17.0 Definition/Creation of Trusts

17.1 In General
17.2 Express Trusts
17.3 Statute of Frauds

17.1 In General

A trust is a manner of holding property where legal and equitable title is separate.¹⁶  Generally, a trust fits into one of two general categories: (1) an express trust and (2) an implied trust.

Implied trusts may be segmented into two subcategories: "Implied trusts may be either resulting or constructive trusts. A resulting trust arises upon the presumed intention of the parties where the terms of the disposition or accompanying facts establish that beneficial interest is not to go with legal title." Siemiesz v. Amend, 237 Md. 438, 441 (1965). A resulting trust is similar to the express trust but differs in the respect that the intention of the parties is not expressed but implied from the circumstances. A resulting trust may result in a situation when the purchase price is paid by one person and title is taken in another person. In that instance, it is presumed that the person taking title holds the property in trust for the person who paid the purchase price. This is, however, a rebuttable presumption. See Annapolis v. West Annapolis Fire & Improvement Co., 264 Md. 729, 735-36 (1972).

A constructive trust, on the other hand, arises by operation of law but not because the parties had intended to create a trust but because the equity Court is enforcing a remedy by imposing a trust on property. In the words of Judge Cardozo:

"A constructive trust is the formula through which the conscience of equity finds expression. When property has been acquired in such circumstances that the holder of the legal title may not in good conscience retain the beneficial interest, equity converts him into a trustee."

Beatty v. Guggenheim Exploration Co., 225 N.Y. 380, 386, 122 N.E. 378, 380 (1919). Constructive trusts "may arise because the property was acquired through duress, fraud, undue influence or mistake, or through a breach of fiduciary duty, or through wrongful disposition of another's property." Siemiesz, 237 Md. at 442.

17.2 Express Trusts

An express trust comes into being because a person having the power to create a trust expresses an intent to have a trust and takes steps to create a trust.

"To constitute an express trust, various combinations of elements have been said to be essential, the most common one being: Sufficient words to create it; a definite subject, and a certain and ascertained object. It would seem, however, that the elements of an express trust, as distinguished from the acts or words necessary to create it, are the same as those of all trusts, and consist of a trust res or subject matter, and the holding of the legal title of that property by one person for the benefit of another, while the matters requisite to create such a trust are a sufficient declaration of trust, evidencing an intention to create a trust and setting out the trust property, terms, and parties with reasonable certainty, and a transfer of the legal title by the owner of the property to a trustee to be held for the benefit of another, or a retention of title by the owner under circumstances which clearly and unequivocally disclose an intent to hold for the use of another."

Sieling v. Sieling, 151 Md. 536, 549-550 (1926) (quotations omitted).

Whether an express trust has been created is a factual determination. In In Re Shank, 240 B.R. 216 (Bankr. D. Md. 1999), Debtors under a Chapter 11 plan sought to characterize a reorganization plan which formed an asset pool for the benefit of certain secured creditors. This asset pool was deemed to be a trust so that the tax liability generated from the sale of those assets would be netted against the assets in the pool rather than pass through to the Debtors. Under a bankruptcy reorganization, Debtors retained legal title to the assets from the asset pool subject to various claims running in favor of Creditors. Debtors made two alternative arguments: (i) that the creation of the asset pool coupled with the extensive powers over that pool granted to a creditor representative created a trust with the creditor representative as trustee; or (ii) that the debtor in possession retained ownership of the property but that the property was being held for the benefit of the creditors. In regards to the first contention, Judge Stephen Derby found that extensive powers held by someone over property does not make that person a trustee without the legal title:

"Debtors argue that the Creditors' Representative's wide ranging power over the Asset Pool assets requires the court to find that a trust was created with the Creditors' Representative as its trustee. This is a fallacious argument, akin to arguing that because all dogs have four legs, all four-legged entities must be dogs. The fact that the Creditors' Representative had extensive obligations under the Plan is also consistent with the proposition that the Creditors' Representative was the collection agent of the unsecured claim holders, charged with the task of collecting the debt that the Plan created. As stated above, the existence of a trustee is derivative from the finding that there has been a proper declaration of trust. [Citations omitted]. While the Creditors' Representative may have had some of the characteristics of a trustee, he certainly lacked the most prominent: that of holding legal title to the property."

Id. at 223. Judge Derby also dismissed the Debtors' alternative argument that the debtor was a trustee for the creditor. “The [Debtors'] duties under the Plan were perfunctory and colorless--akin to the contractual obligations incident to a contract to convey residential rental property. [Citations omitted]. A contract to convey property is not a trust. See Restatement (Second) of Trusts § 13." Id.

Underlying In Re Shank is the issue that a separation of the equitable from the legal estate must exist in order for a trust to exist. Although the creator of the trust constitute need not be a third person who is transferred the legal title, in order for a trust to be created a trustee must be holding the property for the benefit of another. Sieling, 151 Md. at 550. Indeed, it has been held that "a person cannot be both the trustee and the cestui que trust. In order to create a trust the legal estate must be separated from the beneficial enjoyment. A trust cannot exist where the same person possesses both." Gray v. Harriet Lane Home for Invalid Children, 192 Md. 251, 264 (1949).

