The following paper was presented to the House Committee on the Judiciary in June, 1997. It is based, in part, on an article published June 2, 1997, by Michigan Lawyers Weekly, which, in turn, was based, in part, upon a paper delivered in November, 1995, to the Berrien County Bar Association. It was published in the Michigan Lawyers Weekly on June 2, 1997.
In 1978, the Michigan Revised Probate Code became effective. 10 years later, the Probate and Estate Planning Section of the State Bar of Michigan began work on a successor. In about 1995, pre-enactment seminars by members of the Section (and the Taxation Section) began to be scheduled.
In November, 1995, I received an electronic copy of the proposed Estate Settlement Act, and made a preliminary review of it. More recently, I obtained from the Michigan Legislative Service Bureau a copy of what is now Michigan's Senate Bill No. 209, and again looked it over. What follows is a commentary on the portions of the bill that struck my attention as an estates and trusts practitioner, and not an exhaustive report on the proposal as a whole.
SB 209 is 7/8" thick, 389 pages in length, and weighs 2 pounds, without index or table of contents. It is based on the Uniform Probate Code, as adopted by the National Conference of Commissioners on Uniform State Laws, Chicago, Illinois, which has been adopted in 18 states.(1)
It obviously represents a considerable investment in time and study by the members of the Section, and particularly no doubt its Council. If passed, however, it will present some problems.
Most significantly, the proposed statute has, I trust not intentionally, been unavailable for review by the Bar, until it was introduced into the legislature. Requests to the Committee of the Bar for copies were met with the statement that the Michigan Legislative Service had requested that it not be disseminated. I have not asked the MLS if they concur with that assertion. But since it has been unavailable, it has been uncommented upon. The absence of broad critical review is therefore understandable.
When it was enacted 2 decades ago, the RPC was the source of considerable uncertainty and confusion. It brought us independent probate, registration of trusts, a new form of action, new procedural rules, and new text to many provisions. It took the bar and the bench some time to figure it out, and many seminars were held on its provisions.
It appears we may once again have the confusion and uncertainty generated by a new codification, especially because of the following: First, the uniform draft was not a model of clarity or utility. Second, as discussed below, many of the provisions are seemingly inappropriate. Third, like much Michigan legislation, the Bill restates much old law in new form, so that one cannot tell readily what has been changed and what has not. Fourth, what was the uniform statute has been recast, presumably by the Michigan Legislative Service, into Michigan's specific style which adds phrases such as "all of the following" and substitutes "must" rather than "shall". The proposal before the Michigan legislature therefore is no longer "uniform," and its readability is certainly not improved. Fifth, it intrudes into areas where legislation is not expected: drafting style, and family dynamics. Sixth, it adds some surprising rules concerning fiduciary investments.
It will take 5 years, in my experience, before most moderately specialized practitioners actually absorb major legislative changes and incorporate them as a part of their working knowledge. I expect that it will take at least that much longer before the bench absorbs it, because it will not reach them for 5 years.(2)
Let's take a look at the bill--interesting, voluminous, elaborate, turgid, complex, and, to me, frustrating. Those of us who specialize in the area have a large task ahead, if it passes.
And those of the Bar who think that any lawyer can write a will had better have their professional liability insurance paid up. Because some of its rules are counter-intuitive. And drafting-resistant.
There are some areas where the RPC might be improved, such as an enhanced probate estate for spousal election purposes (we already have it for estate taxation purposes), and a probate court unburdened by the divorce cases recently thrust upon it by judicial experimentation, and the abolition of boxed forms, which are anathema for serious automated drafting.
SB 209, however, does none of these things. What it does is to restate the entire probate code, as now embodied in MCL 700.1 et seq., MSA 27.5001 et seq., including the following interesting changes: It
Some of the more significant or interesting of these proposals are discussed in the following sections.
A whole new standard for fiduciary responsibility is expressly set forth in the "Prudent Investor Rule. A brief perusal of those provisions indicates that, if this proposal passes, one should think at least twice before undertaking fiduciary responsibilities.
The current investment provisions of the probate code state the current prudent investor rule,(5) which is basically a "reasonable fiduciary" standard. The current section authorizes investments in securities such as the
"ordinarily prudent person of intelligence and integrity, who is a trustee of the money of others, would purchase, in the exercise of reasonable care, judgment, and diligence, under the conditions existing at the time of purchase, having due regard for the management, reputation, and stability of the issuer and the character of the particular securities."
However, a much more detailed provision concerning investments appears in the Uniform Management of Institutional Funds Act, which generated a new standard:(6) the investor must consider long and short term needs, present and anticipated financial requirements, expected total return on investments, and general economic conditions. That provision, though not in terms applicable to fiduciaries, should be applicable by analogy, and fiduciaries, especially those in long-term posts, would do well to so assume.
