martha's care since 1986.
Petitioner and Martha, among other individuals, were beneficiaries under the will of their aunt, Bertha Lammers, who died in the State of Illinois. That will provided in pertinent part as follows:
(b) All the balance of my said estate shall be divided equally among the children of my brothers and sisters, the descendants of any deceased nephew or niece to take per stirpes the share such deceased nephew or niece would have taken if living.
Martha's share of the estate amounted to $10,813.52, which petitioner deposited into a savings account.
Petitioner sought the creation of a trust, which was to be funded with the proceeds of the savings account into which Martha's share of Aunt Bertha's estate was deposited, along with certain social security benefit payments which petitioner indicates were not required to be applied for the cost of Martha's care. Petitioner indicated that she sought creation of the trust because Aunt Bertha, before her death, had told petitioner that petitioner should hold the funds for Martha and that the funds were not to be used for Martha's regular support, care, and maintenance costs. Rather, Aunt Bertha indicated that the funds were to be used for medical costs not covered by Martha's insurance program and for recreational and pleasure needs. Under the terms of the trust, all distribution of income and principal would be at the sole discretion of the trustee and any distributions from the trust were to supplement benefits Martha received from any governmental or private assistance program in order to maximize the quality of Martha's life. Petitioner was to be the original trustee under the trust.
The trial court granted the petition to establish the trust and appoint a trustee. Thereafter, respondent moved to set aside the trial court's order because of lack of notice. The trial court did set aside the order but, following a hearing, again granted the petition to establish the trust and appoint a trustee.
An individual who receives services from the Department of Mental Health is financially liable for those services and the department, subject to certain restrictions, may attach the assets and income of those individuals to pay for the services provided by the department. See M.C.L. Sec. 330.1804; M.S.A. Sec. 14.800(804), M.C.L. Sec. 330.1818; M.S.A. Sec. 14.800(818), and Miller v. Dep't of Mental Health, 432 Mich. 426, 428-429, 442 N.W.2d 617 (1989).
First, we note that the creation of the trust itself is not improper or invalid. Petitioner is certainly entitled to create a trust for the benefit of her sister. Thus, to the extent that the trial court approved the creation of the trust and appointed a trustee, the trial court acted properly and respondent's request that this Court set aside the order creating the trust and appointing the trustee must be denied. Rather, the question that must be resolved is whether Martha's creditors, particularly the respondent, can reach part or all of the res of the trust and whether respondent is entitled to the alternate relief requested, that we reverse the court's holding that the trust funds are protected from a creditor's reach.
It is not disputed that the trust at issue in this case is a discretionary trust. Under a discretionary trust, the trustee may pay to the beneficiary as much of the income or principal as the trustee in his discretion determines to be appropriate. Miller, supra at 429, 442 N.W.2d 617. Where the trust is discretionary and the beneficiary has no right to a disbursement from the trust other than what the trustee in his sole discretion chooses to distribute, the beneficiary's creditors cannot compel the trustee to pay any part of the income or principal in order that the creditors may be paid. Id. at 429-430, n. 7, 442 N.W.2d 617, citing 1 Restatement Trusts, 2d, Sec. 155(1), p. 323. However, it must be noted that the Miller case involved a situation in which the settlor of the trust was a person other than the beneficiary of the trust.
The general rule that creditors cannot compel the trustee of a discretionary trust to make a payment of income or principal applies only in those cases where the settlor of the trust is an individual different than the beneficiary of the trust. Under 1 Restatement Trusts, 2d, Sec. 156, where the settlor is a beneficiary of the trust, the creditors can reach the maximum amount that the trustee could pay to the beneficiary under the terms of the trust:
(1) Where a person creates for his own benefit a trust with a provision restraining the voluntary or involuntary transfer of his interest, his transferee or creditors can reach his interest.
(2) Where a person creates for his own benefit a trust for support or a discretionary trust, his transferee or creditors can reach the maximum amount which the trustee under the terms of the trust could pay to him or apply for his benefit.
Respondent does not cite any Michigan authority that has affirmatively adopted the rule set forth in Sec. 156 of the Restatement, and our own research has failed to discover a case that either accepts or rejects this rule. However, the Supreme Court, in Miller, supra, did cite with approval the Restatement on a number of occasions. Furthermore, the rule stated in the Restatement promotes a valid public policy: A person ought not to be able to shelter his assets from his creditors in a discretionary trust of which he is the beneficiary and thus be able to enjoy all the benefits of ownership of the property without any of the burdens. Accordingly, we find the Restatement to be persuasive in this regard and conclude that the rule should be applied. Thus, if Martha can be considered to be the settlor of the trust, her creditors may compel payment from the trust to the maximum amount that is within the trustee's discretion to pay.
This brings us to the question of who is the settlor of the trust and the consequences of that conclusion. Had Aunt Bertha been the settlor of the trust, by either establishing the trust as a term in her will or by an inter vivos transfer to Mary with instructions to hold it in trust for Martha's benefit, then the decision in Miller would apply and respondent could not reach the assets of the trust or compel petitioner as trustee of the trust to make the payment. However, the trial court specifically found that petitioner, not Aunt Bertha, was the settlor of the trust, and petitioner has not filed an appeal challenging that determination.
If petitioner is the settlor of the trust, as the trial court found, then Miller would also apply and respondent could not reach the assets placed in trust by petitioner as settlor. Our conclusion here is restrictive in that it is necessary that the property placed in trust by petitioner as settlor be property to which petitioner had legal title in her individual capacity. This is a simple application of Miller and the...
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