Do My Children Need to Know About My Trust?

In Michigan, in most cases trustees of an irrevocable trust are required to inform certain adult beneficiaries of an irrevocable trust about the existence of a trust for their benefit. However, the law has evolved in Michigan to except certain trusts from disclosure for a period of time defined by the trust agreement.

Background

Michigan state statutes (“Michigan law”) establish certain “default trust provisions” and dictate which trust provisions may or may not be overridden by the terms of a trust agreement.

Under Michigan law, trustees of irrevocable trusts (including revocable trusts that have become irrevocable post-death) are generally required to inform and report certain trust details to “qualified trust beneficiaries”. In Michigan, a qualified trust beneficiary is defined as a person the settlor intends to benefit, who is either a current or potential recipient of trust distributions, or who would be entitled to a distribution if the current beneficiaries’ interests terminated without terminating the trust.

Example: Parent establishes an irrevocable trust for the current benefit of spouse and after the spouse’s death, his children. The qualified trust beneficiaries entitled to certain information and reporting are the spouse and the children. Reporting to minors may be sent to a legal guardian.

Information and Reporting

Michigan law provides that a trustee shall inform these beneficiaries of:

the existence of the trust and
the identity of the trustee.

The trustee shall also keep them “reasonably informed about the administration of the trust and of the material facts necessary to protect their interests”.

At the reasonable request of one of these beneficiaries, the trustee shall furnish:

a copy of the terms of the trust and
“relevant information” about trust property.

A trustee shall also notify all qualified trust beneficiaries in advance of trustee compensation.

A trustee shall also furnish an annual accounting of trust financial activity.

If the trust agreement provides that less than all qualified trust beneficiaries are entitled to an accounting, the probate court can force the trustee to nevertheless furnish the accounting.

[See MCL 700.7814 Duty to inform and report for the complete statute.]

Law Change

In 2024, Michigan law was updated, making it possible for individuals to create certain irrevocable trusts in Michigan that remain “undisclosed” to trust beneficiaries for a period of time up to 25 years. Here is an excerpt of the statute.

700.7409a Trusts with nondisclosure period.

Sec. 7409a.

(1) If the terms of a trust other than a charitable trust are embodied in a trust instrument that clearly express the settlor’s intent that 1 or more items of prime disclosure information should be withheld, generally or in specified circumstances, from 1 or more of the trust beneficiaries, both of the following apply:

(a) During the nondisclosure period all of the following apply:

(i) To the extent necessary to effectuate the settlor’s expressed intent, the trustee does not have the duty under section 7814(2)(a) to (c) to provide beneficiaries with the terms of the trust and information about the trust’s property and to notify qualified trust beneficiaries of the existence of the trust and the identity of the trustee.

(ii) The trustee may administer the trust in accordance with the settlor’s expressed intent regarding nondisclosure of primary disclosure information to the extent made practicable by the terms of the trust given the circumstances of the beneficiaries and any reporting obligations imposed on the trustee by law other than this act.

(iii) If the trust instrument grants a nondisclosure correlative right, the trustee has a duty to administer the trust in accordance with the settlor’s expressed intent regarding nondisclosure of primary disclosure information, but only to the extent made practicable by the terms of the trust given the circumstances of the beneficiaries and any reporting obligations imposed on the trustee by law other than this act.

(iv) Any purported appointment or distribution of assets of the instant trust to another undisclosed trust is ineffective to the extent it could cause the appointed or distributed assets to be administered continuously under the authority of this section for a period ending after the date on which the instant trust’s maximum nondisclosure period ends.

[omitted sections]

(5) As used in this section:

(a) “Maximum nondisclosure period” means a period of 25 years from the later of the first date on which property becomes subject to the terms of the trust or the date on which the trust ceases to be revocable by the settlor.

Information and Reporting During a Nondisclosure Period

A nondisclosure provision can include directions to the trustee to not provide the following information to beneficiaries during the nondisclosure period:

not disclose information about a trust or its existence,
not disclose the trustee’s identity,
not disclose the trust trust property, and/or
not render accountings.

Uses for Undisclosed Trusts

Trust makers with concerns about “affluenza”, with young children, or children with health challenges, creditor issues, or in bad marriages, or trust makers treating children disproportionately under the trust terms, may find an undisclosed trust useful.

Who Receives Information About an Undisclosed Trust?

This new Michigan law provides this option for undisclosed trusts:

While a trustee is not required to provide information on the trust’s existence, the trustee’s identity, the trust property, or accountings during a nondisclosure period, the trust provisions can establish a “protection powerholder” to receive trust information, such as accountings, in place of the beneficiary. This person functions as a trust director and is subject to Michigan’s rules that apply to trust directors. A protection powerholder has a fiduciary duty to act in the best interests of the beneficiaries, like a trustee or trust director.

Pitfalls

Despite the trustee’s best efforts, information may get out. The trust agreement provisions can establish the right to remove a trustee for failing to honor the trust’s direction not to provide certain information to the beneficiaries.

As appealing as undisclosed trusts sound, I see some practical challenges with trying to administer a trust of this type when it comes to inadvertent disclosure, making decisions on discretionary trust distributions, maintaining compliance with taxation law, and fulfilling fiduciary duties.

A Viable Option

It is an exciting time to be a trust attorney in Michigan, as I do love the enhanced creativity and flexibility now permitted in creating wealth transfer vehicles! For those people facing estate and gift tax exposure but afraid of spoiling their kids and grandkids, there is now a viable option to procrastinating on doing wealth transfer planning.

By: Elyse W. Germack, Attorney & CPA

Educational use only. Not professional advice. Consult your personal professional advisors before taking any action.