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’s what to know about Maryland law.

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

Claims Against Trustees

Claims against trustees usually fall in two categories: how the trust assets are managed, and how the trust is administered. Potential breach of fiduciary claims against a trustee might include:

• Mismanagement of trust assets, such as failure to properly insure or otherwise secure and protect trust assets or risky investments
• Favoring a particular beneficiary or class of beneficiaries (such as income beneficiaries over remaindermen) through investment decisions
• Self-dealing, such as when a trustee, who is also a beneficiary, rents a home at bargain prices or is living in the home rent-free
• Misappropriation of trust funds

A Trustee’s Fiduciary Duties

A trustee’s fiduciary duties are set forth in Subtitle 8 of the Title 14.5 of the Estates and Trusts Article, known at the Maryland Trust Act (“E&T”).

• A trustee shall administer the trust reasonably under the circumstances, in accordance with the terms and purposes of the trust and the interest of the beneficiaries, and in accordance with Title 14.5. E&T, §14.5. Although the terms of a trust generally prevail over Title 14.5 provisions, the terms of a trust cannot alter this fundamental duty of a trustee. E&T, §14.5-105.
• Duty of Prudence: A trustee shall administer the trust as a prudent person would, by considering the purposes, terms, distributional requirements, and other circumstances of the trust. In satisfying the aforementioned standard, the trustee shall exercise reasonable care, skill and caution. E&T, §14.5-803.
• Duty of Loyalty to the Beneficiaries: A trustee shall administer a trust solely in the interests of the beneficiaries. E&T, §14.5-801.
  • There is a presumption of conflict between the personal and fiduciary interest of the trustee if a transaction involving trust property is entered into by the trustee with (a) the spouse of the trustee, (b) a descendant, sibling, or parent of the trustee or a spouse of a descendant, sibling, or parent of the trustee, (c) an agent or attorney of the trustee, or (d) a corporation or any other person or enterprise in which the trustee, or a person that owns a significant interested in the trustee, has an interest that might affect the best judgment of the trustee
  • If a trust has two or more beneficiaries, a trustee shall act impartially in investing, managing, and distributing the trust property, giving due regard to the respective interests of the beneficiaries. E&T, §14.5-803.
• The standard of care required of a trustee or personal representative as a fiduciary include:
  • The exercise of the care, skill and diligence of a reasonably prudent person dealing with his or her own property;
  • The exercise of good faith and loyalty to all the beneficiaries;
  • The lack of self-dealing;
  • The exercise of reasonable watchfulness over investments; and
  • The maintenance of full, accurate and precise records.

See Allan J. Gibber, Gibber on Estate Administration, §3-1 (6th ed.) (citing Kann v. Kann, 344 Md. 689, 708 (1997). See also E&T, §14.5-801 et seq.

• If a trustee has special skills or expertise, or is named a trustee in reliance on the representation of the trustee that the trustee has special skills or expertise, then the trustee shall use those special skills or expertise. E&T, §14.5-806.
• A trustee may delegate duties and powers to an agent that a prudent trustee of comparable skills could properly delegate under the circumstances. A trustee shall exercise reasonable care, skill and caution in (1) selecting an agent, (2) establishing the scope and terms of the delegation, consistent with the purposes and terms of the trust; and (3) periodically reviewing the actions of the agent in order to monitor the performance of the agent and compliance with the terms of the delegation of the agent. E&T, §14.5-807.
• Trustee Investment Obligation and The Prudent Investor Rule – Under E&T, §15-114, a fiduciary shall, inter alia, invest and manage fiduciary assets as a prudent investor would and exercise reasonable care, skill and caution regarding the anticipated effect on the fiduciary assets under the facts and circumstances prevailing at the time of any action by the fiduciary.

Tort Action for Breach of Fiduciary Duty

Until July 2020, there was no independent tort of breach of fiduciary duty in Maryland. In Plank v. Cherecki, the Maryland Court of Appeals settled decades of uncertainty and dicta from prior decisions and held that a breach of fiduciary duty may be actionable as an independent tort claim. Plank v. Cherneski, 469 Md. 548 (2020). Under Plank, in order to state a claim for breach of fiduciary duty, a plaintiff must show:

• The existence of a fiduciary relationship;
• Breach of the duty owed by the fiduciary to the beneficiary; and
• Harm to the beneficiary.

