To incorporate the Maryland Trust Act (“MTA” or “Act”) into Maryland law, the Act is added as new Title 14.5 of the Estates and Trusts Article, with ten subtitles. Existing Title 14, Subtitle 1 of the Estates and Trusts Article is deleted in its entirety. The Act incorporates provisions of existing Subtitle 1 as needed. In many cases, language is moved with little or no change from existing Subtitle 1 to the Act. Attached is a chart showing the location of the repealed provisions of existing Title 14, Subtitle 1 in new Title 14.5.

The following is a comparison of the changes, clarifications and gap-filling provisions of the Act to current Maryland law. For context, this comparison also explains the general structure of the Act. However, this comparison is not intended as an explanation of the entire Act.

This memorandum also describes how the Act differs from the Uniform Trust Code (“UTC”), on which the Act is based. The UTC and Comments may be found at www.uniformlaws.org/Act.aspx?title=Trust Code. The UTC Comments are a useful explanation of the statutory provisions and often discuss the common law basis for the statutes.

The original drafters of the Act, initially the Section Council of the Estate and Trust Law Section of the Maryland State Bar Association, subsequently joined by the Trust Committee of the Maryland Bankers Association (collectively, the “Drafters”), used the UTC as a model. The Department of Legislative Services made stylistic changes in the bill drafting process, most of which are not discussed in this memorandum. The Maryland Association for Justice made further changes. Finally, the House Judiciary Committee and the Senate Judicial Proceedings Committee made further changes.

It is important to point out that most Maryland trust law is case law, not statutory, and thus relies on the common law of Maryland and many other jurisdictions. Similarly, the UTC is based largely on existing common law. Since the Act was based on the UTC, which was based on common law, which makes up much of Maryland’s trust law, the Act is substantially similar to existing Maryland law. In addition, the drafters of the Act generally followed a policy of “codify, not modify,” in adapting the Act from the UTC.

Preamble.

The Senate Judicial Proceedings Committee, for unknown reasons, added the Preamble, a series of seven disjointed statements about the purposes and effect of trusts, with mixed portions of legal analysis and subjective opinion. We should hope that the Preamble will be removed, or if not, then ignored, or at least not relied upon to support any proposition that is not otherwise clear from the text of the statute.

Subtitle 1. In General.

Subtitle 1 of the Act provides general provisions and definitions.

Scope. Section 14.5-102 provides that the scope of the Act includes all express trusts. The Act does not apply to resulting trusts or constructive trusts, which are really a form of court-ordered relief.

In Section 14.5-102, the Drafters changed Section 102 of the UTC to include a reference to the Maryland Discretionary Trust Act (“MDTA”). The MDTA remains codified as Title 14, Subtitle 4 of the Estates and Trust Article, but Section 14.5-102 of the MTA makes clear that the provisions of the MTA apply to the MDTA unless otherwise provided by the MDTA.

Definitions. This comparison generally discusses definitions as they become relevant. The definition of “qualified beneficiary” in Section 14.5-103(r) appears in various Act provisions (Section 14.5-105, Section 14.5-108, Section 14.5-110, Section 14.5-412, Section 14.5-701, Section 14.5-704, Section 14.5-706, Section 14.5-708 and Section 14.5-813). These provisions specify certain rights that belong only to “qualified beneficiaries.” Section 14.5-103(r) defines “qualified beneficiary” to mean a beneficiary who is a permissible distributee or who would become a permissible distributee if the interests of all current permissible distributees terminated or if the trust itself terminated.

This definition is similar to the existing definition of “qualified beneficiary” in current Section 15-502.3(a), relating to unitrust conversions and the exercise of the power to adjust between income and principal. In addition, several other existing Maryland statutes include a concept similar to qualified beneficiary, specifically Section 14-107 (termination of small trust), and Section 14-111 (donation of conservation easement).

In Section 14.5-103, the Drafters changed the following definitions: The Drafters added or modified the definitions of discretionary distribution provision, general power of appointment, mandatory distribution provision, power of appointment, power of withdrawal, spendthrift provision and support provision in connection with the revision of the Article 5. The Drafters changed the definitions of conservator and guardian to reflect the Maryland concepts of guardian of the person and guardian of the property. The Drafters changed the definition of guardian of the person to add the reference to the probated will of a parent of the minor to conform to Maryland practice in this regard. The Drafters changed the definition of environmental law to conform to the existing definition in Section 14-108(b). The Drafters changed the definition of qualified beneficiary for purposes of clarity to state that where a trust contains a power of appointment, the default takers may be considered qualified beneficiaries, but not persons named in unexercised powers of appointment.

Knowledge. Section 14.5-104 defines when a person has knowledge of a fact. It serves as a helpful clarification of other provisions of the Act.

The Maryland Association for Justice changed Section 104(a)(3) of the UTC, now Section 14.5-104(3) of the MTA, to provide that a person has knowledge of a fact if from all the facts and circumstances known to the person at the time, the person knows or should know the fact, instead of has reason to know the fact. Also, the Maryland Association for Justice deleted Section 104(b) of the UTC, concerning knowledge imputed to an organization that conducts activities through employees.

Default and Mandatory Rules. Section 14.5-105 provides that the terms of a trust prevail over any provision of the Act except for certain “mandatory” rules. In other words, the Act generally provides “default” rules, which can be changed by the settlor. Most of the mandatory rules relate to inherent characteristics of a trust, such as the requirements for creation of a trust, the duty of a trustee to act reasonably under the circumstances, etc. Thus, although Maryland does not currently recognize the concept of such explicit “mandatory” rules, these rules are inherently reflected in common law. This comparison notes which specific rules are mandatory in the discussion of the specific rule.

The Drafters deleted Section 105(a) of the UTC, setting forth the general statement that the UTC governs the duties and powers of a trustee, relations among trustees, and the rights and interests of a beneficiary, except as otherwise provided in the terms of the trust, because it suggests that the Act is all inclusive of law regarding trustee duties, and in Maryland there is other statutory law addressing trustee duties, e.g., Section 15-114 (prudent investor rule). The Maryland Association for Justice changed UTC Section 105(b)(2) (and other provisions throughout the Act) to state “reasonably under the circumstances” instead of “in good faith.” In UTC Section 105(b)(5), the Drafters deleted the phrase “the effect of a spendthrift provision” as part of the revision of Article 5. The Drafters changed UTC Section 105(b)(7), now found as Act Section 14.5-105(8), to conform to the change to Section 708 to reflect the Maryland trustee commission statute. The Drafters deleted UTC Section 105(b)(8) and changed UTC Section 105(b)(9) to conform to the changes to the trustee’s duty to inform and report under Section 14.5-813. Subsequently, the Senate Judicial Proceedings Committee re-inserted UTC Sections 105(b)(8) and (9), and expanded UTC Section 105(b)(8) to cover Section 14.5-813(a), resulting in some apparent overlap. The House Judiciary Committee deleted UTC Section 105(12), which provides that periods of limitation for commencing a judicial proceeding are mandatory rules. Finally, UTC Section 105(b)(14) was moved to Section 14.5-105(7).

Common Law of Trusts; Principles of Equity. Section 14.5-106 provides that the common law of trusts and principles of equity supplement the Act, except where modified by the Act or other statute. Thus, the Act does not displace all existing trust law. As long as the Act does not specifically change common law in Maryland, that law remains in effect. Section 14.5-106 is unchanged from UTC Section 106.

Governing Law. The House Judiciary Committee deleted Section 107 of the UTC, but the Act reserves Section 14.5-107, presumably for possible future enactment, or else to avoid re-numbering later Sections. UTC Section 107 (not enacted) allows the settlor to select the law that will govern the meaning and effect of the terms of the trust (unless contrary to a strong public policy of the jurisdiction having the most significant relationship to the matter at issue).

Principal Place of Administration. Section 14.5-108 addresses the principal place of administration of a trust. As the UTC comment states, locating a trust’s principal place of administration will ordinarily determine which court has primary if not exclusive jurisdiction over the trust, and Section 14.5-202 so provides (see below). The UTC comment also states that locating a trust’s principal place of administration may also be important for other matters, such as payment of state income tax, or determining the jurisdiction whose laws will govern the trust. The UTC comment further states that the law of the trust’s principal place of administration usually governs administrative matters, and the law of the place having the most significant relationship to the trust’s creation usually governs the dispositive provisions; although neither of these points is stated explicitly in the Act, they are consistent with Maryland common law. Thus, it should be assumed that a trust for which the principal place of administration is Maryland will be subject to Maryland law regarding its administration, including the Act and Maryland common law. In addition, the Act specifically refers to the principal place of administration in Section 14.5-110(d) (attorney general treated as qualified beneficiary with respect to charitable trust) and Section 14.5-202 (jurisdiction over trustee and beneficiary).

Section 14.5-108(a) permits the settlor to designate the principal place of administration if a trustee has its principal place of business or residence in the jurisdiction, or all or part of the administration occurs in the jurisdiction. This is consistent with Maryland common law, which allows the settlor to designate the law governing the administration of the trust. Geier v. Mercantile-Safe Deposit & Trust Co., 273 Md. 102 (1974); Pitts v. First Union Nat’l Bank, 262 F.Supp.2d 593 (D. Md. 2003).

Section 14.5-108(b) states that a trustee is under a continuing duty to administer the trust at a place appropriate to its purpose, its administration, and the interests of the beneficiaries. This may impose a duty on trustees not found in current Maryland law, particularly if the trustee is required continuously to seek out a better place. The UTC comment provides some comfort, stating that ordinarily, absent a substantial change of circumstances, the trustee may assume that the original place of administration is also the appropriate place of administration. The comment also provides that the duty to administer the trust at an appropriate place may also dictate that the trustee not move the trust.

Section 14.5-108(c) permits the trustee to transfer the trust’s principal place of administration to another state or to a jurisdiction outside the United States. This is consistent with Maryland common law.

Section 14.5-108(d) states that a trustee must notify qualified beneficiaries in advance of a proposed transfer of the trust’s principal place of administration and may not make the transfer if a qualified beneficiary objects. This section imposes an additional notice requirement on the trustee that is not found in current Maryland law. This section also gives the beneficiaries additional rights not found in current Maryland law, in that it seems unlikely that a court would give each qualified beneficiary such a veto power.

The Drafters eliminated some of the provisions of Section 108 of the UTC that would have represented new law, and retained only Section 108(a) and Section 108(c) of the UTC (as well as UTC Section 108(f), which is not in the Act). The House Judiciary Committee deleted the rest, eliminating Section 108 of the UTC entirely. The Senate Judicial Proceedings Committee reinserted UTC Section 108(a) – (e), but not UTC Section 108(f), as Section 14.5-108(a) – (e).

Methods and Waiver of Notice. Section 14.5-109 provides for methods and waiver of notice and sending a document under the Act, thus filling in a gap in Maryland law. Section 14.5-109(a)(1) and (2) permit notice or delivery of a document in a manner reasonably suitable under the circumstances and likely to result in receipt, first-class mail, personal delivery, or delivery to the person’s last known address or place of business. Section 14.5-109(a)(3) was added by the House Judiciary Committee, and is unclear. Section 14.5-109(a)(3)(ii) provides that notice “under this title” must be made by personal service or by certified mail, postage prepaid, return receipt requested. Section 14.5-109(a)(3)(i) provides that “This paragraph applies to” six specified actions: (1) the proposed termination of a trust, (2) the proposed modification of the administrative or dispositive terms of a trust (3) the proposed combination of two or more trusts into a single trust, (4) the proposed division of a trust into two or more separate trusts, (5) the proposed resignation of a trustee or co-trustee, or (6) the proposed transfer of the principal place of administration of a trust. This represents new law in Maryland. Section 14.5-109(a)(3)(ii) appears to limit Section 14.5-109(a)(1) and (2), at least with respect to notice (as opposed to delivery of a document).

Section 14.5-109(b) waives notice or sending of a document to a person whose identity or location is unknown and not reasonably ascertainable by the trustee, and Section 14.5-109(c) permits the recipient to waive notice or sending of a document, in writing. Section 14.5-109(d) provides that notice of a judicial proceeding must be given as provided in the applicable rules of civil procedure.

The Maryland Association for Justice deleted part of UTC Section 109(a), which permitted notice by a properly directed electronic message. As noted above, the House Judiciary Committee added Section 14.5-109(a)(3).

Others Treated as Qualified Beneficiaries. Under Section 14.5-110, the following are given the rights of qualified beneficiaries: a charitable organization expressly designated to receive distributions, a person appointed to enforce a trust created for the care of an animal or another non-charitable purpose, and, with respect to charitable trusts administered in Maryland, the attorney general. This Section closely follows UTC Section 110.

Non-Judicial Settlement Agreements. The House Judiciary Committee deleted Section 111 of the UTC, providing for non-judicial settlement agreements. The Act reserved Section 14.5-111.

Applicability of Certain Provisions of Estates of Decedents Law to Trusts. Section 14.5-112 re-enacts existing Section 14-102.

Rules of Construction. The Drafters deleted Section 112 of the UTC in order to incorporate Maryland’s existing corresponding statute, Section 14-102, as Section 14.5-112.

Insurable Interest of Trustee. The Drafters did not consider Section 113 of the UTC because it was added to the UTC by a later amendment.

Subtitle 2. Judicial Proceedings.

Subtitle 2 of the Act sets forth basic rules regarding judicial proceedings and the role of the court.

Role of Court in Administration of Trust. The Senate Judicial Proceedings Committee rewrote Section 14.5-201(a), which had previously reflected Maryland law and common law generally, to state that a court may intervene “actively” in the administration of a trust. It also added “fashioning and implementing remedies as the public interest and the interests of the beneficiaries may require,” which probably does not add any substantive change to the Act’s Section 14.5-901, dealing with remedies for breach of trust. Finally, it added the power of a court to act “on the court’s own motion,” which may be a significant change, although it seems unlikely to be used very often.

Under Section 14.5-105(13), the settlor may not alter the court’s power to take such action and exercise such jurisdiction as may be necessary in the interests of justice. This mandatory rule does not specify which section of the Act it applies to, but it would certainly apply to Section 14.5-201, as well as possibly other sections of the Act.

Other than the changes noted above, Section 14.5-201 contains provisions that are similar to existing Maryland Rules 10-101 and 10-108(c). Section 14.5-201(d)(1) re-enacts existing Section 14-101 without substantive change. Section 14.5-201(d)(2) should refer to Titles 1 through 14, not 1 through 13.

Jurisdiction Over Trustee and Beneficiary. Section 14.5-202 is consistent with existing Courts and Judicial Proceedings Article Section 3-403 and Maryland Rule 10-101. Section 14.5-202(b)(2), providing that by accepting a distribution from a trust having its principal place of administration in Maryland, the recipient submits personally to the jurisdiction of the courts of Maryland regarding any matter involving the trust, may be a useful addition to Maryland law.

Scope of Judicial Review. Section 14.5-203 provides for judicial review of trustee actions. Section 14.5-203(b) provides that a court may review an action by a trustee under a support provision or a mandatory distribution provision in the trust. Where a discretionary trust is involved, however, Section 14.5-203(a) provides for a more limited scope of judicial review.

