Maryland Lawyer’s Guide to Asset Protection in Estate Planning: An Overview

Proper Asset Protection Planning vs. That Which Comes Back to Burn You.

1.0 Asset Protection as Part of Estate Planning.

Effective asset protection techniques should be discussed as part of estate planning in general. Legitimate asset protection techniques can be added to conventional estate planning that will be beneficial if the client or their beneficiaries later experience financial difficulty. Once actual threats arise, however, it is generally too late and, indeed, may make matters worse due to state creditor protection and federal bankruptcy rules governing fraudulent transfers.

Asset protection planning, once considered an exotic – perhaps fringe – area of the practice of law, is recognized increasingly as a fundamental part of estate planning:

“Asset protection in some respects has been a part of estate planning for as long as an estate planning discipline has existed. After all, people create trusts for family members in most instances to preserve and protect property for the future use and benefit of the family members. From this perspective, asset protection is really just an integral part of the primary goal of the estate planner – to provide a structure to pass property, either during life or at death, to a client’s designated beneficiaries, while reducing transfer taxes and avoiding other costs and delays.

In today’s increasingly litigious environment, however, asset protection planning is becoming increasingly significant as a separate area of focus within the field of estate planning. The essence of asset protection planning is the use of advanced planning techniques to place assets beyond the reach of future potential creditors. In this way, the client can preserve the assets to pass to family members or other beneficiaries through traditional estate planning techniques.”¹

1.1 About These Materials and Its Use.

These materials were initially created by us as part of continuing education courses for Maryland lawyers. These programs are sponsored by the Maryland State Bar Association. Our firm has been active as presenters over the years on numerous programs.² These materials addresses some of the considerations that Maryland estate planning lawyers should raise with their clients when discussing and/or structuring various estate planning and asset protection strategies.

The issues covered by this material are nuanced, complex and continuingly developing. Non-lawyers, or lawyers without specific experience in the asset protection aspects of estate planning, should consult a lawyer with the specific knowledge and experience necessary before undertaking such planning. These materials are not intended to provide legal advice and should only be used as a starting point for research by fellow Maryland estate planning lawyers.

This topic is particularly relevant for clients in certain professions or situations with a high-risk status: physicians, accountants, lawyers and others supplying professional services in private practice; owners of closely held businesses and/or clients owning rental properties; executives and directors of publicly held companies with potential risk to shareholders and others holding a fiduciary duty to others. To be effective, this planning must take place before specific and identifiable creditors become present threats.

1.2 Modern Asset Protection Is Becoming More Aggressive.

Some asset protection techniques are long standing and generally widely accepted. Holding property by married couples, for example, as tenants by the entirety has existed in Maryland since colonial times. It precludes creditors from seizing property unless both spouses are subject to the debt.³ Third party spendthrift trusts that shield trust assets from its beneficiary’s debts also is broadly accepted.⁴ Both of these asset protection techniques are deemed to support a broadly recognized social benefit.

Over the last several decades, however, offshore and domestic asset protection trusts have gained popularity if not respectability. Indeed, various jurisdictions have competed to attract wealthy clients to transfer trust situs to their jurisdictions. Professor Sterk’s “trust law’s race to the bottom” prophesy has become today’s reality.⁵

1.3 The Pigs-Get-Fat-and-the-Hogs-Get-Slaughtered Principle.

Under modern portable situs trust theory, one can purportedly create or migrate her or his trust to Nevada to avoid Maryland’s marital property laws governing the distribution of family assets on divorce. Among other issues under Maryland law, there is a general prohibition for a self-settled Maryland trust, where the settlor retains significant benefits from the trust after creation but excludes access by the settlor’s creditors. Whether a self-settled Nevada trust would be honored by the Maryland Courts is dubious, as discussed below. Indeed, it is an open question whether any state with the common law self-settled trust rule will honor such a trust or, for that matter, whether the U.S. Bankruptcy law would enforce the provisions such a trust:

“Notwithstanding the fact that many self-settled asset protection trusts have been established in the states that have eliminated the self-settled rule, salient questions remain about the effectiveness of the self-settled trust strategy. First, it is not clear that a settlor who resides in a common law state can, through the simple expedient of including a choice-of-law provision in the trust instrument, sidestep the home-state common law approach. If the choice-of-law provision is found to violate the home state’s strong public policy, courts will generally refuse to enforce it. Second, in 2005, Congress amended the Bankruptcy Code to create a federalized self-settled trust rule: transfers to a self-settled trust can be invalidated in bankruptcy where the transfer was made within ten years of the bankruptcy filing and with the intent to hinder, delay, or defraud creditors, even if the claim did not arise until after the creation of the trust. Thus, even if the trust is located in a state that has overruled the self-settled trust rule, creditors can nonetheless reach the trust’s assets if the requirements of this federal statute are satisfied.

To the extent that trust assets can be reached by creditors, either because the choice-of-law provision is found to be inconsistent with the public policy of the settlor’s home state or because of the Bankruptcy Code, the estate tax advantages that the self-settled trust are designed to offer may prove to be unavailable.”⁶

These issues are addressed in detail below.

Some of the Guard Rails Lawyers Must Stay Within.

2.0 Maryland Lawyers Must Practice Ethically.

For the lawyer, asset protection planning and implementation can raise ethical issues irrevocably tied to the substantive law. A client may want to transfer assets to an entity or person to make collection more difficult after a creditor becomes a threat. The Maryland Uniform Fraudulent Conveyance Act enables the creditor to set aside such transfers where the creditor is known at the time of the transfer and insufficient other funds are set aside to satisfy the debt.

2.1. A Lawyer Is Not Permitted to Assist Clients in Committing Fraud.

The Maryland Rules of Professional Conduct (“MRPC”) states: “A lawyer shall not counsel a client to engage, or assist a client, in conduct that the lawyer knows is criminal or fraudulent, but a lawyer may discuss the legal consequences of any proposed course of conduct with a client and may counsel or assist a client to make a good faith effort to determine the validity, scope, meaning or application of the law.”⁷ Additionally, the MRPC state: “In representing a client, a lawyer shall not use means that have no substantive purpose other than to embarrass, delay, or burden a third person…”⁸ Also, the MRPC provides that a lawyer shall not “engage in conduct involving dishonesty, fraud, deceit or misrepresentation.”⁹ It is notable that the language used in these various rules reflect the language used in the Maryland Uniform Fraudulent Conveyance Acts.

In Attorney Grievance Comm’n v. Pak,¹⁰ a Maryland lawyer was disbarred for executing a series of actions designed to prevent a judgment from attaching to property of her client (who were her parents): “Using her knowledge of the law, respondent aided and advised her parents in creating shell corporations to transfer title in order to avoid a judgment lien.” The Court upheld the circuit court finding that the creation of “shell” business entities and other actions violated the Fraudulent Conveyance Act and therefore violated MRPC 8.4(c):

“Judge Martin concluded that respondent undertook fraudulent actions in order to protect her parents and their assets and thus violated MRPC 8.4(c). He found that her actions to create shell business entities (H&K, L.L.C. and CACHA, L.L.P.) had no legitimate business purposes and were used to transfer title to the Pak’s properties, without consideration. The evidence before the hearing court was sufficient for Judge Martin’s conclusions. The hearing court also noted that respondent advised her parents when to send the funds to Korea and orchestrated the purchase of the Autumn Frost property in her husband’s name only. Lastly, the hearing court found that the Respondent’s actions were within the definition of fraud, as outlined in Maryland Code (1975, 2005 Repl. Vol.), § 15-207 of the Commercial Law Article.”

The Court of Appeals agreed: “We accept Judge Martin’s findings and conclusions on the issue and hold that the respondent did violate MRPC 8.4(c), because there is clear and convincing evidence that her actions were an effort to delay, hinder, or defraud her parents’ creditors.”

In Pak, the evidence showed she assisted in the series of questionable transactions for the specific purpose of frustrating the creditor’s collection of a judgment. Indeed, part of the transaction involved a transfer to the lawyer’s husband. Additionally, the attorney became a defendant in the collection suit and as a party (as well as in her representative capacity) she made misleading statements in depositions, in pleadings and in open court. Lying under oath in a deposition or to the Court, of course, would justify disbarment by itself. The Pak case involved facts arising, no doubt, from her love of her parents and her desire to protect them. The case, however, demonstrates the willingness of the Court to wed the language of the Rules of Professional Conduct with that of the Maryland Fraudulent Conveyance Act in establishing her participation in fraud.

To date, there has not been an Attorney Grievance case in Maryland based on assisting with a fraudulent conveyance since Pak. Nor have there been any Attorney Grievance cases based on Maryland lawyers helping to migrate existing trusts, or create a new self-settled trust, in a permissive asset protection jurisdiction for a Maryland client. Nevertheless, the implications of Pak cannot be ignored:

“If a settlor establishes an APT (self-settled asset protection trust), but one or more creditors are unsatisfied, those creditors may attack the APT and the attorneys involved. The attack may include allegations that the non-APT state attorney violated professional responsibility obligations. The existence of an unsatisfied creditor may be probative in determining whether the transfer involved fraud and whether the attorney’s conduct violated the applicable professional responsibility standards.

The APT cases have reflected a substantial judicial hostility towards the APT. The cases involve foreign APTs rather than domestic APTs, but the essential conclusion is that those courts were not favorably disposed towards the foreign APTs because of their court- and creditor-thwarting purposes. Additional litigation will determine whether a court of a non-APT state will treat a domestic APT any differently than the courts that have addressed foreign APTs. Given the court- and creditor-thwarting purposes of all APTs, I expect that non-APT state courts will deal harshly with sister-state APTs.”¹¹

Professor Lischer reaches this conclusion based on various state cases and concluded: “Given the high stakes involved, it might be prudent for the non-APT state attorney to decline to advise or assist in any APT planning.”¹²

In Florida, on the other hand, it is a different story. No cause of action exists for liability of a non-transferee aiding and abetting a fraudulent transfer.¹³ This holding is based on the view that the Uniform Fraudulent Transfer Act is not a source of liability; rather it only allows creditors to set aside fraudulent transfers made to transferees under a theory of cancellation:

“Consistent with this analysis we conclude that FUFTA (the Florida Uniform Fraudulent Transfer Act) was not intended to serve as a vehicle by which a creditor may bring a suit against a non-transferee party (like First Union in this case) for monetary damages arising from the non-transferee party’s alleged aiding-abetting of a fraudulent money transfer.”¹⁴

The Freeman case, of course, addressed the narrow issue of whether the UFTA creates tort liability or whether it is merely a remedial statute. Not addressed are the other theories of liability that may involve other parties than the debtor – including liability of the lawyer.¹⁵

2.2 Stay Alert for Civil Conspiracies and/or Potential Torts.

The creditor in Pak filed suit against the attorney alleging conspiracy for her involvement in the fraudulent transfers.¹⁶ Because of the family relationship between the lawyer and clients, and the deep involvement by the attorney, it was reasonably clear that the lawyer crossed the line from permissible advocacy to active participant.

A lawyer acting as active participant in a tort was the basis of a New Jersey case involving a notable U.S. automobile executive.¹⁷ The Plaintiff was a Michigan law firm that sought to collect a judgment it had against its former client, John DeLorean. The Defendant was a New Jersey law firm representing Mr. DeLorean. The complaint alleged that the New Jersey firm actively, knowingly and intentionally participated in Mr. DeLorean’s unlawful efforts to shield his farm from attachment. According to the complaint, the New Jersey lawyers prepared a memorandum of lease after the Michigan judgment was rendered purporting to set out the terms of a pre-existing life lease on the property running in favor of Mr. DeLorean’s children. These allegations were sufficient to return the case to the federal district court for a trial on civil conspiracy and aiding and abetting a fraud on creditors.

Maryland does not recognize a civil conspiracy as an independent tort; however, it will recognize a conspiracy by assisting others to commit a recognized tort:

“The statement by the Court of Special Appeals, that civil conspiracy is recognized in Maryland as an independent tort, is simply incorrect. This Court has consistently held that “conspiracy” is not a separate tort capable of independently sustaining an award of damages in the absence of other tortious injury to the plaintiff. There is no doubt of the right of a plaintiff to maintain an action on the case against several, for conspiring to do, and actually doing, some unlawful act to his damage. But it is equally well-established, that no such action can be maintained unless the plaintiff can show that he has in fact been aggrieved, or has sustained actual legal damage by some overt act, done in pursuance and execution of the conspiracy It is not, therefore, for simply conspiring to do the unlawful act that the action lies. It is for doing the act itself, and the resulting actual damage to the plaintiff, that afford the ground of the action.”¹⁸

In that case, the Court failed to find an underlying tort and therefore upheld the dismissal of the complaint against the attorney. Given the treatment of a fraudulent transfer as being an actionable fraud by the Maryland Court in Pak, presumably a conspiracy to engage in a fraudulent conveyance would be a tort.

2.3 Stay on Safe Grounds & Document Same.

The line between participating in a fraudulent transfer and engaging in asset protection planning will be determined by a “facts and circumstances” test: “As a general proposition, attorneys who assist clients with transfers of property in good faith and without actual or deemed knowledge that the transfers are fraudulent conveyances should not be liable to the clients’ creditors or in violation of any ethical obligations that the attorneys may have under state law.”¹⁹

Accordingly, it is essential that the practitioner document that the plan was not designed to prejudice known or reasonably anticipated creditors:

“Under what circumstances will transfers to APTs [asset protection trusts] be deemed fraudulent under the fraudulent transfer laws? More particularly, if a settlor transfers assets to an APT not with a specific creditor in mind, but rather with the general goal of shielding assets from potential future creditors, will the transfer be deemed fraudulent and thus voidable under the UFTA or similar laws? Although the answer to this question is not without doubt, it appears that most courts are unwilling to void transfers whose purpose and effect is to shelter assets from creditors that were unknown at the time of the transfer. Furthermore, the more remote in time the claim of a future creditor, the less likely a court will be to find that an earlier transfer was fraudulent with respect to that creditor. Thus, as long as a person creating an APT does so well in advance of a creditor’s claim, and especially if the creditor was unknown and unforeseeable at the time of the transfer to the trust, it is likely that the transfer will not be deemed fraudulent.

In an action brought under UFTA section 4(a)(1) — in which the creditor must prove “actual intent to … defraud” — a future creditor must typically establish that, as of the time of the transfer, the creditor held ‘contingent, unliquidated, or unmatured claims,’ or that the creditor held ‘a claim that [could] reasonable [be] foreseen by the transferor.’ Professor Peter A. Alces states that, in an action based on actual intent to defraud, a future creditor must ‘establish a causal link between the fraudulent disposition and the injury suffered.’ Regarding this same question Professor Alces further states that ‘[the] focus on causality provides a means to distinguish between the actions that operate directly to prejudice a particular creditor and those actions that in some remote, not foreseeable way, have after the passage of considerable time or the occurrence of an intervening cause, compromised a creditor’s financial interest.’

Concerning a similar issue, in an often-cited passage the court in Oberst v. Oberst stated: ‘While the Court finds it very difficult to locate the exact line between bankruptcy planning and hindering creditors, Congress has decided that the key is the intent of the debtor. If the debtor has a particular creditor or series of creditors in mind and is trying to remove his assets from their reach, this could be grounds to deny the discharge. If the debtor is merely looking to his future wellbeing, the discharge will be granted. This is an uncomfortable test and does not seem equitable; but it is the law. Thus, the concept of ‘reasonable foreseeability,’ the requirement that future creditors establish a ‘causal link’ between the transfer and their claims, and the notion that one may permissibly plan for one’s general ‘future wellbeing’ all serve to limit those future creditors who can successfully claim that a transfer was intended to defraud them.”²⁰

Therefore, practitioners should be careful to document in detail: (i) the reasons for any asset protection plan, (ii) the extent of the client’s debt (including foreseeable creditors), and (iii) that, at the time of the plan, the client has sufficient other assets to meet his or her obligations as those obligations come due. A careful solvency analysis will identify those assets that are not available to creditors under state law, identify assets available for a client’s known and anticipated creditors, and then focus the asset protection planning on the remaining assets. This process should be documented in the file. This process has been called a “creditor protection plan.”:

“The proper approach to effective, careful asset protection planning begins with a solvency analysis of the client.

In an accurate solvency analysis, the lawyer should make a complete list of all of the client’s assets and then make three subtractions from the total value. The first subtraction should be the value of all current debts. Reserves must be established to satisfy these obligations. This action protects present creditors.

The second subtraction should include all liabilities, claims, contingent liabilities, threats, guarantees, contingent claims, pending lawsuits, and potential claims faced by the client. The lawyer should aggressively identify, document and quantify all of these liabilities. To assist in this exercise, it may be appropriate to conduct independent internet database research of the client’s financial/legal situation. In some cases, an audited financial statement is very helpful and should be secured. Furthermore, the attorney should inquire about the client’s business and professional reputation. For example, does the physician client have a history of malpractice claims? Does the business client have a history of disputes with creditors, associates, etc.? After all liabilities are evaluated and summed, reserves must be set aside to satisfy them. This action protects potential subsequent creditors.

The third subtraction in the solvency analysis involves all client assets already protected from creditors under the law (e.g., homestead, insurance, and retirement plans). Such exemptions and protections vary tremendously from state to state, of course. In some cases, it may be advisable to join an attorney from another state (if that is where some assets are located) and/or join an attorney with creditor’s rights expertise (if there are pending claims against the client) as co-counsel.

Finally, at the end of the solvency analysis, the lawyer must devise a methodology to protect creditors. Indeed, that ‘creditor protection plan’ is the entire purpose of the solvency analysis and is, in fact, the linchpin of prudent, careful asset protection planning.”²¹

Maryland and Federal Statutes on Wrongful Transfers.

3.0 The various State Uniform Acts.

Maryland, like every other state, has a statute that is designed to protect creditors from debtors hiding or transferring property to avoid their debt. There are two uniform acts governing fraudulent conveyances: the Uniform Fraudulent Conveyance Act (1918) (The “UFCA”), and the Uniform Fraudulent Transfer Act (1984) (the “UFTA”). The Uniform Law Commission also approved various amendments to the Uniform Fraudulent Transfer Act in 2014, including modifying the name of the UFTA to the Uniform Voidable Transactions Act (the “UVTA”) (2014). The name change was deliberate:

“The change of title is not intended to effect any change in the meaning of the Act (the UFTA”). The retitling is not motivated by the substantive revisions made by the 2014 amendments, which are relatively minor. Rather, the word “Fraudulent” in the original title, though sanctioned by historical usage, was a misleading description of the Act as it was originally written. Fraud is not, and never has been, a necessary element of a claim for relief under the Act. The misleading intimation to the contrary in the original title of the Act led to confusion in the courts…The misleading insistence on “fraud” in the original title also contributed to the evolution of widely used shorthand terminology that further tends to distort understanding of the provisions of the Act. Thus, several theories of recovery under the Act that have nothing whatever to do with fraud (or with intent of any sort) came to be widely known by the oxymoronic and confusing shorthand tag ‘constructive fraud.’”²²

Indeed, the use of the word “fraudulent” in both the 1918 and 1984 Acts was misleading because both acts had moved from the necessity of proving a subjective intent to defraud to a more objective test focused on the harm to a creditor that the statutes seek to make actionable. The basis for renaming the name of the 1984 Act equally applies to both earlier uniform statutes – important because Maryland continues to use the 1918 Act. Although the various versions of the uniform acts have been adopted in most states, there are some jurisdictions with their own, but very similar, statutes.

3.1 Background: the Maryland Uniform Fraudulent Conveyance Act.

Maryland continues to use the older act which is rooted in the Statute of 13 Elizabeth (1571):

“Fraudulent conveyance law has its origins in the Statute of 13 Elizabeth, ch. 5 (1571). See 5 Collier on Bankruptcy ¶ 548.01 (15^th Ed. Revised). The purpose of the fraudulent conveyance doctrine is to prevent assets from being transferred away from a debtor in exchange for less than fair value, leaving a lack of funds to compensate the creditors. Id. In the foundational fraudulent conveyance case, In re Twyne’s Case, 3 Co. Rep. 806, 76 Eng. Rep. 809 (Star Chamber 1601), the Star Chamber examined the facts surrounding such transfers to determine whether they had “signs and marks” of a fraudulent or malicious intent, such a secret transfers, continued ownership or possession of property after its alleged transfer, self-serving representations in transfer documents that the transfer was not intended to defraud creditors, transfers of substantially all assets, or transfer made while action was pending against the transferor. See also Collier’s, supra. In short, fraudulent conveyance law is aimed at preventing debtors from making collusive transfers to other – often friendly recipients – in an attempt to avoid their creditors. See Fraudulent Conveyance Law & Its Proper Domain, Douglas G. Baird & Thomas H. Jackson, 38 Vand. L. Rev. 829, 830 (1985) (“A debtor cannot manipulate his affairs in order to shortchange his creditors and pocket the difference. Those who collude with a debtor in these transactions are not protected either.”)

* * *

In the United States, § 67(e) of the 1898 Bankruptcy Act directly copied much of the Statute of 13 Elizabeth. Most states followed suit, either recognizing 13 Elizabeth through common law, or expressly adopting or reenacting it. See Fick v. Perpetual Title Co., 694 A.2d 138, 143 (Md. Ct. Spec. App. 1997) (citing 37 C.J.S. Fraudulent Conveyances § 2, at 852 (1943)). Maryland adopted the English statute, 1 Alexander’s British Statutes 499 (cod’s ed. 1912), which remained in effect until 1920, when the MUFCA was adopted. See Fick, 694 A.2d at 143; see also Clinton Petroleum Serv., Inc. v. Norris, 319 A.2d 304, 307 (Md. 1974) (stating that the MUFCA ‘replaced in virtually identical terms the statute of 13 Elizabeth’). The Maryland Court of Appeals remarked of the statute, ‘[t]he Uniform Act is declaratory of the common law and is practically a restatement of the Statute of 13 Elizabeth.’ Westminster Sav. Bank v. Sauble, 39 A.2d 862, 864 (Md. 1944) (citations omitted); see also Damazo v. Wahby, 305 A.2d 138, 141-142 (Md. 1973) (reiterating that the MUFCA is declaratory of common law and did not restrict the legal or equitable remedies already available to a creditor).”²³

The Maryland version of the UFCA is located in Title 15 of the Commercial Law Article (hereinafter “MUFCA”).

Despite declarations that the MUFCA had “virtually identical terms” with the Statute of 13 Elizabeth, MUFCA was actually a refinement of its antecedent: “The Uniform Act (of 1918) was a codification of the ‘better’ decisions applying the Statute of 13 Elizabeth.”²⁴ These “better decisions” expanded the original requirement of showing subjective intent to defraud to a more objective standard:

“The Statute of Elizabeth required that a creditor prove actual, subjective intent to hinder, delay, or defraud to avoid a conveyance. Because subjective intent to defraud was difficult to prove, courts focused on objective factors to establish the wrongful intent. Decisions under the Statute soon turned on ‘circumstances, so frequently attending sales, conveyances and transfers, intended to hinder, delay and defraud creditors, that they [were] known and denominated badges of fraud.’ The court in Twyne’s Case (an English Star Chamber case of 1601) cataloged several factors having particular probative force: (1) the debtor made a general transfer of all property; (2) the debtor retained possession and use of the property; (3) the transfer was clandestine; (4) the transfer was made ‘pending the writ’: (5) the parties created a trust to govern use of the property; or (6) the deed explicitly vouched for its own validity and the parties’ honesty and good faith.

American jurisdictions enacted legislation similar to the Statute of Elizabeth or adopted the Statute as part of the common law. The American courts similarly adopted the English decisions that expanded the Statute through the use of objective indicia of fraud; later American decisions also increased the list of ‘badges.’ Although a strict construction of the Statute required proof of fraudulent intent, many courts permitted creditors to avoid a transfer on the basis of objective factors alone.”²⁵

3.2 The Maryland Statutory Law.

The MUFCA provides that any conveyance made “with actual intent, as distinguished from intent presumed in law, to hinder, delay, or defraud present or future creditors, is fraudulent as to both present and future creditors.” MUFCA § 15-207. The MUFCA also provides that conveyance without “fair consideration” is fraudulent if (i) the conveyance is made by a person who is insolvent or becomes insolvent because of the transfer (MUFCA § 15-204), (ii) by a person engaged or about to be engaged in a transaction for which the conveyance leaves him or her with “unreasonably small capital” for that transaction (MUFCA § 15-205), or (iii) by a person who intends or believes that he or she will incur debts beyond his or her ability to pay as they mature (MUFCA § 15-206). The MUFCA also provides similar rules governing the conduct of partners and partnerships. MUFCA § 15-208.

MUFCA § 15-202 defines insolvency:

“(a) A person is insolvent if the present fair market value of his assets is less than the amount required to pay his probable liability on his existing debts as they become absolute and matured.

(b) In determining if a partnership is insolvent, there shall be added to the partnership property:

(1) The present fair market value of the separate assets of each general partner in excess of the amount probably sufficient to meet the claims of his separate creditors; and

(2) The amount of any unpaid subscription to the partnership of each limited partner, if the present fair market value of the assets of the limited partner is probably sufficient to pay his debts, including the unpaid subscription.”

The 1918 Uniform Act uses “fair salable value” instead of “present fair market value” in its definition of insolvency. The UFTA uses “fair valuation” as it standard. When applying this balance sheet test, assets do not include unreachable assets (such as Tenants by the Entirety property or trust assets subject to a valid spendthrift clause). MUFCA § 15-201(b).

The handling of contingent obligations, such as guarantees, presents some difficulty. A Maryland Bankruptcy Court held that contingent debts are not determined under standard accounting rules (GAAP) which only lists debts that are probable and can be reasonably estimated. Instead, “the amount of a contingent claim, however, is determined in accordance with the probability that the contingency will occur and that this valuation after such discounting is made from the debtor’s perspective.”²⁶

In other words, the debtor must measure, and adjust for, the likelihood of needing to cover all contingent debt. Contingent debt needs analyzed and dealt with in the planning process using a reasonable judgment as to the probability such guaranty will be called. This process requires the exercise of judgment by an experienced and qualified appraiser which, of course, introduces subjectivity to the process:

“Valuing contingent liabilities provides unique challenges. The analysis requires a multidisciplinary skillset because input from lawyers and other professionals is critical to determine a contingent liability’s value. In turn, the valuation process transforms into a collective effort through which professional judgment will select ‘the approach(es) and the method (s) that best indicate the value.’ Using professional judgment establishes subjectivity that will continue to govern the insolvency analysis. Valuation is an imperfect science under which an expert must estimate the likelihood of a contingent liability based on his/her personal judgment. Judgment, however, is in the eye of the evaluator.” ²⁷

As noted, fair consideration given for property or an obligation will defeat a constructive fraudulent conveyance claim. It is defined by MUFCA § 15-203:

“Fair consideration is given for property or an obligation, if:

(1) In exchange for the property or obligation, as a fair equivalent for it and in good faith, property is conveyed or an antecedent debt is satisfied; or

(2) The property or obligation is received in good faith to secure a present advance or antecedent debt in an amount not disproportionately small as compared to the value of the property or obligation obtained.”