The provision is a "sleeper," in some ways, because the simple-sounding terms are far from that. What are a trust's "long-term needs?" How are they determined? What should be "anticipated" in the way of "financial requirements?" How are "requirements" different from "needs?" And "general economic conditions" includes world-wide issues, as well as those of politics, war, peace, what the Federal Reserve Board may or may not do, and other possible imponderables.
However, the new provision in SB 209 appears far more burdensome(7). The fiduciary must consider not only general economic conditions, but "the possible effect of inflation and deflation," "the expected tax consequences," the "expected total return from income and the appreciation of capital," "the need for liquidity, regularity of income, and preservation or appreciation of capital," "an asset's special relationship or special value, if any, to the purposes" of the estate or the beneficiaries, and, perhaps most onerous of all, the "role that each investment or course of action plays within the overall portfolio."
Certainly, it is desirable to identify total return as an investment objective. But to require documentation of each investment's role is inappropriate: investment managers do not, should not and probably cannot do that. What they do, and probably should do, is establish and maintain an appropriate investments mix which, in the aggregate, works toward the plan. And why, one wonders, did the Commissioners use the term "capital" rather than "principal" in the rules? Are the terms different? If so, how?
There are some other interesting provisions in the Prudent Investor Rule sections:
The new Prudent Investor Rule certainly creates a host of litigation possibilities.
I suggest the following amendments to the Prudent Investor Rule:
"To the extent that such a prudent investor would do so, [a]mong the circumstances that a fiduciary must should consider in investing and managing fiduciary assets are all such the following that are relevant to the fiduciary estate or its beneficiaries: . . ."
This amendment would retain the prudent investor concept, avoid overspecificity, and make it clear that nothing in the act supersedes the general, overriding concern that the fiduciary should act reasonably as others would.
Subsection (5) of Section 1503, which reads as follows, be deleted.
"A fiduciary who has special skill or expertise, or is named fiduciary in reliance upon the fiduciary's representation that the fiduciary has special skill or expertise, has a duty to use that special skill or expertise."
The reasons are that (1) there is no question that persons holding themselves out as experts are already held to a higher standard than nonexperts; and (2) why a fiduciary was named is not readily susceptible to ascertainment.
The major inheritance law changes proposed in Article II, Part 1, of SB 209 are (1) the disinheritance of children of the decedent if their parent is the surviving spouse, and (2) the use of an indexed formula as to spousal participation in the estate if there are children not of both parties. Elaborate, formula-based and graduated spouse's election rights, and intestate spouse's shares, are provided for, although they have been simplified somewhat over the last 2 years' revisions.
Under present law(8), if a person is survived by a spouse and children, the surviving spouse receives 1/2 of the estate and the children 1/2. If all children are children of both, the spouse receives the first $60,000 before division. Under SB 209, the children receive nothing in the second instance, and under the first scenario, if there are children of the spouse who are not the decedent's, the spouse's share is limited by a formula which is itself indexed for inflation, and the children (but not the spouse's children) receive the balance.
One can only surmise that the drafters were concerned that the widow or widower with other children from other relationships would somehow treat the children he or she had with the decedent differently. This seems to go beyond legislative ascertainment of presumed intention, into social engineering.
Other seemingly arbitrary ratio adjustments pervade the intestacy provision, depending upon inside/outside children ratios, and date of death.
I suggest that the inheritance provisions (Article II, Part 1), be deleted.
The Estate Settlement Act as first reviewed by this author contained a provision which would have augmented the probate estate of a decedent, for the purpose of spousal election, to include most of the categories included in a decedent's federal gross estate. This would have considerably broadened what used to be called the "widow's election", now the "spouse's election." It has, however, been eliminated from SB 209.
Added to the existing Michigan "Supervised" and "Independent" administration of decedents estates is a new alternative. The spectrum (Article III) now includes(9)
However, the loopholes in the conclusiveness provision for independent probate in MCL 700.358, MSA 26.5358, remain: the broad exceptions of fraud, misrepresentation, and inadequate disclosure(10). This exception will continue to impair the finality of such proceedings.
"Section 31010. Notwithstanding anything herein to the contrary, the Certificate of Completion shall have the same effect as would an order allowing a final account and assigning the residue were the proceeding a supervised administration."
Another Part of the Bill(11) provides precise and difficult rules of construction for wills. Some (but not all) are applicable also to deeds, trusts, insurance policies, annuities, pay-on-death accounts, qualified plans, powers of attorney, powers of appointment, and other similar instruments.(12)
Novel terms are created within the statutory scheme: "primary beneficiary designations," "primary substitute gifts," "alternative beneficiary designations," "surviving beneficiaries," "substitute gifts," "younger-generation beneficiary designations," "younger-generation substitute gifts," "substitute claims," and "alternative future interests," are defined and used. Some terms are defined more than once.(13)
Some language examples: 2709 provides "If a beneficiary fails to survive the decedent and is a grandparent, a grandparent's descendant, or the decedent's stepchild, the following apply: (a) Except as provided in subdivision (d), . . ." Another provision: "For the purposes of section 2701, words of survivorship, such as in a beneficiary designation to an individual 'if he survives me' or in a beneficiary designation to 'my surviving children', are not, in the absence of additional evidence, a sufficient indication of an intent . . ."(14)
As indicated earlier, the provisions are not only complex, but counter-intuitive and drafting-resistant: saying what you want to have happen in a document will not have that effect.