Section 14.5-203(a)(1) states that a discretionary power conferred on a trustee to determine the benefits of a beneficiary is subject to judicial control to prevent misinterpretation or abuse of the discretion of the trustee. Section 14.5-203(a)(2) provides that the benefits to which a beneficiary of a discretionary distribution provision is entitled, and what may constitute an abuse of discretion by the trustee, depend on the terms of the discretion, including the proper construction of accompanying standards, and on the settlor’s purposes in granting the discretionary power and in creating the trust. Section 14.5-203(a)(3) provides that notwithstanding the breadth of discretion granted to a trustee by the terms of the trust, including the use of the terms “absolute,” “sole,” or “uncontrolled,” a trustee abuses its discretion if the trustee (1) acts dishonestly, (2) acts with an improper motive, even though not a dishonest motive, (3) fails to exercise the trustee’s judgment in accordance with the terms and purposes of the trust, or (4) acts beyond the bounds of reasonable judgment.

Section 14.5-203(a) is consistent with current Maryland law, which provides that a court will not interfere with an exercise of discretion by a trustee provided that the power was exercised honestly, reasonably and in good faith. Mercantile-Safe Deposit and Trust Company v. U.S., 172 F. Supp. 72 (Md. 1959); Waesche v. Rezzato, 224 Md. 573 (1954);Baer v. Kahn, 131 Md. 17 (1917). However, as noted below, the Drafters expressly avoided including any “reasonableness” or “good faith” standard for court review of a trustee’s discretion, so the Act may represent a change to Maryland law, to the extent that Maryland had adopted such a standard.

The Drafters added Section 14.5-203 in connection with the revision of Article 5. The Drafters also deleted UTC Section 814(a), which would have overlapped Section 145-203(a)(3). Richard Wright, of the Section Council’s Article 5 Subcommittee, explained the changes as follows:

In First National Bank v. Department of Health and Mental Hygiene, 284 Md. 720, at 730, 399 A.2d 891, at 896 (1979) (following Section 128, Comment d of the Restatement (Second) of Trusts), the Court of Appeals found that its review of trustee action under a discretionary distribution provision was limited to situations where the trustee acted "dishonestly or arbitrarily or from an improper motive." NCCUSL's Section 814(a) would substitute instead a standard of review for trustee exercises of discretionary authority based on whether the trustee's actions were "in good faith and in accordance with the terms and purposes of the trust and the interests of the beneficiaries." Considerable debate has occurred nationally as to whether NCCUSL's "good faith" standard would interject a "reasonableness standard" that would allow courts to substitute their discretion for that of the settlor's chosen trustee. As enacted, the Legislature in Section 14.5-203(a) declined to use NCCUSL's Section 814(a) and codified the standard of review for potential abuse of discretion by trustees acting under a discretionary distribution provision as limited by the Court of Appeals in First National Bank v. Department of Health and Mental Hygiene, supra, See also, Section 14.5-106 of the Act which provides that "{t]he common law of trusts and principles of equity supplement this title, except to the extent modified by this title or another statute of this State." New subsection (b) makes it clear that a Court may review trustee action under a support provision or a mandatory distribution provision.

In Section 14.5-203(a)(1), the Senate Judicial Proceedings Committee struck the word “only” before “to prevent,” apparently intending to expand the situations in which a discretionary power conferred on the trustee to determine the benefits of a beneficiary is subject to judicial control, i.e., the change converts the number of situations from an exclusive list to a non-exclusive list. This may represent a change to current Maryland law.

Subject-Matter Jurisdiction. The Drafters deleted Section 203 of the UTC, dealing with subject-matter jurisdiction, because subject-matter jurisdiction in Maryland is too ambiguous to codify.

Venue. The Drafters deleted Section 204 of the UTC, dealing with venue, because venue is adequately addressed in Maryland Rule 10-501.

Section 14.5-105(7) provides that a settlor may not draft around the provisions of the Act relating to the subject matter jurisdiction and venue for commencing a proceeding as provided by state law. Section 14.5-105(7) should have been deleted when Sections 203 and 204 were deleted.

Subtitle 3. Representation.

Subtitle 3, regarding representation, contains some of the most dramatic and innovative changes, which are also some of the most helpful and useful changes, to current Maryland law in the Act. These changes include “virtual representation,” or allowing certain persons to represent and bind beneficiaries who are not parties to a judicial proceeding or even a non-judicial settlement agreement. Because of the broad nature of the changes, this comparison first discusses current Maryland law in this area, then describes the Act on the subject, and finally compares and contrasts the two approaches.

Representation Under Current Maryland Law. Other than the Maryland Rules, Maryland courts have little guidance, and therefore great flexibility and discretion, in allowing one beneficiary to represent and bind another beneficiary. Maryland courts have stated that all persons who are legally or beneficially interested in the subject matter of an action and whose interests will be affected by a decree are both necessary and proper parties to an action to enforce a trust, including all beneficiaries. Ruhe v Ruhe, 113 Md. 595, 77 A. 797 (1910). The court has also stated, however, that persons who have no interest in the subject matter of an action to enforce a trust that are material or that will be prejudicially affected by the decree are not necessary parties. Maddox v. District Supply, Inc., 222 Md. 31, 158 A.2d 650 (1960). It may not be clear whether the court allows such representation or simply determines that the relief involved does not significantly affect the interests of the beneficiaries who are not parties. For example, the court may allow parents to represent their minor children if the interests of parent and child are identical or aligned (i.e., no conflict of interest). The court also may allow holders of powers of appointment to represent the interests of default takers. The court probably would be unwilling to allow a beneficiary to represent and bind another beneficiary if there were a conflict of interest between them with respect to the question or dispute.

Outside of judicial proceedings, Maryland currently has no general statute or common law rule allowing a person to represent and bind one or more beneficiaries with respect to trust matters. Thus, if the law requires all beneficiaries to agree on how to handle a particular issue of trust administration, it is necessary to involve all of the beneficiaries directly, as well as the trustee if his duties are affected, and perhaps the settlor if living. Because most trusts include one or more beneficiaries whose interests have not completely vested, the identity of all the beneficiaries is not known. Thus, it is not possible for all beneficiaries to be involved. The beneficiaries who are parties to the agreement should be bound, but there is no way to bind beneficiaries who are not parties.

In certain limited statutory contexts, the necessary parties are defined to include only certain beneficiaries, thus avoiding the need for representation. These situations include termination of small trusts under existing Section 14-107, donation of a conservation easement under existing Section 14-111, and decisions by a trustee to convert a trust into a unitrust or make an adjustment between principal and income under Section 15-502.3.

With respect to judicial proceedings, the current Maryland Rules provide for appointment of a representative for a beneficiary in certain limited circumstances. Maryland Rule 2-202(d) provides that in a suit against an individual under disability, the guardian or other like fiduciary, if any, shall defend the action. If there is no such guardian or other fiduciary, the court shall appoint an attorney to represent and defend the individual. Maryland Rule 2-202(b) indicates that an individual under disability includes a minor. In addition, Maryland Rule 2-203(a) provides that in an action that may affect a property interest of an individual not in being, the court may appoint an attorney to represent the individual. In such a case, any order or judgment subsequently entered in the action is binding on the individual to the same extent as if the individual had been in being when the action was commenced and had appeared in the action. Similarly, Maryland Rule 10-103(f)(3) provides that if an interested person is a minor or disabled person, “interested person” includes a fiduciary appointed for that person, or, if none, the parent or other person who has assumed responsibility for the interested person.

Representation Under Maryland Trust Act. Subtitle 3 of the Act greatly expands Maryland law on representation of beneficiaries in three types of situation. First, Subtitle 3 permits certain persons to “represent and bind” one or more beneficiaries who are minor, incapacitated, unborn, or unknown, or whose location is unknown and not reasonably ascertainable, to the extent there is no conflict of interest between the representative and the person represented with respect to a particular question or dispute. Second, Subtitle 3 permits certain persons to represent and bind existing, competent beneficiaries, in limited situations. Third, Subtitle 3 permits certain persons to represent and bind certain beneficiaries, even if there is a conflict of interest, in limited situations.

Basic Effect of Representation. In all three foregoing situations, Section 14.5-301 provides for the effect of such representation. Section 14.5-301(a) provides that notice to a person who may represent and bind another person has the same effect as if notice were given directly to the other person (except as required by the applicable rules of civil procedure in a judicial proceeding). Section 14.5-301(b) provides that the consent of a person who may represent and bind another person under Subtitle 3 is binding on the person represented. Neither the notice nor the consent is valid if the person represented objects to the representation by notifying the trustee and the representative before the consent or notice would otherwise have become effective, although in many cases the person represented is unknown or otherwise lacks capacity to object. In addition, this representation is effective in all contexts, including both judicial proceedings and outside of court (such as non-judicial settlement agreements). The representation rules of Subtitle 3 apply to representation of settlors as well as beneficiaries, but because representation of settlors is uncommon, this comparison generally refers to represented persons as “beneficiaries.”

Consideration of General Benefit to Family. Section 14.5-301(e) provides that a representative may consider “general benefit accruing to the living members of the family of the individual.” This is a useful addition, particularly in the estate planning context. It allows the representative to consider the interests of not only the represented person, but also other members of the represented person’s family. Thus, the representative is able to waive property interests or other rights, if doing so benefits the represented person’s family.

Where Beneficiaries Cannot Act and No Conflict of Interest Exists. The first type of situation, in which a person may represent and bind one or more beneficiaries who are minor, incapacitated, unborn, or unknown, or whose location is unknown and not reasonably ascertainable, to the extent there is no conflict of interest between the representative and the person represented with respect to a particular question or dispute, is covered by Sections 14.5-303 and 14.5-305. Section 14.5-303 permits representation by: (1) a guardian of the property of a minor or disabled person; (2) a guardian of the person of a minor or disabled person if a guardian of the property has not been appointed; (3) an agent under a power of attorney granting specific authority to act with respect to trust matters; (4) a trustee of a trust that is a beneficiary of another trust, with respect to the beneficiaries of the trust; (5) a personal representative of a decedent’s estate that is a beneficiary of a trust, with respect to the interested persons in the estate; and (6) a parent of a minor, unborn or unknown child if a guardian of the property or guardian of the person for the child has not been appointed. All of these categories would represent a broadening of the Maryland common law powers of a guardian, agent, fiduciary, and parent. Representation by parents has been adopted statutorily in many states. As noted above, under Section 14.5-303 the representation is effective only to the extent there is no conflict of interest between the representative and the person represented with respect to the particular question or dispute.

Section 14.5-305 provides that if the court determines that an interest is not represented under Subtitle 3, or that the otherwise available representation might be inadequate, the court may appoint a representative, as long as there is no conflict of interest between the representative and the person represented with respect to the particular question or dispute.

Where the Beneficiaries Can Act and No Conflict of Interest Exists. The second type of situation, in which a person may represent and bind existing, competent beneficiaries (not just beneficiaries who are minor, incapacitated, unborn, or unknown, or whose location is unknown and not reasonably ascertainable), but only to the extent there is no conflict of interest, could occur under Section 14.5-303(3), (4) or (5). This representation does not apply to a beneficiary who objects.

Representation Even Where Conflict of Interest Exists. The third type of situation, in which a person may represent and bind certain beneficiaries even if there is a conflict of interest, is found in Section 14.5-302. That section provides that the holder of a “qualified” power of appointment may represent and bind persons whose interests as permissible appointees or takers in default are subject to the power. A qualified power of appointment is (1) a general power of appointment, or (2) a power of appointment exercisable in favor of all persons other than the power holder, the power holder's estate, the power holder's creditors, and the creditors of the power holder's estate. Under Section 14.5-103(h), a general power of appointment is one that: (a) by its terms specifically authorizes the holder to direct trust property to the holder, the holder’s estate, or the holder’s creditors; (b) is held in a capacity other than as a trustee; (c) is not limited by any ascertainable standard; and (d) is exercisable by the holder or holders without the consent of any other person.

Representation under Section 14.5-302 is effective even if there is a conflict of interest (unlike the UTC version of this provision, which provides that the representation is effective only to the extent there is no conflict of interest). Also, this representation is effective even if the represented beneficiary is a competent adult, although this representation does not apply to a beneficiary who objects.

Multiple Representatives. The representation rules of Subtitle 3 generally do not establish priority among multiple representatives. Thus, if there are multiple valid representatives for a beneficiary, any of them may represent and bind the beneficiary. However, Section 14.5-303(6) provides that a parent may not represent a child if a guardian of the property or guardian of the person for the child has been appointed.

Comparison to Current Law. The representation rules of Subtitle 3 have a variety of effects on existing Maryland law. Representation may reduce the number of persons whose notice or consent is necessary in both judicial and non-judicial proceedings. As noted above, under current law, the court generally would not allow a beneficiary to represent and bind another beneficiary, and would require both beneficiaries to be made parties to the proceeding (appointing a representative for minor or unascertained beneficiaries if necessary), particularly if there is a conflict of interest between them with respect to the question or dispute. In addition, a court generally would not allow a beneficiary to represent and bind another ascertained, adult, competent beneficiary, unless the interest of the second beneficiary is quite remote, and also aligned with the interest of the first beneficiary (as in a judicial proceeding regarding an administrative matter, such as the replacement of a trustee or the division or consolidation of a trust).

Thus, the representation provisions of Subtitle 3 change Maryland law in two significant ways. First, Subtitle 3 improves administrative efficiency, by reducing the number of necessary parties in a trust matter. Second, Subtitle 3 can affect substantive rights. By allowing one beneficiary to represent another beneficiary, the first beneficiary essentially can “cut off” the rights of the second beneficiary. This change is limited by the provisions of Subtitle 3 requiring that there be no conflict of interest. The one exception is the representation by the holder of a qualified power of appointment under Section 14.5-302, which represents a significant expansion of the power of a holder of a general power of appointment or a broad limited power of appointment.

Comparison to UTC – Basic Effect. The Drafters changed Section 301(a) of the UTC to provide that the applicable rules of civil procedure in a judicial proceeding are not superseded by Section 14.5-301(a). The purpose of this amendment was to make the MTA consistent with existing Maryland law, specifically the rules of civil procedure. The Maryland Association for Justice changed the words “who may” in the UTC to “that is authorized to.” In Section 14.5-301(a), the Drafters changed Section 301(a) of the UTC to create an exception for a person represented who objects to the representation by notifying the trustee and the representative before the notice would otherwise have become effective. This conformed Section 14.5-301(a) to Section 14.5-301(b).

The Drafters changed Section 14.5-301(b) to add the phrase “by notifying the trustee and the representative,” in order to clarify the method of objecting to the representation. The Drafters changed Section 301(c) to eliminate the reference to Section 411, and also deleted Section 301(d), prohibiting a settlor from representing and binding a beneficiary with respect to a proceeding under Section 411, in both cases because Section 14.5-410, which corresponds to Section 411, does not provide for any participation by the settlor. The Drafters moved Sections 14.5-301(d) and 14.5-301(e) from their original location as UTC Sections 305(b) and 305(c), because these provisions are applicable throughout Subtitle 3, not just for purposes of Section 305.