In Gray v. Harriet Lane Home for Invalid Children, the Court of Appeals found that a trust was not created. This decision was in part because of the lack of a beneficiary separate from the trustee. That case involved a bequest to a charity before Maryland’s adoption of the cy pres doctrine. The will left substantial property to the Harriet Lane Home, the income of which was to be used to operate contagious disease wards. The testatrix was definite as to the type of contagious disease units to be run (those treating scarlet fever and diphtheria) and in her intention that a substantial amount of the bed space should be available to poor children. Eventually, scarlet fever and diphtheria were no longer a threat in Maryland due to advances in immunizations and available drugs. Additionally, by the time of the testatrix's death open wards were considered unacceptable in the treatment of contagious diseases. The testatrix’s legal heirs claimed that the bequest was specific and that its purposes could not be accomplished (hence, the remaindermen would presumably receive the property). The court held that no trust could exist because the gift was to the Harriet Lane Home and it would effectively be trustee for itself. The court held further that the bequest was either: 1) an absolute gift which created an endowment fund for the home; or 2) an estate on a condition subsequent. Finding that conditions subsequent are not favored by the law because the breach of such a condition causes a forfeiture to which the law is adverse, the court concluded that the conditions actually expressed the grantor's confidence that the grantee would use the property as closely as practicable for the specified effect.¹⁷   

The rule that a trust cannot exist without a separation of the legal and equitable title raises issue with the efficacy of revocable trusts used as will substitutes. In the basic revocable trust the settlor is the sole trustee during his or her competency. In addition, the settlor retains the right to amend or revoke the trust. There is no Maryland case law directly upholding this standard arrangement. There are cases, however, where the court discusses revocable trusts without raising the issue as to such arrangements being illusory. In Upman v. Clarke, 359 Md. 32, 38 (2000) (discussed previously), the court noted that the property was placed in trust initially with the settlor as sole trustee. However there was no discussion by the court following this observation. Other jurisdictions have held that the revocable trust is valid as a trust because it has another beneficiary at the death of the settlor. Due to the revocable nature of the trust, however, such beneficiary has a tenuous hold on the trust. See Restatement (Second) of Trusts § 56 cmt. f; Farkas v. Williams, 125 N.E.2d 600 (Ill. 1955) (describing the interest of a beneficiary under a trust who must survive the settlor as ”a contingent equitable interest in remainder") Maryland addressed an analogous situation in an irrevocable in trust in United States v. Baldwin, 283 Md. 586 (1978). In that case the settlor retained a life estate in the assets, the right to name himself as trustee, and a limited testamentary power of appointment so that he could name any person as the remaindermen. The court held that the remaindermen had "vested remainder in the trust corpus, subject to divestment by Baldwin's exercise of his testamentary power." Id. at 595. This created a beneficiary separate and apart from the settlor. See also Pope v. Safe Deposit. & Trust Co., 163 Md. 239 (1932).

Presumably, the Court of Appeals would uphold the basic revocable trust arrangement. However, there is a fundamental tension between the basic principles underlying a law of trust and the recognition of a revocable trust as a trust. A trust is characterized by the bundle of fiduciary obligations owed by the trustee to the beneficiary. If the trustee and the beneficiary are the same person, there is obviously no one to enforce the fiduciary obligations.

The Court of Special Appeals recognized this essential aspect of a trust in Jacob v. Davis, 128 Md. App. 433 (1999). The court quotes George Bogert, The Law of Trusts and Trustees, (Rev. 2d ed. 1983) § 961, to stress the crucial role of obligation:

"A [testator] who attempts to create a trust without any accountability in the trustee is contradicting himself. A trust necessarily grants rights to a beneficiary that are enforceable in equity. If the trustee cannot be called to account, the beneficiary cannot force the trustee to any particular line of conduct with regard to the trust property or sue for breach of trust. The trustee may do as he likes with the property, and the beneficiary is without remedy. If the court finds that the settlor really intended a trust, it would seem that accountability inchancery or other court must inevitably follow as an incident. Without an account the beneficiary must be in the dark as to whether there has been a breach of trust and so is prevented as a practical manner from holding the trustee liable for a breach."

Id. at 450. If a revocable trust is not a bona fide trust it and of itself, it may demand a formal execution like a will. However, “[Maryland law] is clear that one person can hold as trustee for the use and benefit of himself and others, and it is only when the full beneficial and equitable titles become vested in the same person that a merger takes place." Sieling, 151 Md. at 547-48.

"It is true that, if the settlor reserves the right to use the property, and does use it in accordance with the terms of the trust, as evidenced from the intention of the parties, there may be nothing remaining at the death of the settlor; but the question of whether or not a trust has been created cannot be made to depend upon whether there may or may not be property existing at the time the beneficiaries are entitled to the enjoyment thereof. In the case Milholland v. Whalen, supra., this Court held that there was a valid subsisting trust created from the time Miss. O'Neill made the deposit in the bank in the form in which it was made, and that without regard to the fact that she retained possession of the passbook by which she might have withdrawn all the funds, which were subject of the trust, before her death. It will be seen in that case that the settlor retained at least as complete control and dominion over the subject of the trust as is contained in the instrument of writing in this case made by Johann Sieling and Anna Sieling; the effect in that case being that if there was any money remaining in the bank which was the subject of trust at the death of the settlor, it should go, by virtue of the declaration of trust, to her sister."

Id. at 548-49.

17.3 Statute of Frauds

If the subject matter of a trust is an interest in land, the statute of frauds requires that the trust be in writing. Dove v. White, 211 Md. 228 (1956); Grimes v. Grimes, 184 Md. 59 (1944); Mushaw v. Mushaw, 183 Md. 511 (1944); O'Connor v. Estevez, 182 Md. 541 (1943).

The Court of Special Appeals in Juliano v. Juliano, 36 Md. App. 1 (1977), held that the statute of frauds governed a trust where the subject matter of the trust is twofold: land itself and proceeds from the land’s sale. Some states view such a situation as two separate and severable trusts. In Maryland an express oral trust involving land is void and thus an alleged trust or promise involving the proceeds of the land’s sale is also void. Kidd v. Carson, 33 Md. 37 (1870).