11.0 Non-Probate Transfers

11.1 In General
11.2 Multiple Party Accounts
11.3 Revocable Trusts

11.1 In General

Revocable trusts and other will substitutes have become commonplace in today’s estates and trusts practice. The development of will substitutes and other non-probate devices has largely developed outside of the statutory framework that governs testamentary dispositions. This is, in fact, the main selling point of will substitutes: such devices avoid probate. The fact that these devices avoid the substantive law of testamentary dispositions, however, can create unintended results:

"Transferors use will substitutes to avoid probate, not to avoid the subsidiary law of wills. The subsidiary rules are the product of centuries of legal experience in attempting to discern transferors' wishes and suppress litigation. These rules should be treated as presumptively correct for will substitutes as well as for wills."

John H. Langbein, The Non-Probate Revolution and the Future of the Law of Succession, 97 Harv. L. Rev. 1108, 1136-37 (1984).

The subsidiary rules governing testamentary instruments contain default rules which act as savings clauses for wills. By the terms of the statute, however, this protection does not extend to non-probate transfers. For example, as noted in previously, a divorce occurring after the execution of a will revokes all of the provisions in the will related to the ex-spouse. Md. Code Ann., Est. & Trusts § 4-105. The divorce decree does not have a similar effect in the non-probate setting. PaineWebber v. East, 363 Md. 408 (2001) (holding divorce does not revoke pre-divorce IRA designation to ex-spouse); Cassiday v. Cassiday, 256 Md. 5 (1969) (finding that divorce decree does not extinguish pre-divorce insurance beneficiary designation to ex-spouse). Estates and Trusts Article § 8-103 places a six-month limitation on the presentation of claims against an estate. Md. Code Ann., Est. & Trusts § 8-103. However, it is unclear whether this statute of limitations applies to revocable trusts.

The Maryland State Bar Association has attempted, from time to time, to extend certain of the statutory protections available for the probate estate to non-probate transfers. House of Delegates Bill 1111, filed in the 2001 Maryland General Assembly, purposed to extend these rules in an effort to achieve parity between the probate and non-probate systems:

“The recent explosion of the use of revocable trusts to avoid probate has had an unintended consequence: it separates those transfers from the various protective provisions of the Estates and Trusts law. Over many years, the General Assembly has constructed "fail-safe" provisions in Maryland law to protect individuals during the process of succession if that happens in the probate setting. Unfortunately these rules do not carry over – by definition – to the use of revocable trusts as Will substitutes. To use one example, a bequest left to a spouse in a Will becomes void upon a divorce regardless of whether the decedent got around to changing his or her Will after the divorce. This very common sense rule may not apply to a bequest left in a revocable trust to a spouse. The law governing the execution of Wills, to cite another example, is designed to minimize fraud by requiring two witnesses who are aware of the Testator's act and his or her condition at the time of signing. A revocable trust could be executed wholly without witnesses. The proposal is to make the rules governing Wills extend to revocable trusts when they are operating as Will substitutes.

Two code sections would be altered by these proposals: current Sections 8-103 and 14-102 of the Estates and Trusts Article. Section 8-103 sets forth the statute of limitations for claims against an estate. The change would clarify that claims against an estate – whether passing through a revocable trust at death or through a Will at death – must be presented within six months from the death of a decedent. Section 14-102 would be modified to extend specific provisions of the Estates and Trusts Article to revocable trusts. These provisions are focused on the basics: execution, revocation, effect of divorce, effect of an In Terrorem clause, etc. The most notable change for the practitioners would be that revocable trusts would need two witnesses like Wills. Florida has a similar statute. To protect practitioners from being surprised by the provision, this part of the new law would govern only revocable trusts executed [on a delayed basis].”

Summary, H.D. 1111, 2001 Gen. Assem. (Md. 2001). To date, no legislative remedy has been enacted.

