Annotations
ANNOTATIONS FOR THE UNIFORM TRUST CODE, THE DC UNIFORM TRUST CODE,
THE MARYLAND TRUST ACT, AND THE VIRGINIA UNIFORM TRUST CODE
Written by Nancy G. Fax and Alex S. Tanouye
Abbreviations:
UTC – Uniform Trust Code
MTA – Maryland Trust Act
DC UTC – District of Columbia Uniform Trust Code
VA UTC – Virginia Uniform Trust Code
ARTICLE 1 — GENERAL
Definition of “Spendthrift Provision”
UTC §103, DC §1301.03(18), and VA §64.2-701 define “spendthrift provision” as a term of a trust which restrains both the voluntary and involuntary transfer of a beneficiary’s interest. MD §14.5-103(w) includes that definition along with the following alternative: a trust term which restrains involuntary transfer of the interest of a beneficiary and permits voluntary transfer of the interest of a beneficiary only with the consent of a person that is not a beneficiary.
Default and Mandatory Rules & Trustee’s Duty to Inform and Report
Generally, UTC §105 provides that the terms of a trust cannot alter the duty of the trustee to respond to the request of a [qualified] beneficiary age 25 or older of an irrevocable trust for trustee’s reports and other information reasonably related to the administration of the trust.
DC §19-1301.05(b)(9) omits the bracketed word “qualified,” with the effect that any beneficiary can request reports and other information from the trustee. However, DC §19-1301.05(c) allows the settlor to waive or modify the duties of a trustee to give notice, information and reports to beneficiaries by (1) waiving or modifying such duties during the lifetime of the settlor or the lifetime of the settlor’s surviving spouse, (2) specifying a different age at which a beneficiary of class of beneficiaries must be notified under DC §19-1308.13(b)(2) and (3), or (3) designating a person or persons to act in good faith to protect the interest of beneficiaries to receive any notice, information or reports in lieu of providing such notice, information or reports (under DC §19-1308.13) to the beneficiaries.
MD §14.5-813(a) and (c) entitle only “qualified” beneficiaries to information and reports from the trustee upon request. MD §14.5-105(10) contains a mandatory rule omitted from the UTC; it provides that the terms of the trust cannot alter the duty of the trustee to notify the “qualified” beneficiaries (age 25 or older) of an irrevocable trust of their rights to: know of the existence of a trust; know the identity of the trustee; request reports; request a copy of the trust instrument; and, receive other information reasonably related to the trust administration.
VA §64.2-703(B) does not prohibit the terms of a trust from altering or negating the duty of the trustee (under VA §64.2-775) to respond to beneficiaries’ requests for reports and other information. In addition, VA §64.2-703(B) omits the UTC provision prohibiting the terms of a trust from waiving the trustee’s duty (under VA §64.2-775) to notify qualified beneficiaries (age 25 or older) of an irrevocable trust of the existence of the trust, the identity of the trustee, and of their right to request trustee’s reports.
Default and Mandatory Rules & Court’s Power to Adjust Trustee Compensation
UTC §708(b) provides that the terms of a trust cannot supersede the court’s power to adjust a trustee’s compensation which is unreasonably low or high. Both DC §19-1301.05(b)(7) and VA §64.2-703(B)(7) include this UTC provision. MD §14.5-105(8), however, omits reference to compensation specified in the trust; rather, it simply states that the terms of a trust cannot alter the power of the court under MD §14.5-708(a) to increase or decrease the commissions of a trustee.
Default and Mandatory Rules & Judicial Proceedings
UTC §105(b)(12) provides that the terms of a trust cannot alter the periods of limitation for commencing a judicial proceeding. MD §14.5-105 does not include this mandatory rule, which suggests that the terms of a trust can alter the periods of limitation for commencing a judicial proceeding.
UTC §105(b)(14) provides that the terms of a trust cannot alter the subject-matter jurisdiction of the court and venue for commencing a proceeding as provided in §§203 and 204. DC §19-1301.05, MD §14.5-105 and VA §64.2-703(B) do not include this mandatory rule, which suggests that the terms of a trust can alter the subject-matter jurisdiction of the court and venue for commencing a proceeding.
Principal Place of Administration
TC §108(b) provides: A trustee is under a continuing duty to administer the trust at a place appropriate to its purposes, it administration, and the interest of the beneficiaries. This provision is included in the DC UTC and the MTA, but not in the VA UTC. This provision has prompted concern that a trustee might be held liable for failing to determine the best jurisdiction in the United States, and possibly elsewhere, that is the best place to administer the trust.