Note: The Plank Court recognized that many kinds of fiduciary relationships can be created by common law, statute, or contract — each with its own characteristics.

Procedural Matters

The Maryland Trust Act, Title 14.5 of the Estates & Trust Article, came into effect on January 1, 2015. It essentially codified much of the common law surrounding trusts and is based on the Uniform Trust Code. Accordingly, case law from other jurisdictions that have adopted the Uniform Trust Code may be instructive.

• The common law of trusts and principles of equity supplement the Maryland Trust Act to the extent modified by the Maryland Trust Act or another law. E&T, 14.5-106.
• Trust disputes in Maryland are considered to be equitable in nature. See E&T, §14-101. The circuit court has original jurisdiction over equity matters and, accordingly, has jurisdiction over a trust dispute. C&JP, §1- 501.
• Under E&T, §14.5-201, on the invocation of the court’s jurisdiction by an interested person, on the court’s own motion, or as otherwise provided by law, the court may intervene actively in the administration of a trust, fashioning and implementing remedies as the public interest and the interests of the beneficiaries may require.
  • By accepting the trusteeship of a trust having the principle place of administration in the State of Maryland, the trustee submits personally to the jurisdiction of the Maryland court.
  • Beneficiaries are also subject to the jurisdiction of the Maryland court.
  • Recipients of any distribution from the trust submit personally to the jurisdiction of the Maryland court.
• A trust proceeding may be initiated by a fiduciary or other interested person filing a petition in the circuit court in the county in which the trust property is located or where the trustee, if any, resides, is regularly employed, or maintains a principal place of business. See Md. Rule 10-501. The form of the petition is set forth in Md. Rule 10- 501(c).
• The petitioner must serve all interested persons and all others exercising control of any or all of the fiduciary estate with a copy of the petition and a show cause order issued pursuant to Rule 10-104. See Md. Rule 10- 502.
• If no response to the show cause order is filed and if the court is satisfied that that the petition has complied with the notice requirements, the court may rule on the petition summarily. See Md. Rule 10-103. If an objection is filed, the court must hold a hearing and all interested persons and all others exercising control over the fiduciary estate must be notified of the hearing. Md. Rule 10-103(b).
• Any interested person may obtain discovery in a contested matter pursuant to Title 2, Chapter 400 of the Maryland Rules, unless otherwise ordered by the court. Md. Rule 10- 102. A court may apply any of the rules of Title 2 as it deems appropriate.

Beneficiary Disputes

The trustee has a fiduciary duty to the beneficiaries to implement what the trustee believes was the settlor’s intent. Trustees are exposed to claims by beneficiaries who are disappointed and upset with the distribution of assets. Disgruntled beneficiaries can cause harm to other beneficiaries by running up legal costs that ultimately deplete the assets available in the trust to all beneficiaries.

• A trustee has a duty to respond to the request of a qualified beneficiary for information related to the administration of the trust, including a copy of the trust instrument. E&T, §14.5-813. Note the limitation on qualified beneficiaries. Qualified beneficiaries are those entitled to current distributions.
• Under the Maryland Trust Act, a trustee’s discretionary powers to determine the benefits of a beneficiary is subject to judicial control to prevent misinterpretation and abuse of discretion. E&T, §14.5-203.
  • Even if the trust provision uses words such as “absolute”, “sole” or “uncontrolled” discretion, a trustee abuses the discretion of the trustee in exercising or failing to exercise a discretionary power if the trustee:
    • Acts dishonestly;
    • Acts with an improper motive, even though not a dishonest motive;
    • Fails to exercise the judgment of the trustee in accordance with the terms and purpose of the trust; or
    • Acts beyond the bounds of reasonable judgment.

