Introduction
Recently, Maryland joined more than 25 other states and the District of Columbia in enacting its version of the Uniform Trust Code (UTC). The Maryland Trust Act (MTA) takes effect on January 1, 2015, and will apply to all trusts created before, on or after January 1, 2015, and to all judicial proceedings concerning trusts commenced on or after January 1, 2015. The MTA more comprehensively codifies Maryland’s existing trust law, and also includes modifications and additions to existing law. This summary highlights the MTA’s key new additions, modifications to existing Maryland law and departures from the UTC.
General Provisions
The MTA incorporates several of the general provisions from the UTC, including:
- The definition of “qualified beneficiary” found in the UTC. The MTA incorporates this definition throughout to identify the parties who have certain rights with respect to trusts.
- The UTC’s provisions regarding default and mandatory rules. There are thirteen provisions that are mandatory under the MTA; otherwise, the terms of a trust instrument prevail over MTA provisions.
- The UTC rules for determining which laws govern the administration of the trust, including the rules for establishing a trust’s principal place of administration and the rules for a trustee’s request to transfer the trust’s principal place of administration. However, the MTA omits the UTC provision allowing for the transfer of property to a successor trustee simultaneously with the transfer of a trust’s principal place of administration.
The MTA also omits a key UTC provision regarding trust administration that other jurisdictions, such as Virginia and the District of Columbia, have adopted – the ability for interested persons to enter into nonjudicial settlement agreements. Under the UTC, interested persons may enter into a nonjudicial settlement agreement to resolve matters that might otherwise require court approval. Thus, under the MTA, trustees and beneficiaries must continue to seek court approval to make many changes involving trust administration.
Representation
The MTA incorporates some key UTC provisions regarding representation. As a result, the MTA now allows limited virtual representation of a beneficiary by another party as follows:
- The holder of a qualified power of appointment may now represent and bind persons whose interests, as permissible appointees or takers in default, are subject to the power. However, under the MTA, representation by a holder of a power of appointment is effective even if there is a conflict of interest between the representative and the person represented.
- A parent may now represent and bind his or her minor, incapacitated, unborn or unknown child if a guardian of the property or guardian of the person of the child has not been appointed and if there is no conflict of interest between the parent and the child with regard to the particular question or dispute.
Notably, however, the MTA does not adopt the UTC provision that allows for the virtual representation of a minor, incapacitated or unborn person, or a person whose identity or location is unknown and not reasonably determinable, by a person having a substantially identical interest with respect to the particular question or dispute.
The addition of these new MTA provisions allowing for “virtual representation” with respect to trust matters is a significant change to existing Maryland law. Under current Maryland law, beneficiaries who are not parties to an agreement related to a trust matter cannot be bound. Further, in court proceedings, appointment of a guardian ad litem is necessary to represent the interests of minor or unborn beneficiaries with an interest in a trust. These changes will provide greater administrative efficiency by reducing the number of necessary parties to court proceedings and agreements and will reduce the cost and often complexity of court proceedings by making court appointment of a guardian ad litem unnecessary.
Creation, Validity, Modification and Termination of Trusts
The MTA adopts several UTC provisions regarding the creation, validity, modification and termination of trusts, including:
- A provision allowing a Maryland court to modify or terminate a noncharitable irrevocable trust if: (1) all beneficiaries and the trustee consent; and (2) the court concludes either (a) that the continuation of the trust is not necessary to achieve any material purpose of the trust, or (b) that the modification is not inconsistent with a material purpose of the trust. The MTA departs from the UTC by requiring that the trustee, in addition to the beneficiaries, consent to the proposed modification or termination. However, under the MTA, the failure to obtain the beneficiaries’ unanimous consent does not prevent a Maryland court from modifying or terminating a trust if the court determines that the interests of the nonconsenting beneficiaries will be adequately protected.
- A provision allowing a Maryland court to modify the administrative or dispositive terms of a trust or terminate a trust without beneficiary consent if modification or termination of the trust would further the purposes of the trust because of circumstances not anticipated by the settlor. The MTA also allows a court to modify a trust instrument’s administrative terms if continuation of the trust on its existing terms would be impracticable or wasteful or would impair the trust’s administration.
- Both of these provisions are mandatory provisions of the MTA. Thus, the court’s ability to modify or terminate a trust may not be changed by the settlor in a trust instrument.
In addition to these UTC provisions, the MTA also incorporates current Maryland trust law, which allows a corporate trustee to terminate a trust with a fair market value of $100,000 or less with notice to the beneficiaries and co-trustees providing the opportunity to object. The MTA includes one key addition, though – individual trustees will now also have this power to terminate the trust.
Creditor’s Claims Provisions
The MTA both codifies existing Maryland law regarding creditor’s claims and spendthrift and discretionary trusts and adopts certain UTC provisions regarding these topics. Some key non-UTC provisions in the MTA regarding creditor’s rights are:
- If a nonsettlor beneficiary is serving as trustee, a creditor cannot attach, exercise, reach or otherwise compel distribution of that beneficiary’s interest to any extent beyond that in which a creditor could do so if the beneficiary was not acting as trustee.
- A power of appointment held by a person other than the settlor of the trust, and the property subject to that power, are not property interests subject to creditors of the person holding the power of appointment.