UTC §108(c) provides that the trustee may transfer the trust’s principal place of administration to another state or to a jurisdiction outside of the U.S. without precluding the right of the court to order, approve, or disapprove such a transfer. VA §64.2-706(B) allows the trustee to transfer the principal place of administration of an inter vivos trust, but not a testamentary trust. VA §64.2-706(F) expressly provides that the court, for good cause shown, may transfer the principal place of administration of a testamentary trust to another state or to a jurisdiction outside of the U.S. upon such conditions, if any, as it may deem appropriate. The UTC, the MTA, and the DC UTC do not differentiate between inter vivos and testamentary trusts in connection with the transfer of a trust’s principal place of administration.
Provision of Notices
UTC §109(a) permits notice to a person by first class mail, personal delivery, delivery to the person’s last know place of residence or place of business or a properly directed electronic message.
MD §14.5-109(a)(2) omits reference to “a properly directed electronic message.” N.B. that MD §14.5-109(a)(3) requires a trustee to provide notice to a person that any of the six actions listed in the statute by personal service or otherwise by certified mail, postage prepaid, return receipt requested. MD §14.5-109(c) provides that the person to whom notice must be provided can waive – “in writing” – the right to receive notice. None of the UTC, the DC UTC, and the VA UTC contains an “in writing” requirement.
Nonjudicial Settlement Agreements
As originally enacted, the MTA did not provide for nonjudicial settlement agreements. On April 26, 2016, however, Governor Lawrence J. Hogan Jr. approved passage of a nonjudicial settlement agreements law (new MD §14.5-111) that became effective on October 1, 2016. New MD §14.5-111 provides that “interested persons” can enter into a binding, nonjudicial agreement with respect to the following matters:
- Interpretation or construction of trust terms;
- Approval of an accounting;
- Granting the trustee a necessary or desirable power;
- Transfer of the principal place of administration;
- Resignation or appointment of a trustee and determinations of trustee compensation; and
- Liability of a trustee for an action relating to the trust.
Determining Relationships Among Persons
MD 14.5-112 provides that the rules of construction contained in MD EST & TRUSTS §§1-202 through 1-210.1 (applicable to estates and wills) are also applicable in construing the terms of inter vivos trusts. These rules of construction relate to the terms “surviving spouse,” “children,” “issue,” and “per stirpes,” as well as other terms.
ARTICLE 2 — JUDICIAL PROCEEDINGS
Role of Court in Administration of Trusts
Under the UTC and in all three jurisdictions, the court may intervene in the administration of a trust when its jurisdiction is invoked by an interested person or as provided by law. MD §14.5-201(a) expressly provides that a court may intervene in the administration of a trust on the court’s own motion, fashioning and implementing remedies as interests of beneficiaries and the public may require. MD §14.5-201 provides that a court having equity jurisdiction has general superintending power with respect to trusts, notwithstanding any provision in Titles 1 through 13 of the Estates and Trusts Article.
Discretionary Powers Subject to Judicial Control
MD §14.5-203 contains a provision omitted from the UTC relating to discretionary powers and the abuse of the discretion of the trustee.
Proceedings to Appoint or Remove Trustees; Pleadings, Parties, Orders, and Notices
The VA UTC includes provisions (§§64.2-712 and 64.2-713) omitted from the UTC relating to proceedings to appoint and remove trustees and the nature and effect of pleadings, parties, orders, and notices in judicial proceedings involving trusts. Among other matters, §64.2-713 provides for notice to unborn, minor, and incapacitated individuals and the binding effect of orders issued to fiduciaries, holders of powers of appointment, and others.
ARTICLE 3 — REPRESENTATION
Representation & General Provisions
The representation provisions permit notice to be given to a person who may represent and bind another person and provide that the consent of a person who may represent and bind another person is binding on the person represented unless the person represented objects to the representation before the consent would otherwise have been effective. DC §19-1303.01(b) and VA §64.2-714(B) specify that an objection to consent is made by notifying the trustee or the representative. MD §14.5-301(b) specifies that an objection to consent must be made by notifying the trustee and the representative. In addition, under MD §14.5-301(a), the person represented with respect to notice to that person may object to the representation as to notice by notifying the trustee and the representative.
MD §14.5-301(d) and (e) are additional representation provisions, absent from UTC §301, which provide that a representative may act on behalf of another person whether or not there is a judicial proceeding pending and, in making decisions, may consider the general benefit accruing to the members of the represented individual’s family. These additional representation provisions are included in UTC §305, DC §19-1303.05, and VA §64.2-718, which pertain to the appointment of a representative by the court.
