THE UPDATE MARYLAND TRUST LAW

In January of 2015, an reorganization of the Maryland Trust law became effective.  Included in that effort were significant changes in the rules of how trusts are to be administered.

A summary of this new law follows and what I see as having a major impact on people who are beneficiaries of Trusts, whether created in a will or during the life of the Grantor.

The current law concerning trusts, while well developed, was difficult to locate. The new law is an attempt to organize the controlling laws in one place, incorporated case law into the statute in a comprehensive manner.

The new provisions do all of that well. They clarify, codify and also significantly modify the law of trusts in Maryland.

         First the good: it is now possible to go to one place, Maryland Code, Estates Article, Section 14.5-101 and following, to in one place efficiently find Maryland law controlling the trusts law. For those interested in achieving asset protection for your beneficiaries, from lawsuits and marital problems, the law clarifies and bolsters the strength of the protections available through proper trust planning.

Maryland case law provided strong creditor protections from those attempting to invade an irrevocable trust, not created by the current beneficiary. The new statute reiterates those protections.

.         Second, what you might not like: the new law imposes reporting requirements to contingent beneficiaries that did not previously exist, retroactively.

One strong advantage to a trust, from most clients, and been the privacy they and their beneficiaries are afforded by trust planning.

As a living trust does not go through probate, the terms of that trust, and assets contained there, are private. Our documents have typically required the disclosure of the existence of the trust, and its contents and terms, to the taxing authorities (when applicable) and the current income beneficiary.

The new law, based in large part on the Uniform Trust Code (UTC) adds notice requirements and annual reports to those individuals called “qualified beneficiaries”, who are defined as:

(R) (1) “QUALIFIED BENEFICIARY” MEANS A BENEFICIARY THAT ON THE DATE THE QUALIFICATION OF THE BENEFICIARY IS DETERMINED:

(I) IS A DISTRIBUTEE OR PERMISSIBLE DISTRIBUTEE OF TRUST INCOME OR PRINCIPAL;

(II) WOULD BE A DISTRIBUTEE OR PERMISSIBLE DISTRIBUTEE OF TRUST INCOME OR PRINCIPAL IF THE INTERESTS OF THE DISTRIBUTEES DESCRIBED IN ITEM (I) OF THIS PARAGRAPH TERMINATED ON THAT DATE WITHOUT CAUSING THE TRUST TO TERMINATE; OR

(III) WOULD BE A DISTRIBUTEE OR PERMISSIBLE DISTRIBUTEE OF TRUST INCOME OR PRINCIPAL IF THE TRUST TERMINATED ON THAT DATE AND NO POWER OF APPOINTMENT WAS EXERCISED.

Therefore, an individual who would inherit if the primary beneficiaries dies, is entitled to know the terms of the trust, and it assets, at least annually.

If a beneficiary is under age 25, they don’t have the right to reports until after he or she reaches the age of 25.

As a consequence, if you have a trust and have provided asset protection in that trust for your beneficiaries, those beneficiaries may now need to report to the secondary beneficiaries what they are doing with their inheritances.

Those trust beneficiaries who have extensive control over who received the assets at their death, by way of a General Power of Appointment or broad Limited Power of Appointment may not need to give such notice.

Some commentators have suggested that the new law allows the trust creator to modify the definition of “qualified beneficiaries” to restore the privacy protections allowed under the old law. It is entirely unclear whether this would be allowed, and will be unclear until cases work their way through the courts or the statute is modified again.

As a consequence, you may want to revisit your planning, and verify that the value of asset protection that you might have created outweighs the loss of privacy that the new law requires. If the asset protection is not as important to your as privacy, you should modify your will or living trust to eliminate the asset protection.

Additionally, if you elect to retain the asset protection provisions of your trust, you may still want to review the tax treatment of inheritances within that asset protected trust. We have historically been far more concerned with death taxes than income taxes in our plan design. Given that the death taxes may soon no longer apply to your beneficiaries, you should consider revising your asset protection plans to eliminate the negative income taxes from your current asset protection trust. See my article which discussed the update of the Maryland Estate Taxes.