General Claims Against a Decedent’s Estate
In general, claims against the estate of a decedent must be filed within the earlier of (i) 2 months from when the personal representative mails or otherwise delivers notice to a known creditor or (ii) 6-months from the date of death (regardless of notice or even opening the estate). Md. Code Ann., Estates & Trusts (“ET”) § 8-103 (a). Keying an absolute 6-months deadline from death instead of from notice of the appointment of a personal representative running in a newspaper avoids the “state action” element of the due process requirement under the U.S. Constitution. Tulsa Professional Collection Services v. Pope, 485 U.S. 478 (1988); Ohio Cas. Ins. Co. v. Hallowell, 94 Md. App. 444 (1993).
As a general rule, other than if a proceeding for a small estate is instituted, property of a trust that was revocable at the death of the settlor is not subject to, and the trustee and beneficiaries of that trust may not be held liable for, claims of the creditors of the settlor that are not properly presented in the estate proceeding within the time periods specified in ET § 8-108. Maryland Trust Act (“MTA”) § 14.5-508 (b)(1). Estates with probate assets of $50,000 or less may elect to be administered as a small estate which has less procedural requirements than for regular estate administrations. If no probate estate is opened or if only a small estate administration is conducted, a decedent’s revocable trust does not enjoy the shortened statute of limitations unless notice is published similar to that required of regular estates. MTA § 14.5-508(b)(2).
These limitations do not apply to either claims by the state or by the United States. Medicaid reimbursement actions are state claims. ET § 8-103(f) governs Maryland Medical Assistance (i.e., Medicaid) claims. Its 6-month period runs from the date of the notice, not death. Specifically, Medicaid claims must be filed within the earlier of “(1) 6 months after publication of notice of the first appointment of a personal representative;” or (2) 2 months after the personal representative gives actual notice to the state. Federal claims are not so limited.
The “notice” of the appointment of the personal representative requires for notice to be published “in a newspaper of general circulation in the county of appointment once a week in 3 successive weeks.” ET § 7-103. The issue in Maryland Department of Health v. Myers, 248 Md. App. 631 (2020) was whether the deadline for the filing of creditor claims runs from the publication of the first such notice, or from the date after all 3 required notices had run. Applying the plain meaning rule to the statute, the Court in Myers concluded that “the General Assembly made a policy determination that, to adequately provide notice to creditors and other interested parties of the decedent’s death and the appointment of a personal representative, three successive weekly publications of the notice were required; anything less would be incomplete and partial.” Accordingly, the running of the 6-month claims period for state Medicaid reimbursement claims under ET § 8-103 (f) does not commence with the first published notice; it begins to run only after the three required notices have published. (Note that claims of ordinary—non-state—claimants are governed by ET § 8-103 (a), not (f), and therefore the Myers holding does not apply).
Decedents’ estates may also be subject to claims by the United States. If so, the priority of those claims is subject to the Federal priority statute. 31 U.S.C. § 3713 (a)(1)(B) of that statute provides that “a claim of the United States Government shall be paid first when … the estate of a deceased debtor, in the custody of the executor or administrator, is not enough to pay all debts of the debtor.” The literal language of the Federal priority statute is absolute. Federal cases, however, have permitted a carve out for reasonable funeral and estate administrative expenses. United States v. Weisburn, 48 F. Supp. 393 (E.D. Penn. 1943); also see United States v. MacIntyre, 2012 WL 2403491 (unreported 2012) for a list of cases supporting the carve out. MacIntyre is a chilling example of personal liability imposed on the fiduciary based on constructive notice of the federal claim for taxes due. The statute of limitation for federal claims is governed by federal, not state law.
Trusts Created by Others
Although Maryland generally adopted the Uniform Trust Code (“UTC”), effective January 1, 2015[1], it designated its trust codification as the Maryland Trust Act (“MTA”) to draw attention to the fact that its “version” of the UTC departed significantly from the uniform act.
The creditors of a descendant who was a beneficiary of a third-party trust has little or no recourse from such a trust. Indeed, there is much less access by the creditors of a beneficiary of Maryland third-party trusts at death or during life than afforded by the UTC.