UTC §301(d) is a bracketed provision providing that a settlor may not represent and bind a beneficiary with respect to the termination or modification of a trust. The purpose of this provision is to avoid the possible inclusion of the trust in the settlor’s estate for estate tax purposes because, arguably, participation in the termination or modification of a trust constitutes a retained interest under §2036 of the Internal Revenue Code. UTC §301(d) is omitted from DC §19-1303.1 and also omitted from MD §14.5-301. UTC §301(d) is included in VA §64.2-714.
Representation by Holder of Testamentary Powers of Appointment
UTC §302 permits the holder of a general testamentary power of appointment to represent and bind persons whose interests, as permissible appointees or takers in default, are subject to the power, but only if there is no conflict of interest between the powerholder and the persons represented with respect to the particular question or dispute.
Both DC §19-1303.02 and MD §14.5-302 omit the conflict of interest proviso because the powerholder can act to include or exclude the permissible appointees or takers in default regardless of whether a conflict of interest exists; this omission renders irrelevant any concern about a conflict of interest. VA §64.2-715 retains the conflict of interest proviso.
N.B. MD §14.5-302 permits the holder of a “qualified power of appointment” to represent and bind permissible appointees or takers in default. The term “qualified power of appointment” is defined in MD §14.5-302(b) as either a general power of appointment or a power of appointment exercisable in favor of all persons other than the powerholder, his estate, his creditors, and creditors of his estate.
N.B. DC §19-1303.02 confusingly provides that the “holder of a power of appointment” may represent and bind permissible appointees or takers in default. This statute then defines a “qualified power of appointment” in the same manner as MD §14.5-302(b), described above, but there is no other reference elsewhere in the statute (or in the entire DC UTC) to a “qualified power of appointment,” and so it is unclear from a literal reading of DC §19-1303.02 whether the statute applies to any powerholder or only one who has a general power of appointment (or a broad limited power of appointment).
Representation by Fiduciaries and Parents
To the extent there is no conflict of interest with respect to the particular question or dispute, UTC §303(4) permits a trustee to represent and bind the beneficiaries of the trust. The same provision appears in DC §19-1303.03(4) and VA §64.2-716(4). However, MD §14.5-303(4) provides that a trustee of a trust that is a beneficiary of another trust may represent and bind the beneficiaries of the trust that is the beneficiary of the other trust. Similarly, UTC §303(5), DC §19-1303.03(5), and VA §64.2-716(5) provide that a personal representative of a decedent’s estate may represent and bind persons interested in the estate. MD §14.5-303(5) provides that a personal representative of a decedent’s estate that is a beneficiary of a trust may represent and bind interested persons in the estate.
UTC §303(6) and all three jurisdictions permit a parent to represent and bind the parent’s minor or unborn child if a conservator or guardian for the child has not been appointed. MD extends this provision to include an incapacitated child, an unknown child of the parent, and a child whose location is unknown and not reasonably ascertainable. MD §14.5-303(7) (which became effective on October 1, 2016), DC §19-1303.03(7), and VA §64.2-716(7) allow an individual to represent a grandchild or more remote descendant, whether born or unborn, who is incapacitated or whose location is unknown and unascertainable (Maryland), whom a parent may not represent and bind (DC), or who is not otherwise represented (Virginia).
DC §19-1303.03(8) provides that a qualified beneficiary may represent and bind any beneficiary who would succeed to his or her interest under the terms of the trust or pursuant to the exercise of a power of appointment. This provision appears in none of the UTC, the MTA, and the VA UTC.
Representation by Person Having Substantially Identical Interest
UTC §304 permits representation of a minor, incapacitated, or unborn person, or of a person whose location is unknown and cannot reasonably be ascertained, by another person (or “representative” in Maryland) who has a substantially identical interest with respect to a question or dispute, absent a conflict of interest. MTA 14.5-304 (which became effective on October 1, 2016), DC §19-1303.04, and VA §64.2-717 provide that the “conflict of interest” precludes representation only if the conflict relates to the particular question or dispute. In other words, if the representative and the represented person have a conflict of interest that is unrelated to the particular question or dispute at hand, then representation is permitted notwithstanding the unrelated conflict of interest.
ARTICLE 4 — CREATION, VALIDITY, MODIFICATION AND TERMINATION OF A TRUST
Methods of Creating Trusts
UTC §401 provides that a trust may be created by (i) the transfer of property to a trustee during the settlor’s lifetime or by will, (ii) the declaration of by the owner of property that the owner holds property as trustee or (iii) exercise of a power of appointment in favor of a trustee. DC §19-1304.01(4) also permits the creation of a trust by a court in lieu of the transfer of property to a conservator or guardian. VA §64.2-719(4) also permits the court to authorize the creation of a trust by a conservator on behalf of an incapacitated person. VA §64.2-719(1) permits an attorney-in-fact to create a trust for the benefit of the principal if the power of attorney expressly authorizes the attorney-in-fact to do so.