Representation by Holder of General Testamentary Power of Appointment. Section 302 of the UTC provided that to the extent there is no conflict of interest between the holder of a general testamentary power of appointment and the persons represented with respect to the particular question or dispute, the holder may represent and bind the persons whose interests, as permissible appointees, takers in default or otherwise, are subject to the power. The Drafters revised this section in two ways. First, the Drafters changed “general testamentary power of appointment” to “qualified power of appointment,” and added Subsection 14.5-302(b), defining the term qualified power of appointment to mean either a general power of appointment or a power of appointment exercised in favor of all persons other than the power holder, the estate of the power holder, the creditors of the power holder, and the creditors of the estate of the power holder. Second, the Drafters deleted the requirement that there be no conflict of interest between the holder and person represented. This is because the holder of a qualified power of appointment has such broad powers that the holder should also be able to represent and bind the persons whose interests are subject to the power.

Representation by Fiduciaries and Parents. The Drafters changed Section 303(1) and 303(2) to reflect the Maryland terms, guardian of the property and guardian of the person. Also, the Drafters changed Section 303(1) to clarify that the guardian of the property can represent the disabled person, not just the estate that the guardian of the property controls (which would not be subject to the trust). The Drafters changed Section 303(3) to provide that an agent having specific authority to act with respect to trust matters may represent and bind the principal, which is broader than the UTC version, which required the agent to have authority to act with respect to the particular question or dispute. Thus, a principal can give an agent authority to represent and bind a principal with respect to trust matters in general, as long as the authority is specific, without referring to the particular question or dispute. The Drafters changed Sections 303(4) and 303(5) of the UTC to clarify these provisions. The Drafters changed Section 303(6) of the UTC, allowing a parent to represent and bind the parent’s minor or unborn child, to add incapacitated or unknown children and children whose locations are unknown and not reasonably ascertainable, because these additional categories will make the section more useful.

Representation by Person Having Substantially Identical Interests. The House Judiciary Committee deleted Section 304 of the UTC, but it reserved Section 14.5-304. That Section allowed representation of a person by another person having a substantially identical interest with respect to the particular question or dispute, but only to the extent there is no conflict of interest.

Appointment of Representative. The House Judiciary Committee changed Section 305(a) of the UTC, providing for a court appointed representative, to require that there be no conflict of interest with respect to the particular question or dispute. As noted above, the Drafters moved Sections 305(c) and 305(d) of the UTC to Sections 14.5-301(d) and 14.5-301(e) of the Act, because they are general provisions, applicable to all representatives, not just court-appointed representatives.

Subtitle 4. Creation, Validity, Modification, and Termination of Trust.

Subtitle 4 of the Act sets forth rules regarding the creation, validity, modification and termination of trusts.

Methods of Creating Trust. Section 14.5-401 provides for the methods of creating a trust. This section generally reflects common law and closely follows the UTC.

Requirements for Creation of Trusts. Section 14.5-402 generally follows the common law. One exception is Section 14.5-402(c), which provides that a power in a trustee or other person to select a beneficiary from an indefinite class is valid. Such a provision fails under traditional doctrine because there is no person who can enforce it. Under the Act, the provision does not fail immediately, but if the power is not exercised within a reasonable time, the power fails and the property subject to the power passes to the persons who would have taken the property had the power not been conferred.

The requirements for creating a trust are mandatory rules under Section 14.5-105(1).

The Drafters deleted Section 402(a)(5) of the UTC, providing that the same person may not be the sole trustee and sole beneficiary, because Maryland has not adopted this “doctrine of merger.” The Drafters changed Section 402(c) to provide that a power in a person (other than a trustee) named in a trust to select a beneficiary from an indefinite class is valid, in order to make this option available to settlors.

Trusts Created in Other Jurisdictions. Section 14.5-403 generally follows the common law. The Drafters deleted “had a place of abode” from Section 14.5-403(2)(i) because it is an undefined term that would add confusion.

Trust Purposes. Section 14.5-404(a), providing that trust purposes must be lawful, not contrary to public policy, and possible to achieve, reflects common law. Maryland courts have apparently omitted to state the “not contrary to public policy” requirement. Klein v. Bryer, 227 Md. 473, 177 A.2d 412 (1962). However, this omission may not have been intended, and if the addition of this requirement represents a change in Maryland law, it is probably minor.

Section 14.5-404(b), providing that a trust and its terms must be for the benefit of its beneficiaries, reflects a concept that is generally implicit, but not traditionally stated, in trust law. This “for the benefit of the beneficiaries” rule may impact the ability of a settlor to control trust property.

Under Section 14.5-105(3), the settlor may not draft around the requirement that a trust and its terms must be for the benefit of its beneficiaries and that the trust have a purpose that is lawful, not contrary to public policy, and possible to achieve. Section 14.5-105(3) does not explicitly refer to Section 14.5-404, but Section 14.5-105(3) clearly makes Section 14.5-404 a mandatory rule.

Section 14.5-404 closely follows UTC Section 404.

Charitable Purposes; Enforcement. The Drafters deleted Section 405, relating to charitable trusts, because charitable trust provisions are found in Title 14, Subtitle 3 of the Estates and Trusts Article.

Creation of Trust Induced by Fraud, Duress or Under Influence. Section 14.5-405, providing that a trust is void to the extent its creation was induced by fraud, duress or undue influence, reflects common law. The Act does not set forth what factors should be considered to establish any of these three grounds, leaving common law in place. This Section closely follows UTC Section 406.

Evidence of Oral Trust. Section 14.5-406 provides that except as required by another statute, an oral trust is permitted, but the trust and its terms must be established by clear and convincing evidence. This statute leaves intact Maryland’s Statute of Frauds, requiring a writing where the trust involves realty. The “clear and convincing evidence” standard reflects current Maryland law. Urquhart v. Alexander & Alexander, Inc., 147 A.2d 213 218 Md. 405 (1958) (“clear and convincing”); Price v. Price, 161 A. 2; 162 Md. 656 (1932) (“clear and unmistakable”). This Section closely follows UTC Section 407.

Trust for Care of Animal. Section 14.5-407, relating to a trust for the care of an animal, re-enacts existing Section 14-112 without substantive change. Existing Section 14-112 closely followed UTC Section 408.

Noncharitable Trust Without Ascertainable Beneficiary. Section 14.5-408 and Section 14.5-402(a)(3)(iii) permit an “honorary” trust, i.e., a trust created for a specific non-charitable purpose, but without an ascertainable beneficiary, or for a non-charitable purpose to be selected by the trustee. Such a trust generally is unenforceable under Maryland common law. Rosser v. Prem, 52 Md. App. 367, 449 A.2d 461 (1982). A limited exception exists for a trust for the care of a cemetery plot. Killen v. Houser, 237 Md. 79 (1965); Section 11-102(b)(1).

The Drafters added the phrase “unless the settlor elects otherwise” to Section 14.5-408(1)(ii), because it would be consistent with existing Section 11-102(b)(5), which allows a settlor to draft around the rule against perpetuities.

Modification or Termination of Trust; Proceedings for Approval or Disapproval.Section 14.5-409(a) provides that a trust terminates to the extent that (1) it is revoked or expires in accordance with its terms, or (2) the purposes of the trust have become unlawful, contrary to public policy, or impossible to achieve. This represents modern common law. Restatement (Third) of Trusts Section 61. As discussed above in connection with Section 14.5-404, the requirement that trust purposes be not contrary to public policy has not been expressed in Maryland law.

The Drafters changed Section 410 of the UTC, now Section 14.5-409 of the MTA, to delete the provision that a trust terminates to the extent that no purpose of the trust remains to be achieved, because it would be difficult to know (without court action) that no purpose of the trust remains to be achieved. Note that this rationale no longer applies because Section 14.5-410 requires court action.

Section 14.5-409(b) provides that a proceeding to approve or disapprove a proposed modification or termination under Sections 14.5-410 through 14.5-414, or combination or division of a trust under Section 14.5-415, may be commenced by a trustee or beneficiary. 

Section 14.5-409(b) overlaps the Maryland Rules, which allow a “fiduciary or other interested person” to file a petition requesting a court to assume jurisdiction over a trust. Md. Rule 10-501(a). The Maryland Rules define the term “interested person” to include a current income beneficiary of the trust, any trustee or co-trustee, and the settlor of the trust. Md. Rule 10-103(f)(2). Differences between Section 14.5-409(b) and the Maryland Rules involve both their scope and the parties to whom they give standing. As to scope, the Maryland Rules apply to any petition requesting a court to assume jurisdiction over a trust, while Section 14.5-409(b) applies only to a proceeding to approve or disapprove a proposed modification or termination under Sections 14.5-410 through 14.5-414, or combination or division of a trust under Section 14.5-415. As to the parties to whom they give standing, the Maryland Rules give standing to the settlor, which Section 14.5-409(b) does not. However, the Maryland Rules do not give standing to beneficiaries other than current income beneficiaries, while Section 14.5-409(b) gives standing to all beneficiaries. Also note that Section 14.5-415, restating existing Section 14-106, gives standing to “trustees, personal representatives, beneficiaries and parties in interest” in a proceeding to approve or disapprove a proposed combination or division of a trust. Thus, the only effect of Section 14.5-409(b) appears to be to give standing to beneficiaries other than current income beneficiaries in a proceeding to approve or disapprove a proposed modification or termination under Sections 14.5-410 through 14.5-414.

Section 14.5-105(4) provides that a settlor may not draft around the power of a court to modify or terminate a trust under Section 14.5-410, Section 14.5-411, Section 14.5-413, and Section 14.5-414. Note that Section 14.5-105(4) does not prohibit the settlor from drafting additional methods of achieving the changes provided in the Sections that it covers.

In Section 410(b), the Drafters deleted the provision allowing a settlor to commence a proceeding to approve or disapprove a proposed modification or termination under Section 411, because Section 14.5-410, which corresponds to Section 411, does not provide for any participation by the settlor. The Drafters deleted the final sentence of Section 410 of the UTC, allowing the settlor of a charitable trust to maintain a proceeding to modify the trust under Section 413, because Section 413 was also deleted (see below).

Modification or Termination of Noncharitable Irrevocable Trust by Court. Section 14.5-410(a)(1) permits a court to terminate a trust if the trustee and all beneficiaries consent and if the court concludes that continuation of the trust is not necessary to achieve any material purpose of the trust. In Maryland, where all the beneficiaries of the trust aresui generis, no principle of law is violated, and the objective of the trust has been adhered to, the court may allow termination of the trust, provided all beneficiaries consent. Probasco v. Clark, 474 A.2d 221, 58 Md. App. 683 (1984). Where termination of the trust is inconsistent with the settlor’s intention or defeats a material purpose of the settlor, a trust may not be terminated. In re Trust of Lane, 323 Md. 188 (1991); Kirkland v. Mercantile-Safe Deposit and Trust Co., 218 Md. 17 (1958). Thus, Section 14.5-410(a)(1) tracks existing Maryland law, except for the addition of the requirement that the trustee also consent. This addition would be a significant change in certain circumstances.

Section 14.5-410(a)(2) permits a court to modify a trust if the trustee and all beneficiaries consent and if the court concludes that the modification is not inconsistent with a material purpose of the trust. This rule also is consistent with existing Maryland law, except again for the addition of the requirement that the trustee also consent. In general, in any circumstances in which a court could terminate a trust, a court would have a similar power to modify a trust. Note, however, that the courts have been inconsistent with respect to modification of testamentary trusts. Shriners Hospitals for Crippled Children v. Maryland National Bank, 312 A.2d 546, 270 Md. 564 (1973) (court has no power to amend or rewrite a testamentary non-charitable trust); but see Probasco v. Clark, 474 A.2d 221, 58 Md. App. 683 (1984) (“Courts do, however, have the inherent power to modify a [testamentary] trust so long as that authority is exercised with caution and not employed merely as a tool or device to enable beneficiaries to receive [an increased amount]…”). Thus, Section 14.5-410(a)(2) clarifies this point.

The Drafters deleted Section 411(a) (an optional provision of the UTC) because it provided for a non-charitable irrevocable trust to be modified or terminated upon consent of the settlor and all beneficiaries, without court action, even if inconsistent with a material purpose of the trust. The Drafters also deleted an alternate form within Section 411(a) that required court involvement. Neither alternative was consistent with existing Maryland case law. The Drafters retained Section 411(b) of the UTC, now Section 14.5-410(a), which is consistent with Maryland case law. In addition, the Senate Judicial Proceedings Committee added the trustee as a necessary party to give consent.

Section 14.5-410(b) provides that a spendthrift provision does not prevent termination of a trust. The original UTC provision stated that a spendthrift provision is not presumed to constitute a material purpose of the trust. This is a more modern view of the purpose of a spendthrift clause. Restatement (Third) of Trusts, Section 65, comment e. In Maryland, a spendthrift clause has been found to be a material purpose preventing termination or modification of a trust. In re Trust of Lane, 323 Md. 188 (1991); Mahan v. Mahan, 577 A.2d 70, 320 Md. 262 (1990); Kirkland v. Mercantile-Safe Deposit and Trust Company, 218 Md. 17 (1958). Query whether these opinions set forth a mere presumption or an absolute rule that a spendthrift provision constitutes a material purpose of a trust. The facts in both Lane and Kirkland involved spendthrift trusts, and in both cases, the court held that spendthrift provisions were a material purpose of the trust, preventing modification or termination. However, these cases would not prohibit a court from determining that a spendthrift provision is not a material purpose of a trust. Thus, the Drafters changed Section 14.5-410(b) to permit the court to determine whether or not a spendthrift trust is a material purpose of a trust. Section 14.5-410(b) avoids this issue by simply stating that the spendthrift provision does not prevent termination.

Section 14.5-410(b) is intended to expand the situations in which a spendthrift trust may be terminated, although of course the trust could not be terminated if the continuance of the trust were necessary to achieve a material purpose of the trust. It is possible that a spendthrift provision represents such a material purpose, thus preventing termination. Thus, Section 14.5-410(b) should be read consistently with the original UTC provision, and consistently with Section 14.5-410(a)(1).

The expansion of situations in which a spendthrift trust may be terminated should not cause trust assets to be subject to the claims of a beneficiary’s creditors (and thus also includible in the beneficiary’s estate for estate tax purposes). Section 14.5-504(c) makes clear that a beneficial interest that is subject to a spendthrift provision may not be judicially foreclosed or attached by a creditor. Furthermore, even if the beneficiary serves as sole trustee, and virtually represents all other beneficiaries, for example, because of Section 14.5-302, which allows virtual representation even in a conflict of interest, any argument that the beneficiary holds a power of withdrawal should fail, because the power is not “presently exercisable,” as required by the definition of “power of withdrawal” in Section 14.5-103(p), and because the court must still act to terminate the trust, including the finding that continuance is not necessary to achieve any material purpose of the trust. Query whether this result would be different if the Act included UTC Section 111, permitting non-judicial settlement agreements. In any event, if the beneficiary’s interest were threatened by a creditor, it would seem difficult to overcome the beneficiary’s argument that the spendthrift provision constitutes a material purpose of the trust.