One departure from the UTC concerns the remedies of the “exception” creditors of a beneficiary of a discretionary third-party trust. Under the UTC § 504 discretionary trusts may be attached by the exception creditors to the extent a beneficiary could compel a distribution. Beneficiaries of discretionary trusts have a right to force a distribution if it is withheld as an abuse of the trustee’s discretion: ” The exercise or nonexercise of fiduciary discretion is always subject to judicial review to prevent abuse. What might constitute an abuse, however, is not only affected by the extent of the trustee’s discretion, standards applicable to its exercise, and purposes of the trust, but also by the beneficiary’s circumstances and the effect discretionary decisions will have on the discretionary beneficiary and on others in relation to the fulfillment of trust purposes.” Restatement (3d) of Trusts § 60 cmt. (e). Exception creditors are those for claims by children, spouses, or former spouses for court-ordered support. Otherwise, UTC does not permit attachment by other creditors.
The MTA § 14.5-502 (a)(1)-(2), on the other hand, provides that the beneficiary of a discretionary trust “has no property right in a trust interest” and it therefore “may not be judicially foreclosed, attached by a creditor, or transferred by the beneficiary.” Additionally, a discretionary trust distribution provision may provide “one or more standards or other guidance for the exercise of the discretion of the trustee” MTA § 14.5- 103(g)(2)(i). The MTA third-party discretionary trust provisions do not make an exception for exception creditors or any others. The common law roots of the Maryland broad definition of a discretionary trust are found in First Nat. Back of Maryland v. Dept. Health and Mental Hygiene, 284 Md. 720, 399 A.2d 891 (1979). That case, however, recognizes the possibility of a forced distribution to a creditor under very limited circumstances. Not so under the Maryland statute.
Both support trusts and spendthrift trusts more closely track the UTC treatment. Each are generally immune from creditor attachment but with exceptions. MTA § 14.5-505 (b) permits enforcement of a claim against a beneficiary for (i) family law support or maintenance orders, (ii) a creditor that provided services to protect the beneficiary’s interest in the trust, and (iii) claims by Maryland or the United States. Interestingly, a Maryland spendthrift provision must preclude involuntary transfers but does permit voluntary transfers of a beneficial interest “only with the consent of a person that is not a beneficiary.” MTA § 14.5-103 (x). Neither the UTC nor traditional Maryland common law rules permitted any voluntary transfers. UTC § 103 (16). Brent v. State of Md. Cent. Collection Unit, 311 Md. 626, 631, 537 A. 2d 227, 229 (1988); Duvall v. McGee, 375 Md. 476, 826 A. 2d 416 (2003) at footnote 4.
Other than discretionary, spendthrift or support trusts, the Maryland statute permits creditors of beneficiaries of third-party trusts access to beneficiary’s interest in the trust: ” A court may authorize a creditor or an assignee of a beneficiary to reach the interest of the beneficiary by attachment of present or future distributions to or for the benefit of the beneficiary or by other means if that interest is not subject to a discretionary distribution provision, a support provision, or a spendthrift provision.” MTA § 14.5-501 (a). Nevertheless, the court may limit the amount, timing and set other terms on such access under certain circumstances. These factors include taking into account the support needs of the beneficiary and of the beneficiary’s family, and/or the amount of the creditor claim and the amount of the likely realized yield of a forced sale as compared to the potential value to the beneficiary. MTA § 14.5-501 (b) (1) and (3). The UTC related provision simply states: “The court may limit the award to such relief as is appropriate under the circumstances.” UTC § 501. The Comment to that section states that because proceedings to satisfy a claim are equitable in nature, a court may consider the circumstances of the beneficiary and the beneficiary’s family. By making the equitable power to limit creditor access explicit in the Maryland statute, one might argue that MTA § 14.5-501 is meant to encourage a more activist role for the equity court than suggested by the UTC. Subject to MTA § 14.5-501, creditors can also attach current and future distributions of a mandatory distribution trust to the extent accessible by the beneficiary. If the trust does not distribute a mandatory distribution within a reasonable time after the designated distribution date, the creditor may reach that distribution. MTA § 14.5-506 (b). This would be useful to a creditor of a mandatory distribution to a beneficiary, such as when a beneficiary reaches a certain age, of an otherwise spendthrift or discretionary trusts arrives and the trustees delay or refuse to make the distribution. This restates the Maryland common law. See Brent v. State of Md. Cent. Collection Unit, 311 Md. 626, 640-641, 537 A.2d 227 (1988).
