Equity Will Not Interfere With Plain Language Of Trust Instrument And Trust Settlement Agreement

Just how controlling is a trust instrument? Even though a court may have the equitable power to modify a trust instrument or trust settlement agreement, the Court of Appeals of Michigan‘s opinion in In re George W. Scheer Inter-Vivos Trust reminds us of just how reluctant a court may be to allow equity to interfere with the plain language of a trust.

Not long after George Scheer’s death, the beneficiaries of an inter vivos trust established by George and his wife, Pauline, began to fight. That dispute was resolved by a settlement agreement through which a majority of the trust assets was distributed to the beneficiaries in varying amounts and not in strict proportion to each beneficiary’s pro-rata share of the trust. Some assets were held back until the IRS gave final clearance. But, once the clearance was received by the IRS, another dispute arose regarding the manner in which the remaining assets were to be distributed.

The successor trustee of the trust proposed a distribution plan. One of the beneficiaries presented a different proposed distribution plan. This beneficiary objected to the successor trustee’s proposed distribution because (1) it would give him a disproportionately greater share of some bank stock, and (2) the successor trustee used the values of the stock at the time of the grantor’s death to determine the distribution, while the value of the stock had significantly declined since that time. The court characterized both objections as arguing the same thing: “it is inequitable to require him to take a disproportionate share of the stock which has a market value significantly less than the valuation used to determine the distribution.”

The probate court accepted the successor trustee’s proposed distribution and the appellate court affirmed. While the successor trustee’s distribution might be unfair, the trust instrument and the settlement agreement controlled:

If the controlling principle here was that of equity, we might agree with appellant. But what controls are the settlement agreement and the trust document. The settlement agreement provided that the assets held back from the interim distribution were to be distributed according to the terms of the trust. And the trust gives the Trustee the power to make distribution in cash or in kind and to determine the value of the property distributed in kind.

Because the trust instrument gave the trustee the discretionary power to “make distributions in cash or in kind, at valuations to be determined by TRUSTEE, whose decisions as to values shall be conclusive,” the court was merely giving effect to the discretionary power that the grantor gave the trustee.

Fair or not, the trust instrument controlled.