The 2014 General Assembly outdid itself by passing significant estates and trusts legislation.
One major enacted change increased the Maryland estate tax threshold. Although the federal estate tax threshold is $5 million indexed for inflation (currently $5.34 million), the Maryland estate tax threshold has held steady at $1 million for over a decade. The new law phases in increases in the state estate tax threshold until it matches the federal one in 2019. Next year, for example, the Maryland threshold is $1.5 million; followed by $2.0 million in 2016; $3 million in 2017; $4 million in 2018; and finally joining up with the federal counterpart in 2019 forward. Additionally, in 2019, unused exemption portability between spouses will be permitted for state estate tax purposes, just like it now exists on the federal level.
This year also brought the adoption of the Maryland Trust Act (the “MTA”). The MTA is based in large measure on the Uniform Trust Code (the “UTC”), which has been adopted, in some fashion, by twenty-nine other jurisdictions. The UTC filled a void: the law of trusts in many jurisdictions, including in Maryland, was “thin”, so the UTC, according to its Reporter, was an effort to provide “a precise, comprehensive, and easily accessible guide to trust law questions.”
The MTA looked to the UTC as an initial template, but deviated on occasion to preserve the Maryland common law. Accordingly, when practitioners look to judicial interpretations of the UTC in other jurisdictions, they must be careful that it is an apple-to-apple comparison with our statute.
An example of the MTA embracing existing Maryland law, rather than following UTC framework, involves our definition and treatment of discretionary trusts. The UTC, following the Restatement (Third) of Trusts, abolishes the distinction between discretionary trusts and support trusts. Their traditional distinction has come to be seen as points along a continuum where, at one end, the trustee is given broad discretion and, where on the other end, the trustee’s discretion is cabined by a distribution standard. A broad discretionary power limits access to the fund by the beneficiary’s creditors because the beneficiary, supposedly, could not sue to force a distribution. Maryland (and consequently the MTA) retains the discretionary/support distinction and provides a bias in favor of categorizing trusts as discretionary trusts. First Nat. Bank of Md. v. Dept. of Health and Mental Hygiene, 284 Md. 720, 399 A.2d 891 (1979) defined a trust that was a hybrid of a discretionary trust and a support trust as a discretionary trust, holding that the following language created a discretionary trust: “My trustees … shall pay … in their absolute and uncontrolled discretion … for her (daughter’s) maintenance, comfort or support.” The First National decision provided a vast “comfort zone” in drafting third party discretionary trusts that would be out of the reach of the beneficiary’s creditors. The MTA preserves the First National approach.
An example of the MTA adopting the UTC approach instead of existing Maryland law relates to the proof permitted to establish the terms of the trust. Trusts are to be interpreted in accordance with settlor intent. Under Maryland common law, the evidence of such intent for testamentary trusts is largely restricted to the four corners of the document whereas extrinsic evidence may be used to establish settlor intent for inter vivos trusts. The MTA, adopting the UTC stance, applies the inter vivos rule to all trusts.
As with the UTC, the MTA provides great latitude to the settlor when drafting a trust. There is a narrow band of “non-modifiable” provisions but, otherwise, a settlor may craft a trust to meet his or her circumstances. The MTA therefore continues the great flexibility afforded planning through the use of trusts.