Probate in Equity Courts

January, 2012  | By Carl E. Eastwick

Semmes, Bowen & Semmes Baltimore, Maryland

These days, a revocable inter vivos trust serves as the principal testimony instrument of many estate plans. The settlor of a trust of this sort retains nearly total control of the trust assets by retaining the unfettered power to amend the trust, and by implication also to revoke it. It matters not whether the trustee is the settlor or a third party. Thus, the beneficiaries of the trust possess but a tenuous contingent interest in the trust assets.

The popularity of these substitutes for wills is largely due to the desire on the part of the trust maker to avoid the administration of wealth under the supervision of a probate court, a special purpose tribunal whose function is to validate wills, appoint and supervise the persons who administer the estate, and resolve many disputes involving creditors of the decedent and the heirs. The aim of a revocable trust plan is to distribute the assets quickly and privately. However, avoiding probate may negate certain helpful rules which apply to testamentary gifts made under a will. These include the orderly satisfaction of the claims of creditors, survivorship presumptions, the ability to revoke a will by a subsequent will, the automatic removal of an ex-spouse as a beneficiary and fiduciary, ademption of gifts by extinction, and anti-lapse rules. A well drafted trust and helpful statutory provisions sometimes compensate for the lack of these legal aids. Nevertheless, judicial supervision of the administration of revocable trusts is, in some cases, inevitable.

Since a local probate court is often without jurisdiction over trusts, tending to the various problems and disputes in the administration of revocable trusts falls to the courts of equity. The Uniform Trust Code is a great aid to the court if the trust in question is governed by the law of a jurisdiction where the UTC has been enacted, which includes the District of Columbia and Virginia. Maryland has not yet adopted any version of the UTC.

Determining the Validity of the Trust. Article 6 of the UTC deals specifically with the validity of revocable trusts, and it impliedly vouches for their usefulness as a testamentary arrangement. Under the UTC and the common law, a settlor must have the same legal capacity to create a revocable trust as to execute a will. Just like a will, a trust is void to the extent its creation was induced by fraud, duress, or undue influence. The challenger carries the burden of proving the elements of the invalidity, even if it is shown that a relationship of confidence existed between the defendant and the settlor. Upman v. Clarke, 359 Md. 32; 753 A.2d 4 (2000). A statute of limitations applies to actions brought after the settlor’s death contesting the validity of a revocable trust.

Protecting the Rights of Beneficiaries. Section 603 of the UTC as adopted in DC and Virginia provides that a revocable trust’s beneficiaries have almost no protection under the UTC so long as the trust is revocable. The rights of beneficiaries become fixed only after the settlor dies or the trust otherwise becomes irrevocable. In Maryland, the extent of the rights in a continuing trust has been addressed by the Maryland Court of Special Appeals in an action by a beneficiary to compel the trustee to give him certain notices and for an accounting following the death of the settlor of a revocable trust. The trial court granted the relief requested by the beneficiary. The intermediate appellate court affirmed that the beneficiary of the trust in question has the right to receive the notice and could compel an accounting. However, the Court of Appeals vacated the appellate order on the ground that the trial court’s order for an accounting is not a final order subject to appeal. Moreland Johnson v. Johnson, 184 Md. App. 643; 972 A.2d 861 (2009), vacated and remanded, ___ Md. ___ (2011).

Protecting the Rights of Creditors. American common law does not protect assets placed in a revocable trust from the creditors of the settlor. Some states, but not Maryland, Virginia, or the District of Columbia, have granted limited lifetime protection from creditors to certain prescribed types of self-settled trusts. After the death of the settlor, in UTC jurisdictions it is clear that revocable trust assets may be exposed to the claims of settlor’s creditors and are accessible to pay funeral costs and expenses of administration after the death of the settlor. However, the UTC addresses neither the priority of the claims nor the liability of the settlor’s other non-probate assets to satisfy claims against the settlor’s decedent estate.

Rights of Spouses. In Maryland, a settlor may effectively exclude a spouse as a beneficiary. The exclusion is generally upheld, even if the spouse claims a statutory share against the trust in a proceeding in equity on the theory that the forced share statute applies to revocable trust assets following the settlor’s death. Karsenty v. Schoukroun, 406 Md. 469; 959 A.2d 1147 (2008). In contrast, the UTC states that trust assets are available to pay a spouse’s statutory allowances to the extent that the settlor’s probate estate is inadequate. The UTC overrides any trust provision which attempts to vary these spousal protections.

It is natural to assume that the popularity of revocable trusts as testamentary vehicles increases the probability that the equity courts will be called upon to sort out problems associated with the administration of trust assets following the death of the settlor. Probate courts, supported by an ingrained set of laws and procedures, have acquired the institutional competence to resolve disputes which arise when family members feud or fiduciaries are not up to the task. It is hoped that the advent of the UTC, together with its inevitable adaptations and the foundation of the common law, will over time provide the courts of equity with similar tools.