432 Mich. 426

MILLER v DEPARTMENT OF MENTAL HEALTH

Docket No. 81754.

Argued October 4, 1988

(Calendar No. 2).

Decided June 6, 1989.

*427Daniel E. Atkins for the petitioner.

Frank J. Kelley, Attorney General, Louis J. Caruso, Solicitor General, and George L. McCargar, Patrick J. O'Brien, and Irene M. Mead, Assistant Attorneys General, for the respondent.

Amicus Curiae:

Hill, Lewis, Adams, Goodrich & Tait (by John D. Mabley) for the State Bar of Michigan, Probate and Estate Planning Section.

Levin, J.

The question presented is whether Carol Miller’s interest in a trust established by her father is an asset that the Michigan Department of Mental Health can claim to reimburse itself for services rendered to her by the department.

We hold that if, as contended by Carol Miller, her interest in the trust is as a beneficiary of a discretionary trust, she would not have an ascertainable interest in the assets of the trust, and her interest in the trust would not be an asset that the department may claim. Whether the trust is a *428discretionary trust depends, we agree with the probate judge, on the intent of her father as the settlor.

The judge ruled without an evidentiary hearing that the trust was a discretionary trust. We are of the opinion that the settlor’s intent cannot in the instant case be determined without an evidentiary hearing concerning the factual context and the circumstances.

We reverse the judgment of the Court of Appeals and remand the case to the probate court for an evidentiary hearing.

i

Carol Miller has been in the care of the department since 1958.1 It appears, although no evidentiary record was made, that neither she nor her family made payments to the department for her support.2 In 1983, her father established a trust of which he was the beneficiary during his lifetime and which provided that, if Carol Miller survived him, the trustee shall pay so much of the income and such amounts of principal as the trustee deems proper for her support, maintenance, and welfare.

After her father died in 1984, the department determined that the assets of the trust should be included in determining her financial ability to pay for the services rendered to her by the department.3 An administrative law examiner affirmed *429the department’s determination.4

The probate court reversed, finding that the trust established by Carol Miller’s father was a discretionary trust and hence she did not have an ascertainable interest in the assets of the trust. The Court of Appeals reversed, finding that the trust was a support trust rather than a discretionary trust.5

ii

There are, for the purpose of this discussion, three kinds of trusts. Firstly, a trust vesting in the beneficiary the right to receive some ascertainable portion of the income or principal. Secondly, a trust providing that the trustee shall pay so much of the income or principal as is necessary for the education or support of the beneficiary, called a support trust.6 Thirdly, a trust providing that the trustee may pay to the beneficiary so much of the income or principal as he in his discretion determines, called a discretionary trust.7

*430Where the beneficiary is entitled to receive an ascertainable portion of the income or principal, creditors can reach the beneficiary’s interest unless there is a spendthrift clause providing that the beneficiary’s interest shall not be transferable or subject to the claims of creditors.8 Without regard to whether there is a spendthrift clause, ordinary creditors cannot reach a beneficiary’s interest in a support trust because the nature of the beneficiary’s interest, being limited to such amount as is necessary for education or support, precludes recognition of the claims of creditors that would defeat the object of the trust.9 Similarly, without regard to whether there is a spendthrift clause, creditors cannot reach a beneficiary’s interest in a discretionary trust because of the nature of the beneficiary’s interest.10 The beneficiary’s receipt of any amount depends on the trustee’s exercise of his discretion, and thus the benefi*431ciary does not have an ascertainable interest in the assets of a discretionary trust.

Although ordinary creditors cannot reach the ascertainable interest of the beneficiary of a trust with a spendthrift clause or the interest of a beneficiary of a support trust, the interest of a beneficiary of such a trust can be reached to enforce claims by the beneficiary’s wife or child for alimony or support, for necessaries furnished the beneficiary and to satisfy a claim of the United States or of a state.11 This exception does not apply to the interest of a beneficiary in a discretionary trust,12 and thus it is determinative of the instant controversy whether the trust established by Carol Miller’s father is a support trust or a discretionary trust.

iii

The trust established by Carol Miller’s father provided that the trustee shall pay the income to her father during his lifetime and such amounts of the principal as he might choose to withdraw. It further provided that, if Carol Miller survived him, the trustee shall pay "so much of the income” and "such amounts of principal (even to the extent of all) as the Trustee deems proper for the support, maintenance and welfare of” Carol Müler.13

A

The trust instrument did not contain a spendthrift clause. This is of no consequence. The claim *432here is asserted by the state and thus could be asserted without regard to whether there was a spendthrift clause unless this is a discretionary trust.14

The trust established by Carol Miller’s father did not establish an entitlement in her to receive a definite portion of the income or principal. The question is thus, again, whether the trust established was a trust established for her education or support, a support trust, in which event the state may assert its claim, or a discretionary trust, in which event its claim cannot be asserted because her interest in the assets is not ascertainable.

