11.4 Revocable Trusts
Maryland has yet to adopt the Uniform Trust Code and the rule as to the availability of trust assets for probate creditors is unclear. Presumably, creditors would need to rely on the fraudulent conveyance statute to assert a post death claim against the trust or on a theory that creditors are entitled to reach the assets because the settler held a general power of appointment. See Martin J. Placke, Creditors’ Rights in Nonprobate Assets in Texas, 42 Baylor L. Rev. 141, 142-9 (1990).
Generally, of course, a revocable trust is a completed transfer and upon formation and funding the trustee, not the settler, has a present interest in the property. Karsenty v. Schoukroun, 406 Md. 469, 495, 959 A.2d 1147 (2008), Brown v. Fidelity Trust Co., 126 Md. 175, 94 A. 523 (1915), Brown v. Mercantile Trust & Deposit Co., 87 Md. 377, 40 A. 256 (1898). This would seem to present a barrier to prevailing on the theory that the transfer at death of the assets of a revocable trust constitutes the fraudulent transfer. See In re Granwell, 20 N.Y.2d 91, 228 N.E.2d 779, 281 N.Y.S.2d 783 (1967) where the fraudulent transfer act generally applied when the assets held by the decedent in a revocable trust were gratuitously transferred at his demise thereby causing his estate to be insolvent. In a different setting, however, the Court of Appeals treated the revocable trust as a mere will substitute. Upman v. Clarke, 359 Md. 32, 48, 753 A.2d 4, 12 (2000) (Holding that the testamentary rule, not the one governing lifetime gifts, applied for the presumption of undue influence when a confidential relationship exists)(“The trust here…is clearly more akin to a testamentary instrument than to an inter vivos gift…”).
A revocable trust, of course, is one where the settler retains the right to revoke – in effect, where the settler retains a general power of appointment. At the moment of death, of course, this power disappears. It is unknown whether a Maryland court would make appointive property subject to probate creditor claims. Generally, “The common law provides that creditors cannot reach appointive property as long as a general power remains unexercised.” Marie Rolling-Tarbox, Powers of Appointment Under the Bankruptcy Code: A Focus on General Testamentary Powers, 72 Iowa L. Rev. 1041, 1046 (1987); John O. Fox, Estate: A Word To Be Used Cautiously, If At All, 81 Harv. L. Rev. 992, 1007 (1968) (“Although there are cases to the contrary, as a general rule over which a general power of appointment is exercised may be reached by creditors of the donee of the power, if his or her other assets are insufficient for the payment of his or her debts. But if the surviving spouse (the donee) under a power of appointment fails to exercise the power, her creditors cannot acquire the power to compel its exercise nor can they reach the property covered by the power…”). Nevertheless, a Massachusetts case uses this theory to hold the assets of the revocable trust liable for probate estate creditors even when that general power is unexercised. State St. Bank & Trust Co. v. Reiser, 7 Mass. App. Ct. 633, N.E.2d 768 (1979). This case held that the probate creditors had an equitable right to the property covered by the general power of appointment even though unexercised based on the position of the Restatement of Property § 328 (1940).
Under the Uniform Trust Code, however, the assets held by a revocable trust would be subject to creditor claims to the extent that the probate asset is inadequate to satisfy such claims, including administrative expenses and statutory shares or allowances. This is a “pure” will substitute approach.