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Law Lends Finality to Planning With Revocable Trusts

A law emerging from this year’s session of the Maryland legislature now extends certain probate estate protections to revocable trusts, enhancing their utility as an estate planning tool.

A flaw in the sometimes commercially touted strategy of beating estate probate with a revocable trust has been that creditor claims against the creator of the trust would persist in death long past the cut-off that otherwise would apply if the estate were administered in probate. But a new addition to the Maryland Trust Act, effective October 1, puts revocable trusts on essentially equal footing with the probate process against creditor’s claims.

Probate involves opening an estate with the Register of Wills, making certain filings as to the value of the estate assets and accounting to the Register of Wills as to receipt of estate income and payment of estate expenses after death, as well as the eventual distribution of net assets according to terms of the Will. Creditors have six months to bring claims against the estate, after which time the personal representative of the estate, and the estate’s beneficiaries, are protected by a bar to most such claims, thereby providing finality to the closing of the estate.

If instead the decedent had created a revocable trust, which could be revoked or modified at any time during life, the assets held by the trust would not be subject to the probate process because they would be disposed of according to terms of the trust, and not to any Will. Without the new law creditors could claim against such trust assets after the trust settlor’s death, subject only to applicable statutes of limitations.

For this reason, many estate planning lawyers have cautioned against probate avoidance as a goal in itself. However, the revocable trust served, as it still does, as a useful way to hold property out of state. If a Maryland resident owned a beach house in Delaware, for example, the owner’s personal representative would have to open a separate estate there, in addition to the one in Maryland, to pass the property under a Will. If instead, the owner had put the property in a revocable trust during life, the additional probate in Delaware could be avoided. Similarly, revocable trusts served, as they still do, as a helpful way for a trust settlor who is infirm or disabled, or expects to be, to provide detailed terms of asset administration for his or her benefit for the remainder of life.

Under the new law, if an estate (other than a small estate) has been opened for a decedent at the Register of Wills, the trustee and the beneficiaries of a trust that was revocable just before death may not be held liable for creditor claims unless such claims are properly presented under deadlines already set for probate estates. These deadlines are six months after death or two months after a personal representative delivers a statutorily provided notice to the creditor, stating that the claim will be barred unless presented within two months.

For a decedent who created a revocable trust but for whom no probate estate has been opened, the new law provides for a general notice procedure, similar to the one already applicable to probate estates, involving newspaper publication once a week for three weeks, announcing the death of the revocable trust settlor, giving the name and address of the trustee where any claims must be brought. Claims against the trust property, the trustee and the trust beneficiaries are barred unless presented within six months after the date the notice was first published.

With the protections afforded under the new law, the revocable trust may be pressed into service more routinely in estate planning. The revocable trust model may not necessarily become standard for basic estate planning, however, because the model depends on transferring substantially all assets to the revocable trust so that the trust, rather than the Will, disposes of most assets. The costs and efforts of doing this may not be convenient or desirable in every case.

For more information please contact Jay Merwin at 410-583-2400 or merwin@bowie-jensen.com.

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