The new Maryland Trust Act takes effect January 1, 2015 and will apply to all Maryland trusts, including those created prior to its effective date. For the most part, the Act provides default rules that can be overridden by the express terms of a trust, but some rules are mandatory. The following is brief summary of the highlights of the new Act:
Duty to Inform & Report. Within 60 days of accepting trusteeship (after January 1, 2015), a trustee must notify all qualified beneficiaries of the trustee’s acceptance of the trust and of the trustee’s name, address and telephone number. When a new irrevocable trust is created (or a formerly revocable trust becomes irrevocable) on or after January 1, 2015, the trustee must notify all qualified beneficiaries within 90 days, informing them of the trust’s existence, the identity of its settlor, each beneficiary’s right to request a copy of the trust document, and the right to request regular reports from the trustee. A trustee is also required to respond promptly to a qualified beneficiary’s request for information related to the trust’s administration (including a copy of the trust), unless the request is unreasonable under the circumstances. Many of the notice requirements are mandatory rules under the Act, meaning that the settlor cannot waive them by providing contrary instructions in the trust’s terms. It is not possible to have a truly “quiet” trust in Maryland under the Act (i.e., a trust that its beneficiaries do not know exists).
The term “qualified beneficiary” means someone (i) who is a permissible distributee of trust income or principal or (ii) who would become a permissible distributee if the interests of all current permissible distributees terminated or if the trust itself terminated.
Virtual Representation. With respect to issues affecting a trust, the Act allows some people (“representatives”) to stand in for others and make decisions that are binding on them, such as providing consent to a proposed action of the trustee. For example, a court-appointed guardian may represent the ward, a parent may represent a minor child, and a person who holds certain powers of appointment over trust assets may represent remainder benefi ciaries. The court may also appoint a representative in appropriate situations where the Act has not provided for a representative (such as to represent generations of unborn beneficiaries of a “dynasty” trust).
Modification and Termination of Trusts. If the trustee and all beneficiaries consent, a court may modify or terminate an irrevocable (non-charitable) trust unless the court determines that it would interfere with a material purpose of the trust. However, the Act does not permit the trustee and beneficiaries to modify or terminate such a trust on their own, via a non-judicial settlement agreement; the court must be involved (unless the trust’s terms say otherwise). The court can also reform or modify a trust to carry out the settlor’s intentions or achieve the settlor’s tax objectives and can combine or divide trusts.
A trustee may decide to terminate a small trust (under $100,000) without a court order, after providing notice to the qualified beneficiaries (who then have an opportunity to object).
Creditor Protection. The Act codifies (and fills in some gaps in) existing Maryland law protecting certain trusts from the claims of a beneficiary’s creditors.
Revocable Trusts. The Act permits an agent acting under a power of attorney to exercise the principal’s retained power to revoke or amend his or her revocable trust, but only if both the trust and the power of attorney include an express authorization.
If a trust is silent as to whether or not the trust is revocable, the Act provides that the trust is revocable. This is a change to pre-Act Maryland law (under which such a trust would be deemed irrevocable) and it affects only trusts created on or after the Act’s effective date of January 1, 2015.
Trustee’s Standard of Duty. A trustee must act “reasonably under the circumstances” and in accordance with the terms and purposes of the trust and in the interests of the beneficiaries. This is a mandatory rule, so the settlor cannot waive this duty of the trustee by setting forth a different standard in the trust instrument. It is a higher standard than “in good faith,” which is the rule that applies in many other jurisdictions (including DC and Virginia).
Stay tuned! The Section Council of the Estates & Trust Law Section of the Maryland State Bar is working on amendments to the Act already. Their short list of priorities: expanding virtual representation (so that it can be more readily used for “dynasty” trusts); allowing trustees and beneficiaries to enter into binding non-judicial settlement agreements (e.g., so that when everyone gets along, a trust can be modified or terminated without a court proceeding); clarifying the statute of limitations for bringing creditors’ claims against a revocable trust following the settlor’s death.
If you have questions about the Maryland Trust Act or what it means for you, please contact one of the attorneys in our Estate Planning and Administration Group.