11.2 Multiple Party Accounts

In 1992, Maryland expanded the Financial Institutions section of the Maryland Code. See Md. Code Ann., Fin. Inst. § 1-204 (LexisNexis 2006).This addition was intended to reverse the common law treatment governing "Totten" trusts and other accounts held by financial institutions. The Floor Report for the bill, H.D. 1119 (Md. 1992), summarizes the new legislation:

"This bill makes a number of changes to the multiple-party account law.

1.    Clarifies that the accounts affected by the law are checking, savings, and share draft accounts as well as time deposits (including CDs). This clarifies that the law applies to CDS.

2.    Clarifies that a multi-party accounts (MPTs) may not be established in the name of corporations and charitable or civic organizations. The bill repeals language that the account established on behalf of the charitable or civic organization must be established by an agent or trustee of that organization.

3.    States that MPTs do not include accounts set up on behalf of a minor under the Maryland Uniform Transfers to Minors Act and the provisions dealing with the recovery by minors in tort actions.

4.    Provides that the designation of a person as a "convenience person" is a durable power of attorney and that the designation is not affected b the disability of the parties to the account.

5.    Currently, an MPT will be subject to the MPT law if the account is used after a notice is given that the law changed on October 1, 1993 and that the law will affect the rights of the parties. The bill clarifies that "use" of the account means any activity in the account or any information on file with the depositary institution.

6.    Provides that, instead of being required to comply with the current requirement that the account parties be given a copy of the account agreement, the bill allows the depositary institution to instead provide a notice identifying the type of account, the survivorship rights of the parties, and how the parties can obtain a copy of the agreement.

7.    Provides that written materials may be deemed given to the parties if delivered in person or mailed to the parties. Also provides that the written materials may be sent as part of the statement.

8.    Allows for a "convenience person" to be designated on an account that is not a MPT.

9.    States that a garnishment against property held by a financial institution in P.O.D. accounts or trust accounts that are MPTs is not valid unless all the parties are judgment debtors."

Section 1-204 was meant to eliminate disputes as to whether various arrangements were convenience accounts or whether those arrangements were to be governed by title. Essentially, § 1-204 establishes a presumption that these accounts will be governed by title. It requires that financial institutions comply with the statute for every multiple party account established on or after October 1, 1993. This statute authorizes: (i) a "POD" account (pay-on-death account); (ii) a joint account (meaning, as understood at common law, survivorship); (iii) a trust account (created by the account agreement and where none of the beneficiaries are trustee); (iv) or a power of attorney account where there is a designation of a person as a convenience person on the account.

The purpose of the statute is to remove ambiguity as to the nature of the accounts. Therefore, "unless the account agreement expressly provides otherwise, upon the death of the last party to a multiple account, any funds remaining in the account shall belong" to the person entitled to those funds under the account agreement. § 1-204. If the account agreement does not expressly establish the right to funds to a certain person at the death of the party, or if there is no account agreement, any funds in the account upon the death of a party shall belong to the surviving party or parties. The presumptive correctness of the account agreements is not a per se bar to continued litigation. Issues remain concerning whether the account was established ab initio as a product of fraud, undue influence, or for any other reason that would cause the account to be set aside by a court. This legislation is specifically purposed to end litigation as to how the decedent meant the account to operate.

In Stanley v. Stanley, 175 Md. App. 246 (2007), the Court held that at the death of the creator of the multi-party account, the funds go equally to the joint owners.  In that case, three of four surviving parties to the account closed the account, effectively shutting out the fourth owner.  The Court of Appeals held that at the death of the creator of the account, the survivorship aspect of the account trumps the ability of the others to withdraw.

Accounts established before October 1, 1993 may also be subject to the terms of § 1-204 if: 1) the depository institution gave written notice of the law changes and how the parties’ rights may be affected; and 2) if after notice there was activity in the account, a written communication to the depositor about the changes, or some similar sign approving that the account be governed by § 1-204.