Section 14.5-410(d) provides that the failure to obtain unanimous consent of all of the beneficiaries does not prevent the court from modifying or terminating a trust, if the court determines that the interests of each beneficiary who does not consent will be adequately protected. By contrast, common law requires the consent of all beneficiaries for a modification or termination of a trust. From the Heart Church Ministries, Inc. v. African Methodist Episcopal Zion Church, 370 Md. 152, 803 A.2d 548 (2002).

Modification or Termination Because of Unanticipated Circumstances or Inability to Administer Trust Effectively. Section 14.5-411(a) permits a court to modify the administrative or dispositive terms of a trust or terminate a trust if, because of circumstances not anticipated by the settlor, modification or termination will further the purposes of the trust. To the extent practicable, the modification must be made in accordance with the settlor’s probable intention. Current Maryland law permits court modification of a trust if, due to circumstances unforeseen by the settlor, compliance with the trust terms would defeat or substantially impair trust purposes. Staley v. Ligon, 239 Md. 61 (1965); Probasco v. Clark, 474 A.2d 221, 58 Md. App. 683 (1984). In addition, Section 14.5-411(b) permits a court to modify the administrative terms of a trust if continuation of the trust on its existing terms would be impracticable, wasteful, or impair the trust’s administration. This provision is consistent with common law and would be useful in dealing with troublesome trust provisions. The consent of all beneficiaries is not required under Section 14.5-411.

Section 14.5-411 closely follows UTC Section 412.

Cy Pres. The Drafters deleted Section 413 of the UTC, dealing with cy pres, because Subtitle 3 contains corresponding provisions.

Termination of Certain Trusts Without Order of Court. Section 14.5-412 re-enacts existing Section 14-107, providing a procedure for the termination of a small trust without order of court, with two changes. First, the section allows an individual trustee to use the procedure, not just a bank, trust company or other corporate entity authorized to act as a fiduciary under Maryland law, as in the existing provision. Second, the term “beneficiary” is changed to “qualified beneficiary,” and the definition of “beneficiary” is eliminated. As a result, only qualified beneficiaries need be involved in termination of small trusts.

The Drafters deleted Section 414 of the UTC and inserted existing Section 14-107 in its place, as Section 14.5-412.

Reformation to Correct Mistakes. Section 14.5-413 permits a court to reform the terms of a trust, even if unambiguous, to conform the terms to the intention of the settlor, if it is proved by clear and convincing evidence that both the intent of the settlor and the terms of the trust were affected by a mistake of fact or law, whether in expression or inducement. The UTC comment explains that a mistake of expression occurs when the terms of the trust misstate the settlor’s intention, fail to include a term that was intended to be included, or include a term that was not intended to be included. A mistake in the inducement occurs when the terms of the trust accurately reflect what the settlor intended to be included or excluded but this intention was based on mistake of fact or law.

Current Maryland law permits a court to correct and reform an inter vivos trust to conform to the parties’ intent. Liberty Trust Company v. Weber, 200 Md. 491, 90 A.2d 194 (1952);Kiser v. Lucas, 185 A. 441, 170 Md. 486 (1936). Section 14.5-413 applies to all trusts, including testamentary trusts.

Current Maryland law provides that the grounds for reformation must be established by clear and satisfactory evidence. Kiser v. Lucas, 185 A. 441, 170 Md. 486 (1936). Section 14.5-413 requires “clear and convincing evidence.”

Section 14.5-413 reflects a prior version of Section 415 of the UTC, before a clarifying amendment to Section 415 of the UTC in 2011. The revised version of the UTC provides, “The court may reform the terms of a trust, even if unambiguous, to conform the terms to the settlor’s intention if it is proved by clear and convincing evidence what the settlor’s intention was and that the terms of the trust were affected by a mistake of fact or law, whether in expression or inducement.” The revised rule thus states that it is necessary to prove what the settlor’s intention was, not that the settlor’s intention was affected by a mistake of fact or law. The UTC comment to the revision states that the revision better conforms to the Restatement.

Modification to Achieve Settlor’s Tax Objectives. Section 14.5-414(a), permitting modification to achieve the settlor’s tax objectives, is consistent with Maryland law that a court has the inherent authority to modify a trust so long as it is satisfied that circumstances exist that could not have been foreseen by the settlor and that as a result, the beneficiaries would suffer loss. Probasco v. Clark, 474 A.2d 221, 58 Md. App. 683 (1984). Section 14.5-414(b) permits the court to provide that the modification has retroactive effect, which may be a useful clarification, although whether a retroactive modification will be recognized under federal tax law is a matter of federal law.

Section 14.5-414 closely follows UTC Section 416.

Combination and Division of Trusts. Section 14.5-415 re-enacts existing Section 14-106 without substantive change.

As noted above, Section 14.5-105(4) prevents the settlor from altering the court’s power to modify or terminate a trust under Section 14.5-410, 14.5-411, 14.5-413 and 14.5-414. Section 14.5-105(4) does not mention Section 14.5-415, so presumably a settlor could restrict or eliminate a court’s power to divide or merge the trust.

The Drafters deleted Section 417 of the UTC and inserted existing Section 14-106 in its place, as Section 14.5-415.

Subtitle 5. Creditor’s Claims, Spendthrift and Discretionary Trusts.

Subtitle 5 deals with creditor’s claims against parties to a trust, including the beneficiaries, holders of powers of appointment, and the settlor.

Section 14.5-105(5) provides that the settlor may not draft around the rights of certain creditors and assignees to reach a trust as provided in Subtitle 5. UTC Section 105 provides the same mandatory rule, but also provides that the effect of a spendthrift provision under Subtitle 5 prevails over the terms of the trust.

The Drafters extensively rewrote Article 5 of the UTC. The House Judiciary Committee and the Senate Judicial Proceedings Committee made further changes.

Rights of Beneficiary’s Creditor or Assignee. Section 14.5-501(a) codifies the principle that a court may authorize a beneficiary’s creditor or assignee to reach the beneficiary’s interest in the trust by attachment of present or future distributions if the beneficiary’s interest is not subject to a discretionary distribution provision, a support provision, or a spendthrift provision. The Drafters added the references to discretionary distribution provisions or support provisions, which were not mentioned in UTC Section 501. The Drafters also added definitions of these terms (see discussion below), which were not in the UTC.

Section 14.5-501(b) deals with how the court may limit relief to a creditor and what factors to consider. It provides that the court may limit the amount, timing, or other terms and conditions of an award under this section to relief as is appropriate under the circumstances, considering among other factors the support needs of the beneficiary and the beneficiary’s spouse, former spouse and dependent children. With respect to a beneficiary that receives public benefits, the court may consider the beneficiary’s supplemental needs if the trust was not intended to provide for the beneficiary’s basic support. The court also may consider the amount of the creditor’s claim and the likely proceeds that a sale would produce as compared to the potential value of the interest to the beneficiary. In drafting Section 14.5-501(b), the Drafters gave greater guidance to the court to limit the creditor’s relief, compared to UTC Section 501(b), which simply provides that the court may limit the award to such relief as is appropriate under the circumstances.

Discretionary Trusts. Section 14.5-502 deals with discretionary trusts, i.e., those with discretionary distribution provisions. Section 14.5-103(f)(1) defines “discretionary distribution provision” to mean a provision in a trust that provides that the trustee has discretion to determine: (a) whether to distribute income or principal to one or more beneficiaries; (b) the amount of income or principal to distribute; (c) who among a class of beneficiaries will receive income or principal; (d) whether a distribution is from income or principal; or (e) when to pay income or principal. Section 14.5-103(f)(2) states that a trust provision is a discretionary distribution provision regardless of whether the trust instrument provides one or more standards or other guidance for the exercise of the trustee’s discretion, and regardless of whether the trust contains a spendthrift provision.

Sections 14.5-502(a)-(d) are the operative rules that protect beneficial interests in discretionary trusts, e.g., stating that a beneficiary of a discretionary distribution provision has no property right in a trust interest that is subject to the provision, that a beneficial interest that is subject to a discretionary distribution provision may not be judicially foreclosed, attached by a creditor, or transferred by the beneficiary, that a creditor of the beneficiary has no right to income or principal, and so on.

Section 14.5-502 is intended to codify the result in First National Bank v. Department of Health and Mental Hygiene, 284 Md. 720, 399 A.2d 891 (1979), which held that a trust was a discretionary trust, and thus a creditor of the beneficiary could not compel the trustees to pay any part of the principal, unless it is shown that the trustees have acted arbitrarily, dishonestly, or from an improper motive in denying the beneficiary the funds sought. First National Bank, supra, citing Restatement (Second) of Trusts Section 128, comment d (1957); see Offutt v. Offutt, 204 Md. 101, 120 A.2d 554 (1954).

Section 14.5-502 also sets forth related rules applying and illustrating this protection. For example, Section 14.5-502(e) states that if a portion of a trust is subject to beneficiary’s power of withdrawal, only that portion is not protected, and only during the period it may be exercised. Similarly, Section 14.5-502(f) states that if a beneficiary makes contributions to a trust, along with other settlors, only the portion attributable to the beneficiary’s contributions is not protected. Section 14.5-502(g) states that the interests of certain blind or disabled beneficiaries are protected, notwithstanding precatory “special needs” language in the trust instrument. These rules are logical applications of existing law.

For a comparison of Section 14.5-502 to corresponding UTC provisions, see the discussion following the discussion of Section 14.5-503, below.

Support Trusts. Section 14.5-503(a) provides the general rule that a beneficial interest that is subject to a support provision may not be judicially foreclosed or attached by a creditor, and that trust property that is subject to a support provision is not subject to the enforcement of a judgment until income or principal is actually distributed to the beneficiary. Section 14.5-103(w) defines “support provision” as a mandatory distribution provision in a trust that requires the trustee to distribute income or principal or both for the health, education, maintenance, or support of a beneficiary, and does not give the trustee discretion whether to distribute for these purposes or to select from among a class of beneficiaries to receive distributions. Section 14.5-103(m) defines “mandatory distribution provision” to mean a provision that requires the trustee to distribute income or principal to a beneficiary, including a distribution on termination of the trust. The term does not include a provision that allows the trustee to make a distribution subject to the exercise of the discretion of the trustee, even if the discretion is expressed in the form of a standard of distribution, or the terms authorizing the distribution “couple language of discretion with language of direction.” This definition of mandatory distribution provision is based on UTC Section 506(a).

Section 14.5-503(b) elaborates further by providing that the use, occupancy, and enjoyment of a single parcel of residential real property (as designated by the trustee) and tangible personal property by a beneficiary whose interest is subject to a support provision may not be transferred and are not subject to the enforcement of a judgment against the beneficiary.

Section 14.5-503 is intended to reflect current Maryland law protecting support trusts, as well as the Restatement (Second) of Trusts Section 154 (1959). In First National Bank v. Department of Health and Mental Hygiene, 284 Md. 720, 399 A.2d 891 (1979), the court stated that when a supplier of necessaries has a claim against the beneficiary of a support trust, the interest of the beneficiary can be reached to compel payment for the required items or services. Safe Deposit & Tr. v. Robertson, 192 Md. 653, 65 A.2d 292 (1949) (quoting Restatement of Trusts section 157 (1935)); see Pole v. Pietsch, 61 Md. 570 (1884).

In First National Bank, the court held that the trust was not a support trust, even though the trust instrument directed the trustees to pay “so much of the principal as they, in their absolute and uncontrolled discretion, may determine, to my daughter, Annesley Bond Baugh, or, in their absolute and uncontrolled discretion, may apply the same for her maintenance, comfort and support,” because the “maintenance, comfort and support” provision was intended to be subject to the trustees’ “absolute and uncontrolled discretion.” The court interpreted the “maintenance, comfort and support” provision to mean that the trustees could make discretionary payments for support directly to a creditor despite the existence of a spendthrift provision, or in other words, the court interpreted the provision as if it read “to her or for her benefit,” rather than “to her or for her maintenance, comfort and support.” Under this interpretation, the trust contained no support provision.

Comparison of Sections 14.5-502 and 14.5-503 to Corresponding UTC Provisions.Sections 14.5-502 and 14.5-503 are not found in the UTC. Although Section 14.5-502 deals with discretionary trusts, it is not the same as UTC Section 504. While UTC Section 504(b) provides that a creditor of a beneficiary may not compel a distribution that is subject to the trustee’s discretion, this rule is made subject to UTC Section 504(c), which permits the court to order a distribution from a discretionary trust to satisfy a judgment against the beneficiary for support or maintenance of the beneficiary’s child, spouse or former spouse to pay such amount as is equitable under the circumstances, to the extent the trustee has not complied with a standard of distribution or has abused its discretion. Thus, the UTC would have eliminated the distinction between discretionary and support trusts, and made discretionary trusts subject to the claims of certain exception creditors, at least to the extent the trustee has not complied with a standard of distribution or has abused its discretion. By contrast, under the Act, only support and spendthrift trusts are subject to exception creditors (see discussion of exception creditors in Section 14.5-505, below).

Spendthrift Provisions. Section 14.5-504(a) provides the general rule that a spendthrift provision is valid and enforceable. Section 14.5-103(u) defines “spendthrift provision” as a term of a trust which restrains both voluntary and involuntary transfer of a beneficiary’s interest, or which restrains involuntary transfer of a beneficiary’s interest and permits voluntary transfer of a beneficiary’s interest only with the consent of a person who is not a beneficiary. This definition is broader than the UTC definition found in Section 103(16), which provides that the spendthrift provision must restrain all voluntary and involuntary transfers of a beneficiary’s interest, and Section 14.5-504(a) is broader than UTC Section 502, which requires a spendthrift provision to restrain all voluntary and involuntary transfers of a beneficiary’s interest in order to be valid.

Under Section 14.5-504(b), based on UTC Section 502(b), a trust provision that the interest of a beneficiary is held subject to a “spendthrift trust” or words of similar import restrains both voluntary and involuntary transfer of the beneficiary’s interest. Thus, such words should be sufficient to create a spendthrift provision. This is a shorthand way to draft a spendthrift provision, but it might have been given effect under current Maryland law as an expression of the settlor’s intent.

Section 14.5-504(d), based on UTC Section 502(d)(1), provides that a beneficiary may not transfer an interest in a trust in violation of a valid spendthrift provision, nor may a creditor reach the interest or a distribution by the trustee before the receipt by the beneficiary of the interest or distribution. Similarly, Section 14.5-504(c) provides that a beneficial interest that is subject to a spendthrift provision may not be judicially foreclosed or attached by a creditor, and Section 14.5-504(d)(2) provides that an attempt by a beneficiary to transfer an interest in a trust in violation of a valid spendthrift provision is void. These latter two rules are not found in the UTC, but simply restate existing Maryland law.