3.3 The Objective Approach to “Fraud” – Badges of Fraud.

Proving actual fraudulent intent is difficult – few advertise they are committing fraud to avoid a debt.²⁸ The Maryland Supreme Court adopted the traditional “badges of fraud” indicia as the test in Maryland:

“Relative to indicia or badges of fraud 37 Am.Jur.2d, Fraudulent Conveyances, § 10 (1968) states:

‘The facts which are recognized indicia of fraud are numerous, and no court could pretend to anticipate or catalog them all. Among the general recognized badges of fraud are the insolvency or indebtedness of the transferor, lack of consideration of the conveyance, relationship between the transferor and the transferee, the pendency or threat of litigation, secrecy or concealment, departure from the usual method of business, the transfer of the debtor’s entire estate, the reservation of benefit to the transferor, and the retention by the debtor of possession of the property.

Although it has been said that a single badge of fraud may stamp a transaction as fraudulent, it is more generally held that while one circumstance recognized as a badge of fraud may not alone prove fraud, where there is a concurrence of several such badges of fraud an inference of fraud may be warranted.'”²⁹

3.3.1 Family Relationships are Suspicious.

Several cases examine the importance of a family relationship as an indicium of fraud, concluding that it is not necessarily, of itself, conclusive. In one case, a husband sold closely held family stock to his father immediately preceding his divorce.³⁰ The Court reviewed extensive evidence concerning the family dynamics (the father was displeased about his son’s mid-life crisis) and looked at the consideration paid for the stock. The father paid a premium over book value: “[I]t is argued that the stock was worth considerably more than book value. But it must be appreciated that it might have taken some time to find someone who would invest more than a quarter of a million dollars in an unlisted stock, and that Oles (the son) wanted to sell promptly…. [W]e … hold here that there is not such a glaring inadequacy of consideration as of itself to stamp the transaction with fraud by shocking the common sense of honesty and thereby to render the transaction void.” ³¹

Cases involving transfers between near relatives, however, shift the burden of proof. In those situations, the relative receiving the property must prove sufficient consideration and the lack of fraudulent intent:

“Though he who alleges fraud must prove it, facts and circumstance of a conveyance, especially one between near relatives, may be such as to shift to one who claims to be a bona fide purchaser for value the burden of proving that he is. Freedman v. Yoe, 141 Md. 482, 487, 119 A. 260; Commonwealth Bank v. Kearns, 100 Md. 202, 209, 210, 59 A. 1010; Kennard v. Elkton Bank and Trust Company, 176 Md. 497, 500-501, 6 A.2d 258. It is necessary to establish both a sufficient consideration and also bona fides. If a conveyance is made and accepted with intent to hinder, delay or defraud creditors, it matters not that a full consideration has been paid. McCauley v. Shockey, 105 Md. 641, 649-650, 66 A. 625.”³²

3.3.2 Constructive Notice of Fraud.

Under MUFCA § 15-209, a transaction may be set aside “as against any person except a purchaser for fair consideration without knowledge of the fraud at the time of the purchase or one who has derived title immediately or immediately from such a purchaser.” Literally, that means that a purchaser is free of the Fraudulent Conveyance Act only if the purchaser pays fair consideration and lacks knowledge of the fraud. The Maryland Appellate Court held that, in theory, constructive knowledge is sufficient:

“Must the grantees have actual, as opposed to constructive, knowledge of the fraudulent nature of the conveyance in order to set aside a conveyance as fraudulent under section 15-209? Most courts that have considered the question have held that constructive notice is sufficient.

‘While there is authority to the contrary in some jurisdictions, the general rule is that if a purchaser had knowledge of facts and circumstances naturally and justly calculated to excite suspicion in the mind of a person of ordinary prudence, and which would naturally prompt him to pause and inquire before consummating the transaction, and such inquiry would have necessarily led to a discovery of the fact with notice of which he is sought to be charged, he will be considered to be affected with such notice, whether or not he made the inquiry. Under these circumstances it is immaterial that the purchaser did not have actual knowledge of the fraudulent intent of the seller or did not participate therein.’”³³

Although the general principle is stated in sweeping language, its application has been narrowly interpreted. The case before the Maryland Appellate Court in Fick quoted above, for example, refused to find that the purchaser for fair consideration had such constructive notice. The facts in that case were complex and played out over time. The debtor owed unpaid fees to a law firm. At the time of the debt and of the filing of a collection action by the firm, she owned valuable real estate in her own name. Then before any resolution of the fee action, she added her daughter to the deed but did not immediately record the deed. Then, she and the firm stipulated (i) to hold the suit in abeyance, (ii) she would pay the debt according to a schedule of payments, and (iii) that if she failed to make those payments, a consent order for the remaining balance would be entered. The day after the stipulation was signed, the debtor filed the deed in the land records which had earlier added her daughter to the title. Subsequently the law firm filed the stipulation and received judgment on the debt. Thereafter, the debtor and her daughter entered into a contract to sell their property to a third party. A title company received an affidavit from the debtor giving a reason, under oath, for adding her daughter to the deed totally unrelated to her debt to the law firm. The Court in Fick held that although the third-party purchaser knew of the unpaid debt and of the transfer to the debtor’s daughter, it was not enough to demonstrate imputed knowledge of the fraud. There was no showing, for example, that the purchaser knew of the debtor’s lack of other resources to pay her debt.³⁴

4.0 Fraudulent Transfers in Bankruptcy Proceedings.

As noted at the outset, these materials were initially created for a continuing education course on asset protection as a part of estate planning for Maryland attorneys. It was not then or now designed to be a comprehensive treatment of federal bankruptcy law. What follows is a broad outline of some of the statutory provisions under bankruptcy law affecting estate or asset protection planning for Marylanders. This is not intended to be a treatise on bankruptcy law but instead its purpose is to generally flag issues that may impact that planning. Like the field of estates and trusts, bankruptcy law and its practice by lawyers is a distinct practice area. If advising clients with concerns related to bankruptcy, competent bankruptcy counsel should be brought in to represent the client.

The last wholesale revision to the fraudulent transfer portion of the bankruptcy act was in 2005. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (the “2005 Bankruptcy Act”) was signed by President George W. Bush on April 20, 2005. The impact of the 2005 Bankruptcy Act, even though it is hardly “new” at this point, as with most legislation of any age will not be fully known until digested and interpreted by courts handling specific cases.

4.1 Fraudulent Conveyance Look-Back Period.

The 2005 Bankruptcy Act extended the fraudulent conveyance look-back period from one year to two years from the date a bankruptcy case is filed.³⁵ A new ten (10) year look-back rule, however, applies to “a self-settled trust or similar devise”:

“In addition to any transfer that the trustee may otherwise avoid, the trustee may avoid any transfer of an interest of the debtor in property that was made on or within 10 years before the date of the filing of the petition, if-(A) such transfer was made to a self-settled trust or similar device; (B) such transfer was by the debtor; (C) the debtor is a beneficiary of such trust or similar device; and (D) the debtor made such transfer with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made, indebted.”³⁶

Literally, this 2005 look-back provision applies where it can be established by the bankruptcy trustee that the transfer was made with the actual intent to avoid a specific debt. Actual intent, however, can be established by certain indicia of fraud (the “badges of fraud”):

“Direct evidence of fraudulent intent is rare. Therefore, the court can rely on certain indicia of fraud to determine whether a transfer was fraudulently conducted under Section 727. For example, (1) if there is a lack of consideration for the transfer, (2) if there is a family relationship between the parties, (3) if there is some retention of the property for personal use, (4) if the financial condition of the debtor before and after the transfer is suspicious, (5) if there is an existence of a pattern or series of transactions after the onset of the financial difficulties or pendency of threat of suit by creditors, or (6) if there is a suspicious chronology of events and transfers… The presence of just one of the above listed factors can warrant a court’s conclusion that a transfer was fraudulently made, and, certainly, the presence of several factors ‘can lead inescapably to the conclusion that the debtor possessed the requisite intent.’”³⁷

One can easily imagine, that courts may lean toward finding that such actual intent exists especially if the transfer is to an asset protection trust under an off-shore, foreign country or under a US jurisdiction with a dubious connection with the settlor.³⁸ This puts a premium on documenting the non-fraudulent reasons for the establishment of the trust and the importance of never funding an asset protection trust without first documenting that sufficient assets are “left on the table” to satisfy existing creditors.

4.2 Forum Shopping for the Best Deal.

The Bankruptcy Code, in general, gives debtors the choice of using either the 11 U.S.C. § 522(d) exemptions or the exemptions available under state law. Many states have “opted out” of the federal exemption by forcing use of the state exemption.

Maryland has opted out of federal exemptions.³⁹ Thus, a Maryland debtor will be limited to preserving only items excepted out of execution of judgements by statute and/or by other substantive state law. Married couples, for example, have broad protection of tenants by the entirety property when only one spouse is the debtor. An important state exemption covers any money or other assets payable to a participant or beneficiary from, or any interest of any participant or beneficiary in, qualified retirement plans which is exempt from any and all claims of the creditors of the beneficiary or participant, other than claims by the Maryland Department of Health. The cash otherwise exempt is not lavish.⁴⁰

Before the 2005 Bankruptcy Act, debtors could relocate to jurisdictions with extensive state homestead exemptions. Florida, for example, had permitted an unlimited homestead exemption even when the acquisition of the property was with actual intent to defraud a creditor!⁴¹ The practice of relocating to a more attractive homestead jurisdiction caused the 2005 Bankruptcy Act to tighten the rules. Now, if a debtor moves domicile from one state to another within (approximately) two (2) years of filing the petition, domicile for the purpose of available state exemptions shall be the state of domicile for the (approximately) six (6) months immediately prior to the two (2) year window.⁴² Prior law looked to domicile within 180 days of filing.

The federal homestead exemption also is reduced to the extent of any additions to the value of the property within ten (10) years of filing if the additions were made with the intent to defraud creditors.⁴³ Also any additions over $125,000 of value to the homestead within three (3) years and four (4) months of filing are reachable⁴⁴ as well as other limitations.⁴⁵ These new homestead caps apply to states opting out of the federal exemptions. As noted, however, Maryland does not have a homestead exemption.

Core Asset Protection Strategies for Married Couples:

Tenancy by the Entirety

5. Maryland Tenants by the Entirety.

5.1 Tenants by the Entirety in Maryland as Asset Protection from Creditors.

Maryland law provides unusually strong asset protection for property held as tenants by the entirety. A creditor of only one spouse generally cannot reach entireties property. Unlike many other states, Maryland permits tenants by the entirety in real estate as well as jointly held investment accounts. Maryland courts have upheld even aggressive intra-spousal transfers designed to preserve that protection (Watterson v. Edgerly). However, those same transfers can be unwound in bankruptcy.

One of the most dramatic examples of the respect afforded tenants by the entirety property in Maryland is Watterson v. Edgerly,⁴⁶ a case cited most often for the operation of spendthrift trusts.

The Watterson case upheld a transfer of tenants by the entirety property from a husband, who had creditor judgments against him, to his wife to avoid the creditor’s access to the property. The Maryland Court permitted the transfer because the creditor never had an enforceable interest in the property.

In Watterson, a husband had a judgment lien filed against him. His wife, however, was not a creditor on the original debt or as a result of the judgment. After the judgment, the husband transferred his interest in tenants by the entirety property to his wife for no consideration. Thereupon, the wife executed a Will containing a testamentary spendthrift trust for the benefit of her husband. She died 61 days after the conveyance to her of the real estate. The trial Judge found that it was “immediately apparent that the conveyance” was intentionally fraudulent given that Mrs. Watterson was terminally ill when Mr. Watterson transferred the property to her. The Appellate Court was not persuaded:

“[T]o declare that because Mrs. Watterson died sixty-one (61) days after a conveyance to her of real property which she almost simultaneously placed in a spendthrift trust for the benefit or her husband who had conveyed the property to her, that she was ‘terminally ill’ at the time. We think that a judgment of that type is vested in an authority who occupies a position of review considerably higher than this, or any other Court.”⁴⁷

The Appellate Court of Maryland upheld the conveyance of the real estate despite the existence of a judgment lien operating against the husband: “When, as here, a husband and wife hold title as tenants by the entirety, the judgment creditor of the husband or of the wife has no lien against the property held as entireties, and has no standing to complain of a conveyance which prevents the property from falling into his grasp.”⁴⁸

The Takeaway: Even an intentionally timed transfer between spouses will be upheld if the creditor never had an attachable interest in the entireties property.

This holding was not a fluke; it has been upheld in subsequent cases. The Appellate Court of Maryland held: “Upon this appeal, appellant, Richard Spitz, Jr., asks us to examine an issue which was settled by the court in Watterson. That issue is: ‘whether a husband may convey his interest in real estate, owned by the husband and wife as tenants by the entirety, to his wife … so as to shield the husband from his judgment creditors…’ Our answer remains the same; yes.”⁴⁹ Except for certain federal tax liens, discussed below, the rule of Watterson is still good law.⁵⁰

5.1.1 Tenants by the Entirety and Same Sex Marriage.

All tenancy by the entirety protections apply equally to same-sex married couples under Maryland law. This is clear from the Maryland 2013 statutory law change to explicitly recognize the validity of same-sex marriages. It is also clear from the Obergefell decision of the U.S. Supreme Court in 2015.

Although most of the case law and the statutory provisions refer to a marriage between a “husband and wife” as being the requisite of holding property as tenants by the entirety. Those rights, however, are available to any married couple. In 2013, Maryland statute changed the definition of a “valid” marriage as one being between “a man and a woman” to being “between two individuals who are not otherwise prohibited from marrying.”⁵¹ In 2015, the U.S. Supreme Court held that marriage is a Constitutional right:

“The right of same-sex couples to marry that is part of the liberty promised by the Fourteenth Amendment is derived, too, from that Amendment’s guarantee of the equal protection of the laws. The Due Process Clause and the Equal Protection Clause are connected in a profound way, though they set forth independent principles. Rights implicit in liberty and rights secured by equal protection may rest on different precepts and are not always co-extensive, yet in some instances each may be instructive as to the meaning and reach of the other.”⁵²

Given that Obergefell was based on both the Due Process and Equal Protection clauses, all the rights of a married couple, due to their married status, necessarily flow to all married couples. Statutory and/or case law concerning tenants by the entirety that describes its attributes as right of a married man and woman likewise fully applies to same sex married couples.⁵³

5.1.2 Transfers Before Bankruptcy: Risks Under 11 U.S.C. § 548.

Warning: Transfers that are effective under Maryland law may still be avoided in bankruptcy. The result of bankruptcy setting the transfer aside is not that it goes back to its earlier tenants by the entirety status. Instead, the recovered property re-enters the estate as a one-half tenant-in-common interest, losing entireties protection.

Thus, if a husband with a judgment transfers entireties property to his wife, the judgment creditor cannot reach the property under Maryland law. But if the husband files bankruptcy within two years, the trustee may recover the transfer and convert the asset into a non-exempt interest and can force a sale to collect the value of the husband’s half.

Because a Watterson transfer is still a “transfer,” it will cause a problem if, on the eve of a bankruptcy filing, the debtor spouse tries to mimic that case. In Watterson, it was held that the transfer by the husband of all of his interest in the T/E property to the wife did not constitute a fraudulent conveyance because the judgment creditor of the husband did not have an attachable interest in the T/E property. That is not the same as saying that the marriage, as a separate entity, makes the transfer. Indeed, there are numerous bankruptcy cases bringing back into the bankruptcy estate Watterson-type pre-petition transfers (ones occurring within two years of the filing of the petition). This is because of the sweeping authority given to the trustee to avoid transfers under U.S.C. § 548(a)(1). The result is that the previously exempt property comes back, not as a T/E exempt interest, but as a one-half tenant in common interest because when it comes back it goes to the bankruptcy estate, not the debtor/spouse as spouse holding the asset as T/E property.⁵⁴

5.2 Tenants by the Entirety Protects More Than Just Real Estate from Creditors.

In Maryland, tenants by the entirety protection is available to a vast type of assets: bank accounts, investment accounts and, of course, real estate. Although discussed below of certain cases of presumed tenants by the entirety status, it is best practice to title property as such.

Tenants by the entirety, of course, is most often thought of as a way of holding real estate by a married couple. Indeed, Maryland common law presumes that real property held by a married couple is held as tenants by the entirety.

“It is an ancient doctrine of the common law that if an estate in fee is given to a man and his wife, they are neither joint tenants nor tenants in common, for, since husband and wife are considered in law as one person, they cannot take the estate by moieties, but both are seised of the entirety, and in consequence neither the husband nor the wife can dispose of any part without the assent of the other, but the whole must remain to the survivor. ⁵⁵

 In order for an instrument to create a joint tenancy instead of tenancy by the entirety, the joint tenancy must be clearly expressed so as to leave no doubt of that intention.⁵⁶

Maryland recognizes tenancy by the entireties in bank accounts or other personal property: “It is well established that this Court recognized that a tenancy by the entireties may be created in personal property…A number of our sister states are in agreement with this view.” ⁵⁷

5.3 The Legal Requirements for Creation.

It is a mistake for a couple to assume that tenants by the entirety is simply created by marriage. Property held by one of the couple before marriage remains separate property for asset protection purposes if not retitled as tenants by the entirety after the marriage. Even jointly held property by a couple before they marry remains ordinary jointly owned property and exposed to the creditor of one unless steps are taken after their marriage.

As with joint tenancies, a tenancy by the entirety requires the “four unities:”

“A tenancy by the entireties is essentially a joint tenancy, modified by the common law theory that the husband and wife are one person.” Schilback v. Schilback, 171 Md. 405, 407, 189 A. 432 (1937); see also Schlossberg, supra, 380 F.3d at 178. Thus, just as the creation of a joint tenancy requires the four essential common law unities of interest, title, time and possession, so does the creation of a tenancy the entirety.”⁵⁸

In Cruickshank-Wallace, the husband and wife executed an agreement years before the husband incurred the debt declaring their intent that all of husband’s future wages would be held as tenants by the entirety. After the husband incurred the debt, a tax refund check was sent payable to the couple and diverted into the wife’s account. The Court held that the intent of the couple alone does not create a tenant by the entirety account in the absence of the four unities. A refund check in the names of a husband and wife is not presumed to be held as tenants by the entirety regardless of whether a joint return was filed.⁵⁹ Therefore, even if the couple intended to create a tenants by the entirety in the refund check, they had to take steps to create the tenancy after receipt of the check. By the time of such receipt, of course, the judgment lien attached to the husband’s interest in the refund. The four unities did not exist at the time they received the refund.

5.3.1 Once Titled as Tenants by the Entirety Joint Action Necessary.

The idea of the tenancy by the entirety is “almost [a] metaphysical concept which developed at the common law⁶⁰ that the married couple is an indivisible unit. It follows that the tenancy cannot be severed except by mutual consent, absolute divorce, or death. This is the basis of its strong asset protection and dictates how decisions are to be made.

Once the conditions for the creation are satisfied, the tenancy becomes more than the sum of its parts:

“Maryland retains the estate of tenancy by the entirety in its traditional form. Columbian Carbon Co. v. Kight, supra. By common law, a conveyance to husband and wife does not make them joint tenants, nor are they tenants in common; they are in the contemplation of the law but one person, and hence they take, not by moieties, but by the entirety. Neither can alienate without the consent of the other, and the survivor takes the whole … Tenancy by the entirety may not be severed by the consent of one of the parties or by their individual judgment creditors during their joint lives; except in the case of absolute divorce, during the lifetime of both tenants their estate may be terminated only by the joint action of both and a conveyance to a third person.”⁶¹

Beall involved a bare offer executed by a husband and wife to sell real estate held by the entireties. The husband died before the offeree accepted the offer to purchase the land. The issue was whether the offer survived the husband’s death. The rule governing such offers (not supported by consideration) is that it is revoked by the death of the offeror. The Court held that the offer was by a separate entity (the entirety estate) and that this estate terminates by the death of one spouse. The surviving spouse is not obligated to uphold the offer.

In another case, the issue was whether one spouse may unilaterally terminate a lease of the tenants by the entirety property.⁶² In Arbesman, the wife’s sister lived in part of the marital home, taking care of the wife. The husband attempted to terminate the tenancy of his wife’s sister. The Court held that such a lease could only be terminated by both husband and wife:

“In summary, the tenancy by the entireties estate as it currently exists in Maryland has the following pertinent incidents: the husband and wife take the tenancy by the entireties property not by moieties but by the entirety; each spouse has an equal right to income derived from the tenancy by the entireties property but no right to compel an accounting during marriage … and neither spouse may lease, dispose of or encumber land held as tenants by the entireties without the consent of the other.”⁶³

It is the separateness of the tenancy from its individual constituents that creates the asset protection attribute of the tenancy in Maryland. Entireties property is not subject to the claims against only one spouse: “[P]roperty held by the entireties is watertight as to claims against one spouse only.” ⁶⁴

5.4 Creating or Adding to Entity Property.

As the Watterson case illustrates, if a creditor tries to collect against tenants by the entirety property, the couple have numerous protective actions they can take. If, however, the couple separately or jointly holds property but not as tenants by the entirety, it is too late. Once a claim arises, the creation of a tenancy by the entirety could be attacked as a fraudulent conveyance.

Also, once a creditor is about to collect a judgment against the husband/debtor, his payment to pay mortgage principal is a fraudulent conveyance.⁶⁵ That payment was not to pay the lender for back interest owed but to increase the asset value held in the tenants by the entirety home.

If the Fraudulent Conveyance Act is tripped: “[e]very conveyance made and every obligation incurred by a person who is or will be rendered insolvent by it is fraudulent as to creditors without regard to his actual intent, if the conveyance is made or the obligation is incurred without fair consideration”⁶⁶ other than a Watterson transfer made by existing tenants by the entirety.

5.5 More Protective Options with Maryland Tenants by the Entirety Trust.

Under Maryland law, tenants by the entirety property can be held by revocable trusts. Properly structured, this can create something like a self-settled domestic asset protection trust, discussed below. It is useful by preserving the flexibility of a Watterson transfer while both living but also to create a safety plan if there is one spouse’s debt present at the first death. If the first spouse to die is the debtor spouse, the non-debtor spouse receives the property debt free due to the tenancy. If, however, the surviving spouse is the debtor spouse, that spouse can disclaim the interest deemed coming from the deceased spouse which, in turn, can go to an asset protected trust for the benefit of the survivor.

5.5.1 Basics About the Maryland Tenants by the Entirety Trusts.

By statute, in Maryland property held by the entirety may be transferred to a trust or trusts and retain the same immunity from creditors:

“Property of a husband and wife that was held by them as tenants by the entirety and subsequently conveyed to the trustee or trustees of one or more trusts, and the proceeds of that property, shall have the same immunity from the claims of the separate creditors of the husband and wife as would exist if the husband and wife had continued to hold the property or the proceeds from the property as tenants by the entirety, as long as:

1. The husband and wife remain married;

(2) The property or the proceeds from the property continue to be held in trust by the trustee or trustees or the successors in trust of the trustee or trustees;

(3) Both the husband and wife are beneficiaries of the trust or trusts; and

(4) The trust instrument, deed, or other instrument of conveyance provides that this section shall apply to the property or the proceeds from the property.”⁶⁷

Without this statute, transferring tenants by the entirety property would break the tenancy because it would be going from a married couple as an undividable unit to trustees for the benefit of such a couple. Even if the trustees are the married couple, they would not be holding the property as the married individuals but as trustees for same.

From a trust law vantage, it purports to permit self-settled asset protection trusts for married couples. The essential requirement to be able to create tenants by the entirety trust is that they hold what is transferred into the trust as tenants by the entirety immediately prior to its transfer. Unlike domestic asset protection trusts (DAPTs) elsewhere, the settlor may be sole trustee, the trust need not be irrevocable, and either settlor may retain a non-testamentary general power of appointment.

Assume an example that literally meets all of the requirements of the Maryland statute. Husband (“H”) and Wife (“W”) hold as Tenants by the Entireties (“T/E”) two residences (“Blackacre” and “Whiteacre”) and a brokerage account worth $4 million. They transfer these assets into two revocable trusts: H’s Trust and W’s Trust. H’s Trust holds Blackacre and $2 million of the securities and W’s Trust holds Whiteacre and $2 million. Each Trust provides a death payout to the surviving spouse of $10,000 (or something not de minimis). Each spouse is the sole Trustee of his or her respective Trust and each has extensive rights over this separate Trust during life (including, a general power of appointment) and each has extensive powers to appoint at death (subject to the $10,000 payout override). Perhaps these Trusts are backstopped by a marital agreement to preclude the assertion of an elective share against the Trusts at death.⁶⁸

But for the statute, H & W would have created self-settled trusts which are ineffective as to their creditors. Instead, the property retains its asset protection attributes while both live, and it keeps the immunity mimicking that of entirety property to the extent the surviving spouse receives the property.⁶⁹ Under the common law, self-settled trusts do not protect attachment from the settlor’s creditors:

“Where a person creates for his own benefit a trust with a provision restraining the voluntary or involuntary transfer of his interests, creditors can reach his interests.”⁷⁰

“Where a person creates for his own benefit a trust for support or a discretionary trust … his creditors can reach the maximum amount which the trustee … could pay to him …”⁷¹

The treatment afforded T/E is not an exception to the general rule disfavoring self-settled trusts. Instead, the T/E property is seen as owned 100% by both H & W. Thus, the separate creditors of each spouse cannot attach an individual interest because there is deemed to be no individual interest. Such attachment would prejudice the non-debtor spouse.

Historically, however, it was only the survivorship interest that was protected. Before women had extensive property rights, their husband had control of the property during his lifetime. The husband’s creditors could attach the life interest but not the survivorship interest. After the Married disability was abrogated and both had full rights to property. Several states thereupon repealed the tenancy by the entirety completely as no longer serving its purpose. Other jurisdictions, including Maryland, however, modified the tenancy to protect both the life and the survivorship interests from separate debts during the marriage.⁷² Although the Maryland immunity statute is rooted in the concept tenants by the entirety to the extent of protecting the property from attachment by one spouse’s creditor during the couple’s joint lives, it does not require that the survivor become the fee owner at the first death.

5.5.2 Tenants by the Entirety Trusts as a DAPT for Married Couples.

The Maryland statute creates an exception to the prohibition against settlers sidestepping creditors with self-settled trusts. Effectively, it carves out an exception for a Maryland domestic asset protection trust for a married couple if funded by what was previously held by them as tenants by the entirety property and meets the other requirements of the statute. In the above example, this protection would follow Blackacre and the husband’s one-half interest in the brokerage account regardless of whether the wife had any further interest in that property under the provisions of the trust. If H & W had severed the T/E property to accomplish this same result, of course, they would no longer have the T/E “immunity” and the self-settled trust rules would permit creditors to attach the property.

The operation of the statute establishing tenants by the entirety trusts precludes a creditor of one spouse to attach the trust property. The Maryland exemption from creditor execution against such property is the same as that creditor’s ability against T/E still held by the couple:

The following items are exempt from execution on a judgment: …

(9) The debtor’s beneficial interest in any trust property that is immune from the claims of the debtor’s creditors under § 14.5-511of the Estates and Trusts Article.