11.3 Revocable Trusts

A revocable trust is an inter vivos trust whereby the grantor retains the power to revoke the trust and reacquire the trust property. At the grantor's death, the trust becomes irrevocable. At this point it may terminate or it may continue to exist with the grantor’s directions that certain distributions are to be made to named beneficiaries or to a class of beneficiaries.

Without specific instructions regarding its revocability, a trust is presumed irrevocable. A trust agreement may be set aside on the same grounds that contracts may be set aside: fraud, duress, undue influence, breach of a confidential relationship, or mistake. “The absence of a provision in the trust instrument reserving a power of revocation does not raise an inference that it was omitted by mistake.” Liberty Trust Co. v. Weber, 200 Md. 491, 519 (1952). Affirmative evidence is required to show that the grantor genuinely mistakenly believed that he or she had the power to revoke. The mere fact that the grantor believed that he or she could revoke the trust and made statements to this fact is not a sufficient ground for reforming the instrument. See Id. at 520. Such statements may be sufficient if corroborated by other evidence, or the other evidence may be sufficient without his statement or testimony. Id.

The doctrine that a trust instrument may be reformed by a court to correct a mistake "is ordinarily applicable only in cases...involving inter vivos trust instruments." Shriners Hospitals for Crippled Children v. Maryland Nat'l Bk., 270 Md. 564, 581-2 (1973). Testamentary trusts are treated as wills and "the general prohibition against the reformation of a will would prevail" in cases seeking reformation of a testamentary trust. Id. But see Probasco v. Clark, 58 Md. App. 683, 687 (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]…”).

Apparently, if a trust that is "irrevocable" by its terms is later reformed by a court to become revocable, the federal tax law may permit an amended gift tax return to reflect that there was no completed gift in the first instance. In Berger v. United States., 487 F. Supp. 49 (W.D. Pa. 1980), C. William Berger anticipated a high level job with the Nixon administration at the Federal Aviation Administration. He mistakenly believed that he had to place all of his assets into an irrevocable trust in order to comply with the Nixon administration's conflict of interest policy but, in actuality, a revocable trust would have been sufficient. After his prospects of government service evaporated, he successfully argued in state court that the "irrevocable" aspect of the trust was a mistake and the trust was reformed.

11.3.1 Funded Revocable Trusts

Revocable trusts may be classified as trusts that are intentionally either (i) funded, or (ii) unfunded. Funded revocable trusts are popularly referred to as "living trusts" and are used to circumvent probate:
"O's Will might be described as a document executed by him during his lifetime that will control the devolution of some or all of his property from and after his death, but that is subject to change and revocation by him as long as he lives. Such a description, however, if set forth in any one of several revocable inter vivos property arrangements that are now widely recognized as non-testamentary in character, can be carried out without subjecting the property involved to probate administration on O's death.

The revocable inter vivos trust is one of the widely employed vehicles in the avoidance of probate. Attacks on this type of trust, as being testamentary insofar as the trust provides for the disposition of property from and after death of the settlor, have been made from time to time, but with little success."

James Casner, Estate Planning: Avoidance of Probate, 60 Colum. L. Rev. 108, 108-09 (1960).

Maryland follows the general rule that revocable trusts are not testamentary and therefore do not need to follow the execution requirements imposed by law. Md. Code Ann., Est. & Trusts § 4-102; see also Howard v. Hobbs, 125 Md. 636 (1915) (rejecting self-forgiving mortgage as testamentary in nature); Brown v. Fidelity Trust, 126 Md. 175, 183-84 (1915) (“A deed is not of a testamentary character where the declaration of trust deed sets forth that the [assets] have passed out of the possession of the grantor…the transaction is therefore complete and all present interest has become vested in the trustee.”).

11.3.2 Standby Trusts

Unfunded trusts are referred to as "standby trusts." Such trusts normally remain unfunded until activated by a triggering event, such as disability. If the triggering event does not occur, the standby trust generally stands by until the settlor's death. Cantwell and Rhodes, Standby Trusts: Spare Tires for Late-Life Trips, 19 Colo. Law. at 851 (May 1990).

