Preminger v. Union Bank & Trust Co., N.A.

• Decision Date: 22 July 1970
• Parties: Mary G. PREMINGER, Plaintiff-Appellant, v. UNION BANK AND TRUST COMPANY, N.A., and Ford C. Perne, co-trustees of the Cornelia N. Gilbert Trust II as amended by a will contest settlement agreement dated
• Court: Court of Appeal of Michigan — District of US

Page 795

220 N.W.2d 795

54 Mich.App. 361

Mary G. PREMINGER, Plaintiff-Appellant, v. UNION BANK AND TRUST COMPANY, N.A., and Ford C. Perne,

co-trustees of the Cornelia N. Gilbert Trust II as

amended by a will contest settlement

agreement dated July 22, 1970,

Defendants-Appellees.

Docket No. 16834.

Court of Appeals of Michigan, Division No. 3.

July 22, 1974.

Released for Publication Aug. 20, 1974.

Dale W. Rhoades, Rhoades, McKee & Boer, Grand Rapids, for plaintiff-appellant.

John C. Cary, Grand Rapids, for defendants-appellees.

Before T. M. BURNS, P.J., and V. J. BRENNAN and BASHARA, JJ.

BASHARA, Judge.

On October 18, 1972, plaintiff filed a complaint for declaratory judgment requesting the termination of a trust of which she was a beneficiary and the distribution to her of the trust assets. Defendants answered contending the trust to be a spendthrift trust and therefore not subject to termination while the duties of the trustee remained unfulfilled. The circuit court, after hearing plaintiff's motion for summary judgment, denied the requested judgment and dismissed the complaint. Plaintiff appeals from both circuit court orders.

On September 7, 1966, Cornella N. Gilbert established an inter vivos trust for her two daughters, Mary Preminger and Nancy Homland, and also for Gilbert Gardner, Mary's son. The trust was initially funded with several thousand dollars, but under the settlor's will the bulk of her estate was to be placed equally into the individual trust accounts of the two daughters.

The trust provided that the beneficiaries receive only the income of the trust during their lifetime. If either of the daughters died, the assets of that daughter's account would be placed in the account of the surviving daughter. If Gilbert Gardner survived both the daughters (his mother and aunt), the remainder of the account of the surviving daughter would be paid over into his account. Upon the death of Gilbert or the last daughter, if he predeceased her, the trust assets would be distributed among the children of Cornella Gilbert's brother. Thus, the interest of the three beneficiaries was limited, with one exception, to the income of the trust assets during their lifetimes. The exception was contained in the following language of one clause:

* * * (A)nd the Trustees shall have the right to make payments of principal to the respective beneficiaries when, in their discretion, a need exists but only after a determination that the beneficiary cannot help herself or himself.'

Finally, the controverted classification of this trust as spendthrift comes from the following provision:

'11. Neither the principal nor the income of this trust shall be liable for the debts of any beneficiary of this trust nor shall the funds or properties of this trust be subject to seizure by the creditors of any beneficiary of this trust in any proceeding whatsoever, and no beneficiary of this trust shall have power to sell, transfer, encumber, hypothecate, dispose of or anticipate his or her interest in any such trust whether it be principal or income thereof.'

Subsequent to the death of Cornella Gilbert, plaintiff filed numerous objections to the allowance of the will upon the grounds of mental incompetency and undue influence. A will contest settlement agreement was signed by all interested parties and provided, Inter alia, for the release and conveyance of the future interests of all remainder beneficiaries in the trust to Gilbert Gardner.

Shortly after the death of Nancy Howland in June, 1972, the assets in her trust account were transferred to plaintiff's account pursuant to the terms of the trust. On September 20, 1972, Gilbert Gardner executed a document entitled 'ASSIGNMENT OF BENEFICIARY' wherein he assigned all his rights in the trust to plaintiff, making her sole beneficiary. She then filed her demand for dissolution of the trust which was denied, the propriety of which order is now before us on appeal.

The paramount issue is whether the testamentary language constitutes a spendthrift trust. The first case in Michigan to define a spendthrift trust was Rose v. Southern Michigan National Bank, 255 Mich. 275, 238 N.W. 284 (1931). The Court quoted the following definitional language of Kessner v. Phillips, 189 Mo. 515, 88 S.W. 66 (1905), with approval:

'In order to create a spendthrift trust certain prerequisites must be observed, to-wit: First. The gift to the donee ¹ 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.' 255 Mich. 275, 281, 238 N.W. 284, 286.

Plaintiff contends that the trust established here cannot qualify as a spendthrift trust because the beneficiaries had more than a gift 'only of income'. It is asserted that they had a right to invade corpus because of the language in clause 2 permitting payment to them if they could not financially help themselves. The qualified right the beneficiary has in the corpus of this trust does not fail the 'income only' test of Rose, supra. The right of the beneficiary to receive any part of the corpus is within the discretion of the trustee and such interest is not an estate which the beneficiary could control, dispose of, leave by will, or compel the trustee to deliver until the narrow requirements stated in the trust were met. We find that the trial court was correct in its determination that the settlor created a valid spendthrift trust.

The next issue we consider is whether a beneficiary of this trust could alienate his interest by assignment before the time for payment had arrived. The resolution of this question will depend primarily on whether Michigan permits restraints on the alienation of principal as well as income in spendthrift trusts. Although a restraint on income was approved in Rose, supra, the validity of a restraint on a beneficiary of corpus alone has not been tested in this state. ²

While the question of restraint on principal alone is novel to the courts of this state, our research discloses that the Restatement of Trusts, 2d, now recognizes that certain restraints on the alienation of principal are valid, as do the majority of the modern decisions. ³ The recent decision of In re Estate of Vought, 25 N.Y.2d 163, 303 N.Y.S.2d 61, 250 N.E.2d 343 (1969), reflects the current attitude of the courts on the subject of restraints on alienation:

'The precise question of whether a settlor has the power to make inalienable a principal remainder limited on an entrusted life estate is one of first impression. In this State, although there are many precedents which offer close analogies they...