Effective Oct. 1, 2018, Maryland enacted a one-year statute of limitations for most breach-of-trust actions. To trigger the one-year limitations period, however, trustees must provide certain information to beneficiaries.
On Jan. 1, 2015, Maryland joined 26 other states and the District of Columbia by enacting its version of the Uniform Trust Code (UTC), known as the Maryland Trust Act (MTA). The initial version of the MTA, however, omitted several significant UTC provisions.
In 2016, the legislature filled one of these gaps by allowing trustees and beneficiaries to resolve certain trust matters without court intervention through the use of nonjudicial settlement agreements. (For a summary of the MTA as enacted in 2014, see McGuireWoods’ June 17, 2014, legal alert; for a summary of Maryland’s decision to permit nonjudicial settlement agreements, see the March 24, 2017, alert.)
Effective Oct. 1, 2018, Maryland filled another gap in the MTA by shortening the applicable statute of limitations for a breach-of-trust claim, from three years to one. However, the trustee must take affirmative steps to start the running of this shortened limitations period.
Under the new statute, consistent with other UTC jurisdictions, a beneficiary may not bring a claim for breach of trust more than one year after the beneficiary or the beneficiary’s representative is sent a report that adequately discloses the existence of a potential claim and informs the beneficiary or the beneficiary’s representative of the time allowed to bring a judicial action. A report “adequately discloses” a potential claim if it provides sufficient information that the beneficiary knew of the potential claim or should have inquired into its existence.
Adequate disclosure is critically important. If the trustee does not adequately disclose the potential for a claim or the underlying facts potentially giving rise to a claim and inform the beneficiary of the time allowed to bring a judicial action, the trustee may not invoke the reduced, one-year limitations period. Instead, the claim would be subject to Maryland’s existing three-year statute of limitations for breach-of-fiduciary-duty claims.
Institutional trustees that regularly send account statements to beneficiaries in the normal course of business greatly benefit from this statute. Statements can be, and frequently are, tailored to meet the UTC requirements for an adequate report to take advantage of the shortened statute-of-limitations period. Because the standard for adequate disclosure is simply inquiry notice (meaning the beneficiary received sufficient information on the report to inquire into the existence of a potential claim), account statements reporting the trustee’s financial and other transactions often meet these criteria. Courts in other UTC jurisdictions have upheld bank statements as adequate reports for this purpose, provided the statements include the required notice of the statute-of-limitations period.
The one-year limitations period is not available if the trustee acted in bad faith or with reckless indifference to the purposes of the trust or the beneficiaries’ interests. This provision is not included in the UTC. Instead, it reflects the strict standard Maryland imposes on trustees. See, e.g., D’Aoust v. Diamond, 434 Md. 549, 605 (2012), which states, “[I]n no state are trustees, whether individuals or corporations, held to a stricter account than in Maryland.”
The statute also makes it clear that a trustee may use virtual representation to trigger the one-year limitations period. This is a significant benefit to trustees. Rather than waiting for a minor beneficiary to reach the age of majority, the trustee can send the report to an adult representative of the beneficiary. This representative can be a parent, a more distant relative or a fiduciary, provided there is no conflict of interest between the representative and the represented party.
Maryland has continued to fill gaps in the MTA since it was adopted in 2015. The MTA now includes the UTC policy favoring disclosure, and it rewards disclosing trustees with a shortened, one-year statute-of-limitations period. Maryland trustees now face a strategic decision about how and when to provide a report of a potential claim to beneficiaries. Trustees should consult with their legal counsel to structure reports that adequately disclose the potential for a claim and otherwise meet the statutory requirements to best take advantage of the new law.