Example: Decedent left a house, a deceased daughter with 3 children, and a son. His will provides, "I give my house to my daughter if she survives me. I give my residuary estate to my son." Result? The daughter's children inherit the house.(15)
It appears that the bill's interpretation rules, in this and other areas, are based on assumptions not only as to the wishes of a decedent. but apparently as to considerations of deemed social justice.
Because of their complexity and inappropriateness, I suggest that the construction rules (Article II, Part 7) be deleted in their entirety.
Michigan, especially near its borders, is a haven for residents of other states. In my geographic area, Southwestern Michigan, real estate ownership by Illinois residents is quite common. Currently, there is no really appropriate procedure for the ancillary administration of these Michigan homes.
The ancillary administration provisions of Article IV, Part 1, fill a needed gap.
The ancillary administration provisions, therefore, of Article IV, Part 1, should be enacted.
A whole set of provisions dealing with the ownership and signatory authority, pre- and post- death, of non-probate assets, has been added, and will probably create confusion in the hands of the unrepresented, though some of the provisions will be useful to attorneys. A "TOD" (transfer on death) or "POD" (pay on death)" Totten-trust sort of arrangement results.
Basically, the provision would permit a security to be registered in the form "John S. Brown TOD or POD John S. Brown Jr.", or "John S. Brown and Mary B. Brown JT TEN TOD John S. Brown Jr.".(17) The effect of this registration, it is stated, is not to affect ownership until the death of the non-TOD/POD beneficiaries.
It is certainly true that many problems have been caused, historically, by the inappropriate use of joint and survivorship ownership arrangements, especially between non-spouses. The provision for an alternative is most appropriate. However, the provisions are complex, specific, and will need to be carefully followed or avoided. As they are likely to be used by lay persons, there is no assurance that their added complexity will be appropriately employed.
There does not seem to be any urgent need for a new probate code.
Several substantive changes were among those proposed by the Uniform Act: augmented probate share, TOD/POD securities, inheritance changes, construction rules, and the prudent investor rule. The augmented probate share concept has been deleted, and the TOD/POD rule is being extracted, however. The inheritance changes and construction rules do not seem appropriate. The prudent investor rule is not helpful and is in fact dangerous.
The major restatement and revision of an entire code adds complexity, and in the views of the drafters, will require all of us to be "educated" in the new law. If as the State Bar informs me there are 6188 lawyer members of the Probate and Trust Law Section, and if each requires 8 hours of education, at a cost of $150 per hour, approximately $7.5 million will be consumed in this project just for the section members to be basically informed.
Practitioners who draft wills only occasionally may have their work frustrated in its intent by construction rules such as those in the bill.
Conflict-of-law rules may be stressed, also, in the case of testators with contacts in multiple jurisdictions.
It would seem therefore that the revision is therefore not an unmixed blessing.
The drafters, however, are of the opinion that it has broad support.(18) The Bill has been introduced, and is on its way toward enactment.
Vance A. Fisher
May ___, 1997
(1) The official listing by the Commissioners lists 18 adopting states. Since Michigan, which has not enacted the current version, is included in the list, the listing obviously includes adopters of the predecessor statute, which in Michigan is the "Revised Probate Code."
(2) There are other questions as to when major statutory revisions should occur, and as to who should decide that question.
(3) Section 2112.
(4) Michigan Constitution, Article X, Section 1: "Dower may be relinquished or conveyed as provided by law."
(5) MCL 555.201, MSA 26.85, et seq., MCL 700.551, MSA 27.5561.
(6) MCL 451.1207, MSA 26.1199(7).
(7) Section 1503.
(8) MCL 700.105, MSA 27.5105.
(9) This is a desirable reduction from the 4 proposed in the 1995 version: formal, informal, supervised, and unsupervised.
(10) Section 31006.
(11) Article II, Part 7.
(12) Section 1104(i).
(13) E.g., 2708(f), Section 2713(g).
(14) Section 2709(9c).
(15) Section 2603(a), -(c).
(16) It appears that these have been extracted since I received the bill. Martin, note 19, infra.
(17) Section 6310.
(18) Martin, John H., "From the Chairperson's Desk," 16(3) Michigan Probate and Estate Planning Journal 1 (1997): "The Estate Settlement Act as modified and reintroduced had the backing or tacit approval of everyone who has reviewed it."