Section 14.5-504(e) provides that the use, occupancy, and enjoyment of a single parcel of residential real property (as designated by the trustee) and tangible personal property by a beneficiary whose interest is subject to a spendthrift provision may not be transferred and are not subject to the enforcement of a judgment against the beneficiary.

Exceptions to Support and Spendthrift Provisions. Section 14.5-505(b) provides exceptions to the creditor protection afforded by support and spendthrift provisions for: (1) a beneficiary’s child, spouse, or former spouse who has a judgment or court order against the beneficiary for support or maintenance; (2) a judgment creditor who has provided services for the protection of a beneficiary’s interest in the trust; or (3) a claim of this State or the United States to the extent a Maryland or federal statute so provides. These three exceptions are consistent with current Maryland law. The exception in subsection (b)(1) is consistent with Safe Deposit & Trust Co. v. Robertson, 192 Md. 653, 65 A.2d 292 (1949) (alimony), Zouck v. Zouck, 204 Md. 285, 104 A.2d 573 (1954) (child support), and Restatement (Second) of Trusts Section 157(a). The exception in subsection (b)(2) fills a gap in Maryland common law and would be consistent with the Restatement (Second) of Trusts Section 157(c). The exception in subsection (b)(3) is consistent with Mercantile Trust Co. v. Hofferbert, 58 F.Supp. 701 (D.Md. 1944).

Section 14.5-505(b) tracks UTC Section 503(b) closely. Note, however, that Section 14.5-505(b), unlike UTC Section 503(b), is “subject to the provisions of Section 14.5-502,” the protection for discretionary trusts, which is not found in the UTC.

Section 14.5-505(c) provides that an exception creditor may obtain a court order attaching present or future distributions to a beneficiary, and that the court may limit the award to such relief as is appropriate under the circumstances. This reflects Maryland law, as well as UTC Section 503(c). The Drafters added provisions to Section 14.5-505(c) to clarify the limits on court relief and set forth factors that the court may consider.

Mandatory Distribution Provisions. Section 14.5-506 provides when trusts subject to mandatory distribution provisions are not protected.

Section 14.5-506(a) provides that the court may authorize a creditor, as provided in Section 14.5-501, to attach present or future mandatory distributions to a beneficiary or reach the beneficiary’s interest by other means, as long as the mandatory distribution provision is not a support provision and does not contain a spendthrift provision. This provision is not in the UTC.

Section 14.5-506(b) provides that a creditor or assignee of a beneficiary may reach a mandatory distribution if the trustee has not made the distribution to the beneficiary within a reasonable time after the designated distribution date, even if the trust contains a spendthrift provision or a support provision. This reflects current Maryland law, and is based on UTC Section 506(b).

Summary of Creditor’s Claims Against Beneficial Interests. Under the Act, no creditors can reach beneficial interests that are subject to discretionary distribution provisions. Only exception creditors can reach beneficial interests that are subject to support provisions or spendthrift provisions.

With regard to mandatory distributions, any creditor authorized by the court as provided in Section 14.5-501 may attach present or future mandatory distributions to a beneficiary or reach the beneficiary’s interest by other means, as long as the mandatory distribution provision is not a support provision and does not contain a spendthrift provision. However, if the trustee has not made a mandatory distribution within a reasonable time after the designated distribution date, any creditor can reach the distribution (even if it is subject to a support provision or a spendthrift provision).

In addition, any creditor can reach a distribution after it has been made directly to the beneficiary.

These rules reflect the UTC, except that the UTC permits the court broader authority to order appropriate relief to reach a mandatory distribution, and the UTC also permits the court to order a distribution from a discretionary trust to satisfy a judgment against the beneficiary for support or maintenance of the beneficiary’s child, spouse or former spouse to pay such amount as is equitable under the circumstances, to the extent the trustee has not complied with a standard of distribution or has abused its discretion. Furthermore, the UTC eliminates the category of support trust, while the Act retains it, although the Act’s definition is very limited.

Power of Appointment Created by Third Party. Section 14.5-507(a) provides that a power of appointment held by a person other than the settlor of the trust is not a property interest, and that neither a power of appointment held by a person other than the settlor of the trust nor any property subject to such a power of appointment may be judicially foreclosed or attached by a creditor of the holder of the power. This section retains established Maryland common law with regard to non-general powers of appointment.Mercantile Trust Co. v. Bergdorf & Goodman Co., 167 Md. 158, 173 A. 31 (1934); United States v. Baldwin, 283 Md. 586, 391 A.2d 844 (1978).

Section 14.5-507(a) also applies to general powers of appointment, which may be an expansion of Maryland law. In adding this provision, the Drafters relied upon dicta from the Court of Appeals that for Maryland tax and other purposes, property passes by exercise of a testamentary power of appointment, not from the done of the power but from the donor.Connor v. O’Hara, 188 Md. 527, 53 A.2d 33 (1947). The Drafters also believed that, as long as the donor is not defrauding his own creditors or otherwise violating public policy, he or she should have the right (as a part of his own ownership rights) to restrict creditor access to trust property regardless of whether the rights of the trustee or beneficiaries (other than the donor) amount to ownership equivalence.

Section 14.5-507(b) lists situations that will not be considered sufficient to create a general power of appointment or a power of withdrawal with respect to a beneficiary or settlor, and include (1) a beneficiary serving as a trustee, (2) the settlor or a beneficiary holding an unrestricted power to remove or replace a trustee, (3) the settlor or a beneficiary serving as a trust administrator or in a managerial function for an entity owned in whole or in part by the trust, (4) the settlor or a beneficiary having a relative, close adviser, business associate and the like serve as trustee, (5) the settlor holding a reserved power of appointment (other than a reserved power to appoint to the settlor, the settlor’s creditors, the settlor’s estate, or the creditors of the settlor’s estate), (6) having a Code Section 675(4)(C) power to substitute assets of equivalent value, or (7) having a Code Section 675(2) power to borrow trust property for less than adequate interest or security. This section is intended to make clear that a non-settlor beneficiary’s fiduciary powers as a trustee will not be added to his rights as a beneficiary in determining whether his interest is subject to his creditors. It is also intended to make clear that the listed situations will not make trust property subject the claims of the power holder’s creditors for purposes of estate and gift tax provisions that depend on whether a person has a power that can be used to discharge his legal obligations, such as Treas. Reg. Section 20.2041-1(c)(1) and Treas. Reg. Section 25.2514-1(c)(1).

Section 14.5-507 is not based on any UTC provision.

Creditor’s Claim Against Settlor or Holder of Power of Withdrawal. Section 14.5-508 deals with creditor’s claims against the settlor of a revocable or irrevocable trust or the holder of a power of withdrawal.

Section 14.5-508(a)(1) provides that a revocable trust is subject to the settlor’s creditors during the settlor’s lifetime. Although such claims were not allowed at common law, this conclusion is now well-settled. Restatement (Third) of Trusts Section 25, comment e.

Section 14.5-508(a)(2) provides that with respect to an irrevocable trust, the settlor’s creditors can reach only the maximum amount that can be distributed to the settlor. This is consistent with current Maryland law and common law. In re Robbins, 826 F.2d 293 (4th Cir. 1987) (applying Maryland law); Restatement (Second) of Trusts Section 156 (1959).

Section 14.5-508(a)(3) provides that if a trust has more than one settlor, the creditors of a particular settlor can reach only his contribution.

Section 14.5-508(a)(1) is based on UTC Section 505(a)(1), and Sections 14.5-508(a)(2) and (3) are based on UTC Section 505(a)(2).

Section 14.5-508(a)(4) provides that with respect to a trust described in 42 U.S.C. Section 1396p(d)(4)(A) or (C) (self-settled supplemental needs trust), the court may limit the creditor’s award to the relief that is appropriate under the circumstances. The Drafters added Section 14.5-508(a)(4) to encourage the use of such trusts.

Section 14.5-508(a)(5) provides that after the death of the settlor of a funded revocable trust, and subject to the settlor’s right to direct the source from which liabilities will be paid, the property of the trust is subject to claims of the settlor’s creditors. This may fill a gap in Maryland law, but is probably not a change. Section 14.5-508(a)(5) is based on UTC Section 505(3), except that the UTC provision also made the property of the revocable trust subject to the 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. However, the UTC provision requires the claims, costs, expenses and allowances to exhaust the settlor’s probate estate first, which is not the case under the Act. Neither the Act nor the UTC provides for a specific statute of limitations applicable to claims against a revocable trust after the settlor’s death, so presumably more general statutes of limitations apply.

Section 14.5-508(b)(1) provides that the holder of a power of withdrawal is treated in the same manner as the settlor of a revocable trust, during the period the power of withdrawal may be exercised, to the extent of the property subject to the power. This is a desirable clarification of Maryland law, and is logical because a power of withdrawal is the functional equivalent of a power of revocation. This provision follows UTC Section 505(b)(1).

Section 14.5-508(b)(2) provides that after the lapse, waiver, or release of a power of withdrawal, the former power holder shall no longer be considered a settlor of the trust. This is a new provision in Maryland law. At common law, the opposite was true: the power holder would be treated as the settlor of an irrevocable trust. UTC Section 505(b)(2) followed the common law, but provided an exception for five and five powers and Crummey withdrawal rights. The Drafters expanded this exception to make it the rule.

Personal Obligations of Trustee. Section 14.5-509 codifies the longstanding principle that trust property is not subject to personal obligations of the trustee, even if the trustee becomes insolvent or bankrupt. This Section follows UTC Section 507.

Beneficiary-Trustee Interests. Section 14.5-510(a) provides that a creditor may not attach a beneficiary’s interest in a trust solely because the beneficiary is serving as sole trustee or co-trustee, and Section 14.5-510(b) provides the same rule if the beneficiary may remove or replace a trustee. Maryland does not appear to have a case on point, and in fact, the Restatement (Third) of Trusts Section 60, comment g, sets forth the opposite rule, i.e., that a creditor may reach the beneficial interest of a beneficiary-trustee. Thus, Section 14.5-510 may represent a change in Maryland law, or at least prevent a court from adopting the Restatement (Third) view.

The UTC adopted Section 504(e) to avoid the rule in the Restatement (Third) of Trusts Section 60, comment g. UTC Section 504(e) is narrower than Section 14.5-510(a), as it applies only if the trustee’s discretion to make distributions for the trustee’s own benefit is limited by an ascertainable standard. Most situations in which a beneficiary serves as trustee provide for the beneficiary-trustee’s discretion to distribute principal to himself to be limited by an ascertainable standard, both because the documents are drafted to avoid inclusion in the beneficiary’s taxable estate under Code Section 2041, and as a result of the application of Section 14-109 (now found at Section 14.5-814 of the Act), which statutorily limits the power of a beneficiary-trustee to distribute principal to himself to an ascertainable standard. Thus, the fact that the protection is broader under the Act than the UTC may have little practical significance.

Transfer to Trust of Property Held by Tenants by the Entirety. Section 14.5-511 re-enacts most of existing Section 14-113. However, the Senate Judicial Proceedings Committee deleted Section 14-113(c)(2). This section provided that to the extent the surviving spouse remains a beneficiary of the trust, the property that was immune from the claims of the separate creditors of the decedent shall be subject to the claims of the separate creditors of the surviving spouse. This deletion could represent a significant change to current Maryland law by permitting spouses to retain immunity from creditors for property owned as tenants by the entirety, even after the death of the first spouse, if a transfer is made pursuant to this provision. Presumably, Section 14.5-511 is unaffected by new Section 14.5-508(a)(1), providing that during the lifetime of the settlor, the property of a revocable trust is subject to the claims of the creditors of the settlor, but this is not clear.

Subtitle 6. Revocable Trusts.

Subtitle 6 provides rules regarding revocable trusts. These rules fill in gaps in the current law and provide several helpful clarifications and changes.

Capacity of Settlor of Revocable Trust. Section 14.5-601 provides that the capacity needed to create, amend, revoke or add property to a revocable trust, or to direct the actions of a trustee of a revocable trust, is the same as that required to make a will. This is consistent with common law.

The Drafters added Section 14.5-601(b), in part to make clear that a duly authorized agent under a power of attorney can create or amend a revocable trust. The Drafters added Section 14.5-601(c) because of concern about the trustee owing a duty to the beneficiaries while the settlor is incapacitated. The Drafters based Section 14.5-601(c) on part of the Comment to the UTC definition of “revocable.”

Revocation or Amendment of Revocable Trust. Maryland common law provides that trusts are presumed to be irrevocable unless the terms expressly provide that the trust is revocable. Allen v. Safe Deposit & Trust Company of Baltimore, 177 Md. 26, 7 A.2d 180 (1939); Liberty Trust Company v. Weber, 200 Md. 491, 90 A.2d 194 (1952); cf. From the Heart Church Ministries, Inc. v. African Methodist Episcopal Zion Church, 370 Md. 152, 803 A.2d 548 (2002). Section 14.5-602(a) reverses this presumption. This change is prospective only. This change helps avoid drafting errors.

The balance of Section 14.5-602 fills in numerous gaps in Maryland law regarding the revocation or amendment of a revocable trust. Section 14.5-602(e), regarding the exercise of a settlor’s powers by the settlor’s agent under power of attorney, and Section 14.5-602(f), regarding the exercise of a settlor’s powers by the settlor’s guardian of the property or the settlor’s guardian of the person, are especially helpful additions.

The Drafters changed Section 602(f) of the UTC in two ways: (1) to change the terms conservator and guardian to the Maryland terms guardian of the property and guardian of the person, and (2) to provide that a guardian may exercise the settlor’s powers with respect to revocation, amendment, or distribution of trust property only if the trust instrument does not provide otherwise. The second change limits the scope of the change made by Section 602(f), which fills a gap in Maryland law.

The Maryland Association for Justice deleted Section 602(g), which provided, “A trustee who does not know that a trust has been revoked or amended is not liable to the settlor or settlor’s successors in interest for distributions made and other actions taken on the assumption that the trust had not been amended or revoked.”

Settlor’s Powers; Enforcement on Settlor’s Incapacity. Section 14.5-603(a) provides that, subject to Section 14.5-603(b), while a trust is revocable, the rights of the beneficiaries are subject to the control of the settlor, and the duties of the trustee are owed exclusively to the settlor. This is a helpful clarification, at least in order to negate the effect of other provisions of the Act that are intended to apply only to irrevocable trusts. For example, the trustee would not have the duty to provide information to the beneficiaries of revocable trust other than the settlor. See also Section 14.5-601(c).

The Drafters deleted the optional phrase “and the settlor has capacity to revoke the trust” from Section 603(a) because of concern about the trustee owing a duty to the beneficiaries while the settlor is incapacitated.

Section 14.5-603(b) provides that if 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 shall have the right to enforce the trust as if it were irrevocable.

The Drafters added Section 14.5-603(b) in order to ensure that a beneficiary to whom distributions may be made would have the right to enforce a trust while it is revocable if the settlor does not have capacity.