Requirements for Creation of Trusts
UTC §402, DC §19-1304.02(5), and VA §64.2-720(5) provide that a valid trust is not created if the same person is the sole trustee and the sole beneficiary. MD §14.5-402 omits this provision. Note that often a revocable trust has a sole trustee who is also the sole current beneficiary, but in most, if not all, cases, there are other remainder beneficiaries.
Modification or Termination of Non-Charitable Irrevocable Trusts by Consent
DC §19-1304.11 permits modification or termination of a non-charitable trust upon the consent of the settlor and all beneficiaries, without the need for court approval, even if the modification or termination is inconsistent with a material purpose of the trust. The section also permits modification or termination of a trust upon the consent of all of the beneficiaries, but only if the court concludes that modification or termination of the trust is not inconsistent with any material purpose of the trust.
MD §14.5-410 permits modification or termination of a non-charitable trust upon the consent of the trustee (not the settlor) and all beneficiaries if the court concludes that modification or termination of the trust is not inconsistent with any material purpose of the trust. Accordingly, under Maryland law, court approval is required for all modifications and terminations of non-charitable irrevocable trusts.
VA §64.2-729 requires the court to order the modification or termination of a trust upon the consent of the settlor and all beneficiaries even if the modification or termination of the trust is inconsistent with a material purpose of the trust. A trust may be modified or terminated upon consent of all beneficiaries if the court concludes that the modification or termination if not inconsistent with a material purpose of the trust. Accordingly, under Virginia law, court approval is required for all modifications and terminations of non-charitable irrevocable trusts.
UTC §411(c) is a bracketed provision that provides: A spendthrift provision in the terms of the trust is not presumed to constitute a material purpose of the trust. This provision is included in DC §19-1304.11(c). The corresponding provision in MD §14.5-410(b) is somewhat different; it provides that the existence of a spendthrift provision or similar protective language in the terms of the trust does not prevent a termination of a non-charitable irrevocable trust. This provision is omitted from VA §64.2-729.
Cy Pres
UTC §413 provides that a provision in the terms of a charitable trust that would result in distribution of the trust property to a non-charitable beneficiary prevails over the power of the court under subsection (a) to apply cy pres to modify or terminate the trust if, when the provision takes effect: (1) the trust property is to revert to the settlor and the settlor is still living; or (2) fewer than 21 years have elapsed since the date of the trust’s creation. This provision is omitted from DC §19-1304.13, but is contained in VA §64.2-731. The MTA has no statutory cy pres provision, although the cy pres doctrine is recognized under Maryland common law (see Gordon v. City of Baltimore, 258 Md. 682, 267 A.2d 98 (1970) and Fletcher v. Safe Deposit & Trust Co., 193 Md. 400, 67 A.2d 386 (1949)).
Modification or Termination of Uneconomical Trusts
DC §19-1304.14 permits the termination of a trust with a value of less than $50,000. MD §14.5-412 and VA §64.2-732 permit the termination of a trust with a value of less than $100,000. MD §14.5-412 provides detailed procedures for terminating and distributing an uneconomical trust.
Combination and Division of Trusts
MD §14.5-415 requires judicial intervention to combine or divide trusts unless the trust instrument(s) expressly provides that the trustee can divide or consolidate trusts. UTC §417 and the corresponding DC UTC and VA UTC provisions require no judicial intervention for consolidation or division of trusts.
Title to Trust Property
The UTC has no provision regarding how trust property is to be titled. DC §19-1304.18 provides that property that is transferred to a trust may be titled in the name of (1) the trust by reference to the instrument creating the trust, (2) the current trustee as the trustee of such trust or (3) “the trustee” as the trustee of such trust. The purpose of this provision is to avoid title problems, especially with regard to real property.
ARTICLE 5 — CREDITOR’S CLAIM, SPENDTHRIFT AND DISCRETIONARY TRUSTS
Rights of Beneficiary’s Creditors or Assignees
Subtitle 5 of the MTA differs substantially from UTC Article 5. Much of the common law of Maryland regarding creditors’ rights is well established and follows closely the statement of the law as found in the Restatement (Second) of Trusts.
Article 5 of the UTC is primarily modeled on the precepts of the Restatement (Third) of the Law of Trusts and does not recognize the distinctions recognized by Maryland common law limiting the rights of creditors to reach discretionary trusts, support trusts, and spendthrift trusts. In particular, First National Bank v. Department of Health and Mental Hygiene, 284 Md. 720, 399 A.2d 891 (1979), provides guidance on the creation and administration of discretionary and support trusts.
