Maryland Estate Litigation

Tag: Trust Litigation

What are Trusts? Main Trust Principles

by David A. (Andy) Hall

1. Trust Terms, Concepts and Definitions

A trust is, “[a]n equitable or beneficial right or title to land or other property, held for the beneficiary by another person, in whom resides the legal title or ownership, recognized and enforced by courts of chancery.”[1] It is worth noting that Maryland does not have courts of chancery and the Circuit Court where venue is appropriate would enforce a trust. More generally, a trusts is an important estate planning vehicle, but can also serve a vital role in the protection of assets prior to the Grantor’s[2] death.  They can serve as a desirable alternative to a will and allow the grantor’s family to avoid probate to a large extent and provide for greater control over the decedent’s assets after death.

Types of Trusts

Trusts are broadly split into two categories: living or testamentary.  The living trust, or inter vivos, is a trust created while the Grantor is alive.  A testamentary trust is a trust created in a Last Will and Testament.  Trusts can also be split in two other categories: revocable or irrevocable.  A revocable trust can be terminated by the Grantor during her lifetime.  An irrevocable trust cannot.  Finally, there are charitable trusts and non-charitable trusts.

Goals of Trusts

There are five key goals to trust planning.  1. Avoid Probate; 2. Protect the Grantor/Beneficiary’s Privacy; 3. Plan for Incapacity; 4. Tax Minimization; and 5. Creditor Protection.  By avoiding probate, grantors and their trustees can avoid cumbersome estate administration especially in estates with real property in other jurisdictions.  There is no immediate jurisdiction of the court for the administration of a trust.  The well drafted trust will contain a mechanism for succession should grantor/trustee become incapacitated.  Trusts, particularly those with charitable components can be an useful tool in the minimization of taxes.  Finally, trusts can help protect young or unsophisticated beneficiaries from their own poor choices and shelter assets in the event of a divorce.

Functions of Trusts

Trusts provide for flexible management.  They allow an orderly means for the transfer of authority in the event of a trustee’s resignation, incapacity, or death.  Trusts can also reduce the expenses of administration as compared to probate.  Trust planning is effective to protect the Grantor’s estate planning objectives by allowing her to shield beneficiaries’ from themselves and by exercising control for multiple generations.  Trusts can also serve as mechanism to manage litigation.  Litigation in trust cases is often more expensive and complex, which can deter a would be challenger.  And unlike a will, the filing of litigation does not strip the trustee of power to continue to act without seeking the order of the Court.  In many instances, there will be no need to file for guardianship for an incapacitated or underage beneficiary.

Definitions

  1. Beneficiary – One for whose benefit a trust is created[3]. “Beneficiary” means a person that:
    (1) Has a present or future beneficial interest in a trust, vested or contingent; or
    (2) In a capacity other than that of a trustee, holds a power of appointment over trust property.[4]
  2. Grantor – a person, including a testator, that creates or contributes property to a trust.[5]
  3. HEMS – Health, Education, Maintenance and Support – This is the most common discretionary standard.[6]
  4. Incapacity – inability of an individual to manage the individual’s property or financial affairs effectively due to:
    (1) Physical or mental disability;
    (2) Disease or illness;
    (3) Habitual drunkenness;
    (4) Drug addiction;
    (5) Imprisonment;
    (6) Compulsory hospitalization;
    (7) Confinement;
    (8) Detention by a foreign power; or
    (9) Disappearance.[7]
  5. Income Beneficiary – a person entitled to income from a trust
  6. Independent Trustee – A non-interested trustee who is granted additional powers under the Internal Revenue Code.[8]
  7. Interested Trustee –
  8. Under the Internal Revenue Code, a related or subordinate party. In simpler terms, someone working for or a first degree relative of the Grantor.[9]
  9. Power of Appointment – authority to designate the recipient or recipients of beneficial interests in property.[10]
  10. Property – anything that may be the subject of ownership, whether real or personal, legal or equitable, or an interest in the thing.[11]
  11. Qualified Retirement Benefits – amounts held in or distributed pursuant to a plan qualified under Section 401, an individual retirement arrangement under Section 408 or Section 408A, a tax-sheltered annuity under Section 403 or any other benefit subject to the distribution rules of Section 401(a)(9)
  12. Settlor – See Grantor
  13. Situs – The location of the trust for legal purposes. Maryland law provides that the situs of the trust is any county where the trustee may be sued.[12]
  14. Trustee – One who, having legal title to property, holds it in trust for the benefit of another and owes a fiduciary duty to that beneficiary.[13]
  15. Trustor – See Grantor