(10) With respect to claims by a separate creditor of a husband or wife, trust property that is immune from the claims of the separate creditors of the husband or wife under creditors under § 14.5-511of the Estates and Trusts Article.⁷³

The T/E Trust statute provides that the property “shall have the same immunity from the claims of the separate creditors of the husband and wife as would exist if the husband and wife had continued to hold the property or the proceeds from the property as tenants by the entirety”⁷⁴ To date, no appellate court has interpreted the statute. Quite likely that “same immunity” will be seen as lockstep with the extensive cases interpreting the immunity offered by the tenancy in general. If ever challenged, the court is charged with determining the legislative intent. As with most Maryland legislation, there is not extensive, accessible legislative history spelling out exactly the intent of the Legislature. It appears, however, to have been presented as a way of remedying the unfairness that would occur when spouses change the ownership of their T/E property by transferring it into their trusts for estate planning and probate avoidance purposes.⁷⁵

5.6 Other Spousal Property.

By statute, certain joint accounts held by husband and wife are exempt from garnishment:

“Spousal property. – (1) Except as provided in paragraph (2) of this subsection, a garnishment against property held jointly by husband and wife, in a bank, trust company, credit union, savings bank, or savings and loan association or any of their affiliates or subsidiaries is not valid unless both owners of the property are judgment debtors.

(2) Paragraph (1) of this subsection does not apply unless the property is held in an account that was established as a joint account prior to the date of entry of judgment giving rise to the garnishment.”⁷⁶

This is not a blanket protection of all joint accounts. A jointly held brokerage account, for example, is not covered by the statute. Under Maryland common law, of course, such accounts could be held as tenants by the entirety.⁷⁷ To achieve such a result, a brokerage account should probably be formally titled by the entireties and be subject to the order of both.

The Maryland spousal joint property statute also affords protection to property held in trust form in the same enumerated financial institutions.⁷⁸ Such an account was held free from garnishment even if created after the date of entry of a judgment against one spouse when funded exclusively from the sale of tenants by the entirety property.⁷⁹ The spousal joint account protection, however, may be subject to garnishment if the status of the joint owners is unknown and the co-owner upon notice of the garnishment does not assert timely opposition.⁸⁰ To a large extent, the Family Law provisions reflect the common law of tenancy by the entirety (where the case law shows a bias against joint tenancy in favor of T/E with jointly held assets for married couples). From a planning perspective, it is best to identify joint accounts as held as T/E on the account documents because it will eliminate arguments of the intent of the couple if a creditor seeks access to those funds based on the debt of one spouse.

Maryland statute holds that pre-marital obligations of one spouse do not become the responsibility of the other spouse.⁸¹ Also, spouses are not generally responsible for each other’s tort or contract liability.⁸²

5.7 Tenants by the Entirety & Federal Taxes.

The Supreme Court, in United States v. Craft, ⁸³ held that property held as tenants by the entirety is subject to a federal tax lien against one (not both) spouse. The federal tax lien statue is, of course, a creature of federal law. It attaches to “property and rights to property” held by the taxpayer/debtor.

According to Justice O’Connor’s opinion for the Court, whether the lien attaches to one spouse’s interest in tenants by the entirety property is ultimately a question of federal law. One looks first to state law to determine what rights a taxpayer has in the property the government seeks to reach. Then, one looks to see whether the rights that a taxpayer has in specific property qualify as “property or rights to property” under federal law. Justice O’Connor concluded that the debtor/taxpayer had sufficient rights in the “bundle of sticks” in tenants by the entirety property to rise to an attachable interest. These rights included the right of possession, of income, of sale proceeds (if the non-debtor spouse agreed to the sale), etc. The “legal fiction” that neither tenant has an interest separable from the other (per Blackstone) is not controlling as to the scope of the federal tax lien:

“[I]f neither of them had a property interest in the entireties property, who did? This result not only seems absurd, but would also allow spouses to shield their property from federal taxation by classifying it as entireties property, facilitating abuse of the federal tax system.”⁸⁴

Justices Scalia and Thomas dissented. Justice Thomas objected to what he saw as a federalization of the law governing rights to property:

“Before today, no one disputed that the IRS, by operation of § 6321, ‘steps into the taxpayer’s shoes,’ and has the same rights as the taxpayer in property or rights to property subject to the lien. I would not expand the ‘nature of the legal interest’ the taxpayer has in the property beyond those interests recognized under state law.” ⁸⁵

Justice Scalia jointed in Thomas’ dissent:

“[A] State’s decision to treat the marital partnership as a separate legal entity, whose property cannot be encumbered by the debts of its individual members, is no more novel and no more ‘artificial’ than a State’s decision to treat a commercial partnership as a separate legal entity, whose property cannot be encumbered by the debts of its individual members.”⁸⁶

The fact that the lien attaches to the debtor/taxpayer’s interest does not sever the tenancy. It gives the government the right to either (i) administratively seize and sell the taxpayer’s interest or (ii) foreclose the federal tax lien against the entireties property.

The administration option is problematic for the Internal Revenue Service: “Because of the nature of the entireties property, it would be difficult to gauge what market there would be for the taxpayer’s interest in the property. The amount of any bid would in all likelihood be depressed to the extent that the prospective purchaser, given the rights of survivorship, would take the risk that the taxpayer may not outlive his or her spouse. In addition, a prospective purchaser would not know with any certainty if, how, and to the extent to which the rights acquired in an administrative sale could be enforced … Levying on cash and cash equivalents held as entireties property does not present the same impediments as seizing and selling entireties property.” ⁸⁷

The most likely lien enforcement procedure will be foreclosure.⁸⁸ Foreclosure is supervised by a court under IRC § 7403 and anyone with an interest in the property is joined and heard. The court may order the sale of the whole property, then order “a distribution of the proceeds of such sale according to the findings of the court in respect to the interests of the parties and the United States.” IRC § 7403(c). The value of the respective spouses is an issue of fact:

Question (by the Court): “But in your review, you always value the taxpayer’s interest at 50 percent?”

Answer (by Mr. Jones): “No, I think in the Rodgers — well, if the property’s been sold, yes. If the property hasn’t been sold, and we’re talking about in a foreclosure context, I believe the Rodgers court goes through the example of the varying life expectancies of the two tenants, and which one — and I believe what the Court in Rodgers said was that each of them should be treated as if they have a life estate plus a right of survivorship, and the Court explains how that could well — I think in the facts of Rodgers resulted in only 10 percent of the proceeds being applied to the husband’s interest and 90 percent being retained on behalf of the spouse, but –“⁸⁹

Prior to Craft, the U.S. Supreme Court held that the Supremacy Clause permits homestead property (not tenancy by the entirety property) could be sold as long as a non-delinquent spouse is fully compensated:

“Although we have held that the Supremacy Clause allows the federal tax collector to convert a non-delinquent spouse’s  homestead estate into its fair cash value, and that such a conversion satisfies the requirements of due process, we are not blind to the fact that in practical terms financial compensation may not always be a completely adequate substitute for a roof over one’s head.”⁹⁰

In Rodgers, the Supreme Court formulated various factors that should be weighed before authorizing a sale but did not specifically discuss how to apply the factors in setting fair compensation to the innocent co-owner.

After Craft, various bankruptcy courts have approached compensation to an innocent spouse in different ways. Some tend to see a 50/50 split as the default allocation based as a matter of law or, at least, the fair default allocation:

“The District Court properly rejected this approach (of using life expectancies). Valuing the interests of tenants by the entireties equally accords with the longstanding Pennsylvania common law definition of tenancies by the entirety… [E]ach spouse in a tenancy by the entireties “is entitled to equal use, enjoyment, and possession” and “entitled equally to the usufruct of the properties.” As the District Court correctly observed, “the equal division of assets between spouses … parallels the distribution of entireties property when an entireties estate is severed because of a sale with consent of both tenants, divorce or other reasons… Sound policy reinforces the District Court’s approach to valuation, as an equal valuation is far simpler and less speculative than the valuation contemplated by the Popkys. Thus, we agree with the District Court’s valuation of Sheila Popky’s interest in the proceeds from the sale of the Narbeth property at fifty percent.”⁹¹

Other bankruptcy courts have adopted or endorsed the use of life expectancies derived from actuarial tables in determining the value of a tenant’s interest in entireties property in this context:

“Although Popky’s simple 50/50 rule does not control, we cannot agree with the District Court’s calculation of the Cardacis’ respective interests in the marital home. In a tenancy by the entirety, each spouse has a concurrent interest in the present value of the property, in a life estate, and in a right of survivorship. But because both the probability of obtaining the property upon the death of one’s spouse and the value of the life estate depend on life expectancy, any calculation of the cash value of those interests “must of necessity be based on actuarial statistics[.]That is a logical rule. To give one admittedly extreme example, it stands to reason that a healthy twenty-six-year-old wife would have a greater interest in a life estate than would her ailing eighty-nine-year-old husband. While each spouse would have the same rights to the home, the measurable property value that they would be likely to receive from the property is not the same. Therefore, a method of calculation is needed that takes into account each spouse’s concurrent interest in the present value and their varying interests in life estate and survivorship rights.” ⁹²

If the lien is not acted upon, and one spouse dies, the property goes to the survivor either free of the lien or not, depending on who is the survivor: “when a taxpayer dies, the surviving non-liable spouse takes the property unencumbered by the federal tax lien. When a non-liable spouse predeceases the taxpayer, the property ceases to be held in a tenancy by the entirety, the taxpayer takes the entire property in fee simple, and the federal tax lien attaches to the entire property.” ⁹³

In Craft, the property was quit-claimed to the non-debtor spouse after the debtor spouse incurred the tax lien. Nevertheless, the lower courts held that no fraudulent conveyance was involved because no lien could attach. This point was not preserved on appeal. Justice O’Connor makes clear, however, that that issue will be present in future cases involving federal tax liens: “Since the District Court’s judgment was based on the notion that, because the federal tax lien could not attach to the property, transferring it could not constitute an attempt to evade the Government creditor, in future cases the fraudulent conveyance question will no doubt be answered differently.” ⁹⁴ Thus, the technique involved in the Watterson case will not be respected for federal tax lien purposes.⁹⁵

Disclaimers & Asset Protection

6.0 Are Disclaimers Transfers & Why is it Important?

For most purposes, a disclaimer is not a transfer for fraudulent conveyance purposes under Maryland law. Combined with the ability to hold tenants by the entirety property in a trust as a will substitute, the use of a disclaimer as part of the estate planning can be a hedge against a surviving spouse losing the entire value of the assets if the surviving spouse holds significant sole debt.

Under federal tax law, real property held as tenants by the entirety can be disclaimed by the surviving spouse as to the survivorship which is deemed a 50% interest:

“Except as provided in paragraph (c)(4)(iii) of this section (with respect to joint bank, brokerage, and other investment accounts), in the case of an interest in a joint tenancy with right of survivorship or a tenancy by the entirety, a qualified disclaimer of the interest to which the disclaimant succeeds upon creation of the tenancy must be made no later than 9 months after the creation of the tenancy regardless of whether such interest can be unilaterally severed under local law. A qualified disclaimer of the survivorship interest to which the survivor succeeds by operation of law upon the death of the first joint tenant to die must be made no later than 9 months after the death of the first joint tenant to die regardless of whether such interest can be unilaterally severed under local law and … such interest is deemed to be a one-half interest in the property… This is the case regardless of the portion of the property attributable to consideration furnished by the disclaimant and regardless of the portion of the property that is included in the decedent’s gross estate under section 2040 and regardless of whether the interest can be unilaterally severed under local law.”⁹⁶

If the property is not real estate but is a “joint bank, brokerage, or other investment account (e.g., an account held at a mutual fund), (and) if a transferor may unilaterally regain the transferor’s own contributions to the account without the consent of the other cotenant…” the surviving owner “may not disclaim any portion of the joint account attributable to consideration furnished by that surviving joint tenant.” ⁹⁷ Notably, the Regulation and the examples in the Regulation dealing with bank and investment account exception only refers to joint accounts not to accounts held tenant by the entirety, whereas the provisions for real estate refer to both. Under Maryland law, tenants by the entirety can be created by a married couple in personal property, such as investment or bank accounts, as well as in real estate and the filing of a bankruptcy petition by only one spouse does not sever that tenancy.⁹⁸ Presumably, if the couple first held such an account as tenants by the entirety then transferred it to a trust, neither could unilaterally withdraw the funds except with the other’s consent and the 50% ownership interest would equally apply for the investment accounts. ⁹⁹

As mentioned, clients should hold those account identified as tenants by the entireties ownership accounts with the bank or investment house. A couple could hold most of their assets as tenants by the entities then rely on a “disclaimer trust” with a spendthrift clause at the first death. If the debtor spouse dies first, the asset is received (in general, see below) free of the debts. If the debtor spouse survives and a disclaimer is not a transfer, then at least part of the entireties property could be “directed” to a spendthrift trust for the benefit of the survivor. Obviously, the key issue to this planning is whether a disclaimer is a transfer for fraudulent conveyance purposes.

6.1 Maryland Statutory Disclaimer Provisions.

Maryland has adopted the 2002 version of the Uniform Disclaimer of Property Interest Act. Maryland Est. & Trusts § 9-202(f) states, in part: “(1) A disclaimer made under this subtitle is not a transfer, assignment, or release.” This language is meant to continue the “relation back” effect of prior law:

“Subsection (f) restates the long standing rule that a disclaimer is a true refusal to accept and not an act by which the disclaimant transfers, assigns, or releases the disclaimed interest. This subsection states the effect and meaning of the traditional “relation back” doctrine of prior Acts. It also makes is clear that the disclaimed interest passes without direction by the disclaimant, a requirement of tax qualification.”¹⁰⁰

Effective October 1, 2007, Est. & Trusts § 9-202(f)(2) was added to provide that: “Creditors of the disclaimant have no interest in the property disclaimed.”¹⁰¹ This should preclude most (but as discussed below, perhaps not all) creditors from reaching disclaimed assets.

6.2 Disclaimers and Medicaid Recipients.

The declaration that a disclaimer is not a transfer and therefore not accessible by the disclaimant’s creditors was determined not absolute under prior law. In Troy v. Hart,¹⁰² the Maryland Appellate Court held that, by statute, a Medicaid recipient had an obligation to notify the Maryland Department of Social Services within 10 days upon learning that he was to be a recipient of an inheritance. This would result in DSS adjusting the Medicaid payments to account for the inheritance. Instead, the recipient made no notification and disclaimed the inheritance, which caused his inheritance to be distributed to his sisters. The Court found the disclaimer valid but the transferred funds subject to a constructive trust in order to disgorge it from the other family members. At root, the decision was grounded in public policy:

“What this Court is more broadly faced with is the propriety of the disclaimer in light of societal interest and overall policy considerations. What is ludicrous, if not repugnant, to public policy is that one who is able to regain the ability to be financially self-sufficient, albeit for a temporary or even brief period of time, may voluntarily relinquish his windfall.

While we are mindful that social agencies are ‘skewered through and through with office pens, and bound hand and foot with red tape,’ this acknowledgment does not vitiate legal obligation to report a recipient’s change in financial status. Lettich had a legal obligation to ‘pay his own way’ (by means of the inheritance) until such time as his resources were exhausted. Had the disclaimed funds actually been acquired and exhausted, Lettich most certainly would have been eligible to resume his receipt of Medicaid benefits.”¹⁰³

The Troy Court treats the disclaimer is “the functional equivalent of a transfer,” however, it adopts this position only for the purpose of determining whether an applicant has an “available resource” for benefit qualification purposes. That determination is worlds away from treating a disclaimer as generally a transfer, fraudulent or otherwise. The Troy holding went from the determination that the Medicaid recipient was required to notify DSS of a new available resource to determining that public policy gives the State the right to follow the proceeds:

“What this Court is more broadly faced with is the propriety of the disclaimer in light of societal interest and overall policy considerations… To permit disclaimed property to pass to transferees free and clear of any obligation would be a violation of public policy.”¹⁰⁴

Given the subsequent, explicit language of the Maryland statute that the disclaimant’s creditors have no interest in the disclaimed property, it is doubtful whether the Troy case would be expanded beyond its narrow holding.

6.3 Disclaimers and Federal Tax Debt.

Under federal law, a disclaimer will not defeat a federal tax lien. The taxpayer was insolvent owing the federal government unpaid taxes for which the IRS filed tax liens. His mother died intestate which, by state statute, resulted in her estate going to her son, as her only child. The taxpayer filed a disclaimer so that the inheritance would go to his daughter under state law. The taxpayer argued that a disclaimer is like rejecting an inter vivos gift. This, in turn, supported his contention that he never possessed the inheritance:

“Drye emphasizes his undoubted right under Arkansas law to disclaim the inheritance… a right that is indeed personal and not marketable. See Brief for Petitioners 13 (right to disclaim is not transferable and has no pecuniary value). But Arkansas law primarily gave Drye a right of considerable value—the right either to inherit or to channel the inheritance to a close family member (the next lineal descendant). That right simply cannot be written off as a mere “personal right … to accept or reject [a] gift.” Ibid

In pressing the analogy to a rejected gift, Drye overlooks this crucial distinction. A donee who declines an inter vivos gift generally restores the status quo ante, leaving the donor to do with the gift what she will. The disclaiming heir or devisee, in contrast, does not restore the status quo, for the decedent cannot be revived. Thus the heir inevitably exercises dominion over the property. He determines who will receive the property—himself if he does not disclaim, a known other if he does.”¹⁰⁵

The decision turned (like Craft, discussed above) on a federal definition of whether property interests constitute “property” or “rights to property” under IRC § 6321:

“In sum, in determining whether a federal taxpayer’s state-law rights constitute ‘property’ or ‘rights to property,’ ‘[t]he important consideration is the breadth of the control the [taxpayer] could exercise over the property.’ Morgan, 309 U.S., at 83. Drye had the unqualified right to receive the entire value of his mother’s estate (less administrative expenses), see National Bank of Commerce, 472 U.S., at 725 (confirming that unqualified ‘right to receive property is itself a property right’ subject to the tax collector’s levy), or to channel that value to his daughter. The control rein he held under state law, we hold, rendered the inheritance ‘property’ or ‘rights to property’ belonging to him within the meaning of § 6321, and hence subject to the federal tax liens that sparked this controversy.”¹⁰⁶

Craft and Drye, at their core, rely on the federal Supremacy Clause. Thus, the principles are not just applicable to federal income tax debts and will apply to other federal obligations.¹⁰⁷

6.4 Disclaimers and Bankruptcy.

Ignoring a disclaimer for the purpose of determining what property is subject to a federal tax lien is different than a finding that a disclaimer may be a fraudulent transfer per se. In a bankruptcy proceeding, a creditor can force the debtor out of bankruptcy if the debtor transfers property of the debtor “within one year before the date of the filing of the petition; or

 property of the estate, after the date of the filing of the petition.”¹⁰⁸ This would open the debtor to attack by the creditor without the protection of the bankruptcy proceeding.

A disclaimer executed before filing for bankruptcy was held not to be a transfer that will trigger a discharge from bankruptcy regardless of the Drye decision. The key fact is whether the disclaimer was executed before, rather than after, the creditor filed for bankruptcy protection:

“Like other states, Arizona allows beneficiaries to renounce their interests in trusts through use of a disclaimer. A ‘disclaimer’ has been defined as ‘the refusal to accept an interest in or power over property.’

A properly executed disclaimer carries a significant advantage for an insolvent debtor: it shields the disclaimed interest from the disclaimant’s creditors… As the Supreme Court has explained, ‘an effective disclaimer … relate[s] back to the moment of the original transfer of the interest being disclaimed, having the effect of canceling the transfer to the disclaimant ab initio and substituting a single transfer from the original donor to the beneficiary of the disclaimer.’

…The (Bankruptcy) Trustee’s argument has some force: if the ‘right to channel’ has been recognized as a ‘property’ interest for one federal statute, why not for the other? Nevertheless, we believe that Drye is distinguishable, both factually and legally, and that its adoption in the bankruptcy context would, in any event, be inappropriate.

First, Drye is distinguishable based on timing issues. Although Drye, like this case, involved a collision between federal law and state relation back doctrines, the impact between the two occurred at a different time. In Drye the tax lien was already in place prior to the execution of the disclaimer. Thus, before the taxpayer attempted to execute his disclaimer, the federal government already had an interest in the subject property. Application of the state law fiction would have stripped the government of this interest.

In contrast, the disclaimer here occurred pre-petition, meaning that the retroactive divestment of property interests occurred prior to the bankruptcy estate gaining any interests in the right to disclaim. Therefore, the state law did not operate to defeat any pre-existing interests. Rather, the situation in Drye is more analogous to a post-petition disclaimer, where a debtor invokes the disclaimer protections of state law only after the creation of the bankruptcy estate. In cases of post-petition disclaimers, courts have generally included disclaimed property in the estate, reasoning that the right to disclaim itself belongs to the estate as of the time of filing.” ¹⁰⁹

Thus, the Costas Court applied the relation back rule to hold that the debtor did not have, let alone exercise, a right to transfer the property for discharge purposes.¹¹⁰

Whether disclaimers work beyond the Troy and Drye situations is not fully decided in Maryland. The literal language of Md. Est. & Trusts § 9-202(f), of course, defines the state of the law. This provision flatly denies a creditor’s claim to disclaimed property. Md. Est. & Trusts § 9-210(e), however, states that disclaimers are barred or limited if “so provided by law other than this subtitle.” The Comment to the uniform disclaimer act from whence the Maryland § 9-210(e) was derived categorizes some of those overrides, including the Troy and Drye decisions:

“Subsection (e), unlike the 1978 Act, specifies that ‘other law’ may bar the right to disclaim. Some States, including Minnesota (M.S.A. § 525.532 (c)(6)), Massachusetts (Mass. Gen. Law c. 191A,§ 8), and Florida (Fla. Stat. § 732.801(6)), bar a disclaimer by an insolvent disclaimant. In others a disclaimer by an insolvent debtor is treated as a fraudulent ‘transfer’. See Stein v. Brown, 18 Ohio St.3d 305 (1985); Pennington v. Bigham, 512 So.2d 1344 (Ala. 1987). A number of States refuse to recognize a disclaimer used to qualify the disclaimant for Medicaid or other public assistance. These decisions often rely on the definition of ‘transfer’ in the federal Medical Assistance Handbook which includes a ‘waiver’ of the right to receive an inheritance (see 42 U.S.C.A. § 1396p(e)(1)). See Hinschberger v. Griggs County Social Services, 499 N.W.2d 876 (N.D. 1993); Department of Income Maintenance v. Watts, 211 Conn. 323 (1989), Matter of Keuning, 190 A.D.2d 1033, 593 N.Y.S.2d 653 (4th Dept. 1993), and Matter of Molloy, 214 A.D.2d 171, 631 N.Y.S.2d 910 (2nd Dept. 1995), Troy v. Hart, 116 Md. App. 468, 697 A.2d 113 (1997), Tannler v. Wisconsin Dept. of Health & Social Services, 211 Wis. 2d 179, 564 N.W.2d 735 (1997); but see, Estate of Kirk, 591 N.W.2d 630 (Iowa, 1999) (valid disclaimer by executor of surviving spouse who as Medicaid beneficiary prevents recovery by Medicaid authorities). It is also likely that state policies will begin to address the question of disclaimers of real property on which an environmental hazard is located in order to avoid saddling the State, as title holder of last resort, with the resulting liability, although the need for fiduciaries to disclaim property subject to environmental liability has probably been diminished by the 1996 amendments to CERCLA by the asset Conservation Act of 1996 (PL 104-208). These larger policy issues are not addressed in this Act and must, therefore, continue to be addressed by the States. On the federal level, the United States Supreme Court has held that a valid disclaimer does not defeat a federal tax lien levied under IRC § 6321, Drye, Jr. v. United States, 528 U.S. 49, 120 S.Crt. 474 (1999).”¹¹¹

Under current law, however, the only exceptions to the “no-transfer” rule impacting Marylanders are those described in Troy and Drye.¹¹² Thus, a disclaimers, including the creation of disclaimer trusts as an asset protection vehicle, should work in most, if not all, other circumstances.

Self-Settled Trusts & Asset Protection

7. Self-Settled Trusts.

7.1 The Maryland View.

The standard rule in most U.S. jurisdictions is that a person may not create a trust, retain an interest in that trust, and have the retained interest immune from his or her creditors:

“Can a settlor shelter trust assets from creditors’ claims by reserving a discretionary interest in the trust? In the United States, the traditional answer to this question is ‘no.’ Although the settlor of a discretionary trust cannot compel the trustee to distribute trust income or principal to the settlor, the settlor’s creditors are able to compel such distributions. The standard formulation of this rule is set forth in Section 156(2) of the Restatement (Second) of Trusts as follows:

‘Where a person creates for his own benefit a trust for support or a discretionary trust, this transferee or creditors can reach the maximum amount which the trustee under the terms of the trust could pay to him or apply for his benefit.’

* * *

Note two essential components of the Restatement rule. First, the rule grants to creditors greater rights than those retained by the settlor himself or herself: the settlor cannot complete trust distributions, but the settlor’s creditors can. Second, the rule applies notwithstanding that allowing the settlor’s creditors to reach the assets of the trust may defeat not just the settlor’s interests, but also the interests of other beneficiaries.”¹¹³

Maryland follows the traditional rule:

“Since the late 19^th Century, it has been the rule in Maryland that a person may not effectively create a spendthrift trust for his own benefit. See Watterson v. Edgerly, 40 Md. App, 230 (1978); Warner V. Rice, 66 Md. 436 (1887). The Maryland rule comports with general trust law. See Restatement (Second) of Trusts § 156(1) (1957).”¹¹⁴

In Robbins, a Maryland Bankruptcy case, the settlors created a spendthrift trust with themselves as the beneficiaries. Sometime thereafter they filed a petition for bankruptcy claiming that the trust assets were exempt. The court held that any amount that a trustee is authorized to apply for the benefit of the settlors is available to the settlor’s creditors: “One may wish to have one’s cake and eat it, but the law need not bring their wish to fruition.”¹¹⁵

Robbins distinguished an earlier Maryland Supreme Court decision where the Court certified a question involving a limited power of appointment in a federal tax lien case.¹¹⁶ In Baldwin, the settlor established an irrevocable trust reserving to himself income for life and retained a limited testamentary power of appointment. He did not retain the right to corpus. Because the power of appointment was not general and he could not reach corpus, the corpus could not be reached by the settlor’s creditors. The only interest retained by the settlor was an income interest, and that was the only interest available to his creditors.

The creditors in another Maryland case sought to claim that the trust could be ignored on the “alter ego” doctrine generally applicable to piercing the corporate veil.¹¹⁷ The settlors established an irrevocable trust reserving a life estate (income interest) in their residence with the remainder to their children. Because the trustees held legal title and the children held equitable title, only the life estate interest was available to creditors. The life estate was later sold to the trust and the settlors became tenants of the residence. The court rejected the “alter ego” attack and upheld the trust.