Under Maryland common law, it is well-settled that limited powers of appointment are not property and therefore are not subject to remedies for the benefit of the limited powerholder’s creditors. See, United State v. Baldwin, 283 Md. 586, 391 A.2d 844 (1978) and Mercantile Trust Co. v. Bergdorf & Goodman Co., 167 Md. 158, 173 A.2d 21 (1934). In order to explain and support the provisions of Subtitle 5 of the MTA, a number of definitions are included in MD §14.5-103 which are omitted from the UTC. Those definitions are “discretionary distribution provision,” “support provision,” “mandatory distribution provision,” “power of appointment,” “general power of appointment,” “power of withdrawal,” and “spendthrift provision.”
MD §14.5-501 clarifies that traditional creditor remedies are unavailable with respect to beneficiary interests and trust property that are subject to discretionary distribution, support, or spendthrift provisions. Such remedies are also unavailable with respect to trust property that is the subject of a third party power of appointment, where the power holder acts as a surrogate for the settlor. Absent a valid discretionary distribution, support, or spendthrift provision, a creditor can ordinarily reach the interest of a beneficiary in a trust in the same manner as any other property of the beneficiary.
MD §14.5-502 allows a settlor to use discretionary distribution provisions to protect trust property and intended beneficiaries. In the case of a discretionary trust, a creditor only has a right to attach distributions when and as made by the trustee directly to the beneficiary.
MD §§14.5-503 and §14.5-504 allow a settlor to retrain the transfer of a beneficiary’s interest regardless of whether the beneficiary has an interest in income, in principal or in both. Unless one of the exceptions applies, a creditor of the beneficiary is prohibited from attaching a protected interest and may only attempt to collect directly from the beneficiary after a distribution is made.
MD §14.5-504(e) provides that the use and occupancy of a residence and tangible personal property that are subject to a spendthrift provision may not be transferred by the beneficiary user and that subjecting such use and occupancy to the enforcement of creditor judgments is contrary to legitimate expectations of settlors for their intended beneficiaries.
MD §14.5-505 makes an exception for the claims of certain categories of creditors from the effects of a spendthrift provision and specifies the remedies such exception creditors may take to satisfy their claims. The exception in subsection (b)(1) for judgments or orders to support a beneficiary’s child or current or former spouse is consistent with Safe Deposit & Trust Co. v. Robertson, 192 Md. 653, 65 A.2d 292 (1949) (re alimony claims) and Zouck v. Zouck, 204 Md. 285, 104 A.2d 573 (1954) (re claims for child support).
MD §14.5-506 makes clear a creditor’s right to reach the present or future mandatory distribution interest of a trust beneficiary if that interest is not subject to a support provision or a spendthrift provision.
MD §14.5-507 addresses powers of appointment. Under Maryland common law, a creditor of a holder of a limited power of appointment cannot acquire a lien or interest in the power or the trust property subject to that power. Mercantile Trust Co. v. Bergdorf & Goodman Co., 167 Md. 158, 173 A 31 (1934). Maryland law is less clear with regard to the rights of creditors of general powers of appointment holders. Nevertheless, this provision applies to both limited and general powers of appointment.
Creditors’ Claims Against Settlor
UTC §505(a)(3) provides that, after the death of the settlor, the assets of a revocable trust are subject to claims of the settlor’s creditors, costs of administration of the settlor’s estate, the expenses of the settlor’s funeral and disposal of remains, and statutory allowances to a surviving spouse and children to the extent the settlor’s probate estate is inadequate to satisfy those claims, costs, expenses, and allowances. Both DC §19-1305.05(3) and VA §64.2-747(A)(3) include the same provision. MD §14.5-508(a)(5), however, provides that the asset of a revocable trust are subject to claims of the settlor’s creditors, but it does not include costs of administration, funeral expenses and statutory allowances.
MD §14.5-508(a) codifies the common law rule that a debtor may not place his or her assets beyond the reach of his or her creditors by using a trust that he or she can revoke. Under this section, whether or not the trust contains a discretionary provision, a support provision, or a spendthrift provision with regard to distributions to the settlor, a settlor’s creditor can reach all of the property of his revocable trust and the maximum amount that the trustee of an irrevocable could distribute to the settlor-beneficiary.