2.  Key Parties in a Trust and Their Roles

There are three key roles in a trust, but there are also additional roles to consider as well.  First and foremost is the Grantor.  The Grantor grants or gives property to be included in the trust.  The property is held by the Trustee for the benefit of the Beneficiary.  The Trustee is guided by the rules within the trust document and pursuant to state statute and case law regarding the management of the trust including, but not limited to, distributions to the Beneficiary.  The Trustee has a duty of loyalty to the beneficiaries.[14]  A beneficiary may be either a current income beneficiary or contingent beneficiary entitled to receive funds at some future date under certain specified conditions.

A role player not often contemplated, but which may be forced to decide on matters related to the trust, is the court.  The Court can modify the terms where appropriate or where all trustees and beneficiaries agree as long as it is not inconsistent with the grantor’s intent.  It can modify if unanticipated circumstances arise.  It can also remove a bad actor trustee.

Additional Roles to Consider

  • Trust Protector
  • Trust Company
  • Financial or Investment Advisor
  • Doctor or other mental health professional

A Trust Protector serves an oversight role of the trustee and the operation of the trust.  A trust protector can step in, and depending on their powers, remove the trustee, or amend the trust as necessary to keep it current with the intent of the grantor, or in line with changing laws.  A Trust Company can serve the same role as the trustee, but may have different members of the organization serving various roles.  A Grantor may appoint a Financial Advisor to serve as the investment manager.  Many times a trust instrument will provide that the Grantor or a Trustee can be considered incapacitated for the purposes of the Trust if two doctors certify that person lacks capacity.  In practical instances, it can be extremely difficult to get a reluctant Grantor to two different doctors.  In addition, long-time family physicians are going to be extremely hesitant to certify that her patient no longer has capacity.  Appointing a third party mental health professional, or a trusted person, to decide whether the Grantor has the capacity to continue managing assets is an option to remedy doctor shopping.

Care should be exercised before nominating any party for a particular role.  They should be consulted with prior to their inclusion in the document.  Trustees should affirmatively sign that they have accepted the position.

3. The Laws of Trust Creation and Administration

The most critical law for Maryland attorneys regarding the creation and administration of trusts is The Maryland Trust Act.[15]  It was adopted along with approximately 30 other states as a variation of the Uniform Trust Code.  It was not adopted to revise Maryland law on trusts, but to fill in gaps and codify much of the common law.  It applies, prospectively and retroactively, to all trusts created before, on or after January 1, 2015.  It is not applicable, however, to constructive or resulting trusts.

A couple of key provisions to note, it allows a trustee to terminate the trust if the fair market value is under $100,000.[16]  In addition, it codifies that the capacity to create, amend, revoke or add property to a revocable trust is the same as that to create a will, that is, the Grantor must know the nature and objects of her bounty.[17]

4.  Trust Revocability and its Implications

The ability of a trust to be revoked allows the Grantor to retain control over the trust property.  This gives the Grantor/Trustee considerable power to amend the terms of the trust, change beneficiaries, change or remove trustees, but with this power comes certain drawbacks.  The Trust property will still be considered an asset of the Grantor in most instances.  This can have important ramifications for tax or Medical Assistance planning.  In addition, a self-settled trust will likely not be afforded as much creditor or bankruptcy protection as an irrevocable trust.

5.  Trust Funding Basics

Too many attorneys draft great documents, but the plans they have drafted ultimately fail because of a lack of emphasis on funding the trust.  Clients do not understand that a trust is incomplete until it is actually funded with assets.  A trust is an empty vessel without property to fund the trust.  It is often left to the client to figure out the funding of the trust on their own with a few notable exceptions.  Many attorneys are familiar with the pour-over will and a deed titling real property in the name of the trust, but some may be less familiar with the assignment of personal property or dealing with retirement assets.  Finally, it is helpful for assets that are not titled to have the clients prepare an asset schedule to be included in the trust.