7.2 Offshore Self-Settled Trusts.

One claimed advantage for offshore trust is that those jurisdictions permit self-settled trusts and asset protection from the settlor’s creditors even though the settlor may benefit from the property in the trust in the discretion of the trustee:

“Offshore protection trusts have become one of the most talked about estate planning techniques in recent years. They are heavily promoted as effective barriers against claims of creditors because the laws of most offshore trust havens make it difficult for creditors to obtain jurisdiction over, or levy against, a trust, even if the settlor retains an interest in the trust property. Unlike most states of the United States, a number of foreign jurisdictions permit a settlor to create a spendthrift trust for the settlor’s own benefit. These barriers often insulate the property entirely from creditors or encourage creditors to agree to inexpensive settlements.”¹¹⁸

Offshore trusts can be somewhat problematic:

“Taxpayers who have established offshore trusts are beginning to discovery that those trusts do not always provide the level of creditor protection advertised. The fundamental problem is that a U.S. resident who moves assets to an offshore trust is still personally subject to the jurisdiction of the U.S. Courts.”¹¹⁹

.

7.3 Domestic Asset Protection Trusts.

Recently several states have enacted enabling legislation to permit self-settled asset protection trusts (Alaska, Delaware, Nevada and other jurisdictions). The domestic asset protection trust offers the promise of asset protection without some of the more unacceptable risks associated with offshore trusts:

“Although some debtors willingly pay large fines or endure incarceration to protect their assets, others will find the risks unacceptable. Attorneys who recommend offshore APTs (Asset Protection Trusts) contend that the imposition of sanctions resulted from poor trust design in the cases in question, but a U.S. court might be tempted to employ the sanctions when a trustor has placed assets beyond the court’s reach. The trustor of an offshore APT will have a hard time convincing a U.S. court that the trustor does not retain control over trust assets. … The trustor’s task of proving no retained control is even more difficult if, as often is the case, other beneficiaries of the trust cannot engage local counsel to enforce their interests. The risk of fine or incarceration should be lower in the case of a DAPT (domestic asset protection trust) because the controversy will be adjudicated in the U.S. legal system.”¹²⁰

For this reason, a client exploring a self-settled trust with any significant retained interest, the domestic version is probably the most attractive vehicle. Before the 1990s, however, any effort to avoid the common law treatment of self-settled trusts meant going offshore. After the 1990s that changed:

“In the 1990s, the estate planning bar recognized that if the self-settled trust rule were eliminated, self-settled trusts could possibly provide two valuable strategic advantages. First, a settlor concerned about the possibility of future creditors could establish a self-settled trust without having to surrender permanent and unequivocal access to the assets, which is ordinarily the case when an outright gift is used for creditor-protection purposes. Second, a self-settled trust could offer an ability to minimize estate tax liability while still allowing the settlor to retain indirect control of his or her assets.

In light of these strategic advantages, starting in Alaska, the estate planning bar — along with other professionals, particularly from the banking industry — mobilized and successfully lobbied for legislation that would overrule the self-settled trust rule. By designating an Alaskan trustee, making the trust irrevocable, inserting a spendthrift provision, and invoking choice-of-law provision making Alaskan law controlling in the trust instrument, nonresidents could seek to avoid the self-settled trust rule in their home state.”¹²¹

As with the offshore variety, a detailed discussion of domestic asset protection trusts is beyond the scope of this paper and discussed in numerous articles.¹²² Whether, and to what extent, DAPTs will be enforced by non-DAPT jurisdictions is a question.

7.3.1 Are DAPTs Enforceable in Maryland?

The answer is largely dependent on whether the terms of the DAPT violates public policy in Maryland, the home state of the settlor. The Nevada DAPT, for example, has no exception creditor status for a spouse to reach the equitable division of marital property upon divorce under certain circumstances. Under the common law of spendthrift trusts, and even under most DAPTs in other jurisdictions, spouses have rights to trust assets to satisfy alimony and property divisions pursuant to divorce decrees.

It is likely that non-DAPT jurisdictions (and even many DAPT jurisdictions) will apply its own exception creditor rules when dealing with a divorce based on public policy. Third-party spendthrift trusts traditionally have exception creditors, which uniformly include allowing enforcement of marital awards and child support payments.¹²³.

Each state is held to have a unique authority over marriage and divorce of married couples in their jurisdiction:

“The recognition of civil marriages is central to state domestic relations law applicable to its residents and citizens. ‘Each state as a sovereign has a rightful and legitimate concern in the marital status of persons domiciled within its borders.’ The definition of marriage is the foundation of the State’s broader authority to regulate the subject of domestic relations with respect to the ‘[p]rotection of offspring, property interests, and the enforcement of marital responsibilities.’”¹²⁴

This unique authority is of ancient origin: “The significance of state responsibilities for the definition and regulation of marriage dates to the Nation’s beginning; for ‘when the Constitution was adopted the common understanding was that the domestic relations of husband and wife and parent and child were matters reserved to the States.’”¹²⁵

There is deference to the law of the state where the parties have their most significant connection when construing trusts if the trust terms violate a public policy of that state. This deference is more acute for moveables:

“An inter vivos trust of interests in movables is valid if valid

1. under the local law of the state designated by the settlor to govern the validity of the trust, provided that this state has a substantial relation to the trust and that the application of its law does not violate a strong public policy of the state with which, as to the matter at issue, the trust has its most significant relationship…”¹²⁶

The override of trust terms by the strong public policy of another state which has the “most significant relationship” to the trust is being revisited, and largely continued, by the Uniform Law Commission. In its discussion draft of a new uniform act Conflict of Laws in Trust and Estates Act, it has, at least in its preliminary form, language that the law of the state designated in the trust will be assumed valid unless:

1. “the designated state has no substantial relation to the trust; or

2. the application of the law of the designated state violates a strong public 16 policy of the state with the most significant connection to the trust as to the matter at issue.”¹²⁷

The Comment on this proposed provision follows the common law as described in the Restatement (Second) of Trusts:

“Strong Public Policy Exception. Subsection (a)(2) adopts the long-standing “strong public policy” exception to matters that are within the settlor’s choice. In other words, this act generally accords broad flexibility to the settlor in choosing the applicable law, but not insofar as the choice of law would be counter to the strong public policy of the state with the most significant connection to the trust. Like other uniform acts, this act “does not attempt to specify the strong public policies sufficient to invalidate a settlor’s choice of governing law. These public policies will vary depending upon the locale and may change over time.”¹²⁸

One of the cases referred to in the draft act’s comment is a Utah Court that refused to apply Nevada law to trust construction in a divorce case based on public policy:

“The central dispute between the parties in this case concerns the revocability of the Trust. This is an issue of trust construction to which we would ordinarily apply Nevada law. But we cannot apply Nevada law without violating Utah public policy… Utah has a long-established policy in favor of the equitable distribution of marital assets in divorce cases.”¹²⁹

The trust in question was derived from property acquired during marriage and, like Maryland, Utah statutory law made it subject to equitable distribution upon divorce. The Utah Court applied Utah law despite that the trust agreement designated Nevada law:

“Because Utah has a strong public policy interest in the equitable division of marital assets, we will not enforce the choice-of-law provision contained in the Trust. Instead, we construe the Trust according to Utah law. We hold that the Trust is revocable under Utah law and that Ms. Dahl has an interest in the Trust property as a settlor of the Trust.¹³⁰

….

Under Utah choice-of-law rules, we will generally enforce a choice-of-law provision contained in a trust document, unless doing so would undermine a strong public policy of the State of Utah.¹³¹

….

Issues concerning the meaning of trust terms, the legal effect of those terms, and the status of individuals vis-à-vis the Trust are all matters of trust construction. See Black’s Law Dictionary 355, 592 (9th ed. 2009) (defining “construction” and “effect”). Conversely, questions related to the performance of the trustee’s duties and the management of trust assets are issues of trust administration. See id. at 49 (defining “administration”); 90 C.J.S. Trusts § 225. The central dispute between the parties in this case concerns the revocability of the Trust. This is an issue of trust construction to which we would ordinarily apply Nevada law. But we cannot apply Nevada law without violating Utah public policy.”¹³²

In divorce proceedings, the equable division of property acquired during the marriage is likewise held as a public policy in Maryland. The Maryland Supreme Court refused to recognize a divorce and property settlement under Islamic religious and secular Pakistan law because it did not comply with Maryland public policy:

“The Maryland Legislature declared Maryland’s public policy in regard to property  acquired during a marriage, stating in the preamble to Chapter 794 of the Acts of 1978, that “the property interests of the spouses should be adjusted fairly and equitably.”… It is clear as well, as we point out above, that, under Pakistani law, upon a divorce there is no equitable division of marital property, i.e., property acquired by the parties during the marriage, unless the marriage “contract” so provides.”¹³³

7.3.2 Banctrupcy Courts & DAPTs.

The home state’s self-settled trust treatment generally applies regardless of whether the DAPT document declares that its law apply. In a 2013 bankruptcy case, for example, the Court determined that Alaska law will only apply over the home state if Alaska has a “substantial relation” to the trust in question: “[A] state has a substantial relation to a trust if at the time the trust is created: (1) the trustee or settlor is domiciled in the state; (2) the assets are located in the state; and (3) the beneficiaries are domiciled in the state.”¹³⁴ In Huber, the Court found that the trust met none of those fundamental indications of a significant relationship to the Trust purported situs:

“In the instant case, it is undisputed that at the time the Trust was created, the settlor was not domiciled in Alaska, the assets were not located in Alaska, and the beneficiaries were not domiciled in Alaska. The only relation to Alaska was that it was the location in which the Trust was to be administered and the location of one of the trustees, AUSA [Alaska USA Trust Company].”¹³⁵

Thus, the Court determined to apply the home state, Washington, and not to apply Alaska law: “[I]n accordance with § 270 of the Restatement, this Court will disregard the settlor’s choice of Alaska law, which is obviously more favorable to him, and will apply Washington law in determining the Trustee’s claim regarding validity of the Trust.”¹³⁶

In Huber, based on Washington State law, the Court held refused to honor the asset protection provisions of the Trust. The Huber Court ruled for the creditors at summary judgment on three separate findings. First, Washington State did not recognize self-settled asset protections trusts so the transfers into the self-settled trust were void.¹³⁷ Second, the Court held that the debtor in Huber violated 11 U.S.C.A. § 548(e)(1) by creating self-settled trust, with the debtor is a beneficiary, and which was created for the purpose of hindering a creditor.¹³⁸ Third, 11 U.S.C.A §544 (b)(1), “gives the Trustee the authority to bring an action to avoid fraudulent transfers under state law. Under the Uniform Fraudulent Transfer Act (UFTA), a transfer is fraudulent if the debtor acts with actual intent to hinder, delay, or defraud a creditor, or transfers ‘[w]ithout receiving a reasonably equivalent value in exchange for the transfer or obligation.’”¹³⁹

In another federal case, the District Court in California applied California law by ignoring the choice of law provision of a Nevada DAPT as not applicable to the creditor’s access to real property:

“[T]he issue before the court is not a matter of interpreting the Trust but instead whether the land which is held in that trust can be reached by a plaintiff creditor. As to that question, the court finds § 280 [of the Restatement (Second) of Conflicts of Laws] to be persuasive in stating that “[w]hether the interest of a beneficiary of a trust of an interest in land is assignable by him and can be reached by his creditors, is determined by the law that would be applied by the courts of the situs.” Restatement (Second) of Conflicts of laws § 280 (1971) (emphasis added); see also In re Anselmi, 52 B.R. 479, 490 (Bankr. D. Wyo. 1985) (“Where the res of the trust is real property, the law applied in determining whether the beneficial interest of a beneficiary is exempt from process is the law of the situs of the land.”). Accordingly, because the Property is located in California, the court will apply California law in determining whether it is subject to enforcement of a judgment lien by plaintiff.”¹⁴⁰

Spendthrift Trusts

Spendthrift Trusts

8. Third Party Spendthrift Trusts.

8.1 In General.

A spendthrift trust may be created when the creator of a trust manifests the intention (expressly or by implication) that the beneficiaries receive an equitable interest in the trust free of the claims of their creditors.¹⁴¹ No specific language is needed to create a spendthrift trust although best practice would be to state that the clause intends to create a “spendthrift trust” pursuant to the statute.¹⁴²

The earliest Maryland case, for example, determined that the direction that the trustee make payments “into his (the beneficiary’s) hands, and not into another, whether claiming by his authority or otherwise” was an expressed manifestation of such an intent.¹⁴³ Other manifestations of an intention to create a spendthrift trust are more elaborate:

“No interest of any beneficiary of this Will or any rust [sic] created thereby shall be assignable in anticipation of payment thereof in whole or in party by the voluntary or involuntary acts of any such beneficiary or by operation of law. Neither the corpus of any trust created hereby, nor the income resulting therefrom, while in the hands of my fiduciaries, shall be subject to any conveyance, transfer, or assignment, or be pledged as security for any debt or obligation of any beneficiary thereof, and the same shall not be subject to any claim of any creditor of any such beneficiary through legal process or otherwise. Any such attempted sale, anticipation, or pledge of any of the funds or property held in any such trust or will, or the income therefrom, by any beneficiary shall be null and void, and shall not be recognized by my fiduciaries.”¹⁴⁴

Now that Maryland has statutory authority for spendthrift provisions, planners ought to reference those code provisions.

8.2 Theoretical Underpinning.

A spendthrift trust has been defined as “a trust that restrains voluntary and involuntary alienation of all or any of the beneficiaries’ interests.”¹⁴⁵ A spendthrift trust is designed to protect the trust from the beneficiary’s debts and/or claims. “[T]his particular type of trust, created with the view of providing a fund for the maintenance or use of another, and at the same time securing it against his improvidence, incapacity, misfortune, by means of such a restrictive provision, to which the term spendthrift trust was originally and is now generally applied…”¹⁴⁶ Spendthrift trusts are upheld because the donor of the trust has the right to dispose of his or her property:

“Now common honesty requires, of course, that everyone should pay his debts, and the policy of the law for centuries has been to subject the property of a debtor of every kind which he holds in his own right, to the payment of his debts. He has as owner of such property the right to dispose of it as he pleases, and his interest is, therefore, liable for the payment of his debts. But a cestui que trust does not hold the estate or interest in his own right; he has but an equitable and qualified right to the property or to its income, to be held and enjoyed by the beneficiary on certain terms and conditions prescribed by the founder of the trust. The legal title is in the trustee, and the cestui que trust derives his title to the income through the instrument by which the trust is created. The donor or devisor, as the absolute owner of the property, has the right to prescribe the terms on which his bounty shall be enjoyed, unless such terms be repugnant to the law. And it is no answer to say that the gift of an equitable right to income to the exclusion of creditors is against the policy of the law. This is begging the question. Why is it against the policy of the law? What sound principle does it violate? The creditors of the beneficiary have no right to complain, because the founder of the trust did not give his bounty to them. And if so, what grounds have they to complain because he has seen proper to give it in trust to be received by the trustee and to be paid to another, and not to be liable while in the hands of the trustee to the creditors of the cestui que trust. All deeds and wills and other instruments by which such trusts are created, are required by law to be recorded in the public offices, and creditors have notice of the terms and conditions on which the beneficiary is entitled to the income of the property. They know that the founder of the trust has declared that this income shall be paid to the object of his bounty to the exclusion of creditors, and if under such circumstances they see proper to give credit to one who has but an equitable and qualified right to the enjoyment of property, they do so with their eyes open. It cannot be said that credit was given upon such a qualified right to the enjoyment of the income of property, or that creditors have been deceived or mislead; and if the beneficiary is dishonest enough not to apply the income when received by him to the payment of his debts, creditors have no right to complain because they cannot subject it in the hands of the trustee to the payment of their claims, against the express terms of the trust.”¹⁴⁷

8.3 Special Status Creditors.

8.3.1 Family Law Claims.

Despite the general respect afforded a spendthrift trust, it is not inviolate against certain claims, including alimony arrearages¹⁴⁸ and child support.¹⁴⁹ In the case of alimony and child support, the Court has made the distinction that such claims are not for debts of a beneficiary but are rather duties of the beneficiary. The reason that spendthrift clauses are enforced against ordinary creditors does not apply in divorce or other family law matters. Ordinary creditors are deemed having knowledge of the restriction. There is a substantial difference with family law issues: “[The basis applicable to ordinary creditors] was simply that persons extending credit to the beneficiary on a voluntary basis are chargeable with notice of the conditions set forth in the instrument…. This reasoning is inapplicable to a claim for alimony which in Maryland at least, is ‘an award made by the court for food, clothing, habitation and other necessities for the maintenance of the wife…’. The obligation continues during the joint lives of the parties, and is a duty, not a debt… We rest our decision upon grounds of public policy, not upon any interpretation of the instruments in question, which are not broad enough to authorize payments by the trustee for the benefit of a divorced wife.”¹⁵⁰ Marital property awards are likewise treated as a duty and enforceable. Thus, in a divorce as part of a marital property award, a transfer of a partial interest in a county pension plan, was upheld regardless of any deemed spendthrift protection:

“Whether the pension is a spendthrift trust is immaterial to the issue at hand. The husbands’ pensions are not being used to discharge debts that they owed to their wives. Rather, the courts called for the equitable distribution of marital property and ordered that each spouse be paid his or her rightful portion as it becomes due.³ When a pensioner becomes eligible to collect, the spouse becomes eligible to collect his or her share as a co-owner, not as a creditor.

Nothing in the Marital Property Act supports the assertion that a pensioner’s ex-spouse should be categorized as a creditor. Rather, logic dictates that once the court, sanctioned by Section 8-205 (MD Code, Family Law, § 8-205), uses its power to transfer ownership rights in a pension or retirement plan, the ex-spouse becomes an owner of a portion of the plan. Appellant would have us rule that, with the issuance of the divorce decree and division of marital assets that include a pension, a wife is automatically transformed from a partner in marriage into a general unsecured creditor. Such a ruling would not only be contrary to reason, but would fly in the face of sound public policy.”¹⁵¹

8.3.2 Support Trust Exception Vs. Discretionary Trust.

Every edition of the Restatement of Trusts recognizes that, unless otherwise restricted, a spendthrift trust can be reached to satisfy claims based on “services or supplies provided for necessities or for the protection of the beneficiary’s interest in the trust.”¹⁵² The Comment to the Restatement (Third) bases this exception by assuming that the usual purpose of the trust is to guarantee its beneficiary a level of a base-line support:

“The interest of a beneficiary of a spendthrift trust can be reached to satisfy an enforceable claim by one, such as a physician or grocer, who renders necessary services or furnishes necessary supplies to the beneficiary. To the extent the person’s claim is excessive in amount, however, or if the person has acted officiously, the claim cannot be enforced against the spendthrift interest.

Failure to give enforcement to appropriate claims of this type would tend to undermine the beneficiary’s ability to obtain necessary goods and assistance; and a refusal to enforce such claims is not essential to a settlor’s purpose of protecting the beneficiary.”¹⁵³

These rules suggest that the trust in question is either explicitly or implicitly a “support Trust”:

“A support trust is one in which a trustee is directed to pay or apply trust income or principal for the beneficiary’s benefit, but only to the extent necessary to support the beneficiary, and only when the disbursements will accomplish support. The trustee must determine the beneficiary’s needs for support and must make disbursements for what is necessary for that support. The trust instrument need not explicitly use the word “support.” The nature of the beneficiary’s interest makes it not transferable except to those supplying necessaries for support, and not subject to the claims of other creditors… Not infrequently it becomes a difficult question of construction whether a technical support trust or some similar trust was intended.”¹⁵⁴

Under Maryland law, to the extent that the trust is wholly or partially discretionary, however, no creditor will be able to enforce a judgment for providing necessities.

The Maryland Supreme Court undertook the “difficult question of construction whether a technical support trust or some similar trust was intended”¹⁵⁵ by the following provision:

“My Trustees, accounting from the date of my death, shall pay from time to time the net income and so much of the principal as they, in their absolute and uncontrolled discretion, may determine, to my daughter, Annesley Bond Baugh, or, in their absolute and uncontrolled discretion, may apply the same for her maintenance, comfort and support.”¹⁵⁶

If it is a support trust, then those supplying necessities can sue the trustee for the reasonable cost of those necessities despite it being a spendthrift trust. If, however, it is a discretionary trust, it “is subject to judicial control only to prevent misinterpretation or abuse of the discretion by the trustee:”¹⁵⁷

“A court will not interfere with a trustee’s exercise of a discretionary power when that exercise is reasonable and not based on an improper interpretation of the terms of the trust. Thus, judicial intervention is not warranted merely because the court would have differently exercised the discretion.”¹⁵⁸

In First Nat’l Bank of Maryland, a mother established a trust for the care of her daughter. The daughter resided in Spring Grove State Hospital for over 30 years with her care paid out of trust income. In 1976, the Maryland Department of Health and Mental Hygiene increased the cost of the care which would substantially reduce the trust corpus. Although the income had been regularly used for the beneficiary’s care, the issue was whether the Trust provisions “exhibited an intention to devote the principal of the trust fund to the maintenance, comfort, and support of her daughter, while the petitioners have consistently declared that the principal, as distinguished from the income, was not unreservedly devoted to the support of Annesley Bond Baugh but is to be dispensed only as the trustees, in their absolute discretion, see fit.”¹⁵⁹ Although the trust directed that the trustee “shall pay” for the care, it was subject to the trustee’s “absolute and uncontrolled discretion” which made the trust a discretionary trust.

Because the Court found it was a discretionary trust, it automatically was not subject to creditors supplying necessities: “ Our determination that the testatrix created a discretionary trust, of course, precludes any argument that the trustees can be compelled to pay the principal of the trust for Miss Baugh’s care at Spring Grove unless it can be shown that they acted ‘dishonestly or arbitrarily or from an improper motive.’”¹⁶⁰ The Trustees declined to consume the corpus because of the beneficiary’s “age, her continuing and future needs in relation to the size of the trust estate, and the fact that the Trustees have been notified that Miss Baugh may be discharged from Spring Grove in the near future and require maintenance and support independent of a state facility.”¹⁶¹ The Maryland treatment of discretionary trusts is discussed below.

8.3.3 Tax Debt Exception – Limited of Absolute?

There is an early Maryland case that allowed an attachment against the trustee of third-party spendthrift trust for the beneficiary’s unpaid income taxes that was reduced to a judgment.¹⁶² The trust provided for a mandatory, not discretionary, income distribution to the beneficiary. In that case, the U.S. District Court held that the public policy for protecting third-party spendthrift trusts from a beneficiary’s ordinary creditors would not apply to tax obligations:

“The reasons which have actuated some courts, as in Maryland, to uphold spendthrift trust against the claims of a creditors do not necessarily apply to tax claims of the government either federal or State. The public policy involved is quite different. In the one case the donor of the property has the right to protect the beneficiary against his own voluntary improvident or financial misfortune; but in the other the public interest is directly affected with respect to collection of taxes for the support of the government. The imposition of the tax burden is not voluntary by the beneficiary.”¹⁶³

If Hofferberg was a discretionary trust, however, the Trust would likely be protected against invasion even for government obligations of its beneficiary:

“Suits against trust beneficiaries by government entities fall into two major categories: claims by the federal government to recover back taxes and suits involving eligibility for welfare benefits. Most of these cases involve attempts by the federal government to reach the assets of a trust in order to recover back taxes from a delinquent taxpayer. Such attempts will usually be successful if the trust is mandatory or if taxpayer has power over the trust, such as a general power of appointment or the right to terminate the trust. On the other hand, as the O’Shaughnessy case illustrates, the federal government stands in no better position than other creditors when a trust is purely discretionary…

The Minnesota court acknowledged that Lawrence had a sufficient beneficial interest in the trust to compel the trustees to perform their duties and to enjoin them from committing a breach of trust. However, the court also observed that the trustees “were not required in the exercise of their absolute discretion to distribute any of the trust assets to Lawrence ….” Consequently, it concluded that Lawrence did not have any “property” or “right to property” in the trust assets prior to the time the trustees saw fit to distribute them to him.”¹⁶⁴

In the O’Shaughnessy case, the Minnesota Supreme Court, upon certification, held that under its law a beneficiary of a discretionary trust had no “property” or any “right to property” in the trust principal or income before the trustees exercised their discretionary powers of distribution under the trust agreement.¹⁶⁵  As noted, Maryland Trust Code holds that a “beneficiary of a discretionary distribution provision has no property right in a trust interest that is subject to a discretionary distribution provision.”¹⁶⁶

8.3.4 Limits to the Exception Creditor Pool.

In Maryland, exception creditors are limited to spousal or child obligations and, to an extent discussed above, federal or state tax claims. Even in egregious circumstances, the pool of exception creditors was not expanded. In Duvall v. McGee, the Maryland Supreme Court did not permit a tort judgment to be satisfied by invading the principal of a spendthrift trust held for the benefit of the tortfeasor.¹⁶⁷

In that case, the tortfeasor was convicted of felony-murder for his participation in a robbery that resulted in the killing of the victim who’s estate obtained the judgment. The Court held that the circumstances of that tort was separate from the question of the enforcement of the settlor’s trust. The earlier cases distinguished “ordinary” creditors from exception creditors because those ordinary creditors are deemed to have, at least, constructive notice of the restrictions before extending credit to the trust beneficiary. That presumed notice, however, is not the basis of the distinction between ordinary creditors and the exception creditors:

To be sure, a contract creditor is on notice as to the terms of a spendthrift trust and, on that account, is able to regulate his or her conduct in light of that information. That is not the critical basis for the exception of alimony and support from the rule, however. Robertson and Zouck, as our opinions make clear, relied heavily on the fact that the obligation was a duty and not a debt. That is also the theme that runs through Hofferbert.  In none of these cases was notice mentioned as a basis for the decision. That a tort-judgment  creditor is not on notice that he or she will be injured and thereby will incur a loss goes without saying, but, with due respect to the near unanimous commentators, that fact alone does not make  the claim he or she makes in respect of the loss anything other than a debt or make its exemption from the bar of a spendthrift trust, a matter of public policy.¹⁶⁸

The Duvall Court refused to create a exception for tort victims or victims of crime which it saw as a debt of the beneficiary and which should be treated, for spendthrift provision purposes, as other debts are treated.

The Restatement (Third) of Trusts takes a different position: “The nature or pattern of tortious conduct by a beneficiary, for example, may on policy grounds justify a court’s refusal to allow spendthrift immunity to protect the trust interest and lifestyle of that beneficiary, especially one whose willful or fraudulent conduct or persistently reckless behavior causes serious harm to others.”¹⁶⁹ The Duvall Court only found one reported case adopting an exception for egregious torts: “To be sure, the Supreme Court of Mississippi quite recently held that, “as a matter of public policy … a beneficiary’s interest in spendthrift trust assets is not immune from attachment to satisfy the claims of the beneficiary’s intentional or gross negligence tort creditors.”¹⁷⁰ That case lead the Mississippi legislature to amend the statutory law of the state to preclude tortfeasors from being exception creditors.¹⁷¹ Otherwise, the State would lose significant trust business.