Revocable Trusts
The MTA incorporates several UTC provisions regarding revocable trusts, including:
- The UTC rule that trusts (created under instruments executed after January 1, 2015) are presumed to be revocable unless the terms of the trust expressly provide that the trust is irrevocable.
- The UTC provision that an agent appointed under a settlor’s power of attorney may exercise the settlor’s powers to revoke, amend or distribute trust property only to the extent that the terms of both the trust instrument and the power of attorney provide for such power.
Notably, though, the MTA omits the UTC provision providing a statute of limitations for contesting the validity of a revocable trust.
Office of the Trustee
While the MTA adopts some UTC provisions regarding the office of the trustee, it also omits the following UTC provisions:
- The UTC provision allowing co-trustees who cannot reach a unanimous decision to act by majority decision.
- The UTC standard for trustee compensation, which is “reasonable under the circumstances,” in favor of the existing standard under current Maryland trust law, which bases trustee compensation on defined percentages of principal and income of the trust, with specific exceptions.
Powers and Duties of Trustees
The MTA adopts several UTC provisions regarding the powers and duties of trustees, including the provisions regarding a trustee’s duty to inform and to report to beneficiaries. The MTA’s notice and reporting requirements for trustees are new additions to Maryland trust law. Under the MTA, these provisions only apply to (1) a trustee who accepts a trusteeship on or after January 1, 2015; (2) an irrevocable trust created on or after January 1, 2015; and (3) a revocable trust that becomes irrevocable on or after January 1, 2015. Like the UTC, under the MTA these duties are owed to “qualified beneficiaries” of the trust.
Notable new notice and reporting requirements for trustees under the MTA include:
- A trustee must promptly respond to a qualified beneficiary’s request for information related to the administration of the trust unless unreasonable under the circumstances. Under the MTA, a trustee has a mandatory duty (which cannot be modified by the trust instrument) to provide information and notices to a requesting qualified beneficiary. Unlike the UTC, however, the MTA does not generally require a trustee to keep the qualified beneficiaries of the trust reasonably informed about the administration of the trust and of the material facts necessary to protect their interests, unless such is requested, thereby making the scope of the mandatory duty under the MTA narrower than the default duty under the UTC.
- A trustee has an affirmative duty to notify the qualified beneficiaries within 60 days of acceptance of a trusteeship and of the trustee’s contact information.
- A trustee has an affirmative duty to notify the qualified beneficiaries of a trust’s existence, the identity of the settlor or settlors, the beneficiary’s right to request a copy of the trust instrument, and the right to a trustee’s report (similar to an accounting). Notifications under this section must be made within 90 days of the date the trustee acquires knowledge of the creation of an irrevocable trust, or the date the trustee acquires knowledge that a formerly revocable trust has become irrevocable. Furthermore, under the MTA this notice requirement is mandatory for qualified beneficiaries age 25 or older.
- A trustee must send a trustee report to all qualified beneficiaries requesting such report, annually, upon the termination of the trust, and upon a trustee vacancy (unless a co-trustee remains in office). Under current Maryland law, a trustee has a duty to send a trustee report to requesting beneficiaries or other representatives, but the MTA simplifies this requirement by requiring that trustees send the report to requesting qualified beneficiaries only.
Additionally, the MTA omits several UTC requirements regarding a trustee’s duty to provide notice and reports to beneficiaries, including:
- The UTC’s requirement that trustees send a trustee report annually and upon the termination of the trust to beneficiaries currently eligible to receive income or principal distributions, whether or not they request such report.
- The UTC’s requirement that a former trustee send a trustee report to all qualified beneficiaries upon a trustee vacancy if no co-trustee remains in office, whether or not they request such report.
- The UTC’s requirement that a trustee provide advance notice to qualified beneficiaries of any change in the method or rate of the trustee’s compensation.
The MTA selectively adopts and/or modifies other UTC provisions relating to the powers and duties of trustees. For example, under the MTA, the UTC’s duty to administer a trust “in good faith” is changed to “reasonably under the circumstances,” which appears to be a more objective standard than the UTC version. This standard for administering a trust is also a mandatory provision under the MTA.
The MTA also adopts only one of the UTC’s 26 specific trustee powers. Instead, the MTA grants a trustee those powers enumerated in the trust instrument and also adds a specific power relating to the donation of conservation easements, which is not found in the UTC.
The MTA includes several UTC provisions regarding the authorization of directed trustees and advisers, but also adds some notable Maryland-specific modifications to these provisions. For example, while the MTA incorporates several UTC provisions regarding directed trustees, it also goes beyond the UTC and provides that if the terms of a trust instrument state that a directed trustee shall act in accordance with the adviser’s directions, the trustee may not be liable for loss resulting from such act except in the case of the trustee’s willful misconduct.
The MTA also adopts several of the UTC’s provisions regarding a trustee’s delegation to an agent, but omits the UTC provision granting a trustee specific protection against liability for an agent’s actions if the trustee prudently and properly delegates duties and powers to the agent.
Trustee Liability/Rights of Persons Dealing with Trustees
Finally, the MTA also omits several UTC provisions regarding trustee liability, including:
- The UTC provision addressing trustee accountability for profit made by the trustee in the absence of a breach of trust.
- The UTC provision limiting the time an action may be brought by a beneficiary against a trustee for breach of trust.
- The UTC provision allowing the court, in its discretion, to make an award of attorney’s fees, costs and expenses to a party in a judicial proceeding involving the administration of a trust.