A trustee’s fiduciary responsibilities include managing and distributing property in the trust. Implicit in those duties is the ability to receive and transfer ownership to trust property. As such, when a trust holds real property, the trustee has legal authority to transfer title to the real property to a beneficiary or third party. However, a recent decision in the Michigan Court of Appeals case places limitations on how a trust can hold title to real property and on how a trustee can transfer title to real property in the trust.
Trust Property Basics
A trust is a fiduciary arrangement under which the person creating the trust (called the settlor or grantor) authorizes a named trustee to manage and distribute property in the trust. In MCL 744.7401, the Michigan Trust Code permits the creation of trusts and details methods for creation of a trust.
The statutory provision authorizing creation of trusts refers to “transfers of property,” “identifiable property,” and “an interest in property.” While the section does not specifically address what types of property can be placed in trust, the provisions make it clear that a trust may contain various types of property. Trusts frequently holdreal property andpersonal property, as well as other types of assets.
Often, a trust iscreated by a legal document naming the trustee and beneficiaries and detailing the terms and conditions for management and distribution of trust assets. Creation of the trust through a document (or otherwise) is only the first step in establishing a trust. To be functional, assets must be transferred into the trust, a process that is calledfunding a trust.
When real property is one of the assets placed in a trust, transfer into the trust is accomplished by the settlor executing a new deed for the property that legally transfers title to the trust. That transfer authorizes the trustee to manage the real property and ultimately transfer it to a beneficiary or third party in accordance with the terms of the trust.
A recent decision of the Michigan Court of Appeals placed limitations on trust ownership of real property. The rule announced in the decision is an important restriction for trustees and beneficiaries to understand. It is also one of several important reasons why transfers of real property into and out of a trust are best accomplished with assistance from a knowledgeable attorney.
Michigan Court of Appeals Decision in Schaaf v. Forbes
The Michigan Court of Appeals decision inSchaaf v. Forbes, No. 343630 (Mich. Ct. App. Jul. 1, 2021), relates to ownership of a 60-acre parcel of land on the west shoreline of Torch Lake, located in Milton Township, Michigan. The court proceedings involve multiple intricate legal issues and complicated facts, as well as a complex procedural history that generated multiple court opinions.
The Michigan Court of Appeals issued the most recent decision in the case on July 1, 2021. The following summary of that decision condenses the factual background and covers only the issue and facts relevant to the question of how a trust can hold title to real property.
Background of the Case
The land in question was originally owned jointly by Leo Bussa and his mother, Mae Fitzpatrick. After the mother’s death in 2004, Bussa became trustee of the Fitzpatrick Trust, which then owned the 60-acre parcel. As trustee, he endeavored to restructure ownership of the 60-acre parcel by executing multiple conveyances that transferred title of the property to Bussa as trustee of the Fitzpatrick Trust and others as joint tenants with a right of survivorship.
After Bussa’s death, the successor trustee of the Fitzpatrick Trust filed new deeds confirming transfers to the remaindermen of the original Bussa title transfers. The plaintiffs in Schaaf v. Forbes contested the validity of the original conveyances that transferred title of the property to the Fitzpatrick Trust as a joint tenant with rights of survivorship.
Court Proceedings
The case was tried in circuit court, which found in favor of the plaintiffs, determining that a trust cannot hold real property as a joint tenant with rights of survivorship. The court voided the attendant conveyances, leaving the Fitzpatrick Trust’s interests in the real property to pass according to the terms of the trust.
The defendant appealed to the Michigan Court of Appeals. (That appeal preceded the recent consideration of the case by the Court of Appeals). In a 2019 unpublished decision, the Court of Appeals overturned the circuit court’s decision. Plaintiffs then appealed to the Michigan Supreme Court, which remanded the case to the Court of Appeals.
On remand from the Supreme Court, a three-judge panel (with one judge filing an opinion concurring in part and dissenting in part) issued a decision on July 1, 2021. The Court held that the circuit court properly concluded as a matter of law that a trust may not hold real property as a joint tenant with rights of survivorship. The majority opinion includes a detailed legal analysis of that issue.
Conclusion
While a trust can hold and convey property, the Court of Appeals decision places a limitation on the nature of a trust’s real property ownership. Under the recent Shaaf v. Forbes decision, it is a matter of law that a trust cannot hold real property as a joint tenant with rights of survivorship.
Trust Ownership and Conveyance of Real Property
As the recent Court of Appeals decision illustrates, real property transfers that involve creating a property interest in a trust must be carefully structured to comply with legal requirements. Transfer of title to real estate also involves many other legal issues in Michigan. Particularly when a trust is involved in a real property transfer, assistance from an experienced attorney is essential to ensure the validity of the transfer.