The Uniform Trust Code did not adopt the Restatement approach: “The drafters also declined to create an exception for tort claimants.”¹⁷²

8.4 529 Plans.

The Bankruptcy Act 11 U.S.C. § 541(b)(5) generally excludes 529 plans and education IRAs from the bankruptcy estate. Certain limits, however, apply. The Maryland statute governing 529 plans is more straightforward:

“A person may not attach, execute, garnish, or otherwise seize any current or future benefit under an investment account or any asset of the Plan.”¹⁷³

8.5 Spendthrift Clauses and Trust Termination.

The common law of Maryland followed the general American rule that a trust may be terminated when all beneficiaries consent to the termination and when termination is not contrary to the settlor’s intention:

“While English courts have traditionally recognized the right of the beneficiaries to compel the termination of a trust, American courts just as traditionally limit a termination of a trust to those situations where all beneficiaries consent to the termination, and it is not contrary to the settlor’s intention. Generally, where all of the beneficiaries of the trust are sui generis, no principle of law is violated; if the objective of the trust has been adhered to, the court may allow the termination of the trust provided all beneficiaries consent.  In the absence of an agreement of all interested parties, the court is without power to modify the trust.”¹⁷⁴

The common law of Maryland provided, however, that if the trust contains a spendthrift provision, it is deemed a the material purposes of the trust. Consequently, under Maryland common law, a trust containing a spendthrift provision could not be modified by a Maryland Court regardless of whether all beneficiaries consent:

“These cases and many others in Maryland have upheld the immunity of spendthrift trusts from attempted invasion by creditors of the beneficiaries. A necessary corollary of such a policy is that spendthrift trusts must be immune from attempts by the beneficiaries themselves to reach the corpus. As Dean Griswold has pointed out, to permit premature termination by the beneficiaries, either in whole or in pro tanto, would amount to an assignment of the corpus, the very thing that a restraint on alienation, such as we have in the case at bar, forbids. Griswold, ‘Spendthrift Trusts,’ (2 Ed.) § 517, 517.1. If a beneficiary be forbidden to assign her interest in the trust, should she be allowed to accomplish the same result by termination? We think the answer is apparent. The purpose of the restraint on alienation such as the one in this trust is not only to protect the beneficiaries from the claims of creditors, but also to assure the maximum annual income.”¹⁷⁵

Following the Uniform Trust Code, the Maryland Trust Act no longer treats a spendthrift clause as per se a material purpose of the settlor:

“(a)(1) A noncharitable irrevocable trust may be terminated on consent of the trustee and all beneficiaries if the court concludes that continuance of the trust is not necessary to achieve any material purpose of the trust.

(2) A noncharitable irrevocable trust may be modified on consent of the trustee and all beneficiaries if the court concludes that modification is not inconsistent with a material purpose of the trust.

(b) The existence of a spendthrift provision or similar protective language in the terms of the trust does not prevent a termination of a trust under subsection (a)(1) of this section.”¹⁷⁶

The drafting committee of the Uniform Trust Code recommended that a spendthrift clause not be presumed as a material purpose:

“ By a 2004 amendment, subsection (c) has been placed in brackets and thereby made optional. Spendthrift terms have sometimes been construed to constitute a material purpose without inquiry into the intention of the particular settlor…By a 2004 amendment, subsection (c) has been placed in brackets and thereby made optional. Spendthrift terms have sometimes been construed to constitute a material purpose without inquiry into the intention of the particular settlor…[Section (c)] does not negate the possibility that continuation of a trust to assure spendthrift protection might have been a material purpose of the particular settlor. The question of whether that was the intent of a particular settlor is instead a matter of fact to be determined on the totality of the circumstances.”¹⁷⁷

The Maryland Trust Code (and, to an extent, its common law)¹⁷⁸ permits extrinsic evidence to show settlor intent. Indeed, the phrase “terms of a trust” incorporates oral evidence of what a settlor intended: “’Terms of a trust’ means the manifestation of the intent of the settlor regarding the provisions of a trust as expressed in the trust instrument or as may be established by other evidence that would be admissible in a judicial proceeding.”¹⁷⁹ The “terms of a trust” is broadly defined:

“The phrase “the terms of the trust” is used in a broad sense in this Restatement, as in many statutes and cases. It includes any manifestations of the settlor’s intention at the time of the creation of the trust, whether expressed by written or spoken words or by conduct, to the extent the intention is expressed in a manner that permits proof of the manifestation of intent in judicial proceedings. The terms of the trust may appear clearly from written or spoken words, or they may be provided by statute, supplied by rules of construction, or determined by interpretation of the words or conduct of the settlor in the light of all of the circumstances surrounding the creation of the trust.

Among the circumstances that may be of importance in determining the terms of the trust, either in the absence of a written instrument declaring those terms or in matters about which a written instrument is silent or ambiguous, are the following: (1) the situations of the settlor, the beneficiaries, and the trustee, including such factors as age, legal and practical competence, personal and financial circumstances, and the relationships of these persons and these factors to each other; (2) the value and character of the trust property; (3) the purposes for which the trust is created; (4) relevant business and financial practices at the time; (5) the circumstances under which the trust is to be administered; (6) the formality or informality, the skill or lack of skill, and the care or lack of care with which any instrument containing the manifestation in question was drawn.”¹⁸⁰

Discretionary Trusts

9.1 Maryland Codification of Discretionary Trust Protection.

The First Nat’l Bank of Maryland ¹⁸¹decision was codified by the Maryland Trust Act. To a great degree, the Maryland Trust Act generally followed the Uniform Trust Code. The most dramatic departure, however, from the Uniform Trust Code is this codification of the First Nat’l Bank of Maryland decision.

The statutory definition tracks the Maryland Supreme Court decision, providing, in part, that:

“’Discretionary distribution provision,’ includes a provision in a trust instrument that:

(i) Provides one or more standards or other guidance for the exercise of the discretion of the trustee; or

(ii) Contains a spendthrift provision.”¹⁸²

The Maryland Trust Act exempts third-party discretionary trusts from creditor claims:

“(a)(1) A beneficiary of a discretionary distribution provision has no property right in a trust interest that is subject to a discretionary distribution provision.

(2) A beneficial interest that is subject to a discretionary distribution provision may not be judicially foreclosed, attached by a creditor, or transferred by the beneficiary.

(b)(1) The creditor of the beneficiary of a discretionary distribution provision created by someone other than that beneficiary has no enforceable right to trust income or principal that may be distributed only in the exercise of the discretion of the trustee.

(2) Trust property that is subject to a discretionary distribution provision is not subject to the enforcement of a judgment until income or principal or both is distributed directly to the beneficiary.

(c) A creditor of a beneficiary may not compel a distribution that is subject to a discretionary distribution provision created by someone other than that beneficiary.”¹⁸³

9.2 The Significance of Adopting the First National Holding.

A discretionary trust, in contrast to a support trust, creates no enforceable distribution rights in the beneficiary: “[I]f, by direction of the settlor, all or part of the trust assets can be totally withheld from the beneficiary by the trustees then, to the extent it can be so retained, a discretionary trust would be created.”¹⁸⁴ The Trust in the First National case, on the one hand, had language granting discretion, and on the other hand, including language supplying a purpose for exercising such discretion: “My Trustees … shall pay from time to time the net income and so much of the principal as they, in their absolute and uncontrolled discretion, may determine, to my daughter, Annesley Bond Baugh, or, in their absolute and uncontrolled discretion, may apply the same for her maintenance, comfort and support.”¹⁸⁵ The Trustee’s position was that it was to pay the net income for the daughter’s support but that it had sole discretion over any payment from principal.

The Maryland Supreme Court in the First National case described what it described as “typical” support trust language: “For example, ‘the trustees shall pay to the beneficiary of this trust so much of the income or principal as they deem necessary for his health, comfort, and support,’ is a fairly typical clause that clearly shows the testator’s intent to create a support trust.”¹⁸⁶

The First National decision held that adding “absolute and uncontrolled” discretion to the directions to the Trustees distinguished it from a support trust. Mrs. Baugh could have created a support trust but did not:

“She did not do so [create a support trust], however, but instead qualified the language of support by adding words describing the discretion her trustees were to exercise as being “absolute and uncontrolled,” an addition negating any suggestion that the testatrix wished to limit her trustees’ power to deal with the principal in matters concerning her daughter’s support and maintenance to the somewhat more restricted authority that is associated with a support trust. Our conclusion, therefore, is that the trust, as it related to the principal, was not unqualifiedly for the support of Miss Baugh, but rather could be used for such a purpose at the sole discretion of the trustees.”¹⁸⁷

The degree of the discretion (“absolute and uncontrolled”) is not the determining factor necessary for creating a discretionary trust in Maryland, simple discretion is sufficient. It “means a provision in a trust that provides that the trustee has discretion.”¹⁸⁸

9.3 Trustee Standards.

Once establishing that a discretionary trust is created, the Court in First National found that its review of the Trustee’s failure to distribute principal was limited to whether “it can be shown that they acted ‘dishonestly or arbitrary or from improper motive.’ Restatement (Second) of Trusts § 128, Comment d (1957).” ¹⁸⁹

The basis for the standard that permits court override is because discretion is largely subjective and personal: “”[t]he principle that the exercise by a trustee of a personal discretion conferred upon him is not subject to control by the court, except to prevent an abuse of discretion.”¹⁹⁰ This is not as much of a “hands-off” as it sounds:

“”A court of equity will not interfere in the exercise of the discretionary power conferred on the trustees provided that this power was honestly and reasonably exercised. However, it must appear that the trustees acted in good faith, having a proper regard to the wishes of the testator and the nature and character of the trust reposed in them.”¹⁹¹

A discretionary trust is always required to be administered to reasonably achieve the settlor’s intent: “On acceptance of a trusteeship, the trustee shall administer the trust reasonably under the circumstances, in accordance with the terms and purposes of the trust and the interests of the beneficiaries, and in accordance with this title.”¹⁹² “Reasonably” means it is subject to an objective standard regardless of the purported degree of such discretion:

“[I]n numerous cases the trustee’s ‘absolute’ or ‘controlled’ discretion has been overturned on much the same ground as that on which simple discretions have often been upset – typically, unreasonably small payments to the beneficiary… [A]ny distinction between the test of reasonableness and the state-of-mind test is difficult to discern from the holdings of these cases. In fact, the requirements set out in the dicta of some cases, phrased in terms of requiring ‘reasonable judgment’ and ‘sound discretion,’ go far in obliterating any such distinction”¹⁹³

9.4 The Restatement (Third) Approach.

The traditional standard for judicial review, as reflected in the early Maryland cases and in the Restatement (Second) claimed to permitted intervention only to prevent abuse of discretion caused by trustees acting dishonestly, arbitrarily or because of improper motive.¹⁹⁴

The Restatement (Third) of Trusts states the rules on enforcement and construction consistent with the Maryland Trust Act:

“(1) A discretionary power conferred upon the trustee to determine the benefits of a trust beneficiary is subject to judicial control only to prevent misinterpretation or abuse of the discretion by the trustee.

(2) The benefits to which a beneficiary of a discretionary interest is entitled, and what may constitute an abuse of discretion by the trustee, depend on the terms of the discretion, including the proper construction of any accompanying standards, and on the settlor’s purposes in granting the discretionary power and in creating the trust.”¹⁹⁵

The comments to Restatement (Third) reiterates that discretion is always judged by its reasonableness: “A court will not interfere with a trustee’s exercise of a discretionary power when that exercise is reasonable and not based on an improper interpretation of the terms of the trust. Thus, judicial intervention is not warranted merely because the court would have differently exercised the discretion.”¹⁹⁶

9.5 UTC Approach.

The Uniform Trust Code uses different language from that of the Restatement (Third), although there is debate whether it is dissimilar in effect. The Uniform Trust Code provides as one of its non-modifiable, baseline rules is that “the requirement that a trust and its terms be for the benefit of its beneficiaries…”¹⁹⁷ It also provides that: “Notwithstanding the breadth of discretion granted to a trustee in the terms of the trust, including the use of such terms as ‘absolute’, ‘sole’, or ‘uncontrolled’, the trustee shall exercise a discretionary power in good faith and in accordance with the terms and purposes of the trust and the interests of the beneficiaries.”¹⁹⁸

Under the Uniform Act the trustee’s standard for exercising its discretionary powers as “good faith” is coupled with the duty to follow the terms of the trust for the benefit of its beneficiaries. It does not free the trustee from its fiduciary duty or restrict the ability of the Equity court overseeing its actions:

“Neither under the Uniform Trust Code, or at common law, is good faith used in the contract law sense. Although ‘good faith‘ forms an important role under the Uniform Trust Code, it is not a defined term and one would expect the courts to continue to use the extensive body of the common law of trusts for an understanding of its sense and definition. Whether in the context of a non-modifiable baseline rule under Section 105(b)(3) or when defining the limits of absolute discretion under Section 814(a), good faith under the Uniform Trust Code should be understood in its traditional trust sense. It approximates the common law of trusts and, by wedding good faith to the settlor’s intent and the interests of the beneficiaries, it dances back to a general fiduciary duty that cannot be modified by the terms of the agreement: ‘[A] settlor may not so negate the responsibilities of the trustee that the trustee would no longer be acting in the fiduciary capacity.‘”¹⁹⁹

If good faith is simply subjective, enforcement would be purely illusory.²⁰⁰ “A trust in which there is no legally binding obligation on a trustee is a trust in name only and more in the nature of an absolute estate or fee simple grant of property.”²⁰¹

Spousal Trusts

10. Spousal Lifetime Access Trusts (SLATs).

10.1 Statutory Framework.

An inter vivos Spousal Lifetime Access Trust is a trust created by a spouse for the benefit of their spouse. It is often suggested to preserve the lifetime federal estate and gift tax exemption as a hedge against that exemption being reduced by Congress. It also is a great asset protection technique. Assuming there is no concern of triggering the fraudulent transfer statute, wealth can be transferred to a discretionary trust for the benefit of one spouse that is not susceptible to the donee spouse’s creditors because it is not self-settled – the other spouse is the settlor. Nor is it self-settled by the donor spouse if, at the termination of the donee spouse’s interest, the donee spouse appoints a discretionary interest in the trust back to the original donor spouse. It may be prudent, however, to delay the donee spouse’s appoint, in their Will, so there is no suggestion of an agreed upon arrangement when the SLAT is originally created. Given that a Will can be changed, of course, that ought to be sufficient to establish that no binding arrangement was present, but extra caution may not hurt. The appointed trust back to the donor spouse should not have unfettered control over the trust distributions – either an independent trustee should be used or distributions limited to ascertainable standards. The Maryland statute eliminates the self-settled trust status after the death of the original donee/beneficiary spouse.²⁰² This presents asset protection planning options.

10.2 Transfer Tax/Marital Deduction Treatment.

Treasury Regulations makes it clear that receiving an income interest at the death of the original donee spouse does not reverse the inclusion in the original donee spouse’s estate. Regardless of the reversion, it is treated as a QTIP for tax purposes.²⁰³

10.3 Usefulness.

Assuming the SLAT is not a fraudulent transaction upon creation, this technique permits assets to be insulated from the donor spouse’s creditors. Some planners suggest that one should consider having both spouses creating inter vivos trusts for the other. If each spouse creates an inter vivos SLATs for the other, then both trusts become immune to creditors assuming the reciprocal trust rules can be avoided.²⁰⁴ Assuming the two SLATs are not reciprocal, each is a completed gift.

IRAs

11.0 IRAs & Retirement Plans.

11.1 Inherited IRA Trusts.

The U.S. Supreme Court in held that the funds held in an inherited IRA are not “retirement funds” in the sense used in the categories of assets exempt from the bankruptcy estate available to creditors.²⁰⁵ In Clark, the Court held that the assets of an inherited IRA did not meet the criteria for the federal exemptions.²⁰⁶

The Clark Court used the “plain language” of the federal statutory exemption because the statute did not define “retirement funds:”

“The ordinary meaning of “fund[s]” is “sum[s] of money … set aside for a specific purpose.” American Heritage Dictionary 712 (4th ed. 2000). And “retirement” means “[w]ithdrawal from one’s occupation, business, or office.” Id., at 1489. Section 522(b)(3)(c) [of 11 USCA]’s reference to “retirement funds” is therefore properly understood to mean sums of money set aside for the day an individual stops working.”²⁰⁷

Thus, “retirement funds” are seen as the money put away for one’s own retirement not what is in a retirement account transferred at death to a beneficiary who is not the retiree: “[H]olders of inherited IRAs are required to withdraw money from such accounts, no matter how many years they may be from retirement”²⁰⁸

An Arizona bankruptcy court, consistent to earlier case law, held that under its state exemption an inherited 401K was an exempt asset for bankruptcy purposes.²⁰⁹ It pointed out that Clark only determined the extent of the federal exemptions and those states that opt-out of the federal exemptions are entitled to apply their own state exemptions:

“The problem with applying the holding in Clark v. Rameker to this case is that the only issue presented was whether section 522(b)(3)(C) applies to inherited IRAs by nonspouses. It did not address Arizona’s exemption statute and certainly did not address preemption. Arizona’s exemption law may allow a debtor to keep more than he or she could under the Bankruptcy Code, but there are many exemptions under various state laws that allow debtors to retain more of their assets than they could under federal law. That is a choice Congress has allowed states to make.”²¹⁰

The Pacheco Court held that the state exemption “does not state that a retirement plan must be established under the enumerated sections of the I.R.C. It says that any money payable in a retirement plan under one of the enumerated sections of the I.R.C. qualifies for an exemption.” ²¹¹ Significantly, the Arizona statute historically did not just apply the exemption to the participant of one of the enumerated federal retirement plans but also any beneficiary of one of those plans:

“Any money or other assets payable to a participant in or beneficiary of, or any interest of any participant or beneficiary in, a retirement plan under section 401(a), 403(a), 403(b), 408, 408A, or 409 or a deferred compensation plan under section 457 of the United States internal code of 1986, as amended, shall be exempt from any and all claims of creditors of the beneficiary or participant. This subsection shall not apply to any of the following:..”²¹²

The Arizona cases are based on similar, indeed indistinguishable, statutory exemption provisions as the Maryland statute. The Maryland exemption likewise is not limited to those who establish federal retirement accounts:

“In addition to the exemptions provided in subsections (b) and (f) of this section and any other provisions of law, any money or other assets payable to a participant or beneficiary from, or any interest of any participant or beneficiary in, a retirement plan qualified under [the various federal retirement accounts] …”²¹³

Nevertheless, the U.S. District Court, in a post-judgment collection case, applied The Clark case rational to permit an inherited IRA to be attached by the debtor.²¹⁴ After reviewing the Clark analysis that “retirement funds” implied the fund while it operates to support a retiree in retirement, it ruled that the inherited IRA could be attached by the creditor:

“This analysis [in Clark] applies with equal vigor here. It is clear from the legislative history of CJP § 11-504 (h) that it was intended to protect retirement plans that are actually used to fund individuals’ retirement. See ECF 94-3 (providing statement in favor of original passage of CJP § 11-504 (h) stating that “[t]he purpose of this bill, is to protect all retirement plans so that the citizens of Maryland will not need state welfare to support themselves when they can no longer work”). As the Supreme Court explained, an inherited IRA, by its very nature, is no longer a retirement account. Clark, 573 U.S. at 127-28, 134 S. Ct. 2242. Though this Court is aware of no precedent from Maryland courts weighing in on this issue, the legislative history of the exemption combined with the reasoning of the Supreme Court in Clark make clear that Debtor’s inherited IRA account is not the type of “retirement account” that CJP § 11-504 (h) was intended to protect.”²¹⁵

This holding of what constitutes Maryland law, of course, is the opinion of a federal trial court and is not precedent even within the same circuit unless or until a binding decision comes from the state appellate Court.²¹⁶

For planning purposes, one solution may be to make a “conduit” spendthrift trust, that qualifies as a designated beneficiary under Treasury Regulation §1.401(a)(9)-4, A-5 where the trust itself is ignored and the designated beneficiary is the individual trust beneficiary. This arrangement, of course, exposes distributive the income to the creditors.

11.1 Retirement Accounts for the Retiree.

Retirement accounts, of course, are protected as to the retiree. In In Re: Neil Solomon, M.D), the federal Court of Appeals held that an IRA was exempt and the debtor was not forced to consider non-mandatory withdrawals as potential income for Chapter 13 purposes.²¹⁷ In that case, Dr. Solomon was facing $160 Million in potential tort liability – much of it non-dischargeable under Chapter 7 because it arose from “willful and malicious injury by the debtor.” The bankruptcy court denied a Chapter 13 plan, holding that the debtor needed to include as “disposable income” some part of his IRAs. The Maryland Supreme Court reversed, holding it was exempt.

Life Insurance

12.2 Life Insurance.

The Maryland exemptions also include life insurance proceeds or proceeds from an annuity contract “on the life of an individual made for the benefit of or assigned to the spouse, child, or dependent relative of the individual … whether or not the right to change the named beneficiary is reserved or allowed to the individual.”²¹⁸ “Proceeds” include death benefits, cash surrender value, loan value and dividends except if the debtor receives cash for these items.²¹⁹ This exemption has been recognized by the bankruptcy court.²²⁰

Powers of Appointment

13. Powers of Appointment.

13.1 The Maryland “General” Power.

Maryland has a unique rule that holds that a “general” power of appointment is not really a general power of appointment unless it specifically provides that the donee of the power may appoint to his or her self, creditors, or the creditors of his or her estate. Merely stating that one is granting a “general power of appointment” is insufficient.²²¹ Based on the Maryland precedent, the Bryan Court held that a power designated “a general power of testamentary disposition” was insufficient to permit appointment to self, creditors, estate or creditors of estate:

“’The Maryland law on powers of testamentary appointment is unusual if not unique. A power to appoint or dispose of property by will, unrestricted as to beneficiaries, as for example, ‘in such manner as she may see fit’ or ‘to such person or persons as she may limit, nominate, and appoint’ is called in Maryland a General power, as it is in most jurisdictions, but unlike most jurisdictions, Maryland holds that Such a power does not authorize the holder of the power to appoint to himself, to his own estate or to his creditors unless the power in terms so authorizes.’”²²²

The Bryan Court distinguished an earlier federal tax decision that, at first blush, looks contrary. In that case, the federal Court held that a Maryland testator granted a “general power of appointment” to his wife so that his estate would qualify for a marital deduction “as provided by the Internal Revenue Code of 1954.”²²³ The Bryan Court distinguished the language of that case as not applicable:

“Although there was no express authorization for the wife to appoint the property to herself or to her estate, the court concluded that the power was exercisable in that manner, and that the appointive property therefore qualified for the federal estate tax marital deduction. The court reasoned that the testator’s “explicit reference to the provisions of the Internal Revenue Code” manifested his intent to incorporate “the general power of appointment provisions of section 2041 of the Code, which empower the donee to appoint to herself or her estate.” Without expressing an opinion on the validity of this interpretation of Maryland law, we note that Guiney presents a factual situation entirely distinguishable from that in the instant case. The Bryan will makes no explicit reference to the Internal Revenue Code, and thus the rationale underlying the Guiney decision is simply inapplicable to this case.”²²⁴

The Maryland Trust Act follows, and slightly clarifies, the case law in its definition of what constitutes a “general power of appointment.” It means a power of appointment that:

“(1) By the terms of the trust specifically authorizes the holder to direct trust property to the holder, the estate of the holder, or the creditors of the holder;

(2) Is held in a capacity other than as a trustee;

(3) Is not limited by an ascertainable standard; and

(4) Is exercisable by the holder or holders without the consent of another person.” ²²⁵

Therefore, to create a general power of appointment in Maryland, the donor of the power must specify that the donee may appoint to their self, to their estate, to their creditors or to the creditors of their estate.

13.2 Creditors and Limited Powers of Appointment in Self-Settled Trusts.

As a general rule, creditors of the donee of a limited or special power of appointment cannot reach the underlying property. The Maryland Supreme Court applied the general rule to a self-settled trust where the settlor retained lifetime access to income but not corpus and held that a an testamentary limited power of appointment over corpus:²²⁶

“Baldwin had transferred property to a trust, reserving to himself the right to receive the income from the trust property for life and a power of appointment by will to designate those persons who would receive and enjoy the remainder after his death. The Maryland Court of Appeals held that the power of appointment, under Maryland law, was a special or limited power which did not permit Baldwin to appoint the corpus to his own estate or to his creditors. Such a limited power of appointment of the corpus, coupled with the life estate, did not give Baldwin such a property interest in the corpus as to subject it to the claims of his creditors.”²²⁷

This case follows an earlier decision likewise applying the general rule for non-general powers of appointment to a self-settled trust regardless of the retained life estate over corpus.²²⁸ In the absence of a showing of fraud in the inception of the trust, creditors had no recourse against the principal of the trust.

A settlor, however, may not create a trust and retain a presently exercisable general power of appointment, even subject to ascertainable standards, without exposing the maximum amount that he or she could reach to creditors:

“The general rule is stated in Restatement (Second) of Trusts §156(2) (1957). The creditors of a settlor may reach the assets of a spendthrift trust to the maximum extent that the trustee might apply them for the use and benefit of the settlors. Under the terms of this trust, the trustee was authorized to apply the entire corpus for the support and maintenance of the settlors, and thus the entire corpus is subject to the claim of their creditors.

One may wish to have one’s cake and eat it, too, but the law need not bring the wish to fruition.” ²²⁹

13.3 Maryland Common Law: General Powers in Third-Party Trusts That Are Not Presently Exercisable.

An early U.S. Supreme Court decision held that general powers of appointment are only subject to creditor claims if exercised.²³⁰ The Field case involved a trust which provided income for a spouse for life and which gave the spouse an unlimited general power of appointment. The Court held that the existence of a general power exercisable at the donee’s death does not shift the subject property from the donor to the donee. Instead, it remains the property of the donor creating the power:

“Historically, the common law does not consider a power of appointment to rise to the level of a property interest. Rather, the law sees it as a tool enabling a powerholder to “do an act” for the person granting the power. So piddling is the power of appointment that the Court in 1921 ruled that property passing pursuant the exercise of a general power of appointment was not includible in the powerholder’s gross estate. Congress fixed that in subsequent legislation, expressly including in a powerholder’s gross estate the value of property passing at death through the exercise of a general power of appointment [now also “fixed” for exercised and not exercised general powers].”²³¹

The Field case, however, held that if the donee exercises the power to someone other than the creditor it is deemed a fraudulent conveyance based on the theory that the decedent channeled away the assets from their creditors:

“Where the donee dies indebted, having executed the power in favor of volunteers, the appointed property is treated as equitable, not legal, assets of his estate; Clapp v. Ingrahm, 126 Massachusetts, 200, 203; Patterson & Co. v. Lawrence, 83 Georgia, 703, 707; and (in the absence of statute), if it passes to the executor at all, it does so not by virtue of his office but as a matter of convenience and because he represents the rights of creditors. O’Grady v. Wilmot [1916] 2 A.C. 231, 248-257; Smith v. Garey, 2 Dev. & Bat. Eq. (N.C.) 42, 49; Olney v. Balch, 154 Massachusetts, 318, 322; Emmons v. Shaw, 171 Massachusetts, 410, 411; Hill v. Treasurer, 229 Massachusetts, 474, 477.