MD §14.5-508(b), which became effective on October 1, 2015, provides that property of a deceased settlor’s revocable trust is not subject to claims of the settlor’s creditors unless such claims are filed in the settlor’s estate proceeding before the Orphans’ Court as provided in MD EST & TRUSTS §§8-103 and 8-107; this applies to regular estate proceedings and not to a small estate proceeding under MD EST & TRUSTS §5-601 et seq. If a small estate proceeding is underway, or if no estate proceeding occurs, the trustee of the deceased settlor’s revocable trust can publish notice, the form of which is provided in MD §14.5-508(b), in order to establish a six-month claims period, which begins on the date of first publication. The procedures and requirements for filing a claim are provided in MD §14.5-508(b).
MD §14.5-508(c) provides that the holder of a withdrawal power is treated as if the holder were the settlor of the property in a revocable trust whenever the power is in effect. This subsection was previously codified in subsection (b) – before enactment of the above-described revocable trust claims provision – and it relates to the ability of a withdrawal powerholder’s creditors to reach trust property. N.B. Pursuant to MD §14.5-1003, an individual who creates a lifetime QTIP trust for his or her spouse, and who retains a secondary life estate if the spouse predeceases the transferor, is not considered a settlor for purposes of creditor claims.
DC §19-1305.05(d) provides that the trustee of a deceased settlor’s revocable trust can publish a notice and obtain for the trust the same protection from claims afforded to a decedent’s estate. This probate-type notice has the effect of barring claims against the trustee and the trust property 6 months after the date of the first publication of the notice.
VA §64.2-747(A)(3) provides protection against creditors for the deceased settlor’s revocable trust assets after two years following the settlor’s death.
With regard to exception creditors in Virginia, VA §64.2-744(B) is consistent with prior Virginia law. Children with support orders, but not spouses or former spouses, are exception creditors. Although government entities – the U.S., the Commonwealth, or any Virginia county, city, or town – are exception creditors in most cases, VA §64.2-745 expressly preserves Virginia’s protection for special needs or supplemental needs trusts from state claims against beneficiaries for reimbursement. MD §14.5-1002 contains Maryland’s special needs and supplemental needs trusts provision.
Grantor Trusts
VA §64.2-747(A)(2) provides that a trustee’s discretionary authority to pay directly or to reimburse the settlor for any tax on trust income or principal that is payable by the settlor shall not be considered to be an amount distributable to or for the settlor’s benefit and a creditor of the settlor shall not be entitled to reach any amount solely by reason of this discretionary authority. This provision is intended to prevent a creditor from reaching the assets of a grantor trust for income tax purposes solely because of the settlor’s liability for the tax on the trust income. MD §14.5-1003(a)(1) similarly provides that a settlor’s liability for income taxes on trust property, i.e., grantor trust status, does not per se enable the settlor’s creditors to reach property of such trust.
Beneficiary-Trustee Interests
MD §14.5-510(a) clarifies that a non-settlor beneficiary’s fiduciary powers as a trustee will not add to his/her rights as a beneficiary in determining whether the beneficiary’s interest or trust property is subject to claims by the beneficiary-trustee’s creditors. MD §14.5-510(b) makes is clear that the power of a beneficiary or other person to remove or replace a trustee will not by itself make trust property subject to the claims of that person’s creditors and thereby make such property taxable to the power holder for estate or gift tax purposes.
Immunity of Marital Trust Property from Claims of Separate Creditors of Spouses
Prior MD §14-113 was largely recodified in MD §14.5-511, which provides that property that was held by spouses as tenants by the entirety and subsequently conveyed to the trustee(s) of one or more trusts, of which both spouses are beneficiaries, continues to have the same immunity from the claims of the separate creditors of each spouse as if the spouses had continued to hold the property as tenants by the entirety. After the death of either spouse, the immunity continues to apply to the separate creditors of the decedent, but the immunity no longer applies to the separate creditors of the surviving spouse. VA §55-20.2 provides the same protection to tenancy-by-the-entirety property.
ARTICLE 6 — REVOCABLE TRUSTS
Revocable Trusts
Generally, when a trust is revocable, the duties of the trustee are owed exclusively to the settlor. However, DC §19-1306.03 and MD §14.5-603 provide that when the settlor does not have the capacity to revoke the trust, a beneficiary to whom distributions may be made during the lifetime of the settlor has the right to enforce the trust. This provision might apply to distributions to be made to the settlor’s spouse for his/her health and support. VA §64.2-752 lacks a similar provision.
Limitation on Action Contesting Validity of Revocable Trust
DC §19-1306.04 provides that a person may commence a judicial proceeding to contest the validity of a revocable trust within the earliest of (1) one year after the settlor’s death, (2) 90 days after the trustee sent the person a notice with all relevant information, or six months after the date of the first publication of notice with all relevant information. VA §64.2-753 provides that a person may commence a judicial proceeding to contest the validity of a revocable trust within the earlier of (1) two years after the settlor’s death or (2) six months after the trustee sent the person a notice with all relevant information. The VA UTC provides no publication option. The MTA lacks a corresponding statute (see comment to MD §14.5-604 related to partial revocation by divorce or annulment).
