Although now commonplace, revocable trusts presented a challenge to the common law of trusts. How can a settlor create a trust as something separate and distinct from the settlor yet still retain complete dominion and control over the assets supposedly placed into the trust? Additionally, as a will substitute how can a revocable trust act to transfer assets at the death of the settlor to beneficiaries when the revocable trust violates the essential will formalities dictated by Estates & Trusts § 4-102? The issues have been characterized as “a long-festering problem of legal doctrine: the need to reconcile nonprobate transfers with the supposed monopoly of probate. In order to validate will-like modes of transfer that lack Will Act formality and that operate without the mechanisms and protections of probate, we have been pretending that the will substitutes are lifetime transfers. In truth, will substitutes are simply ‘nonprobate wills’ – ‘wills’ that need not comply with the Will Act.”[1] Each of these challenges goes to the basic, definitional core of a trust and a will.
The rule that a trust cannot exist without a separation of the legal and equitable title raises an issue as to the efficacy of revocable trusts used as will substitutes. In the basic revocable trust the settlor is the sole trustee during his or her competency. In addition, the settlor retains the right to amend or revoke the trust. Maryland had no case directly upholding this standard arrangement. There are cases, however, where the court discusses revocable trusts without raising the issue as to such arrangements being illusory. In Karsenty v. Schoukroun, 406 Md. 469, 959 A.2d 1147 (2008), for example, the court addressed whether the total dominion and control over a trust by a settlor would automatically sweep trust assets into the purview of the spousal elective share. That case made clear that there was a distinction between a probate estate and a trust estate even when the settlor retained control during his lifetime. As part of the distinction between those estates, the court pointed to case law concluding that a deed to trust was “a complete and bona fide transfer” but that case law only related to trusts having third parties as trustees. Nevertheless, the Schoukroun court swept those distinctions into situations involving the settlor as sole trustee. In Upman v. Clarke, 359 Md. 32 (2000) the court noted but did not otherwise discuss that the property was placed in trust initially with the settlor as sole trustee. Other jurisdictions have held that the revocable trust is valid as a trust because it has another beneficiary at the death of the settlor. Due to the revocable nature of the trust, however, this beneficiary has a very tenuous hold on the trust. See Restatement of Law of Trusts (2nd) § 56 Comments f; Farkas v. Williams, 125 N.E. 2nd, 600 (Ill., 1955) (“A contingent equitable interest in remainder.”) The Maryland Courts addressed an analogous situation in an irrevocable in trust in U.S. v. Baldwin, 283 Md. 586 (1978). In that case the settlor retained a life estate in the assets, the right to name himself as trustee, and a limited testamentary power of appointment so that he could name any person as the remaindermen. In Baldwin, the court held that the remaindermen had “vested remainder in the trust corpus, subject to divestment by Baldwin’s exercise of his testamentary power.” Baldwin at 595. This created a beneficiary separate and apart from the settlor. See also Pope v. Safe Dep. & Tr. Co., 163 Md. 239 (1932). Presumably, the Court of Appeals would uphold the basic revocable trust arrangement if it is presented to it before the statutory “fix” provided by the Maryland Trust Act. It cannot be denied, however, that there is a fundamental tension between the basic principles underlying a law of trust and the recognition of a revocable trust as a “trust.” A trust is characterized by the bundle of fiduciary obligations that the trustee owes to the beneficiary.
[1] John H. Langbein, “The Nonprobate Revolution and the Future of the Law of Succession,” 97 Harv.L.Rev. 1108, 1109 (1984).