The Drafters deleted Section 603(b) of the UTC because giving the holder of a power of withdrawal the rights of a settlor of an irrevocable trust would be inconsistent with Article 5.

Limitation on Action Contesting Validity of Revocable Trust. The House Judiciary Committee deleted all of Section 604 of the UTC, which set time limits to commence a judicial proceeding to contest the validity of a revocable trust, provided protection for trustees who distributed trust property without knowing of a pending judicial proceeding contesting the validity of the trust or a possible judicial proceeding, and provided that a beneficiary of a trust that is determined to have been invalid is liable to return any distribution received.

Subtitle 7. Office of Trustee.

Subtitle 7 provides rules regarding trustees. Like Subtitle 6, these rules fill in gaps in the current law and provide several helpful clarifications and additions.

Accepting or Declining Trusteeship. Section 14.5-701 is consistent with common law and provides helpful clarification. It closely follows UTC Section 701.

Trustee’s Bond. Section 14.5-702 is consistent with existing Maryland law regarding trustee’s bonds, which are also covered in Maryland Rule 10-702.

Under Section 14.5-105(6), the settlor may not change the court’s power under Section 14.5-702 to require, dispense with, or modify or terminate a bond.

The House Judiciary Committee deleted Section 702(c) of the UTC because Maryland Rule 10-702 provides for trustee’s bonds.

Co-Trustees. Maryland law requires co-trustees of a non-charitable trust to act unanimously unless otherwise provided in the trust instrument. Donovan v. Miller, 137 Md. 555, 112 A.2d 926 (1921). This rule remains unchanged.

The House Judiciary Committee deleted Section 703(a) of the UTC, which permitted co-trustees to act by majority, and made a conforming change to Section 703(d) (now Section 14.5-703(c)). The House Judiciary Committee also deleted Sections 703(f), (g), and (h), as they related only to trustees who act by majority.

Section 14.5-703 contains helpful clarifications of the rules regarding cotrustees. Section 14.5-703(c) provides that if a cotrustee is temporarily unavailable to perform duties and prompt action is necessary achieve trust purposes or avoid injury to the trust, the remaining trustees may act.

Section 14.5-703(d) provides that a trustee may delegate investment and management functions to a cotrustee as prudent under the circumstances. By contrast, common law prohibits a cotrustee from delegating functions to another cotrustee if the settlor reasonably expected the trustees to act jointly. Restatement (Second) of Trusts, Section 171.

UTC Section 703(e), upon which Section 14.5-703(d) was based, followed the common law approach, stating that a trustee may not delegate to a co-trustee the performance of a function the settlor reasonably expected the trustees to perform jointly. The Drafters changed Section 703(e) of the UTC in order to be consistent with a trend in the common law and other jurisdictions enacting the UTC. This change also conforms UTC Section 703(e) (now found in Section 14.5-703(d)) to Section 14.5-807, relating to delegation by trustees to an agent (discussed below).

Vacancy in Trusteeship; Appointment of Successor. Section 14.5-704(c) permits the qualified beneficiaries, acting unanimously, to appoint a trustee if there is no trustee in office and the terms of the trust do not provide for the designation of a successor trustee. This is a helpful addition to Maryland law, as a court proceeding is required under current law.

The Drafters added Section 14.5-704(a)(7), providing that a vacancy in a trusteeship occurs if a trustee cannot be located for 120 consecutive days, and Section 14.5-704(a)(8), providing that a vacancy in a trusteeship occurs if a trustee is unable to handle business affairs as determined by two licensed physicians, in order to broaden the applicability of the statute. The Drafters deleted Section 704(d) of the UTC, because it related only to charitable trusts, which are covered by Subtitle 3. Section 14.5-704(d), relating to court appointment of an additional trustee or special fiduciary, closely follows UTC Section 704(e).

Resignation of Trustee. Section 14.5-705 retains the current law, which requires court approval for a trustee to resign if the trust instrument does not permit resignation. Under Section 14.5-705(c), liability of a resigning trustee is not discharged by the trustee’s resignation. In addition, under Section 14.5-707, the resigning trustee continues to have the duties of a trustee, as well as the powers necessary to protect trust property, until the trust property is delivered to a successor trustee or other person entitled to it, unless a cotrustee remains in office or the court orders otherwise.

In Section 14.5-705, the House Judiciary Committee deleted UTC Section 705(a)(1), which permitted a trustee to resign upon at least 30 days’ notice to the qualified beneficiaries and all co-trustees.

Removal of Trustee. Section 14.5-706 provides for the removal of a trustee. This section applies in addition to the grounds and procedures for removal of a fiduciary set forth in existing Section 15-112.

In Section 14.5-706, the Drafters added introductory language to the corresponding UTC provision, to make clear that the existing Section 15-112, relating to grounds and procedures for removal of a fiduciary, continues to apply to trusts. The Drafters also amended what is now Section 14.5-706(2)(iv) to require both a substantial change of circumstances and a request by all of the qualified beneficiaries in order for a court to remove a trustee (provided the other conditions are also met). The UTC provision allowed removal if either test was met.

Certain provisions of Sections 14.5-703, 14.5-705, and 14.5-706 are redundant or duplicative of existing statutes. Specifically, Section 14.5-703(a) is partially duplicative of existing Section 15-107 (survival of power when right given one or more fiduciaries). Similarly, Section 14.5-705(c) is redundant of Section 15-111 (resignation of fiduciary), and Section 14.5-706(2) is arguably redundant of Section 15-112 (removal of fiduciary). In these cases, both the relevant Act provision and the existing provision of Title 15 have been retained for clarity and uniformity. Sections 15-107, 15-111, and 15-112 could not be deleted, as these sections apply to all fiduciaries, not just trustees.

Commissions. Section 14.5-708 re-enacts existing Section 14-103. The term “ascertained beneficiaries” in the existing statute is changed to “qualified beneficiaries” in order to be consistent with this defined term.

Under Section 14.5-105(8), the settlor may not draft around the court’s power in Section 14.5-708(a) to increase or decrease a trustee’s commissions.

Section 14.5-708 replaces UTC Section 708.

Reimbursement of Expenses. Section 14.5-709 is consistent with current Maryland law allowing a trustee to be reimbursed for necessary expenses. Hatton v. Weems, 12 Gill & J. 83 (1841). This Section closely follows UTC Section 709.

Permissible Holders of Trust or Fiduciary Powers. Section 14.5-710 re-enacts existing Section 14-110 without substantive change, and Section 14.5-711 re-enacts existing Section 14-104 without substantive change. These sections are not found in the UTC.

Subtitle 8. Duties and Powers of Trustee.

Subtitle 8 concerns duties and powers of trustees. It is consistent with current law and provides several helpful clarifications and additions.

Basic Duties. The first six sections of Subtitle 8, or Section 14.5-801 (duty to administer trust), Section 14.5-802 (duty of loyalty), Section 14.5-803 (duty of impartiality), Section 14.5-804 (duty of prudent administration), Section 14.5-805 (duty to incur only reasonable costs), and Section 14.5-806 (duty to use special skills or expertise) collectively represent a useful codification of the law of Maryland and many other jurisdictions.

Duty to Administer Trust. Section 14.5-801 provides that on acceptance of a trusteeship, the trustee shall administer the trust reasonably under the circumstances, in accordance with the terms and purposes of the trust and the interests of the beneficiaries, and in accordance with this title.

Section 14.5-105(2) provides that the settlor may not override the duty to administer the trust reasonably under the circumstances and in accordance with the terms and purposes of the trust and the interests of the beneficiaries. This section clearly makes Section 14.5-801 a mandatory rule, although Section 14.5-105(2) does not refer to Section 14.5-801 by section number.

Section 14.5-801 reflects Section 801 and Section 14.5-105(2) of the UTC, except that the Maryland Association for Justice changed “in good faith” to “reasonably under the circumstances.” This could be a change to current Maryland law, if current Maryland law imposes a good faith standard, as in the UTC, rather than the objective and thus potentially stricter standard of “reasonably under the circumstances.”

Duty of Loyalty. Section 802(a), providing that a trustee shall administer the trust solely in the interests of the beneficiaries, may represent an expansion of beneficiary rights in Maryland, where courts have applied a best interests of the beneficiaries standard. Section 802(e) retains the best interests of the beneficiaries standard for a trustee exercising control over business interests.

The Drafters deleted Section 802(d) of the UTC, providing that a transaction between a trustee and a beneficiary that does not concern trust property but that occurs during the existence of the trust or while the trustee retains significant influence over the beneficiary and from which the trustee obtains an advantage is voidable by the beneficiary unless the trustee establishes that the transaction was fair to the beneficiary, because it would be broader than current law in Maryland.

The Drafters deleted Section 802(f), regarding trust investments in affiliated funds, because Maryland already has a statute on this point, specifically Section 15-106(c). The Drafters deleted Section 802(h)(4) of the UTC, relating to trust money deposited in a regulated financial service institution operated by the trustee, because Maryland already has a statute on point, specifically Section 15-106(b)(2).

Sections 14.5-803 through 14.5-806 closely follow UTC Sections 803 through 806.

Delegation By Trustee. Section 14.5-807 provides general rules regarding a trustee’s delegation of duties and powers. Although such delegation historically was prohibited, this section is consistent with the recent trend in the law permitting such delegation. For example, Section 15-102(o) provides that a fiduciary may employ agents, attorneys, auditors, investment advisers or other persons with special skills to advise or assist the fiduciary in the performance of his administrative duties. In addition, Maryland courts have long permitted delegation where dealing through an agent accords with the ordinary course of business. McLean v. Peyser, 169 Md. 1, 179 A.58 (1935). However, the court has stated, “It is a fundamental principle of trust law that a trustee may not delegate discretionary duties.” Jacob v. Davis, 128 Md. App. 433 (1999).

Certain provisions of Section 14.5-807 may be helpful in filling in gaps in the law, such as provisions requiring periodic review of the agent’s actions by the trustee, imposing a duty of reasonable care on the agent, and subjecting the agent to the personal jurisdiction of Maryland courts. Note that because existing Section 15-114 already provides rules regarding the delegation of investment duties or powers, Section 14.5-807(d) provides that Section 14.5-807 does not apply to a delegation of investment duties or powers pursuant to Section 15-114.

The Drafters changed Section 14.5-807(a)(1), permitting a trustee to delegate to an agent, to specifically permit delegation to an agent associated with the trustee. The Maryland Association for Justice deleted Section 807(c) of the UTC, providing that a trustee who complies with subsection (a) is not liable to the beneficiaries or to the trust for an action of the agent to whom the function was delegated.

The Drafters added Section 14.5-807(d) to make clear that Section 14.5-807 does not apply to a delegation of investment duties or powers in accordance with existing Section 15-114.

Powers to Direct. Section 14.5-808 provides for directed trustees. While Maryland common law may permit directed trustees, this state has not enacted a statute on the topic. Section 14.5-808(b) provides that a person who can direct a trustee shall be considered an advisor and a fiduciary who is required to act reasonably under the circumstances with regard to the purposes of the trust and the interests of the beneficiaries. The trustee may not act in accordance with the direction if it is manifestly contrary to the terms of the trust, unless expressly waived in writing by the settlor, or the trustee knows it would constitute a breach of a fiduciary duty that the advisor owes to the beneficiaries. The advisor is liable for any loss that results from a breach of fiduciary duty.

Section 14.5-808(c) requires a trustee to act in accordance with the direction of a trust advisor, except in cases of willful misconduct by the directed 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.

14.5-808 does not follow the UTC draft. It contains provisions that originally were suggested by the Bankers and then revised by the House Judiciary Committee.

Other Basic Duties. Section 14.5-809 (duty to protect trust property), Section 14.5-810 (duty to keep records and to keep trust property separate), and Section 14.5-811 (duty to take reasonable steps to enforce and defend claims, and power to abandon unreasonable claims) collectively represent a useful codification of the law of Maryland and many other jurisdictions.

Control and Protection of Trust Property. The Drafters changed Section 14.5-809, providing that a trustee shall take reasonable steps to take control of and protect the trust property, to provide an exception for items of tangible personal property in a revocable trust not in possession or control of the trustee. This avoids placing a duty on a trustee (other than the settlor) to take control of tangible personal property, and may help settlors avoid probate by transferring tangible personal property to a revocable trust.

Recordkeeping and Identification of Trust Property. Section 14.5-810 closely follows UTC Section 810.

Enforcement and Defense of Claims. The Drafters added Section 14.5-811(b), providing that a trustee may abandon a claim that is unreasonable to enforce or assign the claim to one or more of the beneficiaries, because it would be desirable to expressly state these powers.

Collecting Trust Property. Section 14.5-812 is helpful in filling in gaps in Maryland law regarding the extent of the trustee’s duty to collect trust property and redress a breach of trust known to have been committed by a former trustee. It tracks Restatement (Second) of Trusts Section 223 (1959).

The House Judiciary Committee changed Section 812 of the UTC to Section 14.5-812(a), stating the general rule that a trustee is not liable to the beneficiary for a breach of trust committed by a former trustee, and Section 14.5-812(b), setting forth three exceptions to this general rule. The House Judiciary Committee added Section 14.5-812(b)(1), providing 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. The House Judiciary Committee also rewrote Sections 812(b)(2) and 812(b)(3) of the UTC, which had imposed duties on a trustee to take reasonable steps to compel a former trustee or other person to deliver trust property to the trustee, and to redress a breach of trust known to the trustee to have been committed by a former trustee, to provide specifically that a trustee is liable to the beneficiary for a breach of trust if the trustee neglects either of these duties. In Section 14.5-812(b)(3), the House Judiciary Committee also changed the phrase “redress a breach of trust known to the trustee to have been committed by a former trustee” to read “redress a breach of trust committed by a former trustee,” thus deleting the express requirement that the trustee had knowledge of the breach. Note that both Section 14.5-812(b)(1) and Section 14.5-812(b)(3) now apply in situations where the trustee may not have actual knowledge but simply “should know.”

Duty to Inform and Report. Section 14.5-813 addresses the trustee’s duty to provide information to beneficiaries. As further described below, parts of Section 14.5-813 set forth responsive duties, i.e., duties to provide information upon request, and other parts of the section set forth affirmative duties, i.e., duties to provide information even in the absence of a request – specifically, new notice requirements. Furthermore, some of the responsive duties are mandatory, and thus may not be waived in the trust instrument; similarly, some of the affirmative notice requirements are mandatory. Finally, the new affirmative notice requirements have a prospective effective date.

Duty to Inform and Report – Responsive Duties. Section 14.5-813(a) provides that unless unreasonable under the circumstances, a trustee must promptly respond to a qualified beneficiary’s request for information related to the administration of the trust, including a copy of the trust instrument. Section 14.5-813(c)(1) provides that on request by a qualified beneficiary, a trustee must send to the qualified beneficiary, annually and at the termination of the trust, a report of the trust property, liabilities, receipts and disbursements, including the source and amount of the trustee’s compensation, a listing of the trust assets, and, if feasible, their respective market values.

