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, 359 A.2d 564 (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, 492 A.2d 608 (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 105. 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, 753 A.2d 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, 274 A.2d 383, 388 (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, 661 A.2d 726 (1995).
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.