The trust corpus was $172,079.42 at the time Carol Miller’s father died. The department subsequently determined that the amount required to pay for her care was $55,480 a year. The department claims that the trustee was obliged by the terms of the trust instrument to expend from the income and principal of the trust $55,480 a year for Carol Miller’s support and maintenance until the trust corpus was exhausted, and that the trustee did not have any discretion in the matter.

The trust instrument did not provide that the trustee shall pay so much of the income and such amounts of principal as "are necessary” for Carol Miller’s support, maintenance, and welfare, but rather so much of the income and such amounts of principal as the trustee "deems proper” for her support, maintenance, and welfare.

In some circumstances, the words used, "deems proper,” might be read as creating a support trust, vesting in the trustee only the discretion to determine the amount necessary for support of the beneficiary and establishing an entitlement on the part of the beneficiary to enforce payment of such *433amount as the trustee determines should be paid for support in the exercise of a discretion that is judicially reviewable for abuse of discretion. In other circumstances, those words might be read as creating a discretionary trust vesting in the trustee complete discretion regarding the amount, if any, to be paid for the support of the beneficiary.15

Carol Miller’s father had no legal obligation to pay any amount for her support.16 It appears that he had not paid any amount to the department for her support, and that the only payment to the department for her support other than by the state over many years were sums received from the Social Security Administration, less than $4,000 a year. Those are, however, only impressions. No evidentiary record was made in the probate court concerning the factual context or the circumstances.17

*434The probate judge said that in construing a trust instrument the intention of the settlor is paramount, and we agree.18 The judge was of the opinion that the settlor intended to create a discretionary trust; the judge said that the trustee had "complete discretion as to whether or not Carol was to receive any payment from the trust and the amount and the frequency of the payment for her support” and that her interest in the trust "is unascertainable and [it] cannot be determined if she would receive anything.” We cannot decide whether the judge’s determination was clearly erroneous absent a supporting evidentiary record concerning the factual context and the circumstances. We remand to the probate court so that such a record can be made.

B

The Court of Appeals has addressed the question presented in other cases.

In In re Sykes Estate, 131 Mich App 49, 52; 345 NW2d 642 (1983), the settlor had established a trust providing that the income and principal would be payable for the benefit of his wife and son in such proportions as the trustee shall deem necessary to provide for their proper care, support and welfare. The Court of Appeals, in deciding that a discretionary trust had been established, considered that the son had spent much of his adult life in jails in Michigan and in other states, and that the settlor had provided "only occasional and relatively small amounts to his son for his support during his lifetime.” The Court said that "the son’s interest in this discretionary trust is unascertainable, i.e., he could not be certain that he would ever receive anything. Moreover, we find *435that the settlor did not intend to be the sole source of support of his son.”19

On remand, after an evidentiary record has been made, it will be for the probate judge to decide whether Carol Miller’s father intended, when he established the trust and added a provision for her benefit, to require the trustee to pay such amounts as might be needed, $55,480 a year or some lesser amount, to defray the cost of caring for her by the department or whether the provision in the trust instrument for Carol Miller was designed rather to permit the trustee, in the exercise of the discretion conferred, to, for example, pay for needs not covered by the department or the contingency that she might be discharged by the department and be *436in need of care and support outside an institution maintained by the department or some other governmental body.

If the judge decides that Carol Miller’s father did not intend to require the trustee to pay such amounts as might be needed or some lesser amount to defray the cost of caring for her by the department and that a discretionary trust was established, then the beneficiary, Carol Miller, had no ascertainable interest in the trust income or principal, and her interest would not be subject to the claims of creditors including a claim asserted by the state.

c

We have considered cases from other jurisdictions cited in the opinion of the Court of Appeals.20

We have also considered the department’s contention that the Legislature intended that the interest of a beneficiary in a discretionary trust be considered an asset of the beneficiary within the meaning of § 818 of the Mental Health Code21 in determining the individual’s total financial situation. There is nothing in the Mental Health Code or any other pertinent enactment of the Legislature that supports this contention. Testators and settlors have established discretionary trusts in the expectation, justified under the established common law, that a beneficiary’s interest is not *437subject to the claims of creditors, including claims of the United States and of the state, because the beneficiary does not have an ascertainable interest in the assets of the trust. Absent an express statement from the Legislature, this Court would not be justified in concluding that the Legislature intended to defeat those expectations.

Our disposition might make it unnecessary to address the department’s cross-appeal concerning the construction placed by the Court of Appeals on the term "original financial net worth” as used in § 826 of the Mental Health Code.22 We intimate no opinion regarding the construction of that term by the Court of Appeals. If the probate judge decides that the trust established for Carol Miller is not a discretionary trust and the Court of Appeals affirms that determination,23 the department may file with this Court an application for leave to appeal on the statutory construction issue.

Reversed and remanded to the probate court for further proceedings consistent with this opinion. We do not retain jurisdiction.

Miller v. Department of Mental Health
432 Mich. 426

Case Details

Name
Miller v. Department of Mental Health
Decision Date
Jun 6, 1989
Citations

432 Mich. 426

Jurisdiction
Michigan

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