These requirements generally reflect common law. “The beneficiary is entitled to demand of the trustee all information about the trust and its execution for which he has any reasonable use.... If the beneficiary asks for relevant information about the terms of the trust, its present status, past acts of management, the intent of the trustee as to future administration, or other incidents of the administration of the trust, and these requests are made at a reasonable time and place and not merely vexatiously, it is the duty of the trustee to give the beneficiary the information for which he has asked.” Jacob v. Davis, 128 Md. App. 433, 738 A.2d 904, 911-12 (1999); Brewster v. Brennan, 567 F.Supp.2d 791 (D. Md. 2008).

The explicit limitation to qualified beneficiaries is a helpful clarification. However, Maryland courts have permitted a petition for an accounting to be filed by a remainderman. Johnson v. Johnson, 184 Md. App. 643, 967 A.2d 274 (2009) (vacated on other grounds, 423 Md. 602 (2011)); Jacob v. Davis, 128 Md. App. 433, 448, 738 A.2d 904 (1999); In re Clarke’s Will, 198 Md. 266, 81 A.2d 640 (1951).

Duty to Inform and Report – Responsive Duties – Mandatory Rules. Under Section 14.5-105(9), the settlor may not draft around the trustee’s duties to provide information, copies and notices specified under Section 14.5-813(a) and (c). Similarly, Section 14.5-105(10)(ii) provides, in part, that the duty under Section 14.5-813(a) to respond to the request of a qualified beneficiary of an irrevocable trust for reports by the trustee and other information reasonably related to the administration of the trust (that is, the duty set forth in Section 14.5-813(a)) is mandatory (Section 14.5-105(10)(ii) is thus duplicative of part of Section 14.5-105(9) and could be deleted). These mandatory rules are a change to common law, which permits a settlor to draft around the trustee’s duty to provide information to a beneficiary, within reason.

Duty to Inform and Report – New Affirmative Notice Requirements. Section 14.5-813(b) imposes significant new affirmative notice requirements on trustees, i.e., notice requirements that must be met even if the beneficiary does not request information. These new affirmative notice requirements represent a substantial change from current Maryland law, which does not impose this affirmative duty. Johnson v. Johnson, 184 Md. App. 643, 967 A.2d 274 (2009); Jacob v. Davis, 128 Md. App. 433 (1999); Shipley v. Crouse, 29 Md. 613 (1977).

These new affirmative notice requirements, like all rules in the Act, are default rules, and thus they apply to all trusts that do not specifically waive them. Because of this substantial change, a special effective date makes the new affirmative notice requirements prospective only. In addition to being default rules, some of these new affirmative notice requirements are also mandatory rules, i.e., they apply even if the terms of the trust attempt to waive them. This memorandum will discuss the default rules, the effective date, and the rules that are also mandatory rules, in that order. A fourth section will summarize the new affirmative notice requirements and their application.

Duty to Inform and Report – New Affirmative Notice Requirements – Default Rules. Section 14.5-813(b)(1) imposes new requirements on trustees to (i) notify qualified beneficiaries of the trustee’s name, address and telephone number within 60 days after accepting a trusteeship, and (ii) notify qualified beneficiaries of the existence of an irrevocable trust, the identity of the settlor, the right to request a copy of the trust instrument, and the right to a trustee’s report as required by Section 14.5-813(c) within 90 days after the creation of an irrevocable trust. Section 14.5-813(b)(2) provides that notice must be given by personal delivery or by certified mail, postage prepaid, return receipt requested, if the names and locations of the qualified beneficiaries are known to the trustee, and by publication in a newspaper of general circulation in the county where the trust property is located once a week for three successive weeks, if the names and locations of the qualified beneficiaries are not known to the trustee.

Duty to Inform and Report – New Affirmative Notice Requirements – Effective Date. Section 14.5-813(e) provides a special effective date for the additional notice requirements of Section 14.5-813(b). Section 14.5-813(e) provides that Section 14.5-813(b) does not apply to a trustee who accepts trusteeship or to a trust that is created or becomes irrevocable before January 1, 2015.

What if a trust is irrevocable before January 1, 2015, but then after that date changes significantly, for example by dividing into new sub-trusts at the death of a beneficiary. The question will arise, for purposes of Section 14.5-813(e), whether a new irrevocable trust is created or the new sub-trusts are just a continuation of the old trust. Under general trust law principles, it would appear correct to treat new sub-trusts as a continuation of the old trust – even if they are treated as new trusts for tax reporting purposes.

Duty to Inform and Report – New Affirmative Notice Requirements – Mandatory Rules. Section 14.5-105(10) makes part of the new affirmative notice requirements a mandatory rule. Specifically, Section 14.5-105(10)(i) provides that the duty under Section 14.5-813(b) to notify qualified beneficiaries of an irrevocable trust who have attained 25 years of age of the existence of the trust, the identity of the trustee, and their right to request the trustee’s report and a copy of the trust is mandatory. Although Section 14.5-105(10)(i) does not specify which portions of 14.5-813(b) it is referring to, it describes the notice requirement found in Section 14.5-813(b)(1)(ii). Thus, this portion of the new affirmative notice requirements is mandatory.

Note, however, that Section 14.5-813(b)(1)(ii) does not include any age requirement for notice, while by contrast Section 14.5-105(10)(i) applies only to notice to qualified beneficiaries who have attained age 25. Thus, the effect of Section 14.5-105(10)(i) is to make the Section 14.5-813(b)(1)(i) notice requirement mandatory for some beneficiaries (who have attained age 25) and merely a default rule for other beneficiaries. As a result, the settlor could require or permit the trustee to withhold notice from a beneficiary under age 25, or under any other age less than 25 years.

If the settlor requires or permits the trustee to withhold notice from a beneficiary under age 25, or under any other age less than 25 years, then when the beneficiary attains the specified age, the question will be asked whether the trustee must then give notice. The statute does not clearly require notice upon the beneficiary’s attainment of age 25 or other specified age. This is because Section 14.5-105(10)(i) provides that the settlor may not eliminate the trustee’s duty under Section 14.5-813(b) to notify qualified beneficiaries of an irrevocable trust who have attained 25 years of age of the trust’s existence, etc., but since Section 14.5-813(b)(1)(ii) describes that duty as occurring only when the trust becomes irrevocable, there should be no subsequent duty to notify beneficiaries as they attain age 25 or other specified age.

A trustee may believe that notifying beneficiaries as they attain age 25 is a good practice in order to avoid any issue. However, as the above analysis indicates, the settlor can provide in the terms of the trust that the trustee should never give notice to beneficiaries who have not attained age 25 (or some younger age) at the time of the creation of the irrevocable trust or the time it becomes irrevocable, not even as they attain age 25. If the settlor has done so, the trustee may have no choice but to follow the terms of the trust.

Duty to Inform and Report – New Affirmative Notice Requirements - Summary. In summary, on or after January 1, 2015, in addition to having the duty to respond to requests for reports and other information in accordance with Sections 14.5-813(a) and (c), trusteeswill have the following new affirmative notice requirements, i.e., notices that must be given even if not requested, under Section 14.5-813(b):

  1. On or after January 1, 2015, and regardless of when the trust was created originally, if a new trustee accepts appointment as trustee of the trust, the trustee must notify the qualified beneficiaries of the acceptance and of the trustee’s name, address, and telephone number, within 60 days after accepting the trusteeship, unless either: (a) the terms of the trust provide that this requirement does not apply, which is permissible because this is not a mandatory rule, or (b) the beneficiary waives his right to this notice.
  2. On or after January 1, 2015, if an irrevocable trust is created, or if a revocable trust becomes irrevocable, the trustee must notify the qualified beneficiaries of the trust’s existence, the identity of the settlor or settlors, the right to request a copy of the trust instrument, and the right to a copy of the trustee’s report as provided in Section 14.5-813(c), within 90 days after the trustee acquires knowledge of the creation of the irrevocable trust or that the formerly revocable trust has become irrevocable, unless either: (a) the terms of the trust provide that this requirement does not apply to a beneficiary who has not attained age 25, or a lesser age, in which case only beneficiaries who have attained the specified minimum age must receive notice, or (b) the beneficiary waives his right to this notice.

There will not be an affirmative notice requirement in the following situations:

  1. Prior to January 1, 2015, there are no new notice requirements.
  2. On or after January 1, 2015, trusts that were irrevocable before that date will not have any new notice requirements, unless a new trustee accepts appointment.

Duty to Inform and Report – Notice to Representative. Note that under Section 14.5-301(a), notice to a person who may represent and bind another person has the same effect as if notice were given directly to the other person, unless the person represented objects to the representation by notifying the trustee and the representative before the notice would otherwise become effective.

Duty to Inform and Report – Waivers. Section 14.5-813(d) provides that a qualified beneficiary may waive the right to a trustee’s report or other information otherwise required to be furnished under Section 14.5-813, and may withdraw a waiver previously given.

Duty to Inform and Report – Differences from UTC. The Drafters deleted several provisions from UTC Section 813, regarding the duty to inform and report. The Drafters deleted the first sentence, providing that a trustee shall keep the qualified beneficiaries reasonably informed about the administration of the trust and of the material facts necessary for them to protect their interest. The Drafters also changed Section 813(a) to refer to qualified beneficiaries only, not all beneficiaries. The Drafters also deleted Sections 813(b)(2) and 813(b)(3), but the House Judiciary Committee reinserted the original UTC provisions, changing only the 60-day notice requirement in Section 813(b)(3) to a 90-day notice requirement in new Section 14.5-813(b)(1)(ii). The Drafters deleted Section 813(d)(4), requiring the trustee to notify the qualified beneficiaries in advance of any change in the method or rate of the trustee’s compensation, because this rule is stated in Section 14.5-708, relating to trustee’s compensation generally.

The House Judiciary Committee added Section 14.5-813(b)(2), setting forth special requirements for methods of notice under subsection 14.5-813(b). Section 14.5-813(b)(2) provides that notice shall be made by personal delivery or certified mail, postage prepaid, return receipt requested at the beneficiary’s last known address, or if the name or location of a qualified beneficiary is not known to the trustee, by publication in a newspaper of general circulation in the county where the trust property is located once a week for three successive weeks.

The Drafters changed Section 813(c), relating to information that must be sent to beneficiaries who request it, to refer to qualified beneficiaries only, instead of the original UTC, which applied to “distributees or permissible distributees of trust income or principal, and to other qualified or nonqualified beneficiaries who request it.” The Drafters also deleted the words “at least” before the word “annually,” which should not make any substantive difference. The Drafters also changed Section 14.5-813(c)(2) to the active voice, “the former trustee shall send,” instead of the passive voice, “a report must be sent… by the former trustee.” The Drafters also changed current Section 14.5-813(c)(3) to provide that an attorney-in-fact (as well as a personal representative or a guardian) of a former trustee may send the report. In the same provision, the Drafters changed the words “deceased or incapacitated trustee” to “former trustee,” for greater clarity.

The Drafters deleted Section 813(d), relating to a beneficiary’s ability to waive the right to a trustee’s report, because it was no longer necessary as a result of the above changes, and because of the beneficiary’s ability to give consent, release, or ratification of trustee actions under Section 1009 of the UTC. The House Judiciary Committee, having reversed certain of the above changes, re-included Section 813(d), and also limited it to qualified beneficiaries, to be consistent with the rest of the Section.

The Drafters deleted Section 813(e), which was no longer needed because it applied only to Sections that had been deleted. The House Judiciary Committee, having re-included the deleted Sections, also retained Section 813(e), which makes Subsection 14.5-813(b) prospective only.

Prohibition From Exercising Powers Conferred Upon Trustee. Section 14.5-814 re-enacts existing Section 14-109, with one change, specifically the addition of Section 14.5-814(d)(3). That subsection provides that the section does not apply to Internal Revenue Code section 2503(c) trusts, or “minor’s trusts.” This change is necessary to avoid loss of gift tax benefits. While preventing a trustee from distributing trust funds in discharge of a legal obligation of support keeps the trust from being included in the trustee’s gross estate, such a restriction might result in loss of the gift tax annual exclusion for contributions to the trust.

The Drafters moved Section 814(a) to Section 14.5-203(a)(3) and revised it in accordance with the revision of Article 5 (see discussion of Section 14.5-203, above). The Drafters deleted the balance of UTC Section 814 and re-enacted existing Section 14-109 in its place.

General Powers of Trustee. Section 14.5-815(a)(1) provides that a trustee may exercise powers conferred by the terms of the trust. Section 14.5-815(a)(2) provides that, except as limited by the terms of the trust, a trustee may exercise all powers over the trust property that an unmarried competent owner has over individually owned property, other powers appropriate to achieve the proper investment, management, and distribution of the trust property, and other powers conferred by the Act. Section 14.5-815(b) provides that trustee powers are subject to the fiduciary duties prescribed by the Act. This Section closely follows UTC Section 815.

Specific Powers of Trustee. Section 14.5-816(a) provides that a trustee has those powers enumerated in the trust instrument, which is redundant of Section 14.5-815(a)(1).

The House Judiciary Committee added Section 14.5-816(a), which is redundant of Section 14.5-815(a)(1). In Section 14.5-816(b), the Drafters added the reference to Section 15-102, the existing fiduciary powers section.

Section 14.5-816(c), regarding trustee’s powers with respect to possible liability for violation of environmental law, replaces existing Section 14-108(b). A version of Section 14-108(b) applicable to all fiduciaries, not just trustees, continues to be found in Section 15-102(z). Thus, Section 14.5-816(c) is not necessary. Section 14.5-103(g), the definition of “environmental law,” re-enacts existing Section 14-108(a) without change. This definition could be eliminated without harm.

Similarly, Section 14.5-816(d), regarding trustee’s powers with respect to the donation of a conservation easement, re-enacts existing Section 14-111(b). A version of Section 14-111 applicable to all fiduciaries, not just trustees, continues to be found in Section 15-102(aa). Thus, Section 14.5-816(d) is not necessary.

Section 14.5-816(b) would be unnecessary if Section 14.5-816(c) and Section 14.5-816(d) were eliminated. Thus, all of Section 14.5-816 could be eliminated.

The House Judiciary Committee deleted the list of specific powers from Section 816 of the UTC.

Distribution Upon Termination. Section 14.5-817 provides finality to trustees seeking to distribute trust property upon termination or partial termination of a trust. A beneficiary’s right to object to a proposed distribution is cut off 60 days after the trustee sends the beneficiary a proposal and informs the beneficiary of the right to object and the time allowed for objection. Maryland trustees often follow this practice already, but there is no clear guidance on the effect of doing so. The Act fills in this gap.

The Maryland Association for Justice changed the 30-day period in Section 14.5-817(a)(2) for a beneficiary to notify the trustee of an objection to a proposed distribution to a 60-day period. The Drafters deleted Section 817(c) of the UTC, providing that a release by a beneficiary of a trustee from liability for breach of trust is invalid to the extent it was induced by improper conduct of the trustee or the beneficiary at the time of the release did not know of the beneficiary’s rights of the material facts relating to the breach, because it is covered by Section 1009 of the UTC, now Section 14.5-907 of the MTA.