At common law a trust could not be created unless there is trust property. See Restatement (Second) of Trusts § 74 (1959). By statute, a legacy may be made to an inter vivos trust as long as "the trust instrument has been executed and is in existence prior to or contemporaneously with the execution of the will." Md. Code Ann., Est. & Trusts § 4-411; Trosch v. Maryland Nat'l Bank, 32 Md. App. 249 (1976) (noting § 4-411 conditionally abrogates the common law rule that a trust must have a corpus to be in existence). Note, however, that § 4-411 does not generally abrogate the common law; thus it is advisable to create at least a nominal corpus for the standby trust.

Another popular devise for disability planning is the durable power of attorney. See Md. Code Ann., Est. & Trusts §§ 13-601-603. Durable powers of attorney, are distinct from trusts and may have certain shortcomings. Some of the more notable differences are as follows:

“No clear delineation of the extent of the power of the agent: "The most serious problem with durable powers is the uncertainty as to the agent's powers... [M]ost statutes authorizing durable powers confer no power on the agent. Instead, the statutes simply state that powers possessed by the agent are not lost when the principal becomes incapacitated. Therefore, to determine the scope of the agent's authority, one must look to the terms of the power and to the law of agency."

William M. McGovern, Trusts, Custodianships, and Durable Powers of Attorney, 27 Real Prop. Prob. & Tr. J. 1, 32 (1992).

One of the few reported cases on powers of attorney in Maryland demonstrates that instruments granting a power of attorney are to be strictly construed. See King v. Bankerd, 303 Md. 98, 104-06 (1985).

"Various rules govern the interpretation of powers of attorney. As Chief Judge Murphy observed for this Court in Klein v. Weiss, 284 Md. 36, 61, 395 A.2d 126, 140 (1978), one 'well settled' rule is that powers of attorney are 'strictly construed as a general rule and [are] held to grant only those powers which are clearly delineated[.]' Although our predecessors recognized this rule over a century ago in Posner v. Bayless, 59 Md. 56 (1882), they were careful to note that the rule of strict construction 'cannot override the general and cardinal rule' that the court determine the intention of the parties. Id. at 60."

Id. at 105¹⁰.  Given the dearth of Maryland case law involving powers of attorney, the extent of an agent's authority in is unclear.

The Restatement (Second) of Agency § 52 cmt. b (1958) affirms the narrow construction to be given an agent's powers in situations involving land. “Unless otherwise agreed, authority to act in the principal's business does not include authority to sell the principal's interests in land, unless the business entrusted to the agent includes the selling of land.” Id. The narrow scope of an agent’s powers in such circumstances is illustrated as follows:

“P, a farmer, on going to Europe, gives to A a general power of attorney, stating that A has authority to manage all of P's business affairs "as fully as P himself if personally present." During P's absence, A sells several of P's fields, part of his farm, at a high price. A is not authorized to sell the fields.”

Id. at illus. 7.

Problems may arise when the agent attempts to exercise a specific power in spite of careful drafting of documents which include grants of specific power to the agent. One commentator noted that "[it] has become so difficult to get financial institutions to accept powers of attorney even for routine transactions that legislation has had to be introduced to compel financial institutions to accept even statutory forms of powers of attorney." Jonathan Blattmachr, The Master Living Trust, 23 Inst. on Est. Plan. 18-16 (1989). By contrast, the powers of a trustee are more certain. See generally Md. Code Ann., Est. & Trusts §§ 14-101 – 14-408.

Another related uncertainty with a power of attorney involves control.