Grounds for a Trustee’s Removal

Section 14.5-706 of the Maryland Trust Act provides grounds and procedures for the removal of a trustee, in addition to those grounds and procedures set forth in §15-112 of the E&T Article. A settlor, co-trustee or a beneficiary may request the court to remove the trustee if:

• The trustee has committed a serious breach of trust
• Lack of cooperation among co-trustees substantially impairs the administration of the trust
• Because of the unfitness, unwillingness, or persistent failure of the trustee to administer the trust effectively, the court determines that removal of the trustee best serves the interests of the beneficiaries, or
• There is a substantial change of circumstances and removal is requested by all of the qualified beneficiaries, and the court finds that removal of the trustee best serves the interest of all the beneficiaries and is not inconsistent with a material purpose of the trust, and a suitable co-trustee successor trustee is available.
• A court may also remove a trustee on its own initiative.

Breach of Trust

A breach of trust occurs when the trustee violates a duty that the trustee owes to a beneficiary. E&T, §14.5-901. A breach of trust may occur by an action or a failure to act. To remedy a breach of trust, a court may:

• Compel the trustee to perform the duties of the trustee
• Enjoin the trustee from committing a breach of trust
• Compel the trustee to redress a breach of trust by paying money, restoring property, or other means
• Order a trustee to account
• Appoint a special fiduciary to take possession of the trust property and administer the trust
• Suspend the trustee
• Remove the trustee
• Reduce or deny compensation to the trustee
• Subject to §14.5-909, void an act of the trustee, impose a lien or a constructive trust on trust property; or trace trust property wrongfully disposed of and recover the property or proceeds from the property, or
• Order other appropriate relief.

A trustee that commits a breach of trust is liable to the beneficiary for the greater of (1) the amount required to restore the value of the trust property and the trust distributions to what they would have been without the breach or (2) the profit the trustee made by reason of the breach. E&T, §14.5-902.

Absent a breach of trust or the applicable standard of care, a trustee is not liable for loss or depreciation in value of trust property or for not having made a profit. E&T, §14.5-903. Under Section 14.5-812, a trustee is not liable to the beneficiaries affected by the breach for a breach of trust committed by a former trustee. A trustee is liable to the beneficiary for a breach of trust if the trustee:

• Knows or should know of a situation constituting a breach of trust committee by a former trustee and the trustee improperly permits it to continue
• Neglects to take reasonable steps to compel a former trustee or other person to deliver trust property to the trustee, or
• Neglects to take reasonable steps to redress a breach of trust committed by a former trustee

Proceeding to Approve/Disapprove a Proposed Modification or Termination of Trust Section

14.5-409 of the Maryland Trust Act provides the institution of proceedings by a trustee or beneficiary to approve or disapprove a proposed modification or termination of a trust.

Trustee Remedies

The Maryland Rules provide trustees with certain remedies.

• Rule 10-501 permits a trustee, or other interested person, to file a petition for the circuit court to assume jurisdiction on the trust to interpret the trust provisions.
• A trustee can seek an award of fees and costs under Md. Rule 1-341 for bad faith or meritless litigation. The trustee can then file an accounting and seek judicial approval for the trustee to charge those awarded fees against the disgruntled beneficiary’s distributive share.
• Note: A trustee is not personally liable for a contract properly entered into by the trustee in the fiduciary capacity of trustee in the course of administering the trust if the trustee in the contract disclosed the fiduciary capacity. Claims may be brought against the trustee in his/her fiduciary capacity actions taken in his/her capacity as a fiduciary.

Trust Contests

The grounds for challenging the validity of a trust are similar to those for a caveat against a will and include (1) improper execution, (2) lack of mental capacity/legal competency, (3) undue influence, and (4) fraud.

The capacity of the settlor to create, amend, revoke, or add property to a revocable trust, or to direct the actions of the trustee of a revocable trust, is the same as that required to make a will. E&T, §14.5-601. In addition, there are also statutory prerequisites for creating a trust that are different than for making a will, as well as common law differences. See E&T, §§14.5-401, et seq.

The Maryland Trust Act is silent as to the period of limitations to commence a judicial proceeding to contest the validity of a revocable trust.

Trust contests must be filed in the form a petition in the circuit court and should be filed in the county where either all or any part of the property of the estate is located or where the fiduciary, if any resides, is regularly employed, or maintains a place of business. E&T, §14-101. Md. Rule 10-501(b).

Discovery is permitted in trust contests in accordance with Title 1, Chapter 400 of the Maryland Rules, unless otherwise ordered by the Court.

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.