If you have named two or more of your children as your successor co-trustees or have real estate that is important to your family, you should continue reading. A recent Michigan Court of Appeals case provides a cautionary tale for naming co-trustees and family real estate.
In this case, both parents passed and they had named their two children as successor co-trustees. They disagreed on the trust administration and as a result, the probate court ended up removing one of them as co-trustee. They continued fighting for five years in the probate court. One of the disputes was over four lake front lots. The children weren’t able to reach an agreement on the value of the lots, so the trustee entered into a purchase agreement to sell them. The other child claimed that she should receive two of the lots as her 50% share of the trust. The probate court disagreed with that child and allowed the sale to move forward. The Court of Appeals affirmed that decision.
This case includes a number of important lessons for families who are considering naming two or more children as successor co-trustees and also have important family real estate:
- Naming Trustees. It is not unusual for parents who have two children to name them as successor co-trustees. It is also not unusual for families to choose two out of their larger family to act as co-trustees. This can be beneficial in a number of ways. However, as this case suggests, if the children can’t agree and end up disputing how the trust administration will go, it will end up in probate court and result in family strife and significant cost. If there is a potential of disagreement, consider naming a third party (like a trusted person or trust company) so your children have less of a risk of disputing the administration.
- Real Estate Options. If you have real estate that is important to your family, consider giving one or more of your children an option to purchase it. This provision in a trust would include a process for evaluating the real estate and how the sale process needs to be implemented. By doing this, it provides clarity to the beneficiaries and avoids a situation in which the trustee can list the list the property and a child is left to bid as a third party and may end up losing it. Also, it gives the trustee as well as the beneficiaries clarity about how the option should be exercised and if it is not that the trustee can move ahead to list the property on the market.
- Attorney Fees Setoff. A trust administration can be very frustrating for a family if one child or beneficiary isn’t reasonable and ends up causing a trust to incur significant attorney fees and costs. In this case, all of the beneficiaries suffered because the costs lessen the trust assets and reduce what is available for distribution in addition to prolonging the process. To avoid this, consider having a provision in the trust that allows the trustee to setoff attorney fees against the share of a contentious beneficiary. The risk of this or fees actually being offset can typically mean that this beneficiary will stop raising frivolous issues and allow the process to move forward.
If you have any questions about structuring a trust to avoid these issues, feel free to contact me at phmulder@cunninghamdalman.com.
