By Indira K. Sharma, Esq.

Trust disputes are on the rise because more people are using trusts as will-substitutes to transfer assets outside of probate. Here are best practices under Maryland law.

Editor’s Note: The companion piece, Trust Disputes Are On the Rise: What to Know, is located in the MSBA Resource & Learning Library.

Outset of Trust Administration

If you represent the trust, you should send a non-engagement letter at the outset of the trust administration to all interested persons for the purpose of clarifying your role as attorney for the trust. You should make clear that you do not represent the interests of any individual beneficiary.

Estate Planning Stage

At the estate planning stage:

• When drafting the trust, discuss how the chosen fiduciary would interact with the beneficiaries of the estate.
• If you anticipate there could be a disgruntled beneficiary in the future, consider whether it make sense to videotape the trust signing and have the settlor visit his/her physician close to the date of the signing for the purpose of providing a baseline for his/her health at the time of that signing. Ask the doctor to include in the client’s medical records from that meeting his/her thoughts as to the client’s mental capacity.
• If the settlor is omitting a child, a better practice is to name the child (to avoid the omitted child arguing scrivener’s error) and then include a clause stating that the child was intentionally left out. Create a memo to that addresses the settlor’s reasons. The settlor may wish to sign a letter to the child explaining the reasons, to be maintained with the file.

Exculpatory Clauses

To protect the trustee from potential liability, include a clause that relieves the trustee of liability under certain conditions. The clause should limit the liability of the trustee to circumstances involving gross negligence or intentional misconduct. An exculpatory clause is unenforceable to the extent the term:

• relieves the trustee from liability for breach of trust committed in bad faith or with reckless indifference to the purposes of the trust or the interests of the beneficiaries or
• was inserted into the trust as a result of an abuse of a fiduciary or confidential relationship unless the trustee proves that the exculpatory term is fair under the circumstances and that the existence and contents of the exculpatory terms were adequately communicated to the settlor. The Maryland Trust Act (“E&T”). E&T, § 14.5-906.

Obtaining Consent, a Release or Ratification from Beneficiaries

One avenue for preventing actions against trustees by beneficiaries is to obtain their consent or ratification before a potentially questionable action. In addition, the trustee may seek to obtain a release. E&T Section 14.5-907 provides that a trustee is not liable to a beneficiary for breach of trust if the beneficiary consented to the conduct constituting the breach, released the trustee from liability for the breach or ratified the transaction constituting the breach unless:

• the consent, release, or ratification was induced by improper conduct of the trustee; or
• at the time of the consent, release, or ratification, the beneficiary did not know the rights of the beneficiary or of the material facts relating to the breach.

Fee Shifting Provisions

Include a provision in the trust that penalizes an interested party for unsuccessfully challenging the trust or bringing an action against the trustee. The provision would direct the trustee to deduct from the disgruntled beneficiary’s share all costs, expenses and attorneys’ fees incurred by the trust if the disgruntled beneficiary is unsuccessful in court. The goal is to shift the burden of legal fees to a beneficiary and to cause the beneficiary to think twice about viability of his/her claims while preserving the right of the beneficiary to seek relief from a court for wrongful acts of a trustee.

Another MSBA Resource: Leaving a Home in Trust for a Child with Disabilities

Indira K. Sharma is with Saul Ewing Arnstein & Lehr LLP where she represents businesses in a wide range of litigation, from complex contract and commercial disputes to matters involving commercial leases and real estate. Her litigation experience also includes handling probate and fiduciary disputes involving trusts, wills, estates, and guardianships.