By Fred Franke
The Law Office of Frederick R. Franke, Jr. LLC
Maryland courts and commentators traditionally recommend against joint wills. Shimp v. Shimp, 287 Md. 372 (1980) (Footnote 1: “… (joint wills) are more apt to invite litigation than separate independent reciprocal wills.”) Indeed, the Court of Appeals hoped that its decision, “will discourage the use of such wills.” (“Shimp I”).
Revocable trusts, as will substitutes, have generally followed suit with practitioners often creating “separate independent reciprocal” trusts for married couples. This practice has one serious shortcoming. Practitioners would retitle tenants by the entirety property so that each trustee of each separate, independent trust would have title to a 50% tenant in common interest in the property. For tax planning this was not required because the use of a disclaimer to effectively direct 50% of tenants by the entirety property at the first death to a bypass trust would work just as well. Nevertheless, some practitioners did not use this technique for a variety of reasons.
Estates & Trusts § 14.5-511 “remedies” this shortcoming by explicitly permitting tenants by the entirety property to be transferred into a joint trust and retain “the same immunity from claims of the separate creditors” of the couple. This provision, greatly enhanced by refinements effective January 1, 2015, now makes joint trusts a very attractive planning device for married couples in Maryland.
This does not mean that Shimp I concerns about joint wills can be ignored when drafting joint trusts, but that the inherent pitfall of using a joint estate planning vehicle must be dealt with at the planning stage – not let it become a litigation generator for later on.
Shimp I described a joint will as having two separate components: the will component and the contract component. By nature, wills are “ambulatory” and can be revoked or modified by the survivor. The joint will, however, may also be a contract between the couple enforceable after the second death by a third party beneficiary. This contract is not ambulatory. The interplay of these two components can make joint wills, and by extension, joint trusts confusing.
In Shimp v. Huff, 315 Md. 624 (1989) (“Shimp II”), the surviving husband of Shimp I died leaving his joint will intact. The issue in Shimp II was whether Mr. Shimp’s new wife could take her elective share against his assets regardless of the contractual rights emanating from the joint will with his first spouse. The Court held, based on public policy, that the elective share trumped the contract.
Shimp I and II involved a contract to make a will. A tenant by the entirety immunity trust, on the other hand, would involve an inter vivos trust that most likely becomes irrevocable at the first death. The two most common situations where the tenant by the entirety immunity trust would be useful are (i) when the couple wants to preserve the property for later disposition in a blended family situation or as a hedge against remarriage, or (ii) when the couple wants to maximize the asset protection benefits regardless of the order of death. Given these concerns, the tenant by the entirety immunity trust would provide that it becomes irrevocable at the first death. Before that event, of course, it could remain revocable but it should only be revocable by the act of both spouses to enhance the tenant by the entirety attributes. Under the holding of Karsenty v. Schoukroun, 406 Md. 469 (2008), Shimp II should have no application to a trust that becomes irrevocable at the first death. In the last legislative session, the General Assembly considered a bill that would pull the assets of a revocable trust into the base for elective share purposes. This bill would not extend to assets in an irrevocable trust. Accordingly, a tenant by the entirety immunity trust should be free from a Shimp II attack should the surviving spouse remarry.