[1] Black’s Law Dictionary

[2] Also known as a Trustor or Settlor.

[3] Black’s Law Dictionary

[4] Md. ESTATES AND TRUSTS Code Ann. § 14.5-103(d)

[5] Id. § 14.5-103(v)

[6] See also Id. § 14.5-103(y): Support provision. —

(1) “Support provision” means a mandatory distribution provision in a trust that provides that the trustee shall distribute income or principal or both for the health, education, support, or maintenance of a beneficiary, or language of similar import.   (2) “Support provision” does not include a provision in a trust that provides that a trustee has discretion whether to distribute income or principal or both for the purposes under paragraph (1) of this subsection or to select from among a class of beneficiaries to receive distributions in accordance with the trust provision.

[7] Id. § 14.5-103(l)

[8] 26 U.S. Code § 674(c)

[9] Id. § 672(c)

[10] Md. ESTATES AND TRUSTS Code Ann. § 14.5-103(q)

[11] Id § 14.5-103(s)

[12] Md. Rule 6-111(a)

[13]  Black’s Law Dictionary

[14] Md. ESTATES AND TRUSTS Code Ann. § 14.5-802

[15] See generally Id.  § 14.5-101 et seq.

[16] Id. § 14.5-412

[17] Id. § 14.5-601.  It is silent as to irrevocable trusts.

 

David A. (Andy) Hall, Esq.
King|Hall LLC
410-696-2045
5300 Dorsey Hall Drive
Suite 107
Ellicott City, Maryland 21042
andy@kh.legal

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A Primer on Guardianships – Part One – Introduction

by David A. (Andy) Hall

Potential clients will often come into our office because their loved one is no longer able to manage their financial affairs or health care decisions due to a disabling event or disease.  One study suggests that nearly two-thirds of Americans do not have incapacity planning documents.  When the disabled person does not have the proper planning documents in place (at minimum, an advance medical directive and financial power of attorney), then their loved ones are unable to make the necessary medical and financial decisions on their behalf.  Often the next step for those clients is to file for guardianship of their loved one.

Many clients are often dismayed that guardianship is not a simple process.  A husband will often believe that they will naturally be appointed as guardianship for his disabled wife without much fuss, but the process may be much more complicated.  First, the court will appoint an attorney for the “alleged disabled person”.  That term of art is important because it underlines why the courts are very particular in how guardianships proceed.  It is up to the “Petitioner”, the one seeking guardianship, to prove that the alleged disabled person (“ADP”) lacks the capacity to make decisions for him or herself.  The court wants to make sure that the ADP indeed lacks the capacity prior to taking away that person’s rights.

The court appointed attorney will meet with her client and ask if they want to contest the guardianship.  The ADP’s answer is critical to how the case unfolds.  Sometimes this answer is driven by the ADP’s underlying medical condition and sometimes they refuse to believe that they cannot handle the decisions for themselves as they have always done.  If they want to contest the guardianship, then it will proceed like a normal civil case where both parties engage in discovery and the process culminates in a trial.  The ADP has a right to a trial by jury or can elect a bench trial (where the judge makes the final decision).

The process may become more complicated if someone else seeks to be appointed guardian as well.  This often arises where two siblings battle over who best would care for mom or dad when they are disabled.  It is possible for the litigation to be fought between three or more litigants with all sides fighting hard.

Having the right guardianship attorney on your side will help you navigate this complex area of law.  It can be maddening to have to fight so hard just to help your loved one, but it’s the unfortunate side of when the proper planning documents are not in place prior to the disabling event or disease.

David A. (Andy) Hall, Esq.
King|Hall LLC
410-696-2045
5300 Dorsey Hall Drive
Suite 107
Ellicott City, Maryland 21042
andy@kh.legal

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Removing the Personal Representative of an Estate

by David A. (Andy) Hall

Here is the scenario: You are a legatee under a will, which means that you are entitled to “receive any property disposed of by will, including property disposed of in a residuary clause and assets passing by the exercise by the decedent of a testamentary power of appointment”.  See Maryland Code, Estates and Trusts Art., § 1-101(l)-(m).  The personal representative (the “PR”) (or what’s known as an executor in other states) is behaving in a way that you do not agree with.  Your question is whether or not you can have that PR removed.

