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MD2015007 | 2015-1 | Bulletins | www.vuwriter.com MD2015007
MD2015007
Bulletin: MD2015007
UNDERWRITING - Trusts
Much of Maryland's law on trusts is based upon common law (i.e., case law). In 2014, the Maryland Legislature significantly overhauled statutory law relating to trusts, as codified in Estates & Trusts §14.5–101, et seq. For the most part, statutory law fills in gaps that case law does not otherwise address.
This Bulletin sets forth standards that Maryland title agents should adhere to for transactions involving trusts. It is not intended to be a comprehensive review of the law of trusts. Please consult with a Maryland underwriter if you have questions not addressed by this Bulletin.
A trust is a fiduciary relationship, usually created at the direction of an individual (the “Settlor”, also called a “Trustor” or a “Grantor”), in which one or more persons (the “Trustees”) hold the individual’s property (the “Trust Assets”) subject to certain duties to use and protect it for the benefit of others (the “Beneficiaries”). The Trustee holds legal title to the property, and the beneficiaries hold equitable title.
Although many people think of trusts as separate legal entities, the trust itself is not a legal entity that can hold property. It is simply a term specifying a legal relationship between the Settlor and the Trustee.
II. Why are Trusts Used?
The primary purpose of a trust is to avoid probate. Beneficiaries may gain access to trust assets more quickly than if they were transferred by a will. Other benefits may include:
Control: A Settlor may also be the Trustee of a revocable trust while he/she is alive. This allows the Settlor to be in full control of the trust’s assets during the Settlor’s lifetime.
Privacy: Probate proceedings are public documents, trust documents are not.
Savings on court fees: Although it may cost money to set up a trust, the costs of probate, which can be significant, are entirely avoided.
Tax Savings: there can be tax advantages to using irrevocable trusts, which separate all incidents of ownership from the Settlor, effectively removing such assets from the Settlor’s taxable estate.
III. Creation of Trusts:
Under MD Estates & Trusts §14.5-401, a trust may be created by transferring property to another person during the lifetime of the settlor, or it may be established by a will upon the death of a settlor (the latter is sometimes called a “testamentary trust”).
§14.5-402 states that the settlor must have the capacity to create a trust, and must indicate an intention to create a trust. Further, there must be a definite beneficiary, as well as duties for the trustee to perform. Trusts may be created only for lawful purposes that are possible to achieve. §14.5–404.
A trust that is validly created under the laws of another state is also valid in Maryland. §14.5–403.
Oral trusts (i.e., trusts that are not set forth in a written instrument) are valid if the terms may be established by clear and convincing evidence. §14.5–406.
IV. Revocable v. Irrevocable Trusts:
Here are some primary differences between irrevocable trusts and revocable trusts:
- The property belongs to the trust, and not to the Settlor;
- These agreements generally cannot be modified by the Settlor;
- Trust property is not taxed at the time of the Settlor’s death;
- Trust property is out of the reach of the Settlor’s creditors;
- The Trustee should be an independent person chosen by the Settlor, so that it is clear that the Settlor is not exercising control over the trust assets;
- The trust usually has its own tax id number (EIN).
- The property may be conveyed into and out of the trust by the Trustee;
- The trust agreement may be modified at the Settlor’s sole discretion;
- For estate tax purposes, the Settlor still owns the property until the time of death;
- Trust property is not protected from the Settlor’s creditors;
- The Settlor often serves as the Trustee, in order to oversee the trust assets;
- The trust usually does not have its own EIN, since the Settlor files everything on his/her 1040 form.
V. Conveyances into and out of trusts:
To start with, property should never be conveyed out of an irrevocable trust without the approval of an Underwriter, since the property no longer belongs to, or is under the control of, the Settlor. This may create negative tax consequences for the Settlor, or other legal issues. Please consult with an underwriter if this request is made of you.
As for revocable trusts, note that all property should be titled in the name of the Trustee(s) only. For example, the grantee of a deed conveying the property from John Smith to the John Smith Revocable Family Trust dated August 1, 2012, should be:
John Smith, as Trustee of the John Smith Revocable Family Trust dated August 1, 2002.
Never convey property to the trust itself. The trust is not a separate legal entity, so the trustee(s) should always be the grantee(s). Similarly, conveyances out of a revocable trust should be in the name(s) of the Trustee(s) only.
Maryland statutory law recognizes this distinction. See Maryland Real Property §2-122(b)(1) and (b)(2):
(1) A grant of property by deed to a grantee designated in the deed as a trust has the same effect as if the grantor had granted the property to the trustee or trustees appointed and acting for the trust on the effective date of the deed.
(2) If executed by the trustee or trustees appointed and acting for the trust on the effective date of the deed, a grant of property by deed from a grantor designated in the deed as a trust has the same effect as if the grantee had received the property from the trustee or trustees appointed and acting for the trust on the effective date of the deed.
VI. The Garn–St. Germain Depository Institutions Act of 1982:
On occasion, a mortgage investor may require real property to be conveyed from the Trustee of a revocable trust back to the original Settlor, in order for it to be refinanced with that investor. This should not be necessary, since, where the Settlor is one and the same person as the Trustee, the Trustee has full power to mortgage or sell the property (assuming the trust permits this), without a signature from the Settlor as an individual.
Mortgage lenders should also be aware that conveying property into a revocable trust does not trigger the “due-on-sale” provisions of a mortgage or deed of trust, which permit lenders to foreclose upon collateral that has been conveyed to a third party. This is addressed by §1701j-3(d)(8) of The Garn-St. Germain Depository Institutions Act of 1982.
VII. Requirement to Review Trust Documents:
For Maryland title agencies, obtaining information about a particular Maryland trust is an important part of any file review. Asking for a complete copy of the trust instrument is always the best option. Some individuals may resist providing a full copy of their trust document, due to privacy concerns. However, the law permits this request by title insurance producers, as a condition of issuing title insurance. MD Estates and Trusts §14.5–910(h).
Instead of furnishing a copy of the entire trust agreement, MD Estates and Trusts §14.5–910(a) permits the use of a Certification of Trust, which includes the following information:
1) That the trust exists and the date the trust instrument was executed;
2) The identity of the settlor;
3) The identity and address of the currently acting trustee;
4) The powers of the trustee in the pending transaction;
5) The revocability or irrevocability of the trust and the identity of a person holding a power to revoke the trust;
6) The authority of co-trustees to sign or otherwise authenticate and whether the authentication of all or fewer than all of the co-trustees is required in order to exercise powers of the trustee;
7) The taxpayer identification number of the trust, unless the taxpayer identification number is also the Social Security number of a settlor; and
8) The manner and name in which title to trust property may be taken.
A certification of trust may be signed or otherwise authenticated by a Trustee. It must state that the trust has not been revoked, modified, or amended in a manner that would cause the representations contained in the certification of trust to be incorrect.
The recipient of a certification of trust may require the trustee to furnish copies of those excerpts from the original trust instrument, and later amendments which designate the Trustee and confer on the trustee the power to act in the pending transaction.
If a person acts reasonably in reliance on a certification of trust without knowledge that the representations contained in the certification are incorrect, they are not liable for their acts. Further, while acting reasonably under the circumstances, a person who enters into a transaction in reliance on a certification of trust may enforce the transaction against the trust property as if the representations contained in the certification were correct.