By statute, Maryland recognizes tenants by the entirety trusts. MTA § 14.5-511. If properly created, the “immunity” from claims against only one spouse continues for property held by the trust that was held by the couple prior to its funding as tenants by the entirely: ” Property of a husband and wife that was held by them as tenants by the entirety and subsequently conveyed to the trustee or trustees of one or more trusts, and the proceeds of that property, shall have the same immunity from the claims of the separate creditors of the husband and wife as would exist if the husband and wife had continued to hold the property or the proceeds from the property as tenants by the entirety…” MTA § 14.5-511 (b). Although the statute speaks of “husband” and “wife”, it is equally effective for same sex married couples. By the Civil Marriage Protection Act, ratified by the voters in 1012, Maryland recognizes, by statute, same sex marriage. Regardless, the Supreme Court later recognized same sex marriage as a constitutional right. Obergefell v. Hodges, 576 U.S. 644, 677 (2015) (“The dynamic of our constitutional system is that individuals need not await legislative action before asserting a fundamental right.”) Maryland is a very robust tenant by the entirety state, and tenants by the entirety trusts are important planning tools.
Maryland Spousal IRA Rollovers
A spousal rollover IRA is treated as the surviving spouse’s IRA. Md. Cts. & Jud. Proc. § 11-504(h) exempts IRAs and Roth IRAs regardless of value. Maryland has opted out of the federal bankruptcy exemptions. Md. Cts. & Jud. Proc, § 11-504 (g). In In Re: Neil Solomon, M.D., 67 F.3d 1128 (4th Cir. 1995), the federal Court of Appeals held that an IRA was exempt and the debtor was not forced to consider non-mandatory withdrawals as potential income for Chapter 13 purposes. In that case, Dr. Solomon was facing $160 Million in potential tort liability – much of it non-dischargeable under Chapter 7 because it arose from “willful and malicious injury by the debtor.” The bankruptcy court denied a Chapter 13 plan, holding that the debtor needed to include as “disposable income” some part of his IRAs. The Court of Appeals reversed the bankruptcy court and preserved the IRA.
Rousey v. Jacoway, 544 U.S. 320, 125 S.Ct. 1561 (2005), held that IRAs were covered under the federal exemptions of § 522(d)(10)(E) of the Bankruptcy Code. Before Rousey there was an issue because IRAs are not ERISA plans. The Bankruptcy Act makes the federal IRA exemption explicit and adds a limit of $1 Million, inflation-adjusted, for IRAs (but no limit for 401(k)s; rollovers from 401(k)s, SEPs and SIMPLE-IRAs). Bankruptcy Act § 522(n). The $1 Million limit should not cover IRAs under state exemptions when the state opted out of the federal exemptions (like Maryland).
Inherited IRAs
Inherited IRAs, on the other hand, present a different issue. Inherited IRAs are not an exempt asset in any jurisdiction applying the federal bankruptcy exemptions. Clark v. Rameker, 134 S, Ct, 2242(2014). There is no decision directly addressing whether the Maryland statute avoids the Clark analysis but, as discussed below, it is highly likely that the Maryland exemption protects inherited IRAs.
In Clark, the federal exemption was denied because the federal exemption only covered the debtor’s interest in the debtor’s retirement funds in specified qualified plans. An inherited IRA was held not to be the “retirement plan” of the subsequent beneficiary who, of course, had not established the fund initially.
The Maryland statute is materially different from that of the federal exemption. Cts. & jud. Proc. §11-11-504 (h) exempts “any money or other assets payable to a participant or beneficiary from, or any interest of any participant or beneficiary in, a retirement plan qualified under” certain IRC provisions, including IRAs. Although there is no Maryland-specific ruling, the inclusion of a “beneficiary” of an IRA as well a the “participant” ought to make inherited IRAs exempt from bankruptcy proceedings and from Maryland attachment.
In re Pacheco, 537 B.R. 935 (2015) (Bankr. D. Ariz. 2015) held that an inherited IRA was exempt from creditors under its state exemption statute. Arizona had likewise opted out of the federal exemptions and its exemption was virtually identical to that of Maryland. A.R.S. § 33-1126 (B). The Arizona statute varies only in syntax from its Maryland counterpart: Arizona states “Any money or other assets payable to a participant in or beneficiary of, or any interest of any participant or beneficiary in, a retirement plan under…”.
By including “beneficiary” to the protected class ought to sweep inherited IRAs into the Maryland exemption. “The inclusion of the term “beneficiary” likens the Maryland statute to state laws that have explicitly exempted inherited IRAs such as those in Arizona, Delaware and Florida. It may be likely that courts find that inherited IRAs are protected under Maryland law both in and out of bankruptcy.” Robert E. Eggmann and Dormie Ko, Bringing Clarity to Inherited IRAS, 51 Loy. U. Chi. L. J. 1095, 1109 (2019).