Where the power is executed, creditors of the donee can lay claim to the appointed estate only to the extent that the donee’s own estate is insufficient to satisfy their demands. Patterson & Co. v. Lawrence, 83 Georgia, 703, 708; Walker v. Treasurer, 221, Massachusetts, 600, 602-603; Shattuck v. Burrage, 229 Massachusetts, 448, 452.

It is settled that (in the absence of statute) creditors have no redress in case of a failure to execute the power.”²³²

Under Maryland common law, at least (and, perhaps, as expanded in dicta), the Field approach was followed. See, for example, the Maryland Supreme Court in 1969:

“In Connor v. O’Hara, 188 Md. 527, in holding that for purposes of the Maryland inheritance tax laws, property passing by exercise of a testamentary power of appointment is regarded as passing not from the donee of the power but from the donor, Judge Markell, for the Court, said that this theory of passage not only is as fully applicable in Maryland as elsewhere but has been carried further here than in many other jurisdictions, and continued:

‘In England, and generally but not universally in this country, this rule is qualified by a rule that when a general power of appointment is exercised, equity will regard the property appointed as part of the donee’s assets for the payment of his creditors in preference to the claims of his voluntary appointees. In such cases the appointed property is treated as equitable, not legal, assets of the donee’s estate, and may pass to the executor, not by virtue of his office but as a matter of convenience and because he represents the rights of creditors. United States v. Field, 1921, 255 U.S. 257, 262, 263, 41 S. Ct. 256, 65 L. Ed. 617, 18 A.L.R. 1461. In Maryland this English rule has been rejected. Decisions of dicta of this court indicate that a donee has no power (unless expressly conferred) to appoint for payment of his own debts. Balls v. Dampman, 69 Md. 390, 16 A. 16, 1 L.R.A. 545; Price v. Cherbonnier, 103 Md. 107, 110, 111, 63 A. 209; cf. Wyeth v. Safe Deposit & Trust Co., 176 Md. 369, 376, 4 A. 2d 753; appointed property is not part of the donee’s estate, not subject to the jurisdiction of the Orphans’ Court, and not subject to payment of the donee’s debts. Prince de Bearn v. Winans, 111 Md. 434, 472, 74 A. 626.“²³³

It was not fully clear, however, which English rule has been rejected: whether it simply refers to Maryland rejecting the assumption that a power is a general power unless specifically stated otherwise, or whether Maryland rejects the English rule that only exercised general powers are available to creditors and therefore no power of appointment is exposed because it is always deemed to be held by the donor.

Effective 2015 and as discussed below, the Maryland Trust Act clears up the ambiguity and provides that any power of appointment where the settlor is not the donor, and that does not grant an unlimited distribution right to the donee, it remains the property of the donor and not subject to the donee’s creditors.²³⁴

13.4 Creditors and Presently Exercisable General Powers of Appointment.

In bankruptcy, whether exercised not exercised, presently exercisable general power becomes part of the bankruptcy estate:

“No principled argument exists for excluding presently exercisable general powers from the bankruptcy estate. Nothing prevents the donee from reaching the appointive property other than the exercise of the power. Thus, for all practical purposes the donee has full access to property subject to the presently exercisable power. In contrast, because a donee holding a general testamentary power can be viewed as having only restricted access to property, the general testamentary power seemingly should not be included in the bankruptcy estate.”²³⁵

This is an exception that does not extend to powers of appointment that cannot be exercised to the donee. 11 U.S.C.A. § 541(b): “(b) Property of the estate does not include– (1) any power that the debtor may exercise solely for the benefit of an entity other than the debtor.”

13.5 The Maryland Trust Act.

The Maryland Trust Act treats third-party created powers of appointment as the property of the donor, not the donee:

“(a)(1) A power of appointment held by a person other than the settlor of the trust is not a property interest.

(2)A power of appointment described in paragraph (1) of this subsection and property subject to that power of appointment may not be judicially foreclosed or attached by a creditor of the holder of the power.”²³⁶

The power of appointment held by the settlor remains open to the settlor’s creditors.²³⁷

The Maryland Trust Act lists various roles, authority, or powers held by a beneficiary or by a settlor that will effectively open up an otherwise protected trust. These are circumstances that suggest control over the trust or relationships that might be argued to be having the equivalence of a property interest in the trust assets:

“(b) None of the following shall be sufficient to create a general power of appointment or a power of withdrawal with respect to a beneficiary or settlor:

(1) The beneficiary serving as a trustee or cotrustee;

(2) The settlor or the beneficiary holding an unrestricted power to remove or replace a trustee;

(3) The settlor or the beneficiary of a trust serving as a trust administrator, a partner of a partnership, a manager of a limited liability company, or an officer of a corporation, or serving in another managerial function of another type of entity if part or all of the trust property consists of an interest in the entity;

(4) A person related by blood or adoption to the settlor or the beneficiary serving as trustee of the trust;

(5) The agent, accountant, attorney, financial adviser, or friend of the settlor or beneficiary serving as trustee of the trust;

(6) A business associate of the settlor or the beneficiary serving as trustee of the trust;

(7) A power of appointment held by the settlor other than the reserved power of the settlor to withdraw trust property for the benefit of the settlor, the creditors of the settlor, the estate of the settlor, or the creditors of the estate of the settlor;

(8) A power to substitute property of equivalent value for trust property as defined in § 675(4)(c) of the Internal Revenue Code of 1986, as amended; or

(9) A power to borrow trust property for less than adequate interest or without security as defined in § 675(2) of the Internal Revenue Code of 1986, as amended.”²³⁸

13.6 The Beneficiary as Trustee of Third Party Trusts.

Under the Maryland Trust Act, there is little question but that a beneficiary may serve as the sole trustee of a trust established by a third person for his or her own benefit and not be treated as the owner of the trust assets for tax or asset protection purposes if the distribution discretion is limited by an ascertainable standard:

“A creditor may not attach, exercise, reach, or otherwise compel distribution of the beneficial interest of a beneficiary that is a trustee or the sole trustee of the trust, but that is not a settlor of the trust, except to the extent that the interest would be subject to the claim of the creditor were the beneficiary not acting as cotrustee or sole trustee of the trust.”²³⁹

The Uniform Trust Code has a similar provision which is consistent with the accepted practice of trust provisions for spouses that qualify as “taxable” and not includable in the spouse’s estate even when the spouse if sole trustee:

“Trusts are frequently drafted in which a trustee is also a beneficiary. A common example

is what is often referred to as a bypass trust, under which the settlor’s spouse will frequently be named as both trustee and beneficiary. An amount equal to the exemption from federal estate tax will be placed in the bypass trust, and the trustee, who will often be the settlor’s spouse, will be given discretion to make distributions to the beneficiaries, a class which will usually include the spouse/trustee. To prevent the inclusion of the trust in the spouse-trustee’s gross estate, the spouse’s discretion to make distributions for the spouse’s own benefit will be limited by an ascertainable standard relating to health, education, maintenance, or support.”²⁴⁰

The Maryland Trust Act and the Uniform Trust Code rejected the Restatement (Third) that would permit creditors to reach that the amount that the beneficiary/trustee may properly take from the trust subject to what a court may order be retained for the beneficiary’s actual needs for reasonable support, health care, and education.²⁴¹

Family & Closely Held Entities

Family & Closely Held Entities

14.0 Asset Protection & Family Partnerships.

The use of family partnerships (and family limited liability companies) often was driven by the valuation discount possibilities which reduce exposure to federal and state estate taxes. As the thresholds to triggering these taxes have increased, this is still a powerful tax strategy but less an issue for many clients.

The use of family partnerships and other closely held entities, on the other hand, can be a valuable asset protection hedge against creditor attacks on the business entity when the creditor acquires a judgment lien against an individual partner or member of the entity. A creditor of a debtor-partner has seeking a charging order as its exclusive remedy in reaching the debtor-partner’s membership interest, discussed below.

Also, the use of a certain type of partnership can insulate a partner from personal liability for debts of the partnership simply because of being a partner. This type of partnership, a limited liability partnership, can be either general or limited partnerships, as discussed below.

14.1 Limited Liability Partnership.

A partner’s liability for partnership debts in a limited liability partnership is statutorily restricted:

“(c) Subject to the provisions of subsection (d) of this section, a partner of a limited liability partnership is not liable or accountable, directly or indirectly, including by way of indemnification, contribution, or otherwise, for any debts, obligations, or liabilities of or chargeable to the partnership or another partner, whether arising in tort, contract, or otherwise, which are incurred, created, or assumed by the partnership while the partnership is a limited liability partnership solely by reason of being a partner in the partnership or acting or omitting to act in such capacity or rendering professional services or otherwise participating, as an employee, consultant, contractor, or otherwise, in the conduct of the business or activities of the partnership.

(d) Subsection (c) of this section does not affect:

(1) The liability of a partner of a limited liability partnership for debts and obligations of the partnership that arise from any negligent or wrongful act or omission of the partner or of another partner, employee, or agent of the partnership if the partner is negligent in appointing, directly supervising, or cooperating with the other partner, employee, or agent;

(2) The liability of the partnership for all its debts and obligations or the availability of the entire assets of the partnership to satisfy its debts and obligations; or

(3) The liability of a partner for debts and obligations of the partnership, whether in contract or in tort, that arise from or relate to a contract made by the partnership prior to its registration as a limited liability partnership, unless the registration was consented to in writing by the party to the contract that is seeking to enforce the debt or obligation.”²⁴²

These restrictions on the individual liability for partnership debts apply to general and limited partnerships.²⁴³

This liability shield generally covers all vicarious liability in contract, tort or otherwise, but the shield does not protect from liability for “any negligent or wrongful act or omission of the partner” or “negligent in appointing, directly supervising, or cooperating with the other partner, employee, or agent.”²⁴⁴ The current Uniform Partnership Code does not contain those provisions that hold a partner liable if the partner is “negligent in appointing or directly supervising” cause the wrongful act or omission.²⁴⁵ Arguably the difference in this language does not mean that there is a substantial difference in the essential meaning of the Maryland and Uniform approach: “In an LLP, all the partners have the same limited liability protection as shareholders of a corporation and therefore are not vicariously liable for the obligations of the partnership although they are liable for their own malfeasance.” ²⁴⁶ There are critics of the general limitation of partners’ liability:

“By eliminating a partner’s personal liability for the misconduct of other partners, the LLP legislation altered forever a fundamental premise of general partnership law in the United States. Historically, American partnership law was guided by the principle that partners should bear significant personal responsibility for the conduct of fellow partners and the partnership business. The LLP erases this responsibility and eliminates both the incentive and necessity for a partner to consult, monitor, and keep informed about the conduct of other partners. With total limited personal liability in place, partners will not be inclined to consult, monitor, or be involved with the work of other partners. As a matter of fact, “partners may find that they can best reduce their liability risk if they avoid monitoring that might trigger liability for participating in misconduct.” In addition “[l]imited liability creates a moral hazard in allowing [partners] in limited liability firms to reap the benefits of risky activities and not bear all of the cost.”²⁴⁷

Professor Maurice raises important concerns of the impact that the limited liability of partners in general has to those dealing with the partnership, but also a concern as to its impact on the relations among the partners. His concern is rooted in the concept that partners equally are sharing in the enterprise:

“Underlying the partnership is the concept of the equality of the co-owners. Through their contract the partners make a commitment to each based on shared responsibility plus mutual trust and confidence. So long as the partnership exists the partners are inextricably bound together whether the partnership succeeds or fails in its commercial activity.”²⁴⁸

Two classes of partners would exist if one partner is directly supervising operations, thus being exposed to liability for acts by the partnership, and other partners are not active in operations so immune from such liability. Depending on the size, type of business being run, and/or the necessity of hands-on management, however, these concerns may be overstated in many family and closely held partnerships.

14.1.1 Creating or Amending to Become a Limited Liability Partnership.

Creating or amending an existing partnership to a limited liability partnership is straightforward. A limited liability partnership is a partnership, general or limited, that formed in accordance with Maryland’s law and is registered pursuant to the Revised Uniform Partnership Act.²⁴⁹ It must have a name reflecting that status:

(c) The name of a limited liability partnership must include:

(1) The words “limited liability partnership”;

(2) “L.L.P.”; or

(3) “LLP”.²⁵⁰

Presumably mandating naming a limited liability partnership as such and using it on letterhead, websites, and other communications gives actual notice to any prospective creditor of its status:

“Under RUPA, any general partnership may become a limited liability partnership (“LLP”) by filing a statement of qualification with the office of the Secretary of State for the state in which the partnership is formed. Following this filing the general partnership must identify itself as an LLP by including “LLP” or some other identifying words or letters in its name.”²⁵¹

14.2 General and Limited Partnership Interests.

14.2.1 The General Partner’s Interest.

The general partner, of course, generally manages the entity subject to the terms of the partnership agreement. A general partner, however, is not the “owner” of partnership property: “A partner is not a co-owner of partnership property and has no interest in partnership property which can be transferred, either voluntarily or involuntarily.”²⁵² Unless operating as a limited liability partnership, the general partners can become personally liable for partnership debt. Often, of course, lenders may require they guarantee debt which means their vicarious liability is a moot issue.

14.2.2 The Limited Partner’s Interest.

A limited partner, unlike a general partner, does not have liability for any of the partnership obligations and generally does not have management powers except to the extent authorized by the partnership agreement. If, however, a limited partner exercises management functions, the limited partner would be liable to the extent of the exercise of those powers:

[A] limited partner is not liable for the obligations of a limited partnership unless the limited partner is also a general partner or, in addition to the exercise of his rights and powers as a limited partner, he takes part in the control of the business. However, if the limited partner takes part in the control of the business and is not also a general partner, the limited partner is liable only to persons who transact business with the limited partnership and who reasonably believe, based upon the limited partner’s conduct, that the limited partner is a general partner.²⁵³

14.3 The Charging Order.

A creditor of a general partner and limited partner is limited to seeking a charging order to enforce the debt:

“(a) On application by a judgment creditor of a partner or of a partner’s transferee, a court having jurisdiction may charge the transferable interest of the judgment debtor to satisfy the judgment. The court may appoint a receiver of the share of the distributions due or to become due to the judgment debtor in respect of the partnership and make all other orders, directions, accounts, and inquiries the judgment debtor might have made or which the circumstances of the case may require.

(b) A charging order constitutes a lien on the judgment debtor’s transferable interest in the partnership. The court may order a foreclosure of the interest subject to the charging order at any time. The purchaser at the foreclosure sale has the rights of a transferee.

(c) At any time before foreclosure, an interest charged may be redeemed:

(1) By the judgment debtor;

(2) With property other than partnership property, by one or more of the other partners; or

(3) With partnership property, by one or more of the other partners with the consent of all of the partners whose interests are not so charged.

(d) This title does not deprive a partner of a right under exemption laws with respect to the partner’s interest in the partnership.

(e) This section provides the exclusive remedy by which a judgment creditor of a partner or partner’s transferee may satisfy a judgment out of the judgment debtor’s transferable interest in the partnership.”²⁵⁴

This detailed provision for the enforcement by judgment creditors against partners in obtaining a charging order is part of the Maryland Revised Uniform Partnership Act, not part of the provisions pertaining to limited partnerships. ²⁵⁵ Case law, however, adopts the mechanisms of the charging order provisions to defines the scope of creditors’ remedies in both instances:

But we also noted in 91st Street that under section 10-705, the rights of a creditor against a limited partnership interest are “more limited … than that provided for in the UPA and ULPA” governing general partnerships. Id. at 570 n. 2, 691 A.2d 272. The next year, in Lauer Construction, supra, we addressed for the first time the nature and extent of those rights. We held that creditors with a charging order against a limited partnership interest are entitled to the same collection remedy as creditors with a charging order against a general partnership interest, with the same limitations. See Lauer Construction, 123 Md.App. at 119, 716 A.2d 1096. We based our decision on the absence of explicit enforcement or collection mechanisms in section 10-705 and similarities in the right to receive partnership distributions under both RULPA and RUPA.²⁵⁶

14.3.1 The Policy Basis for the Charging Order.

Courts struggle with the dichotomy that the partnership may hold valuable property that benefits the individual partners yet none of the partners have an ownership interest in that underlying property:

“A charging order is the statutory means by which a judgment creditor may reach the partnership interest of a judgment debtor. Bank of Bethesda v. Koch, 44 Md. App. 350, 354, 408 A.2d 767 (1979). Prior to its availability, the courts would resort to common law procedures for collection that were ill-suited for reaching partnership interests. Gose, The Charging Order Under the Uniform Partnership Act, 28 Wash. L. Rev. 1 (1953). Typically, despite the fact that individual partners do not have title in partnership property, partnership property would be seized under writs of execution; the debtor partner’s interest in the partnership would be sold, often to the judgment creditor, subject to the payment of partnership debts and prior claims of the partnership against the debtor partners; and the sale of the debtor partner’s interest would result in compulsory dissolution and winding up of the partnership. Id. As noted by at least one jurist, ‘[a] more clumsy method of proceeding could hardly have grown up.’ Id. (quoting Lord Justice Lindley of the English Court of Appeal, Brown Janson & Co. v. Hutchinson & Co., 1 Q.B. 737 (1895)).”²⁵⁷

14.3.2 The Scope of the Remedies Under a Charging Order,

The scope of what a charging order can accomplish is limited. A creditor only has recourse to attach or sell the economic interests of the debtor. Significantly a creditor has no rights to control or interfere with the management:

“Neither Rector nor Leventhal defined the nature and scope of the charging creditor’s rights so broadly. Neither case held that a receiver with a charging order against limited partnership interests stands in the debtor partners’ shoes for all purposes.

*****

Like the trial court, we reject the receiver’s “substituted shoes” argument, because it is contrary to unambiguous statutory limitations on a charging order against a limited partnership interest and to sound principles of limited partnership law. Distilled to its essence, the receiver’s argument is that the Charging Order operated as either a judicial assignment of the debtor partners’ management rights in the Partnership, or as a judicial substitution of the receiver for the debtor partners for all purposes.”²⁵⁸

Thus, the creditor had no right to be informed of “information regarding partnership transactions includes information regarding partnership property and partnership opportunities” which was available to its partners.²⁵⁹

For both general and limited partnerships, a charging order “provides two basic collection methods: (1) the diversion of the debtor partner’s profits to the judgment creditors; and (2) the ultimate transfer of the debtor partner’s interest should the first collection method prove unsatisfactory.”²⁶⁰

The charging order is controlled by the Court. An order directing all distributions that would go to the debtor-partner to satisfy the judgment would have the least impact on the operation of the partnership. It is only the partner’s financial interest in profits or distributions that is subject of the charging order.

There are numerous reasons that an assignment of the distributions may not provide a meaningful remedy for the creditor. The judgment may be large in relationship to the ability of the distributions to satisfy the debt. In a closely held family partnership there is potential that business judgments by management may decide to reinvest profits to grow the business.

The second option under the statute is to order a sale of the debtor-partner’s share. As with an attachment of distributions, it is only the debtor-partner’s income interest that is sold. The statute gives the remaining partners various options in redeeming that economic interest. What is being sold, however, is an economic interest in an entity the transferee will receive with no management ability.²⁶¹

14.3.3 Management Rights, Fiduciary Obligations & Charging Orders.

The purpose of the charging order is to keep a creditor of a partner from interfering with the operations of a partnership or to reach partnership property. This is illustrated by an Appellate Court of Maryland case.²⁶² In that case, the debtor partner defaulted on his personal obligation resulting in a judgment against him. The judgment creditor received a charging order against the partner’s interest. The partnership incurred bank debt to finance the project. The partnership defaulted on that debt and the FDIC (the bank having dissolved) began its collection remedies against the partnership. The other partners negotiated with the FDIC to purchase the note at a discount. Those partners then sold the property paying themselves the full value of the note with none of the discount passing through to the partnership. The result was that the remaining partners cashed out but no proceeds were left as partnership distributions. The judgment creditor was never paid.

The receiver for the judgment creditor asserted the partnership rights of the debtor partner, claiming that the receiver was entitled to notice of the opportunity to purchase the note because the receiver stands in the debtor partner’s shoes. The Court held that the receiver has the rights of a mere assignee, not those of a partner:

“By limiting a creditor’s right to exercise the debtor partner’s management rights, we ensure that creditors of a limited partner cannot disrupt partnership business or interfere with the management rights of other partners. In particular, this limitation prevents third party creditors from using a charging order as a license to ‘squeeze’ other limited partners into paying off obligations of the debtor, as the necessary costs of eliminating the risk of such interference.

* * *

These reasons for excluding third party creditors from a seat at the partnership’s management table are no less applicable – and perhaps are even more applicable – when the issue under consideration is what to do about partnership debt or about a partnership opportunity. If a charging creditor is permitted to exercise management rights of the debtor partners in matters pertaining to partnership debt or partnership opportunities, that third party creditor is in an enhanced position to wield any of the debtor partner’s management rights as a tool to obtain payment of the judgment debt. Undoubtedly, investors contemplating a limited partnership opportunity would be discouraged by the possibility of having to satisfy or deal with creditors of each partner.”²⁶³

It is precisely this inability of a creditor to interfere with the operations of a partnership or to reach partnership property that insulates a partnership from the creditors of its partners. Even the foreclosure of a debtor partner’s interest confers limited rights to the transferee:

“We do not think that the receiver or judgment creditors are burdened unfairly by the denial of these management rights. Like other well-informed creditors, they presumably knew that partnership interests are notoriously poor security for the repayment of a debt. ‘Credit extenders who look to a partner’s interest in a partnership as a possible source of satisfaction are well advised to take and perfect a security interest rather than rely on a charging order … [because a] partnership interest is not very good collateral…” IV Bromberg and Ribstein, supra, at § 13.07(a), at 13:43.”²⁶⁴

The status of a creditors in general is not strong:

“The lot of a ‘naked assignee’ is not a happy one: not a partner, not protected by partner-to-partner fiduciary duty, not entitled to participate in partnership affairs in any way, and with virtually no rights to obtain partnership-related information.

Moreover, the naked assignee faces adverse tax consequences. The purchaser of a foreclosed partnership interest is considered a partner for federal tax purposes (even though not a partner under state partnership law), Rev. Rul. 77-137, 1977-1 C.B. 178, which means that the purchaser is subject to tax on its share of the partnership’s income regardless of whether the partnership actually distributes any of that income.

The tax situation is different from a mere holder of a charging order. Because that person does not own the underlying interest, the person should not be considered a partner for tax purposes. There is no specific IRS authority on this point. But the point follows from core concepts of partnership tax law and means that — so long as the charging order is not foreclosed and the interest sold — the debtor partner remains taxable on it shares of partnership income even though that share is distributed directly to the judgment creditor.

Thus, the typical judgment creditor does not salivate at the prospects of foreclosure, and a foreclosure sale will typically draw no crowd.”²⁶⁵

14.4 Partnership Interests in Bankruptcy.

The general rule that a creditor of a partner has the status of a mere transferee has been tested in bankruptcy. Generally, a partnership agreement is an executory contract. Section 365 of the Bankruptcy Act permits the trustee broad control over executory contracts. The bankruptcy trustee uses its “business judgment” to determine whether to assume or reject any executory contract held by the debtor.²⁶⁶ The more requirements imposed on the partner (capital calls, serving on management committees) the greater the likelihood a trustee in bankruptcy would not “affirm” the contract.

In a Chapter 11 proceedings against a general partner, the U.S. District Court upheld the bankruptcy court’s acceptance of a plan that had the debtor required to cast his vote as a general partner on matters as directed by a committee of creditors.²⁶⁷ The partnership operated parking lot facilities in Washington, D.C. and other real estate projects. The plan called for the liquidation of the various interests to be handled by the committee but if the debtor, Mr. Antonelli, believed that a specific direction would violate his fiduciary duty to the partnership, he was to file a motion with the bankruptcy court for instructions. Some of the limited partners objected to this arrangement.

In re Antonelli, the court upheld the vote-by-committee plan. In doing so, the court distinguished between partnerships where the identity of the general partner is significant (like a partner in a law firm) and not as significant (a “mature” real estate project):

“Obviously, a reorganization plan could not require that a law firm accept as a partner the assignee of one of their partners who had become bankrupt. The nature of the duties which law partners owe, not only to one another but to their clients, make their identities material to the very existence of the partnership. Real estate partnerships, however, cannot be so strictly categorized. As one commentator has noted, the question of whether or not interests (including the exercise of management power) in a real estate partnership should be assignable under Section 365(c) properly depends upon the stage that the real estate project has reached and the substantiality of the duties which the partners must continue to perform.”²⁶⁸

15.0 Limited Liability Companies (LLCs).

Limited Liability Companies are wholly creatures of statute and have protection parallel to that of partners. In fact, historically the advent of the limited liability for partnerships initially began with the LLC.²⁶⁹ The approach to member liability absolutely tracks, indeed preceded, the treatment under the limited liability partnerships.