"Agents must carry out the orders of the principal even when the orders are contrary to the terms of the power. Trustees, in contrast, normally are not subject to the control of the settlor or the beneficiaries. Because a traditional agency terminated when the principal became incompetent, the problem of principal incompetence never arose under the common law. When a principal becomes incompetent, the purpose of the durable power of attorney would be defeated if the attorney had to follow the principal's instructions. Presumably, courts will create an exception to the general rules of agency to cover such situations. On the other hand, agents under a durable power should obey the principal as long as the principal is competent. Situations will arise when an agent is uncertain whether to follow the directions of a possibly incompetent principal, and the agent will seek a court determination of incompetency. Such resort to the courts will defeat one of the primary reasons for using a durable power."

McGovern, supra, at 23-24. A practitioner need not choose sides in the debate of whether to use a durable power of attorney or a trust when planning for a client's possible disability. Generally a standby trust is considered in conjunction with a durable power of attorney which is used to fund the trust if it becomes necessary.

A recent Maryland Court of Appeals case held that the evidentiary effect of a "confidential relationship" on the disposition of property from a revocable trust should parallel that governing testamentary instruments rather than that governing inter vivos transfers. Upman v. Clarke, 359 Md. 32 (2000), looked at the rules allocating the burden of proof for undue influence in the non-probate setting. Generally in the case of an inter vivos gift a confidential relationship shifts the burden of proof to the donee to evidence the fairness and reasonableness of the gift:

"In other words, once the [confidential] relationship is proved, the plaintiff is relieved from the necessity of proving 'the actual exercise of over-weaning influence, misrepresentation, importunity, or fraud,' and the defendant has the burden of showing that a fair and reasonable use has been made of the confidence, 'that the transfer of the property was the deliberate and voluntary act of the grantor and that the transaction was fair, proper and reasonable under the circumstances'."

Upman, 359 Md. at 42-43, quoting Sanders v. Sanders, 261 Md. 268, 276-77 (1971).

The rule governing attacks on wills is quite different. In will contests, the existence of a confidential relationship is simply one element of proof; the plaintiff retains the burden of proof regardless of establishing a confidential relationship. The reason for the different rules flows from the impact of a gift, as opposed to a devise, on the donor/testator:

"In the complaint, Anderson contends that Francis's position as the decedent's attorney creates a presumption of fraud or undue influence in the procurement of the will. This is simply incorrect under Maryland law. While we recognize such a presumption when an attorney receives a gift inter vivos, we do not extend the presumption to bequests under a will. Shearer v. Healy, 247 Md. 11, 24-25, 230 A.2d 101 (1967). We have said: 'There is an obvious difference between a gift whereby the donor strips himself of the enjoyment of his property while living and a gift by will, which takes effect only from the death of the testator. In cases of gifts by will the fact that a party is largely benefited by a will prepared by himself is nothing more than a suspicious circumstance of more or less weight according to the facts of the case.' Id. at 25 (quoting Cook v. Hollyday, 185 Md. 656, 667, 45 A.2d 761 (1946)). One commentator has observed: 'In a number of states it is said that the equity rule that a presumption or inference of undue influence arises where the party in whom trust and confidence is reposed...applies only to transactions inter vivos, and does not apply to gifts by will...The reason which is frequently assigned for this rule is that the testator gives only property in which his interest is bound to cease at his death, while a gift inter vivos passes property which the donor would have retained but for the gift.' 3 William J. Bowe & Douglas H. Parker, Page on the Law of Wills § 29.84, at 600-01 (1961)."

Anderson v. Meadowcroft, 339 Md. 218 (1995).¹¹  

In Upman the court had to decide whether a revocable trust was governed by the inter vivos transfer rules or by the rules governing testamentary dispositions by will. The court held that the standard governing wills should be applied to revocable trusts. It should be noted that the Court of Appeals added an important caveat when establishing this general rule: "We need not decide here whether, had the Clarkes actually disposed of the assets of the trust or exercised substantial control over them to the detriment of Ms. Upman, the result would have been different. Whether an instrument of this kind is to be regarded as testamentary or inter vivos may depend on how it is, in fact, implemented."

Upman, 359 Md. at 48.