Partial Revocation by Divorce or Annulment
MTA §14.5-604, which became effective on October 1, 2016, provides default rules regarding the effect of divorce or annulment on the former spouse of a revocable trust settlor. The statute provides that upon divorce or annulment, all trust terms relating to distributions to or for the benefit of the settlor’s former spouse are revoked, and for all other trust purposes the settlor’s former spouse is deemed to have died on the date of divorce or annulment. If the former spouse is serving as trustee or trust advisor at the time of divorce or annulment, he or she is removed on the date of divorce or annulment without further court action. In addition, the former spouse cannot later serve in either such capacity or exercise any trust or fiduciary power provided under the trust instrument, including a power of appointment. These default rules can be overridden by express provision in the trust instrument, by a court order, or written agreement between the settlor and his or her spouse (or former spouse).
None of the UTC, the DC UTC, and the VA UTC has a corresponding provision.
ARTICLE 7 — OFFICE OF TRUSTEE
Co-Trustees
UTC §703, DC §19-1307.03 and VA §64.2-756 all permit co-trustees to act by majority decision. MD §14.5-703 omits a “majority rules” provision.
UTC §703(e) and the corresponding provisions of the three jurisdictions all have different standards for delegating among co-trustees.
Vacancy in Trusteeship
MD §14.5-704 adds two additional circumstances in which a vacancy in trusteeship occurs. A vacancy occurs if a trustee cannot be located for 120 days or a trustee is unable to handle business affairs as determined by two licensed physicians. VA §64.2-757 adds one additional circumstance, which is the adjudication of the trustee as an incapacitated person.
Resignation of Trustee
UTC §705 provides that a trustee may resign upon 30 days’ notice to the qualified beneficiaries and all co-trustees. DC §19-1307.05 and VA §64.2-758 add the requirement of notice to the settlor, if living. MD §14.5-705 requires court approval for a trustee resignation unless the trust instrument provides another method for resignation.
Commissions or Compensation
MD §14.5-708 provides a schedule of compensation for trustees. There is no statutory compensation schedule or formula in the UTC, the DC UTC, or the VA UTC.
ARTICLE 8 — DUTIES AND POWERS OF THE TRUSTEE
Duty of Loyalty
VA §64.2-764(D) provides that, for a transaction between a trustee and a beneficiary (not involving trust property) to be considered voidable by the beneficiary, the advantage flowing to the trustee must be “beyond the normal commercial advantage from such transaction.” A loan made by a corporate trustee’s commercial division to a trust beneficiary is an example of a transaction that does not involve trust property.
Powers to Direct
MD §14.5-808(c) requires a trustee to act in accordance with the direction of a trust advisor and relieves the trustee of any loss resulting therefrom, except in cases of willful misconduct by the trustee. In addition, the directed trustee has no duty to monitor the advisor, provide advice to the advisor or communicate with, warn or apprise any beneficiary or third party if the directed trustee might have acted in a different manner.
VA §64.2-770(E) similarly relieves the trustee of liability for acting in accordance with the trust director’s direction, except in the case of willful misconduct or gross negligence on the part of the trustee, and of the duty to monitor or provide information to the trust director or take action if the trustee disagrees with the trust director. N.B. For this subsection to apply, it must be incorporated by specific reference in the trust instrument.
Control and Protection of Trust Property
MD §14.5-809 provides that a trustee of a revocable trust is not responsible for items of tangible personal property that are not in the possession or control of the trustee. This provision facilitates the transfer of tangible personal property to a revocable trust in order to avoid probate with respect to such property.
Recordkeeping and Identification of Trust Property
VA §64.2-772(E) provides that a conveyance or transfer of real or personal property to a trust is deemed to be a conveyance or transfer of the property to the trustee(s). This provision has the same effect as DC §19-1304.18 and is intended to avoid title problems, particularly with respect to real property.
Enforcement and Defense of Claims
The MTA, in MD §14.5-811, affirmatively authorizes a trustee to abandon a claim that is unreasonable to enforce or assign the claim to a beneficiary. None of the UTC, the DC UTC, and the VA UTC has a corresponding provision.
Collecting Trust Property
The UTC, the DC UTC, and the VA UTC require a trustee to redress a breach of trust known to the trustee to have been committed by a former trustee.