“Except as otherwise provided by this title, no member shall be personally liable for the obligations of the limited liability company, whether arising in contract, tort or otherwise, solely by reason of being a member of the limited liability company.”²⁷⁰

As with partnerships, Creditors of a member of an LLC must proceed with as charging order as the “exclusive remedy.”²⁷¹ Also, a charging order constitutes a lien on the economic interest of the debtor in the limited liability company and requires the limited liability company to pay over to the creditor only any distributions that would otherwise be payable to the debtor whose economic interest is charged.”²⁷² Similarly, an assignee is generally entitled to distributions but not to participate in management.²⁷³

As with limited liability partnerships, if the creditor is on notice that the entity, not one of the entity’s members, is the contacting party, generally the creditor does not have recourse to the member. The U.S. District Court applied the principle of a creditor has resort to the company but not a member who is acting as the company’s agent:

“In the seminal Maryland case of Curtis G. Testerman Co. v. Buck, 340 Md. 569, 667 A.2d 649 (1995), the Court said: “The rule in Maryland is clear that ‘if an agent fully discloses the identity of his principal to the third party, then, absent an agreement to the contrary, he is insulated from liability. However, this is subject to exception when the purported principal that is disclosed is nonexistent or fictitious; or when the principal is legally incompetent.’ ” Id at 576-77, 667 A.2d at 653 (citation omitted). See also Mowbray v. Zumot, 533 F. Supp. 2d 554, 564 & n. 12 (D.Md. 2008) (holding LLC member not personally liable in contract action where he entered contract in capacity as “Executive Officer” and “Member” of LLCs); Ace Dev. Co. v. Harrison, 196 Md. 357, 366, 76 A.2d 566, 570 (1950) (“[W]hen an official or agent signs a contract for his corporation it is simply a corporate act. It is not the personal act of the individual, and he is not personally liable for the corporate contract unless the matter is tainted by fraud….”).”²⁷⁴

15.1 LLCs & Bankruptcy.

If the debtor goes into bankruptcy, the bankruptcy trustee stands in the shoes of the debtor which has been held as possession both the debtor’s economic rights but also the non-economic rights. This gives the bankruptcy trustee significant power:

“The charging order under state law gives LLC members a powerful weapon against judgment creditor attack. But what if the LLC member files for protection under the federal bankruptcy laws? Are state law asset protection benefits still as helpful under federal law? Does it matter if the LLC is a single or multiple member LLC? As noted above, the public policy behind the charging order was to balance the judgment creditor’s rights against the desire to avoid a disruption or liquidation of the LLC’s business. In In re Albright, 291 B.R. 538 (Bankr. D. Colo, 2003), a debtor owning an interest in a single member LLC filed for federal bankruptcy protection. The bankruptcy court held that, on filing, the debtor assigned her LLC membership interest to the trustee in bankruptcy under Bankruptcy Code § 541, which afforded the trustee all of the debtor’s rights in the LLC, including the right to liquidate the LLC. The court in Albright noted that the result would have been different if there had been more than one member in the LLC. But compare Albright to In re Ehmann, 319 B.R. 200 (Bankr. D. Ariz. 2005), in which a debtor who owned an interest (less than all) in an Arizona LLC filed for Chapter 7 bankruptcy–liquidation. The trustee in bankruptcy brought a lawsuit against the LLC claiming that the trustee was a substitute LLC member and that the assets of the LLC were being wasted, misapplied, and diverted for improper purposes. The trustee sought an order to dissolve and liquidate the LLC. The LLC sought to dismiss the lawsuit, asserting that the trustee was a mere assignee and that the restrictions on transfer in the LLC operating agreement were “executory” in nature. The court sided with the bankruptcy trustee.”²⁷⁵

16.0 Corporations.

Corporations, of course, afford protection to shareholders for corporate debts because the corporation is a person separate from its shareholders. To hold shareholders responsible, a creditor must pierce the corporate veil. It is not enough, however, for a court to simply wish to prevent an evasion of a legal obligation: “The common thread running through the Maryland cases – as stated earlier – is that the corporate entity will be disregarded only when necessary to prevent fraud or to enforce a paramount equity.”²⁷⁶ Cases consistently support the difficulty in piercing the corporate veil in Maryland:

“In Maryland, “courts will pierce the corporate veil only when necessary to prevent fraud or enforce a paramount equity.” Bart Arconti v. Ames-Ennis, 275 Md. 295, 310-11,340 A.2d 225, 234 (1975), citing Damazo v. Wahby, 259 Md. 627, 633, 270 A.2d 814, 817 (1970); and Gordon v. SS Vedalin, 346 F. Supp. 1178, 1181 (D. Md. 1972). However, in none of the cases cited was the corporate veil allowed to be pierced in order to enforce corporate debts against an individual, in the absence of proof of actual fraud. In reversing the judgment entered against corporate insiders in Bart Arconti, the Maryland Court of Appeals held that the mere shifting of corporate assets from one insolvent entity to another in order to evade legal obligations did not  justify holding the corporate insiders liable by veil piercing. Likewise, in Damazo, the Court of Appeals reversed the trial court that held a corporate insider individually liable for commissions due a broker engaged to sell property titled in the names of two corporations. The appeals court stated that “[t]he fact that Damazo controlled and operated the corporations would not of itself justify piercing the corporate veil or make him liable for that which the corporations owed.” 270 A.2d at 817. The court commented on the lack of evidence that Damazo “used or intended to use the corporations as instruments to perpetrate a fraud,” or that he failed to observe “the separate identities of Damazo and the corporations.” Id. Indeed, all of the corporate formalities of a business that was a going concern were followed.”²⁷⁷

17.0 Family Entities and Divorce.

Despite a spouse holding an interest in an entity (whether a family entity or solely held property) prior to marriage, which is deemed not marital property for divorce purposes, it may be exposed indirectly to the extent that spouse adds value to the entity without full compensation. The key is whether the interest increases during marriage as a result of the spouse’s efforts that is not properly compensated by a salary or other compensation or whether the increase is due to other factors. If the increase is due to the (otherwise uncompensated) efforts of the divorcing spouse, the increase is considered martial property.

In the Innerbichler case, ²⁷⁸ the Court determined that the increase in a husband’s stock value was attributable to his post-marriage efforts and therefore produced a large marital award. In that case, the company was created by the husband prior to the marriage but according to the wife: “AMSCO was in its ‘embryonic stages’ when the parties were first married. Ample evidence was presented at trial showing that TAMSCO was in its fledgling stage of development at the time of the marriage.”²⁷⁹ Because the husband was unable to establish its pre-marriage value, the entire value of the company was deemed marital property.

On the other hand, if the entity was a gift from a spouse’s family and any increase in value achieved do to that spouse being adequately compensated, the entity growth is not marital property. In the trial court below held:

“The Court finds that the Plaintiff has never owned anything more than a minority interest in either GDACo or ATACo. At all times during the marriage, the Plaintiff always received a fair and reasonable salary, full benefits and profit sharing as compensation for his work for these corporations. As a stockholder, the Plaintiff, along with all other stockholders, always received dividends whenever they were declared. It is readily apparent that the plaintiff was just one of many people whose work, along with a variety of other factors beyond the control of the Plaintiff and his family, contributed to the appreciation and increase in value of these business enterprises.”²⁸⁰

The Appellate Court of Maryland upheld the determination that the appreciation of the gifts of corporate stock should not be considered marital property.

In another case, the husband acquired a trailer park as a gift from his parents, which, of course, is not marital property. The expansion of the trailer park, however, by adding more trailers during the marriage was held as marital property because the wife added value during the marriage:

“Among the husband’s assets was a trailer park in Carmichaels, Pennsylvania, that his parents conveyed to him in 1975. The chancellor found this to be a gift from the husband’s parents and, hence, not marital property. However, the trial judge said that three trailers at the trailer park “were acquired during the marriage and were not a gift to George and thus constitute marital property.” The husband contends that the trial judge erred here because this “was directly traceable to a gift.” We disagree. It is true that these trailers were said to have been purchased with income produced by the trailer park, but the wife worked there after the gift was made. She testified:

‘I took care of all of the bookkeeping. I paid all the bills, and when the first trailer started to move in, I kept all the receipts and they came to us and paid the rent and I would give them a receipt, and I would see to it that, you know, the rent was paid on time and things like that.’”²⁸¹

Joint Tenancy & Creditor Collection

Joint Tenancy & Creditor Collection

18. Joint Tenancy.

Tenants by the entirety property, of course, is not subject to the creditors of only one spouse. That is not the case for other forms of joint tenancy. The rule with joint tenancy is that the interest of each holder can be attached and sold by the creditor of one joint tenant to the extent of their interest. If, however, the debtor tenant dies before the creditor executes on its judgment, the survivor receives the property free of the debt.

The Maryland Supreme Court has held that a judgment that constituted a lien on one owner’s interest in joint tenancy property did not defeat the transfer of the property by both joint tenants to a third party because it occurred before the creditor executed on its judgment.²⁸² This is not an intuitive result because joint tenancies are “disfavored” in Maryland and many unilateral acts by one joint tenant operates to sever the tenancy, thereby converting it to a holding as tenant in common. Thus, for example, if one joint tenant executes a lease, executes a contract of sale, or takes other kinds of individual action, the tenancy is severed and the property “converts” to ownership in common. Nevertheless, the mere fact of a judgment against one joint tenant does not effectuate such a severance and conversion:

“[T]he mere entry of a judgment against one of the joint tenants does not destroy any of the four unities of interest, title, time and possession and hence, until there is an execution on the judgment which will destroy one or more of these unities, there is no severance of the joint tenancy. If there is a severance of the joint tenancy by way of an execution upon the judgment of one of the joint tenants, the judgment then becomes a lien upon the interest of the judgment debtor in the tenancy in common which then arises. If, however, the judgment creditor does not execute upon the judgment against the judgment debtor-joint tenant during his life, the entire joint estate is held by the surviving joint tenant or tenants by survivorship and without any lien of the judgment against the property thus held by them. As we said in Alexander v. Boyer, supra, the joint tenants hold ‘per my et per tout,’ and the nature of the tenancy is such that the judgment lien cannot attach to the estate in joint tenancy until after severance and the creation of a separate estate in title and possession to which the judgment lien can then attach. In Eder, the joint tenant who was the judgment debtor, predeceased the other joint tenant. We held that the survivor’s interest was not subject to any lien of the judgment..”²⁸³

Similarly, the Maryland Appellate Court followed suit and further held that a preceding contract of sale did not make a difference in the result. Even if a contract of sale might sever the tenancy, after the sellers executed a contract of sale equitable ownership is transferred to the buyer and “’bare legal title” remains with the seller: “In that circumstance, the legal title is a technicality. Of course, a judgment creditor of a debtor holding bare legal title to property cannot attach the equitable interest in the property, as it is vested in another.’”²⁸⁴

The principle supporting the Eastern Shore Building & Loan Corp. case is the common law rule and it operates to survive the death of the debtor co-tenant:

“At common law, a creditor’s rights to a debtor’s joint property were limited to the right to sever before the debtor joint tenant died…If the debtor owning an interest in joint tenancy died before the creditor sought to reach the debtor’s share, however, his interest was deemed to expire and the survivor held free of any claims against the decedent. This is still the prevailing rule.” ²⁸⁵

Notes

1. Charles D. Fox & Michael J. Huft, Asset Protection and Dynasty Trusts, 37 Real Prop. Prob. & Tr. J. 287, 291 (Summer 2002).↩︎

2. Asset Protection: An Overview for Maryland Estate & Trust Lawyers, MSBA, 6/25/2013. This current treatise is updated and substantially revised to add new material.↩︎

3. Fred Franke, Asset Protection and Tenants by the Entirety, 34 ACTEC Journal 210 (2009).↩︎

4. Stewart E. Sterk, Asset Protection Trusts: Trust Law’s Race to the Bottom?, 85 Cornell L. Rev. 1035, 1040-1 (2000)↩︎

5. Id.↩︎

6. Jay A. Soled & Mitchell M. Gans, Asset Preservation and the Evolving Role of Trusts in the Twenty-First Century, 72 Wash. & Lee L. Rev. 257, 289-90 (2015) (Footnotes excluded).↩︎

7. MRPC19-301.2(d) (Emphasis added). The Maryland rule follows the ABA Model Rules of Professional Conduct 1.2(d).↩︎

8. MRPC19-304.4(a) (Emphasis added) and ABA Model Rule 4.4.↩︎

9. MRPC 19-308.4(c) (Emphasis added) and ABA model rule 8.4.↩︎

10. 400 Md. 567, 929 A.2d 546 (2007).↩︎

11. Henry J. Lischer, Jr., Professional Responsibility Issues Associated With Asset Protection Trusts, 39 Real Prop. Prob. & Tr. J. 561, 610-1, (2004),↩︎

12. Id. At 625. See also, Keith S. Kromash and Nina Vaghaiwalla Rawal, Fraudulent Transfers and Conversions and Ethical Considerations, ASPR FL-CLE 1-1, The Florida Bar, Asset Protection in Florida, Chapter 1 (8^th Ed. 2004) which refers to several state ethics opinions.↩︎

13. Freeman v. First Union Bank, 865 So. 2d 1272 (Fla. 2004).↩︎

14. Id. at 1277.↩︎

15. See generally William L. Siegel, Attorney Liability: Is This the New Twilight Zone?, 27 U. Mem. L. Rev. 13 (1996); Douglas R. Richmond, Rebecca Lamberth and Ambreen Delawalla, Lawyer Liability and the Vortex of Deepening Insolvency, 51 St. Louis U. L.J. 127 (2006); Eugene J. Schiltz, Civil Liability for Aiding and Abetting: Should Lawyers be ‘Privileged’ to Assist Their Clients’ Wrongdoing?, 29 Pace L. Rev. 75 (2008).↩︎

16. Business Loan Express, LLC v. Hekyong Pak, 2004 WL 1554395 (Md. US District Court, 2004) (Unreported).↩︎

17. Morganroth & Morganroth v. Norris, McLaughlin & Marcus P.C., 331 F.3d 406 (3d Cir. 2003).↩︎

18. Alleco, Inc. v. Harry & Jeanette Weinberg Foundation, Inc., 340 Md. 176, 189 (1995) (Cleaned up).↩︎

19. William R. Culp, Jr, and Christian L. Perrin, The Case for Caution: Fraudulent Conveyance Risks in Estate Planning, 24 Prob. & Prop. 41, 44 (Jan./Feb. 2010).↩︎

20. Robert T. Danforth, Rethinking the Law of Creditors’ Rights in Trusts, 53 Hastings L.J. 287, 330 (2002).↩︎

21. Duncan E. Osborne and John A. Terrill, II, Fundamentals of Asset Protection Planning, 31 ACTEC J. 319, 321-4 (Spring 2006).↩︎

22. UVTA, Section 15, cmt. 1 (2014).↩︎

23. In re Abatement Environmental Resources, Inc., 102 Fed. Appx. 272, 276, 2004 WL 1326597 (4th Cir. 6/15/04) (unpublished).↩︎

24. Prefatory Note, Comments, “Uniform Fraudulent Transfer Act” (1984) NCCUSL.↩︎

25. Peter A. Alces and Luther M. Dorr, Jr., A Critical Analysis of the New Uniform Fraudulent Transfer Act, 1985 U. Ill. L. Rev. 527, 529-30 (1985) (Cleaned up).↩︎

26. In re Merry-Go-Round Enterprises, Inc., 229 B.R. 337, 342 (Bkrtcy. D. Md. 1999).↩︎

27. Soneet R. Kapila, Melissa Davis, Daniel Halperin, Eye of the Evaluator; The Role of Contingent liabilities in an Insolvency Analysis, 37-Apr. Am. Bankr. Inst. J. 24, (2018)) (Footnote omitted).↩︎

28. In some cases, however, the circumstances can supply the proof of actual knowledge. In In re Maryland Property Associates, Inc., 309 Fed. Appx. 737, 752 (2009), where an insider was allegedly using his relationship with a bank to have it assist in certain fraudulent activities, the Court observed: “In the end, the Bank argues that the only reasonable inference to be drawn from the evidence as a whole was that Knowles was not actually aware of Greenbaum’s scheme, but merely ‘incredibly stupid.’ We do not agree that the evidence compelled that conclusion. The lack of evidence of any financial motive on the part of anyone at the Bank … might have been more persuasive in the absence of the evidence that Greenbaum was a former director and shareholder of the Bank.” ↩︎

29. Berger v. Hi-Gear Tire and Auto Supply, Inc., 257 Md. 470, 476-77 (1970).↩︎

30. Oles Envelope Corp. v. Oles, 193 Md. 79 (1949).↩︎

31. Id. at 89-90.↩︎

32. Kline v. Inland Rubber Corp., 194 Md. 122, 137-8, 69 A.2d 774, 780 (1949).↩︎

33. Fick v. Perpetual Title Co., 115 Md. App. 524, 537-8 (1997) (Beginning with “While there is authority to the contrary…” the Court is quoting 37 CJS Fraudulent Conveyances § 126, at 957-58 (1943).↩︎

34. Id, 544-6. In Chambers v. Cardinal, 177 Md. App. 418, 437-9 (2007) the Appellate Court of Mayland referenced Fick to supports its refusal in Chambers to impute knowledge of fraud because, in part, the creditor permitted a long lapse of time when they could have acted on their debt. That has certainly a contributing factor in Fick.↩︎

35. 11 U.S.C.A. § 548 (a)(1).↩︎

36. 11 U.S.C. § 548(e)(1).↩︎

37. In re Sandoval, 153 F.3d 722 (4^th Cir. 1998) (Cleaned up) (Unpublished). Per the federal rules, unpublished decisions can be cited for persuasive authority but not precedent. This quotation is an evergreen description of how courts approach looking for actual intent.↩︎

38. Since before the enactment of the 2005 Bankruptcy Act, there had been a shift from the popularity of off-shore asset protection trusts to domestic asset protection trusts (“DAPTs”).↩︎

39. Md. Cts. & Jud. Proc. Art. § 11-504(g) (“In any bankruptcy proceeding, a debtor is not entitled to the federal exemptions provided by § 522(d) of the federal Bankruptcy Code.”)↩︎

40. Md. Cts. & Jud. Proc. Art. § 11-504. The Maryland exemption of tenants by the entirety is quite broad and covers real property and investment accounts held by the entirety. See below.↩︎

41. Havoco of America, Ltd. v. Hill, 790 So. 2d 1018 (Fla. 2001) (debtor relocating from Tennessee.) See, however, Radazzo v. Radazzo, 980 So. 2d 1210 (Fla. 2008) (Havoco distinguished where the funds used to acquire the homestead were obtained fraudulently.)↩︎

42. New Bankruptcy Act 11 U.S.C. § 522(b)(3). The statute uses the number of days for the calculation (180 days instead of 6 months and 730 days instead of 2 years). Given variations in the number of days in a month and the “extra” day in a leap year, using days by the statute may differ.↩︎

43. 11 U.S.C. § 522(o).↩︎

44. 11 U.S.C. § 522(p).↩︎

45. 11 U.S.C. § 522(q).↩︎

46. 40 Md. App. 230 (1978).,↩︎

47. Id. at 234-5.↩︎

48. Id. at 238.↩︎

49. Spitz v. Williams, 69 Md. App. 694 (1987).↩︎

50. For a more comprehensive treatment of tenancy by the entirety, see Fred Franke, Asset Protection and Tenancy by the Entirety, 34 ACTEC J. 210 (2009).↩︎

51. MD Code, Family Law, § 2-201 (b) (marriages that are valid).↩︎

52. Obergefell v. Hodges, 576 U.S. 644, 672 (2015).↩︎

53. Obergefell leaves no doubt that it applies to the right to marry and to all of the legal and non-legal benefits that comes with that status: “Here the marriage laws enforced by the respondents are in essence unequal: same-sex couples are denied all the benefits afforded to opposite-sex couples (of marriage) and are barred from exercising a fundamental right.” Id. at 675. (Emphasis added).↩︎

54. Dana Yankowitz, I Could Have Exempted It Anyway: Can a Trustee Avoid a Debtor’s Pre-Petition Transfer of Exempt Property?, 23 Emory Bankr. Dev. J. 217 (2006).↩︎

55. Columbian Carbon Co. v. Kight, 207 Md. 203 (1955). See also Marburg v. Cole, 49 Md. 402, 411 (1878).↩︎

56. MD Code, Real Property, § 2-117.↩︎

57. Diamond v. Diamond, 298 Md. 24, 29, 467 A.2d 510, 513 (1983) (citations omitted).↩︎

58. Cruickshank-Wallace v. Co. Banking & Trust Co., 165 Md. App. 300, 312 (2005).↩︎

59. McClelland v. Massinga, 786 F.2d 1205 (4th Cir. 1986).↩︎

60. United States v. Gurley, 415 F.2d 144, 149 (5th Cir. 1969) (interpreting Florida law); see also Fred Franke, Asset Protection and Tenancy by the Entirety, 34 ACTEC J. 210 (2009).↩︎

61. Beall v. Beall, 291 Md. 224, 234, 434 A.2d 1015, 1021 (1981) (citations omitted).↩︎

62. Arbesman v. Winer, 298 Md. 282 (1983).↩︎

63. Id. at 290 (citation omitted).↩︎

64. In re Carroll, 237 B.R. 872, 874 (Bankr. D. Md. 1999).↩︎

65. Pearce v. Micka, 62 Md.App. 265, 275 (1985).↩︎

66. Md. Commercial Law, § 15-204.↩︎

67. Md., Estates and Trusts, § 14.5-511(b). As discussed above, statutes and case law may refer to “husband and wife” or “man and woman” when describing the benefits of tenants by the entirety or tenants by the entirety trusts but federal and Maryland law mandates that it equally applicable to same sex marriages. See Obergefell v. Hodges, 576 U.S. 644 (2015) and MD Code, Family Law, § 2-201 (b).↩︎

68. The elective share of surviving spouses may be waived before of after marriage by a written contract. Otherwise, a surviving spouse can elect the statutory amount. MD Code, Estates and Trusts, Title 3, Subtitle 4 (Elective Share of Surviving Spouse). The current T/E Trust statute is Md., Estates and Trusts, § 14.5-511. Before the enactment of the Maryland Trust Act, the T/E Trust statute was found at Md. Estate and Trusts, § 14-113. The same provisions were effective beginning October 1, 2010. Prior to the 2010 statute, it was possible, but not guaranteed, to use trusts to avoid the elective share rights. Karsenty v. Schoukroun, 406 Md. 469 (2008).↩︎

69. Est. & Trusts § 14.5-511(b) (as to the immunity while both are living and remain married) and § 14.5-511(c) (as to treatment after the first death).↩︎

70. Restatement (Second) of Trusts, § 156(1).↩︎

71. Id. § 156(2).↩︎

72. See Fred Franke, Asset Protection and Tenants by the Entirety, 34 ACTEC J. 210 (2009).↩︎

73. MD Code, Courts and Judicial Proceedings, § 11-504 (b) (9) and (10). As noted above, Maryland opted out of the federal exceptions for bankruptcy purposes and § 11-504 therefore is to be used.↩︎

74. MD Code, Estates and Trusts, § 14.5-511 (b).↩︎

75. Maryland Medical Service, Inc. v. Carver, 238 Md. 466, 477 (1965) (“[T]he cardinal rule of construction of a statute is to discover and carry out the real legislative intention.”); Witte v. Azarian, 369 Md. 518, 525 (2002) (“[W]e look first to the words of the statute, on the tacit theory that the Legislature is presumed to have meant what it said and said what it meant.” See also Kaczorowski v. City of Baltimore, 309 Md. 505, 515 (1987) ( “We may and often must consider other “external manifestations” or “persuasive evidence,” including a bill’s title…”). ↩︎

76. Cts. & Jud. Proc. § 11-603(a).↩︎

77. Diamond v. Diamond, 298 Md. 24, 29 (1983) (“It is well established that this Court recognizes that a tenancy by the entireties may be created in personal property.)↩︎

78. Cts. & Jud. Proc. § 11-603(b).↩︎

79. Maryland Nat’l Bank v. Pearce, 329 Md. 602 (1993).↩︎

80. Cts. & Jud. Proc. § 11-603(c); O’Brien v. Bank of America, N.A., 214 Md. App. 51 (2013).↩︎

81. Fam. Law § 4-301↩︎

82. Id. Oddly the statute only says a husband is not liable on his wife’s torts but silent as to the husband’s torts.↩︎

83. 535 U.S. 274 (2002).↩︎

84. Id. at 285.↩︎

85. Id. at 291-2.↩︎

86. Id. at 289.↩︎

87. Notice 2003-60, 2003-39 IRB (9/11/03) (Q & A 7). This is not considered an authoritative interpretation, only “guidance”: “This notice provides guidance on collection from property held in a tenancy by the entirety, where only one spouse (referred to here as the taxpayer) is liable for the outstanding taxes, in light of the Supreme Court decision in United States v. Craft.”↩︎

88. See Steve R. Johnson, Why Craft Isn’t Scary, 37 Real Prop. Prob. & Tr. J., 439, 473-477 (Fall 2002).↩︎

89. Oral argument in Craft, page 15 of official transcript. “Rodgers” refers to United States v. Rogers (sic), 649 F.2d 1117 (5th Cir. 1981), rev’d, 461 U.S. 677 (1983) and Ingram v. Dallas Dep’t of Hous. & Urban Rehab., 649 F.2d 1128 (5th Cir. 1981), vacated 461 U.S. 677 (1983).↩︎

90. U.S. Rodgers, 461 U.S. 677, 704 (1983).↩︎

91. Popky v. U.S., 419 F.3d 242, 245 (3d Cir., Pa. 2005) (Cleaned up).↩︎

92. U.S. v. Cardaci, 856 F.3d 267, 278-9 (3d Cir., N.J. 2017) (Cleaned up).↩︎

93. Notice 2003-60, 2003-39 IRB (9/11/03) (Q & A 4).↩︎

94. U.S. v. Craft, 535 U.S. 274, 289 (2002) (Cleaned up).↩︎

95. Watterson v. Edgerly, 40 Md. App. 230 (1978).↩︎

96. 26 C.F.R. § 25.2518–2, Treas. Reg. § 25.2518–2 (c)(4)(i). There is an exception if the where the spouse is not a United States citizen, Id. at Reg. § 25.2518–2 (c)(4)(ii).↩︎

97. Treas. Reg. § 25.2518–2 (c)(4)(iii).↩︎

98. Greenblatt v. Ford, 638 F. 2d 14 (4^th Cir. 1981).↩︎

99. National case law, however, is mixed as to whether the sole ability of one spouse to remove assets from a joint account destroys any possibility of it to be held as tenants by the entirety. Morrison v. Potter, 764 A. 2d 234, 238-9 (D.C. 2000) (“Indeed, with respect to a joint bank account held by a husband and wife, each spouse acts as the other spouse’s agent, and both have properly consented to the other spouse’s withdrawals in advance, thus satisfying the non-alienation requirement of a tenancy by the entireties…Accordingly, we hold that the joint bank account held by the Morrisons, notwithstanding the husband’s unilateral right to withdraw funds, is presumed to be a tenancy by the entireties, and the funds in the Citibank account cannot be attached by the husband’s individual creditors.”). In re Estate of Fletcher, 538 S.W.3d 444, 454 (Tenn. 2017) (“We adopt the Arkansas approach and hold that, once a husband or wife withdraws funds from a joint bank account held as tenants by the entirety, the funds cease to be held by the entirety.”).↩︎

100. Comment, Section 6, UDPIA (2002).↩︎

101. 2007 Maryland Laws Ch. 155 (S.B. 434). The 2007 amendment also changed Md. Est. & Trusts § 9-212(b) to make a failure to file or register a disclaimer does not affect its validity for all parties not just for the disclaimant and the party receiving the interest.↩︎

102. 116 Md. App. 468 (1997); cert. denied 347 Md. 255 (1997).↩︎

103. Id. at 478.↩︎

104. Id.↩︎

105. Drye v. United States, 528 U.S. 49, 60-1 (1999).↩︎

106. Id. at 61.↩︎

107. U.S. Small Business Administration v. Bensal, 854 F.3d 992 (9^th Cir. 2017), for example, regarding the collection of loan guarantee of a federally insured loan.↩︎

108. 11 U.S.C.A. § 727(Discharge).↩︎

109. In re Costas, 555 F.3d 790, 793-796 (9^th Cir. 2009) (No citations and cleaned up).↩︎

110. 11 U.S.C.A. § 727 sets out the federal bankruptcy rule on discharge and § 548 sets out the fraudulent transfers statute in bankruptcy cases. Because In re Costas was not deemed a transfer, it could not be a fraudulent transfer under 11 U.S.C.A. §548. As discussed above, in 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act tightened the fraudulent transfer statute in Bankruptcy cases.↩︎