Tenants by the Entirety and Joint Tenancy
The asset protection afforded married couples in Maryland with tenancy by the entirety is strong.[2] Generally, a creditor of one spouse cannot attach tenancy by the entirety property unless the debt is an obligation of both.
A dramatic illustration of this concept is offered in Watterson v. Edgerly, 40 Md. App. 230, 388 A.2d 934 (Md. App.1978). In Watterson, the husband was subject to a judgment debt. Thereafter, he transferred all of his interest in the tenancy by the entirety real estate to his wife. She thereupon created a will leaving her assets in trust for the benefit of her husband with a spendthrift clause. The wife died 61 days after the transfer of real estate to her. The Court of Special Appeals said that the husband’s creditor “has no standing to complain” because it never had an attachable interest in the property. An exception to this rule is for federal tax liens. U.S. v. Craft, 535 U.S. 274 (2002) held that a federal tax lien breaches tenancy by the entirety protection. This has been limited to tax liens or certain forfeitures that are treated as tax liens. Maryland recognizes tenants by the entirety trusts. MTA § 14.5-511 which continues the “immunity” from claims afforded tenants by the entirety. The statute permits a trusts or trusts per the statute thus offering more flexibility than the tenancy itself.
Maryland recognizes tenancy by the entirety ownership in real and personal property. Diamond v. Diamond, 298 Md. 24, 467 A.2d 510 (Md. 1983) (“It is well established that this Court recognizes that a tenancy by the entirety may be created in personal property”).
If the debtor spouse predeceases a spouse who is not subject to the debt, the property will pass free of the debt (Craft et al. being the exception). If the debtor spouse is the survivor, a disclaimer to a pre-existing spendthrift trust for the benefit of the surviving debtor spouse ought to protect one-half of the property. ET § 9-202 (f)(2) states: ” Creditors of the disclaimant have no interest in the property disclaimed.” See, however, Drye v. United States., 528 U.S. 49 (1999) which held that a disclaimer is not effective to effectuate a transfer of property free of a federal tax lien in place against the disclaimant. Also see Troy v. Hart, 116 Md. App. 468, 697 A.2d 113 (1997), cert. denied, 347 Md. 255, 700 A.2d 1215 (1997) that held a disclaimer is effectively treated as an available resource for Medicaid.
For other forms of joint tenancy, the property may also be free from the decedent’s creditors even after a judgment is entered against one of the joint owners. In the Eastern Shore Building and Loan Corp. v. Bank of Somerset, 253 Md. 525 (1969), the Court of Appeals held that a judgment that constituted a lien on one owner’s interest in joint tenancy property did not survive a conveyance to a third party unless or until there is execution on the judgment before the conveyance. This is not an intuitive result because joint tenancies are “disfavored” in Maryland and many unilateral acts by one joint tenant operates to sever the tenancy, thereby converting it to a holding as tenant in common. Thus, for example, if one joint tenant executes a lease, executes a contract of sale, or takes other kinds of individual action, the tenancy is severed and the property “converts” to ownership in common. Nevertheless, the mere fact of a judgment against one joint tenant does not effectuate such a severance and conversion unless the judgment creditor executes on the judgment. The holding in Eastern Shore Building & Loan Corp is the common law rule: “At common law, a creditor’s rights to a debtor’s joint property were limited to the right to sever before the debtor joint tenant died.. . If the debtor owning an interest in joint tenancy died before the creditor sought to reach the debtor’s share, however, his interest was deemed to expire and the survivor held free of any claims against the decedent. This is still the prevailing ru1e.” [3] The common law rule, however, would not defeat federal tax liens under the reasoning of Craft and Drye.
[1] As with the UTC § 1106, the Maryland Act generally applies regardless of whether a trust was created prior to enactment. MTA § 14.5-1006.
[2] See generally: Franke, “Asset Protection and Tenants by the Entirety,” 34 ACTEC J. 210 (2009). Although common-law marriage may not be created in Maryland, a valid Maryland marriage can be created by a formal ceremony regardless of whether the couple is issued a marriage license by a county clerk. Trapasso v. Lewis, 247 Md. App. 577 (2020).
[3] Thomas R. Andrews, “Creditors’ Rights Against Nonprobatc Assets in Washington: Time for Reform,” 65 Wash. L. Rev. 73, 92-3 (1990).