MD §14.5-812 states the general rule that a trustee is not liable to the beneficiary for a breach of trust committed by a former and sets forth three exceptions to this general rule. MD §14.5-812(b)(1) provides that a trustee is liable to the beneficiary for a breach of trust if the trustee knows or should know of a situation constituting a breach of trust committed by a former trustee and the trustee improperly permits it to continue. MD §14.5-812(b)(2) and (3) include the UTC duties on a trustee to take reasonable steps to compel a former trustee or other person to deliver trust property to the trust and to redress a breach of trust known to the trustee to have been committed by a former trustee. Unlike the UTC, these provisions specifically provide that a trustee is liable to the beneficiary for a breach of trust if the trustee neglects either of these duties. Also, under MD §14.5-812 (b)(3), a trustee is required to redress a breach of trust committed by a former trustee, deleting the express requirement that the trustee had knowledge of the breach. Accordingly, MD §§14.5-812(b)(1) and 14.5-812(b)(3) apply to situations where the trustee may not have actual knowledge, but simply “should know.”
Duty to Inform and Report
UTC §813 and corresponding sections of the DC UTC and the VA UTC include the requirement that the trustee keep the qualified beneficiaries reasonably informed about the administration of the trust and of the material facts necessary for them to protect their interests. This requirement is not included in MD §14.5-813 because this was not part of the common law of trusts in Maryland.
MD §14.5-813 sets forth special requirements for methods of notice to qualified beneficiaries.
General Powers of Trustees
Because well-drafted Virginia trust instruments contain language conferring on fiduciaries, by incorporation, the powers listed in VA §64.2-105, there will be duplication between the powers conferred expressly in the instrument and those arising by application of default rules under the approach of the VA UTC. VA §64.2-777(C) and VA §64.2-778(B) are included to reduce the likelihood of conflict between express powers in an instrument and those under default rules.
Prohibited Powers
MD §14.5-814 is a tax-savings clause that prevents the grant of inadvertent general powers of appointments and inadvertent gifts.
General Powers
MD §14.5-815(a)(2)(iii) adds a reference to the new Maryland Fiduciary Access to Digital Assets Act (“MFADAA”) which took effect on October 1, 2016. This additional provision gives the trustee authority to exercise the powers conferred in the MFADAA.
Decanting
VA §64.2-778.1 is a decanting provision which permits a trustee – without court authorization – to appoint trust property to a second trust via the trustee’s discretionary distribution power, provided that the trustee is not an “interested trustee,” nine conditions under VA §64.2-778.1(C) are satisfied, and notice of the trustee’s exercise of the power is provided in accordance with VA §64.2-778.1(G).
The UTC, the DC UTC, and the MTA lack decanting provisions.
UPIA — UTC ARTICLE 9 — UNIFORM PRUDENT INVESTOR ACT
Uniform Prudent Investor Act
The UTC contains an optional Article 9 for states that wish to enact the Uniform Prudent Investor Act (“UPIA”) as part of the UTC. Maryland’s version of the UPIA is in MD §15-114 et seq.; the District of Columbia’s version of the UPIA is in DC §19.1309.01 et seq.; and, Virginia’s version of the UPIA is in VA §64.2-780 et seq.
ARTICLE 10 — LIABILITY OF TRUSTEES AND RIGHTS OF PERSONS DEALING WITH THE TRUSTEE
Limitation of Action Against Trustee
VA §64.2-796 varies from the UTC by adding provisions dealing with the effect of fraud and provision excepting claims seeking to surcharge and falsify accountings that have been confirmed pursuant to Title 26 (and are governed by VA §8.01-245).
Damages in Absence of Breach
UTC §1003(a) provides that a trustee is accountable to an affected beneficiary for any profit made by the trustee arising from the administration of the trust, even absent a breach of trust. MD §14.5-903 omits this provision because it is inconsistent with Maryland common law. Hughes v. MacDaniel, 202 MD 626 (1953) and MacDaniel v. Hughes, 206 Md. 206 (1955) both hold that a transaction with a trust which benefits the trustee can be permissible if there is full disclosure, no inequitable advantage, the beneficiary is fully aware of all ramifications of the transaction, and the beneficiary sought outside advice and counsel.
ARTICLE 11 — MISCELLANEOUS PROVISIONS
Severability
Only the DC UTC omits UTC §1103, which provides that the invalidity of any trust provision does not affect any other trust provisions that are effective without the invalidated provision.
Acknowledgment
The commentators are grateful to Richard T. Wright, of The Wright Firm, for his thorough and insightful analysis of the MTA, published in the MSBA Section of Estate and Trust Spring 2014 Newsletter (Vol. 23, No. 2), which provided background and context for many of the MTA provisions discussed in the commentary.