111. Uniform Disclaimer of Property Interests Act (2002/2010), Cmt. at Section 13.↩︎

112. This is not to say that the federal Supremacy Clause will not continue to expand to cover disclaimers in other circumstances. U.S. Small Business Administration v. Bensal, 853 F.3d 992 (2017), for example, did not need to decide whether the disclaimer in that case was ignorable based on Costas because the disclaimer in that case was post-federal lien attaching.↩︎

113. Robert T. Danforth, Rethinking the Law of Creditors’ Rights in Trusts, 53 Hastings L.J. 287, 293-295 (January 2002).↩︎

114. In re Robbins, 826 F.2d 293, 294 (4^th Cir. 1987).↩︎

115. Id. at 295.↩︎

116. United States v. Baldwin, 283 Md. 586 (1978).↩︎

117. In Wiltshire Credit Corp. v. Karlin, 988 F. Supp. 570 (US District Ct., Southern Division Maryland, 1997).↩︎

118. Charles D. Fox IV and Michael J. Huft, Asset Protection and Dynasty Trusts, 37 Real Prop. Prob. & Tr. J. 286, 297 (Summer 2002).↩︎

119. Id. at 301. See Alexander A. Bove, Jr., Go Directly to Jail, Do Not Collect $200! Do Asset Protection Trusts Carry a Mandatory “Go to Jail” Card? Should They?, American Bar Association, 37-Oct. Prob. & Prop. 8 (Sept/Oct 2023) Mr. Bove, points out that the stories of imprisonment and/or contempt are overblown, misleading and only apply in egregious cases. One example of an egregious case is illustrated by In re: Lawrence, 251 B.R. 630 (Bankr. S.D. Fla. 2000), and on appeal at 279 F.3d 1294 (11th Cir. 2002); see also F.T.C. v. Affordable Media, LLC, 179 F.3d 1228 (9th Cir. 1999). As discussed immediately below, domestic asset protection trusts (“DAPTs”) present a lower risk of the more extreme penalties because the trusts continue to be subject to US court jurisdiction.↩︎

120. Richard W. Nenno, Planning with Domestic Asset-Protection Trusts: Part I, 40 Real Prop. Prob. & Tr. J., 263, 347 (Summer 2005).↩︎

121. Jay A. Soled & Mitchell M. Gans, Asset Preservation and the Evolving Role of Trusts in the Twenty-First Century, 72 Wash. & Lee L. Rev. 257, 286-7 (2015).↩︎

122. See, for example: Lischer, Domestic Asset Protection Trusts: Pallbearers to Liability, 35 Real Prop. Prob. & Tr. J., 479 (Fall 2000); Nenno, Planning with Domestic Asset-Protection Trusts: Part I, 40 Real Prop. Prob. & Tr. J., 263 (Summer 2005); Nenno, Planning with Domestic Asset-Protection Trusts: Part II, 40 Real Prop. Prob. & Tr. J., 477 (Fall 2005).↩︎

123. The common law “exception creditors” are described in detail below↩︎

124. U.S. v. Windsor, 570 U.S. 744, 766 (2013) (Cleaned up) Holding that the federal estate tax marital deduction was applicable to a same-sex marriage because it was recognized by New York, the domicile of the couple. This decision was before Obergefell v. Hodges, 576 U.S. 644 (2015) recognizing same-sex marriage as a Constitutional right as fundamental right inherent in the liberty of the person, and under the Due Process and Equal Protection Clauses of the Fourteenth Amendment. Ironically, the internal quote above is from Williams v. North Carolina, 317 U.S. 287 (1942) upholding a Nevada divorce which was based on a short domicile statute.↩︎

125. Id. at 767.↩︎

126. Restatement (Second) of Trusts § 270 (1971). See Robert B. Niles-Weed and Robert H. Sitkoff, The Twenty-First Century Revolution in Conflict of Trust Laws, 97 Tul. L. Rev. 1013 (2023). They make the point that jurisdictional competition for trust business is increasingly moving large value trusts to jurisdictions very favorable to the settlor and “[t]he losers in these transactions–such as creditors (especially divorcing spouses) or tax authorities in states that are losing trust business –will in turn raise objections to the trust’s ability to capture that foreign law or avoid the oversight of states with other connections to the trust.” They argue that the law of conflict of trust laws need updated.↩︎

127. Conflict of Laws in Trusts and Estates Act, Section 204 (a) (1)& (2) (Substantive Validity of Trust: Creation and Validity; Trust Duration; Restraints on Alienation), 21 (6/9/25, Discussion draft).↩︎

128. Id. at 23.↩︎

129. Dahl v. Dahl, 459 P.3d 276, 289 (2015). It is more notable that Utah is a DAPT jurisdiction. Non-DAPT jurisdictions would presumably have greater policy concerns.↩︎

130. Id. at 287.↩︎

131. Id. at 288.↩︎

132. Id. at 289.↩︎

133. Aleem v. Aleem, 404 Md. 404, 421-422 (2008). Chapter 794 of the Acts of 1978 changed division of assets upon divorce from a strict title-based property system to the equitable division of property acquired

     during the marriage regardless of title. There are certain exceptions, such as inheritances, which may dictate planning techniques used by parents and/or grandparents concerned the divorce of their heirs.↩︎

134. In re Huber, 493 B.R. 798, 808 (Bankruptcy Ct., W.D. Washington, at Tacoma)(The Court quoting the Restatement (Second) of Trusts, § 270, cmt. (b).↩︎

135. Id.↩︎

136. Id at 809.↩︎

137. Id,↩︎

138. Id. at 810-14.↩︎

139. Id. at 814. As noted above, Maryland applies the earlier Maryland Uniform Fraudulent Conveyance Act which, of course, likewise nails actual intent to defraud a creditor: “Every conveyance made and every obligation incurred with actual intent, as distinguished from intent presumed in law, to hinder, delay, or defraud present or future creditors, is fraudulent as to both present and future creditors.” MD Code, Commercial Law, § 15-207.↩︎

140. U.S. v. Huckaby, 2026 WL 587784 (Slip Copy) (3/3/2026).↩︎

141. Cherbonnier v. Bussey, 92 Md. 413 (1901).↩︎

142. MD Code, Estates and Trusts, § 14.5-504 (b) (Spendthrift Provisions): “A provision of a trust providing that the interest of a beneficiary is held subject to a “spendthrift trust”, or words of similar import, restrains both voluntary and involuntary transfer of the beneficiary’s interest.”↩︎

143. Smith v. Towers, 69 Md. 77, 15 A. 92, 93 (1888).↩︎

144. DuVall v. McGee, 375 Md. 476 (2003), n.5.↩︎

145. Restatement (Third) of Trusts § 58.↩︎

146. 34 A.L.R. 2d 1335, “The Validity of Spendthrift Trusts,”:↩︎

147. Smith v. Towers, 69 Md. 77, 88-89 (1888) (as quoted in DuVall v. McGee, 375 Md. 476 (2003)).↩︎

148. Safe Deposit & Trust Co. v. Robertson, 192 Md. 653 (1949).↩︎

149. Zouck v. Zouck, 204 Md. 285 (1954).↩︎

150. Safe Deposit & Trust Co. v. Robertson, 192 Md. 653, 662-3 (1949).↩︎

151. Prince George’s County Police Pension Plan v. Burke, 321 Md. 699, 707 (1991).↩︎

152. Restatement (Third) of Trusts, § 59 (Spendthrift Trusts: Exceptions for Particular Types of Claims).↩︎

153. Id. at Cmt. (c).↩︎

154. Helene S. Shapo, George Gleason Bogert, George Taylor Bogert, Bogert’s The Law of Trusts and Trustees, § 229 (Support Trusts) (May 2025 Update).↩︎

155. Id.↩︎

156. First Nat’l Bank of Maryland v. Dept. Health and Mental Hygiene, 284 Md. 720, 726 (1979).↩︎

157. Restatement (Third) of Trusts, § 50 (Enforcement and Construction of Discretionary Interests).↩︎

158. Id.↩︎

159. First Nat’l Bank of Maryland v. Dept. Health and Mental Hygiene, 284 Md. 720, 726-7 (1979).↩︎

160. Id. at 730. The internal quote of the standard of dishonesty, arbitrary or improper motive is from the Restatement (Second) of Trusts § 128, Cmt. d (1957).↩︎

161. Id.↩︎

162. Mercantile Trust Co. v. Hofferbert, 58 F. Supp. 701 (D. Md. 1944).↩︎

163. Id. at 706 (Emphasis added). Hofferbert was, of course, decided almost 70 years before the Maryland Trust Code which enacted provisions related to the validity and enforcement of spendthrift provisions. MD Code, Estates and Trusts, § 14.5-504 (Spendthrift provisions). Given that the Maryland Trust Code preserves the common law of trusts to the extent not explicitly changed by the statute, however, Hofferbert cannot be dismissed as out of date. MD Code, Estates and Trusts, § 14.5-106 (Common law of trusts and principles of equity) (“The common law of trusts and principles of equity supplement this title, except to the extent modified by this title or another statute of this State.”)↩︎

164. Richard C. Ausness, Discretionary Trusts: An Update, 43 ACTEC L. J. 231, 274 & 275 (2018).↩︎

165. U.S. v. O’Shaughnessy, 517 N.W.2d 574 (1994).↩︎

166. MD Code, Estates and Trusts, § 14.5-502, (a)(1). (Interests subject to discretionary distribution provisions.) Prior to the MTA, that was the rule under Maryland common law. First Nat’l Bank of Maryland v. Dept. Health and Mental Hygiene, 284 Md. 720, 726 (1979).↩︎

167. Duvall v. McGee, 375 Md. 476 (2003).↩︎

168. Id. at 499-500 (Cleaned up).↩︎

169. Restatement (Third) of Trusts § 59 (Spendthrift Trusts: Exceptions for Particular Types of Claims), General Comment a (2)(2003).↩︎

170. Duvall v. McGee, 375 Md. 476, 495 (2003). The Mississippi case is Sligh v. First National Bank of Holmes County, 704 So. 2d 1020 (Miss. 1997).↩︎

171. Duvall, at 497 (“Sligh is no longer the law of Mississippi. A mere five months after the decision … the Mississippi Legislature passed the Family Trust Preservation Act of 1998.”).↩︎

172. UTC § 503, Cmt. (Exceptions to Spendthrift Provision).↩︎

173. MD Code, Education § 18-19A-06.1. “Person“, however, does not include the State.↩︎

174. Probasco v. Clark, 58 Md. App. 683, 688-9 (1984). In Probasco, the life income beneficiary was to receive a fixed amount monthly until death at which point, the remainder went to a church. The church and the trustee proposed that an annuity be bought to cover the lifetime annuity and terminate the trust (the corpus having significantly out preforming what was necessary to fund the monthly payments). The Court refused to permit the termination because the life beneficiary objected.↩︎

175. Kirkland v. Mercantile Safe Deposit & Trust Co., 218 Md. 17, 23, 145 A.2d 230, 233 (1958). See also Mahan v. Mahan, 320 Md. 262, 577 A.2d 70 (1990) (“[W]e hold that paragraph six of Frances’s deed of trust created a spendthrift trust, and that a spendthrift trust cannot be terminated by the consent of the beneficiaries, even though all are sui juris and all join in seeking termination.”).↩︎

176. MD Code, Estates and Trusts, § 14.5-410 (Termination of noncharitable irrevocable trusts).↩︎

177. UTC § 411 (c) “A spendthrift provision in the terms of the trust is not presumed to constitute a material purpose of the trust.” The Comment to that Section states that provision was made an optional provision because uniformity could not be achieved: “Several states that have enacted the Code have not agreed with the provision and have either deleted it or have reversed the presumption. Given these developments, the Drafting Committee concluded that uniformity could not be achieved. The Joint Editorial Board for Uniform Trusts and Estates Acts, however, is of the view that the better approach is to enact subsection (c) in its original form…).↩︎

178. Maryland common law always permitted extrinsic evidence of settlor intent, whereas it was only broadly permitted for testamentary trusts until enactment of the Maryland Trust Code in 2014, effective January 1, 2015.↩︎

179. MD Code, Estates and Trusts, § 14.5-103 (aa) (Definitions).↩︎

180. Restatement (Third) of Trusts, § 4 (a) (“What is included in “terms of the trust”?”). See Fred Franke and Anna Katherine Moody, The Terms of the Trust: Extrinsic Evidence of Settlor Intent, 40 ACTEC L. J. 1 (2014).↩︎

181. First Nat’l Bank of Maryland v. Dept. Health and Mental Hygiene, 284 Md. 720 (1979).↩︎

182. MD Code, Estates and Trusts, § 14.5-103 (Definitions) (g) (2).↩︎

183. MD Code, Estates and Trusts, § 14.5-502, (a)(1)-(c). (Interests subject to discretionary distribution provisions).↩︎

184. First Nat’l Bank of Maryland v. Dept. Health and Mental Hygiene, 284 Md. 720, 725 (1979).↩︎

185. Id. at 723 (Emphasis added).↩︎

186. Id, at 727-8.↩︎

187. Id. at 728. (Cleaned up – omitted are references to cases from other jurisdictions, the majority holding as the Supreme Court holds in the First National case.)↩︎

188. MD Code, Estates and Trusts, § 14.5-103 (g)(1) (definitions).↩︎

189. First Nat’l Bank of Maryland v. Dept. Health and Mental Hygiene, 284 Md. 720, 726 (1979).↩︎

190. Offutt v. Offutt, 204 Md. 101, 109 (1954).↩︎

191. Waesche v. Rizzuto, 224 Md. 573, 587 (1961).↩︎

192. MD Code, Estates and Trusts, § 14.5-801 (Duties of trustee relating to administration of trust) (Emphasis added).↩︎

193. Edward C. Halbach, Jr., Problems of Discretion in Discretionary Trusts, 61 COLUM. L REV. 1425, 1429 (1961). Professor Halbach became the Reporter for the Restatement (Third) of Trusts.↩︎

194. Professor Halbach’s 1961 article cited above made the compelling case that it was never as stated in the first two Restatements.↩︎

195. Restatement (Third) § 50 (Enforcement and Construction of Discretionary Interests); compare MD Code, Estates and Trusts, § 14.5-801 (Duties of trustee relating to administration of trust)↩︎

196. Restatement (Third) § 50, Cmt. b (Enforcement and Construction of Discretionary Interests).↩︎

197. Uniform Trust Code, Section 105 (b)(3) (2005).↩︎

198. Uniform Trust Code, Section 814 (2005).↩︎

199. Frederick R. Franke, Jr., Resisting the Contractarian Insurgency: the Uniform Trust Code, Fiduciary Duty, and Good Faith in Contract, 36 ACTEC L.J. 517, 531-2 (2010).↩︎

200. Id. at 530.↩︎

201. McNeil v. McNeil, 798 A.2d 503, 509 (Del. Super. Ct. 2002).↩︎

202. MD Code, Estates and Trusts, § 14.5-1003 (Restrictions relating to settlors of trust). Prior to the MTA, these provisions were at MD Code, Estates and Trusts, § 14-116.↩︎

203. Treasury Regulations, § 25.2523(f)–1f, example 11, (Election with respect to life estate transferred to donee spouse.)↩︎

204. See Mitchell M. Gans, Jonathan G. Blattmacher, Diana S.C. Zeydel, Supercharged Credit Shelter Trust, 21 Real Prop. Prob. & Tr. J., 52, 55-60 (suggesting that the trusts should be created at different times, have different terms such as one having a general power of appointment and the other not, have different classes of potential appointees or differences in how income is to be paid out – unitrust or straight income).↩︎

205. Clark v. Ramekeri, 573 U.S. 122 (2014).↩︎

206. States, of course, can exempt out of the federal exemptions and rely on its own exemptions that apply generally to all creditor ability to collect certain assets. Maryland has opted out of the federal exemptions. MD Code, Courts and Judicial Proceedings, § 11-504(Items excluded from execution of judgment).↩︎

207. Clark v. Ramekeri, 573 U.S. 122, 127 (2014).↩︎

208. Id. at 128.↩︎

209. In re Pacheco, 537 B.K. 935 (Bank. D. Arizona, 2015).↩︎

210. Id. at 940.↩︎

211. Id.↩︎

212. Id. quoting the applicable Arizona statute as it existing when In re Thiem, 443 B.R. 832 (Bank., D. Arizona 2011) was decided also holding it covered the creators and inheritors of IRAs. Subsequently, Arizona statute was amended and made even more explicitly applicable to inherited retirement accounts.↩︎

213. MD Code, Courts and Judicial Proceedings, § 11-504 (h)(1) (Items excluded from execution of judgment) (Emphasis added).↩︎

214. Bartch v. Barch, 720 F.Supp.3d 400, (D. Maryland, 2024).↩︎

215. Id. at 404.↩︎

216. See In re Shattuc Cable Corp., 138 B.R. 557, 565-67 (Bankr. N.D. Ill.1992); In re Phipps, 217 B.R. 427, 428-9 (Banr. W.D. N.Y. 1998) (“There is a vast amount of scholarship to the effect that a bankruptcy judge is not bound in Case B by a decision of just one district judge in Case A, if the district has more than one district judge. Today, this Court finds that the rule is to the contrary in the Second Circuit, if the decision in Case A was submitted by the district judge for publication.”) Phipps, per its footnote 1, appears to be the minority view.↩︎

217. In Re: Neil Solomon, M.D)., 67 F.3d 1128 (4th Cir. 1995).↩︎

218. MD INSURANCE § 16-111 (“Proceeds Exempt from Creditors”).↩︎

219. Id.↩︎

220. In re Howard L. KLEINMAN, Debtor, 274 B.R. 171 (Bankr. D. Maryland, 2002).↩︎

221. Bryan v. United States, 286 Md. 176 (1979).↩︎

222. Id. at 180 (Cleaned up).↩︎

223. Guiney v. U.S., 425 F.2d 145, 147 (1970) (“However, I want to make it clear that I am giving my wife a general power of appointment over this trust in order that one-half of my estate may qualify for the marital deduction … as it is fully my intention to take advantage of the marital deduction as provided by the Internal Revenue Code of 1954, or amendments made thereafter.)↩︎

224. Bryan v. United States, 286 Md. 176, 182 (1979) (Cleaned up).↩︎

225. MD Code, Estates and Trusts, § 14.5-103 (i) (Definitions).↩︎

226. United States v. Baldwin, 283 Md. 586 (1978).↩︎

227. Evan Farr, The Practical Estate Planner: Using Irrevocable Trusts for Medicaid Asset Protection (Part 3), 68 No. 5 Prac. Law. 54 , 58 (2022).↩︎

228. Mercantile Trust Co. v. Bergdorf & Goodman Co., 167 Md. 158 (1934).,↩︎

229. In re Robbins, 826 F.2d 293, 295 (C.A. 4th Md. 1987) (Distinguishing Baldwin because in that case the power of appointment “was a special or limited power which did not permit Baldwin to appoint the corpus to his own estate or to his creditors.)↩︎

230. United States v. Field, 255 U.S. 257 (1921).↩︎

231. Samuel A. Donaldson, Helvering v. Safe Deposit & Trust Co.: Underestimating the Power of a Power of Appointment, 42 ACTEC L.J. 41, 42-3 (2016). The tax consequences are different than the asset protection issues.↩︎

232. United States v. Field, 255 U.S. 257, 263-4 (1921).↩︎

233. Frank v. Frank, 253 Md. 413, 416-7 (1969) (Emphasis added). The Frank decision also reiterated that a general power of appointment in Maryland must specifically state the done can appoint to self and/or their own creditors and therefore “full and complete power of disposition” is not a general power in Maryland.↩︎

234. MD Code, Estates and Trusts, § 14.5-507 (a)(1) (Power of appointment) (“ A power of appointment held by a person other than the settlor of the trust is not a property interest.); however, MD Code, Estates and Trusts, § 14.5-508 (c) (1) (“Claims of creditors or assignees of settlors) (“During the period the power of withdrawal may be exercised, the holder of a power of withdrawal shall be treated in the same manner as the settlor of a revocable trust to the extent of the property subject to that power.”) (Emphasis added).↩︎

235. Rolling-Tarbox, Powers of Appointment Under the Bankruptcy Code: A Focus on General Testamentary Powers, 72 Iowa L. Rev. 1041, 1050 (1987). Note a caveat: “Section 541(c) of the Code, however, indicates that a donee-debtor’s general testamentary power should be included in the bankruptcy estate.” Id. See In re Kiesewetter, 2010 WL 8347141, footnote 20 (Bankr. W.D. Pa. 2010). Such inclusion, however, would only be useful at the debtor’s death: “Were such a power of appointment to come into the estate, the Trustee would not have any greater interest in the power of appointment than the Debtor.” ↩︎

236. MD Code, Estates and Trusts, § 14.5-507 (a) (Power of appointment).↩︎

237. In re Robbins, 826 F.2d 293, 295 (C.A. 4th Md. 1987).↩︎

238. MD Code, Estates and Trusts, § 14.5-507 (b) (Power of appointment).↩︎

239. MD Code, Estates and Trusts, § 14.5-510 (a) (Ability of creditor to attach, exercise, reach, or otherwise compel distribution of interest in trust).↩︎

240. Uniform Trust Code, § 504 (e) Cmt. (Discretionary Trusts: Effect of Standard) (2004 Amendment). The Maryland version in § 14.5-510 (a), however, is not limited to the HEMS standard but MD Code, Estates and Trusts, § 14.5-814 (a)(1) effectively limits such payments by a trustee/beneficiary to the standard.↩︎

241. Restatement (Third) of Trusts, § 60, Cmt. g (1999).↩︎

242. MD Code, Corporations and Associations, § 9A-306 (c) & (d) ( Partner’s liability).↩︎

243. MD Code, Corporations and Associations, § 10-805 (Limited liability limited partnership).↩︎

244. MD Code, Corporations and Associations, § 9A-306 (c) (1) ( Partner’s liability).↩︎

245. Uniform Partnership Act (1997), Section 306, (c) & (d) (last Amended 2013).↩︎

246. A Summary, The Uniform Act (UPA) (1997) (Last Amended 2013), htps//www.uniformlaws.org/viewdocument/enactment-kit.↩︎

247. John Morey Maurice, A New Personal Limited Liability Shield for General Partners: But Not All Partners Are Treated the Same, 43 Gonz. L. Rev. 369, 387 (2008).↩︎

248. Id. at 370.↩︎

249. MD Code, Corporations and Associations, § 9A-101 (g) (Definitions). See subtitle 10 of the Revised Uniform Partnership Act (Corps. 9a) for the registration procedures.↩︎

250. MD Code, Corporations and Associations, § 1-502 (c) (Names, contents and restrictions).↩︎

251. John Morey Maurice, A New Personal Limited Liability Shield for General Partners: But Not All Partners Are Treated the Same, 43 Gonz. L. Rev. 369, 386 (2008).↩︎

252. MD Code, Corporations and Associations, § 9A-501 (Partner not co-owner of partnership property).↩︎

253. MD Code, Corporations and Associations, § 10-303 (a) (Liability to third parties).↩︎

254. MD Code, Corporations and Associations, § 9A-504 (Partner’s transferable interest subject to charging order) (Emphasis added).↩︎

255. Title 9a of Maryland Corporations and Associations statute is the Revised Uniform Partnership Act and Title 10 of the statute is the Limited Partnership Act.↩︎

256. Green v. Bellerive Condominiums Ltd. Partnership, 135 Md.App. 563, 774 (2000).↩︎

257. 91^st Street Joint Venture v. Goldstein, 114 Md. App. 561, 567 (1997).↩︎

258. Green v. Bellerive Condominiums Ltd. Partnership, 135 Md. App. 563, 576-7 (2000).↩︎

259. Id. at 579.↩︎

260. Id. at 561.↩︎

261. In some situations, this may largely benefit the creditor. See Lauer Construction Company v. Schrift, 123 Md.App. 112 (1998) when some of the other partners were the judgment creditors and the end result was to take control of the partnership.↩︎

262. Green v. Bellerive Condominiums Limited Partnership, 135 Md. App. 563 (2000).,↩︎

263. Green v. Bellerive Condominiums Limited Partnership, 135 Md. App. 563, 582-3 (2000).↩︎

264. Id. at 584-5.↩︎

265. Daniel S. Kleinberger, Carter G. Bishop, and Thomas Earl Geu, Charging Orders and the New Uniform Limited Partnership Act Dispelling Rumors of Disaster, 18-AUG Prob. & Prop 30, 32-3 (2004).↩︎

266. See N.L.R.B. v. Bildisco and Bildisco, 465 U.S. 513, 523-5 (1984) (Holding that a “somewhat stricter standard” than the “traditional business judgment standard” used with deciding whether to reject an executory contract should apply to rejecting a collective-bargaining agreement because of the special statute given such contracts by Congress.)↩︎

267. In re Antonelli, 148 B.R. 443 (D. Md. 1992). As of 1991 the Antonelli bankruptcy was the largest Chapter 11 ever filed in the District of Maryland, “involving almost 2,000 creditors, claims of over $200 Million and assets of over $100 Million.”↩︎

268. Id. at 448-9. Elsewhere in the decision, U.S. District Judge Motz cited cases showing that certain contacts are not assignable if involving uniquely personal duties “e.g. ones involving opera singers, painters, authors or football players.” Id. at 447. Not a bad group with whom us lawyers to be associated.↩︎

269. John Morey Maurice, A New Personal Limited Liability Shield for General Partners: But Not All Partners Are Treated the Same, 43 Gonz. L. Rev. 369, 383-6 (2008).↩︎

270. MD Code, Corporations and Associations, § 4A-301 (Personal liability).↩︎

271. MD Code, Corporations and Associations, § 4A-607 (f) (Orders to charge against member’s interest).↩︎

272. Id. at (c) (1).↩︎

273. MD Code, Corporations and Associations, § 4A-603 (b) (2) (Interest assignment).↩︎

274. Baltimore Line Handling Co. v. Brophy, 771 F.Supp.2d 531, 543 (D.C. Md. 2011).↩︎

275. William S. Forsberg, Asset Protection and the Limited Liability Company, 23-DEC Prob. & Prop. 39, 40 (2009).↩︎

276. Bart Arconti v. Ames-Ennis, 275 Md. 295, 312, 340 A.2d 225, 235 (1975).↩︎

277. In re Levitsky, 401 B.R. 695, 710-1 (Bankr. D. Md. 2008).↩︎

278. Innerbichler v. Innerbichler, 132 Md. App. 207 (2000).↩︎

279. Id. at 217.↩︎

280. McNaughton v. McNaughton, 74 Md. App. 490, 498 (1988).↩︎

281. Brodak v. Brodak, 294 Md. 10, 26 (1982).↩︎

282. Eastern Shore Building and Loan Corp. v. Bank of Somerset, 253 Md. 525 (1969).↩︎

283. Id. at 530-31.↩︎

284. Chambers v. Cardinal, 177 Md. App. 418, 434 (2007), quoting from Wolf Organization, Inc. v. Oles, 119 Md. App. 357, 369 (1998).↩︎

285. Thomas R. Andrews, Creditors’ Rights Against Nonprobate Assets in Washington: Time for Reform, 65 Wash. L. Rev. 73, 92-3 (1990).↩︎