Uniform Prudent Investor Act. The UTC contained an optional Article 9 for states that wish to enact provisions of the Uniform Prudent Investor Act as part of the Uniform Trust Code. The Drafters declined to adopt any provisions of the Uniform Prudent Investor Act, a version of which is found in existing Section 15-114.

Subtitle 9. Liability of Trustees and Rights of Persons Dealing With the Trustee.

Subtitle 9 of the Act provides for liability of trustees and rights of persons dealing with trustees.

Remedies for Breach of Trust. Section 14.5-901 authorizes a court to provide various specific remedies for breach of trust, as well as “to order other appropriate relief.” This section is consistent with Maryland law, which permits a court to enforce a trust and establish all questions relative to the establishment, enforcement, protection and preservation of the trust. Chapman v. Baltimore Trust Company, 168 Md. 254, 177 A.285 (1935); Ghinger v. O’Connor, 165 Md. 267, 167 A.184 (1933). Maryland law also permits a court to provide full relief regarding the rights of all persons interested in the trust. Bass v. Smith, 189 Md. 461, 56 A.2d 800 (1948).

The Drafters added Section 14.5-901(a)(2), providing that a breach of trust may occur by reason of an action or by reason of a failure to act, to clarify the definition of breach of trust in Section 14.5-901(a)(1).

Damages for Breach of Trust. Section 14.5-902(a) provides that a trustee who commits a breach of trust is liable to the beneficiaries affected for the greater of: (1) the amount required to restore the value of the trust property and trust distributions to what they would have been had the breach not occurred; or (2) the profit the trustee made by reason of the breach. This rule is consistent with common law. Restatement (Second) of Trusts, Section 204.

Section 14.5-902(b) provides that if more than one trustee is liable to the beneficiaries for a breach of trust, a trustee is entitled to contribution from the other trustee or trustees that are also liable, except that a trustee who received a benefit from the breach of trust is not entitled to contribution from another trustee to the extent of the benefit received. This provision is consistent with common law. Restatement (Second) of Trusts, Section 258.

The Drafters added “that are also liable” at the end of Section 14.5-902(b)(1), so that it reads, “except as otherwise provided in this subsection, if more than one trustee is liable to the beneficiaries for a breach of trust, a trustee is entitled to contribution from the other trustee or trustees that are also liable.” The Maryland Association for Justice deleted the second sentence of Section 14.5-902(b)(1). This sentence had provided, “a trustee is not entitled to contribution if the trustee was substantially more at fault than another trustee or if the trustee committed the breach of trust in bad faith or with reckless indifference to the purposes of the trust or the interests of the beneficiaries.”

Damages in Absence of Breach. Section 14.5-903 provides that absent a breach of trust or the applicable standard of care, a trustee is not liable to a beneficiary for a loss or depreciation in the value of trust property or for not having made a profit. This is consistent with a variety of cases that hold that a trustee who makes an investment in good faith and exercises sound judgment is not liable for any investment losses. Johnson v. Johnson, 168 Md. 568 (1935). See also Section 15-106(e) which, by negative implication, provides that if a trustee exercises reasonable care in selecting securities, there is no liability for a selection that underperforms. A similar provision is found in Section 15-114(c), Maryland’s prudent investor statute. A trustee who acts prudently is ordinarily not liable for mistakes in judgment. Fox v. Harris, 141 Md. 495, 504 (1922).

The Drafters deleted Section 1003(a) of the UTC, providing 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, because it does not reflect Maryland 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 might 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/or counsel.

The Maryland Association for Justice added the phrase “or the applicable standard of care” to Section 14.5-903.

Attorney’s Fees and Costs. Section 14.5-904 is reserved. The Maryland Association for Justice deleted UTC Section 1004, permitting the court to award costs and expenses, including reasonable attorney’s fees, to any party, to be paid by another party or from the trust that is the subject of the controversy.

Limitation of Action Against Trustees. Section 14.5-905 is reserved. The House Judiciary Committee deleted UTC Section 1005, providing for a statutory period for limitation of action against a trustee.

Reliance on Trust Instruments. The Maryland Association for Justice deleted Section 1006 of the UTC, because it limits liability.

Event Effecting Administration and Distribution. The House Judiciary Committee deleted Section 1007 of the UTC.

Exculpation of Trustee. Section 14.5-906 generally reflects existing Maryland law on the limits of the enforceability of an exculpatory provision, that is, a trust provision purporting to relieve a trustee from liability for breach of trust. Section 14.5-906 also expands existing law in significant ways, and drafters of trust instruments may want to revise their documents and practices. This section may even discourage settlors from naming their estate planning attorneys, or other member of the same firm as their estate planning attorneys, as trustees, as explained below.

Under Section 14.5-105(11), the settlor may not draft around these limits on exculpatory provisions.

Section 14.5-906(a)(1) provides that an exculpatory provision is unenforceable to the extent that it relieves a trustee of liability for a breach of trust committed in bad faith or with reckless indifference to the purposes of the trust or the interests of the beneficiaries. Maryland already imposed similar limits on such provisions. Sullivan v. Mosner, 266 Md. 479, 295 A.2d 482 (1972); Attorney Grievance Commission v. Owrutsky, 322 Md. 334 (1991).

As a result of Section 14.5-906(a)(1), drafters of exculpatory provisions now may want to track the statutory language in the trust instrument. As noted above, the settlor may not draft around Section 14.5-906(a). Thus, in order to obtain the maximum protection from liability for trustees, it may be optimal to track the statutory language exactly. For example, such a provision might provide:

EXONERATION. The trustees, and their successors, while acting in good faith, shall not be liable or held responsible for any loss or depreciation in the value of any trust created under this agreement but shall be liable only for loss resulting from their own breach of trust committed in bad faith or with reckless indifference to the purposes of the trust or the interests of the beneficiaries.

Section 14.5-906(a)(2) provides that an exculpatory provision is unenforceable to the extent that it was inserted as the result of an abuse by the trustee of a fiduciary or confidential relationship to the settlor. Section 14.5-906(b) and Section 14.5-906(c), discussed below, provide further amplification of Section 14.5-906(a)(2).

Section 14.5-906(a)(3) provides that an exculpatory provision is unenforceable to the extent that it was unreasonable under the circumstances. This section is not in the UTC, but was added at the request of the Maryland Association for Justice.

Section 14.5-906(b) provides that an exculpatory provision drafted or caused to be drafted by a trustee is invalid as an abuse of a fiduciary or confidential relationship unless the trustee proves that the exculpatory provision is fair under the circumstances and that its existence and contents were adequately communicated to the settlor. This is generally consistent with current Maryland law. However, there may be no case setting forth this rule, and it is certainly conceivable that a Maryland court might have allowed other trustees, who did not participate in the drafting of the exculpatory provision, to be protected by it, and even the trustee who drafted it may have received some protection, in accordance with the settlor’s apparent intent, even if the provision were over-reaching and the court gave it less than full effect. By contrast, under Section 14.5-906(b), an exculpatory provision drafted or caused to be drafted by a trustee that fails these tests will be completely invalid, not only for the trustee who drafted it or caused it to be drafted, but for all trustees. This appears to be a change to Maryland law.

As a result of Section 14.5-906(b), if an exculpatory provision is drafted or caused to be drafted by a trustee, it will be necessary to establish that the exculpatory provision is fair under the circumstances and that its existence and contents were adequately communicated to the settlor. These additional requirements are not insurmountable, but they do require more work and create a risk if not met. Section 14.5-906(b) may affect trust drafting, at least if the trustee drafts the trust instrument, or causes it to be drafted. For example, if a law firm drafts the trust instrument, and the trustee is a member of the firm, the statute probably would apply to potentially negate the provision, not only for that trustee, but for all trustees. In such a case, the draftsperson will have to find a way to document that the existence and contents of the exculpatory provision were adequately communicated to the settlor, such as by adding a new provision to the document, drafting a side letter to the settlor (perhaps counter-signed by the settlor), or some other way.

Section 14.5-906(c) provides that if the settlor was represented by independent counsel, the exculpatory provision is not considered drafted or caused to be drafted by the trustee, even if the exculpatory provision incorporates suggested provisions provided by the trustee. The Drafters added Section 14.5-906(c) to the UTC. This is generally consistent with current Maryland law, though there may be no case setting forth this rule.

Under Section 14.5-906(c), it appears that a trustee is free to insist upon an exculpatory provision, without triggering the limitations of Section 14.5-906(b), as long as the settlor is represented by independent counsel. Thus, for example, a bank named as trustee may provide an exculpatory provision to a settlor, as a condition of serving as trustee, if the trust instrument is drafted by the settlor’s independent counsel. However, if the settlor also names the counsel as a trustee (or if the settlor is ever named as co-trustee or successor trustee of the trust), the exculpatory provision will be invalid unless it passes the additional tests under Section 14.5-906(b). Again, these tests do not appear insurmountable, but their existence may discourage the practice of naming drafting attorneys, or other members of their firm, as trustees or successor trustees.

Beneficiary’s Consent, Release or Ratification. Section 14.5-907 provides for the binding effect of a consent, release or ratification of trustee conduct by a beneficiary (or by the beneficiary’s representative under the representation provisions of Subtitle 3). The trustee is not liable unless he acted improperly to induce the consent, release or ratification, or if the beneficiary did not know of his rights or the material facts relating to the breach. This section is consistent with common law. As with proposed distributions under Section 14.5-817, many Maryland trustees already follow the practice of obtaining beneficiary consent, release or ratification, but Section 14.5-907 formalizes the effect of doing so.

Limitation on Personal Liability of Trustee. Section 14.5-908 limits the personal liability of a trustee acting as a fiduciary. The Maryland Association for Justice deleted Section 1010(b) of the UTC, limiting trustee liability for torts committed in administering a trust.

Interest as General Partner. The Maryland Association for Justice deleted Section 1011 of the UTC, relating to a trustee acting as general partner.

Protection of Person Dealing with Trustee. Section 14.5-909 re-enacts existing Section 14-105. Section 1012 of the UTC has been deleted.

Certification of Trust. Section 14.5-910, permitting a trustee to provide a certification of trust, in lieu of a copy of the trust instrument, to a person other than a beneficiary, is a helpful addition to Maryland law.

The Drafters added the phrase “in the pending transaction” to Section 14.5-910(a)(4). The Drafters also changed Section 14.5-910(a)(7) to provide that a certification of trust need not contain the taxpayer identification number of the trust if it is also the settlor’s social security number. The Maryland Association for Justice changed Sections 14.5-910(f) and (g), and deleted Section 14.5-910(h). The Senate Judicial Proceedings Committee, as requested by the Maryland Land Title Association, added Section 14.5-910(h)(2).

Under Section 14.5-105(12), the settlor may not alter the rights under Section 14.5-908 through Section 14.5-910 of a person other than a trustee or beneficiary.

Subtitle 10. Miscellaneous Provisions.

Uniformity of Application and Construction. The Drafters deleted Section 1101 of the UTC, providing for uniformity of application and construction of the Act, because the Act is not intended as a uniform act.

Recordation and Transfer Taxes. Section 14.5-1001 re-enacts existing Section 14-114 without substantive change.

Special Needs or Supplemental Needs Trust. Section 14.5-1002 re-enacts existing Section 14-115 without substantive change.

Interests in Grantor and Qualified Terminable Interest Property Trusts. Section 14.5-1003 re-enacts existing Section 14-116 without substantive change.

Miscellaneous. Subtitle 10 provides other miscellaneous provisions, including the validity of electronic records and signatures in Section 14.5-1004 and a severability clause in Section 14.5-1005.

Effective Date; Repeals. The effective date of the Act is January 1, 2015. Sections 1104 and 1105 of the UTC, relating to effective date and the repeal of other uniform acts, are unnecessary.

Application to Existing Relationships. Section 14.5-1006 provides that the Act applies to all trusts created before, on, or after its effective date, including existing trusts. The two exceptions to the effective date are that pre-effective date trusts continue to be presumed irrevocable, Section 14.5-602(a), and pre-effective date trusts are not subject to the notice requirements of Section 14.5-813(b), as provided in Section 14.5-813(e). The Act also applies to all judicial proceedings concerning trusts commenced on or after the effective date, but not to judicial proceedings concerning trusts commenced before the effective date.

This approach is similar to the adoption of the Maryland Uniform Principal and Income Act, which applies to each trust or decedent’s estate existing on or after October 1, 2002. Section 2, ch. 478, Acts 2002.

The Maryland Association for Justice changed Section 1106(a)(3) of the UTC, which provided that the UTC applies to judicial proceedings concerning trusts commenced before its effective date unless the court finds that the application of a particular provision of the Code would substantially interfere with the effective conduct of the judicial proceedings or prejudice the rights of the parties, to provide that the Act does not apply at all to judicial proceedings concerning trusts commenced before its effective date.

John P. Edgar, a principal in the Baltimore law firm of Ober|Kaler, is a past chair of the Section Council of the Estate and Trust Law Section of the Maryland State Bar Association. He served as reporter for the Section Council’s review and drafting of the Maryland Trust Act, as the Section Council’s liaison to the Trust Committee of the Maryland Bankers Association in its review of the Act, and as one of the Section Council’s representatives to the General Assembly during the legislative process.

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MARYLAND TRUST ACT – INSERTS

SECTION 10. DUTIES OF TRUSTEE. The grantor directs the trustee and any successor trustees, without prior or subsequent approval by any court:

H. PROVIDE AND RECEIVE INFORMATION, NOTICE AND DOCUMENTS. Except as otherwise required by the law of the jurisdiction governing the administration of the trust: (1) the trustee shall have no duty to provide any information to any beneficiary, (2) the trustee need not give notice to any beneficiary before transferring the trust’s principal place of administration or changing the trust’s governing law, (3) no beneficiary shall have any right to object to any change of the trust’s principal place of administration or change of the trust’s governing law, (4) the trustee may send any notice, document or other information by personal delivery, first-class mail to the recipient’s last known place of residence or place of business, properly directed electronic message, or any other manner reasonably suitable under the circumstances and likely to result in receipt of such information, and (5) a corporate trustee shall be considered to have notice or knowledge of a fact involving a trust only from the time the information was received by an employee having responsibility to act for the trust.

O. EXONERATION. The trustees, and their successors, while acting in good faith, shall not be liable or held responsible for any loss or depreciation in the value of any trust created under this agreement, but shall be liable only for loss or depreciation in value resulting from their own breach of trust committed in bad faith or with reckless indifference to the purposes of the trust or the interests of the beneficiaries.

or

O. EXONERATION. My personal representative, and his successors, while acting in good faith, shall not be liable or held responsible for any loss or depreciation in the value of my estate, but shall be liable only for loss or depreciation in value resulting from their own willful default or gross negligence. The trustees, and their successors, while acting in good faith, shall not be liable or held responsible for any loss or depreciation in the value of any trust created under this will, but shall be liable only for loss or depreciation in value resulting from their own breach of trust committed in bad faith or with reckless indifference to the purposes of the trust or the interests of the beneficiaries.