The Maryland Code in Estates and Trusts Article, §6-306 states that there are six causes for the removal of a PR:

  1. Misrepresenting facts leading to her appointment
  2. Willfully disregarding the order of the court
  3. Incapable or unable to discharge her duties
  4. Mismanagement of property
  5. Failing to maintain an effective designation of a local agent (this is when the PR is not a resident of the State of Maryland)
  6. Failing to perform a material duty of the office

Whether or not a PR’s conduct rises to the level of a court removing that person requires an intensive factual analysis to be performed by your estate litigation lawyer.  Some examples of conduct that could lead to the removal of the PR include: attempting to admit the wrong (or a prior) will to probate, which could arise in a situation where one sibling is in one will and then subsequently left out of the estate in a subsequent will.  They would have a strong desire to gloss over the existence of the subsequent will.

The willful disregard of an order of the court is easier than some people may assume.  If the PR has failed to file an accounting within the proper time, then the court will likely issue a show cause order requiring the PR to either file the accounting or to demonstrate why the accounting has not been filed.  Perhaps the PR did not enlist the help of an estate administration attorney, then they could easily misunderstand these deadlines and what they mean.  Thus, innocently missing a deadline could lead to disregarding an order of the court and be grounds for removal.

If you believe that the PR of the estate is mishandling her duties, then you should contact an estate litigation attorney to have them evaluate the facts of your case.  The last thing that you want is to have bad acting PR wasting away assets that your family member worked hard to accumulate, spent time and money to effectively plan for the disposition of those assets after their passing, and then not be distributed in accordance with their estate plan.

David A. (Andy) Hall, Esq.
King|Hall LLC
410-696-2045
5300 Dorsey Hall Drive
Suite 107
Ellicott City, Maryland 21042
andy@kh.legal

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WHY WE ASK YOUR SON OR DAUGHTER TO LEAVE THE ROOM WHEN YOU ARE SIGNING YOUR WILL

by David A. (Andy) Hall

Understanding Undue Influence

The sad reality that even with the best prepared estate plan there can be instances where a family member, or some other individual challenges your will after your death.  Often times, if you have enough resources to carefully prepare your estate plan, then you have enough resources for descendants to fight over.  When a person decides to undertake the process to challenge the validity of a will, they are called a Caveator and the process by which they challenge the will is called a Caveat.  These proceedings generally start with the Orphan’s Court for the county where the Decedent (the person who died) was domiciled (where they lived).  There are a variety of bases to caveat a will, but one that comes up again and again is undue influence.

 The Maryland Court of Appeals identified seven factors to undue influence in Moore v. Smith, 321 Md. 347, 353 (1990):

  1. The benefactor and beneficiary are involved in a relationship of confidence and trust;
  2. The will contains a substantial benefit to the beneficiary;
  3. The beneficiary caused or assisted in the effecting the execution of the will;
  4. There was an opportunity to exert influence;
  5. The will contains an unnatural disposition;
  6. The bequests constitute a change from a former will; and
  7. The testator was highly susceptible to undue influence.

Factor three, which is the beneficiary caused or assisted in effecting the execution of the will, is the reason that we ask your friend, relative, or caregiver to leave the room when you are signing your Last Will and Testament.  We know from experience that if there is a challenge to your will, then Caveator will ask who was present at the signing of the will.  They will point to the presence of so and so as to why the will should not be admitted to probate.  Why have your family suffer through expensive legal proceedings and potentially derail your carefully chosen estate plans when we can take proactive steps during your planning to prevent these problems many years before they arise?

David A. (Andy) Hall, Esq.
King|Hall LLC
410-696-2045
5300 Dorsey Hall Drive
Suite 107
Ellicott City, Maryland 21042
andy@kh.legal

457526bfb82f4540ba08c7cce8e707dd