Maryland Allows Use of Nonjudicial Settlement Agreements in Trust Administration

March 24, 2017

Maryland previously enacted a version of the Uniform Trust Code (UTC), which contains various provisions focused on permitting more efficient administration of trusts. However, Maryland’s version of the UTC initially omitted the UTC section that allows private agreements, known as “nonjudicial settlement agreements” (NJSAs), to resolve issues related to trusts without court approval. A summary of the UTC provisions Maryland adopted in 2014 — and effective January 1, 2015 — is available here

Many commentators noted the absence of NJSAs from Maryland’s Trust Act, and expressed concern that the absence of NJSAs would make Maryland trusts more difficult to administer than trusts in other UTC states. The state addressed this omission in 2016 when it amended the Maryland Trust Act to authorize the use of NJSAs. Section 14.5-111 of the Maryland Estates and Trust Article, which is based on Section 111 of the UTC, became effective October 1, 2016. This amendment benefits trustees and beneficiaries by potentially reducing trust administration costs and court delays. But while NJSAs offer parties a means of addressing issues related to trusts without court approval, using NJSAs involves certain risks that are absent from court proceedings.

Under Section 14.5-111, interested parties may enter into an NJSA to resolve an issue relating to a trust to the extent the agreement “does not violate a material purpose of the trust and includes terms and conditions that could be properly approved by the court under this title or other applicable law.” Md. Code Ann., Est. & Trusts § 14.5-111(b)-(c). Without limiting its scope, the amendment expressly permits NJSAs regarding the following matters:

(1) interpretation or construction of the terms of the trust;

(2) approval of a report or accounting of a trustee;

(3) direction to a trustee to refrain from performing a particular act, or grant to a trustee of a necessary or desirable power;

(4) resignation or appointment of a trustee and determination of the compensation of a trustee;

(5) transfer of the principal place of administration of a trust; and

(6) liability of a trustee for an action relating to the trust.

Md. Code Ann., Est. & Trusts § 14.5-111(d).

Notably, this amendment expressly permits trustees to resign, obtain approval of their accountings from beneficiaries, and resolve liabilities for actions taken as trustee without court approval even where the trust instrument is silent on such matters. Before the amendment was enacted, trustees had to rely on Maryland’s common law rule that a trustee could seek a release and indemnification without violating its fiduciary duties. The amendment codifies a trustee’s right to seek a release and indemnification. Subject to the terms of the trust instrument, trustees can quickly end acrimonious relationships without public court filings. Likewise, beneficiaries can replace underperforming trustees with less expense and time delay.

The amendment also expressly permits interested parties to empower a trustee to act or prohibit a trustee from acting in a particular circumstance. For example, interested parties may enter into an NJSA instructing a corporate trustee to retain a concentrated position in a family asset. As part of the NJSA, the beneficiaries may also release the trustee from liability if the asset loses value.

However, parties should be mindful of at least three important limitations to NJSAs. First, the amendment is unclear as to which parties must join an NJSA for it to be valid. Trustees of trusts with minor or unborn beneficiaries must refer to other sections of the Maryland Trust Act governing virtual representation by parents and current trust beneficiaries to determine whether those beneficiaries are adequately represented.

Second, an NJSA must include terms and conditions that the court could properly approve. As discussed in the comments to the Uniform Trust Code, the source of the amendment, an NJSA cannot be used to create a result not authorized by law. UTC § 111 cmt. For example, interested parties may not use an NJSA to terminate a trust in an impermissible manner.

Finally, an NJSA may not violate a material purpose of the trust. Md. Code Ann., Est. & Trusts § 14.5-111(b)-(c).

To address the concern regarding whether an NJSA has been approved by the necessary parties, the amendment authorizes petitions to the court to determine whether representation was adequate. Md. Code Ann., Est. & Trusts § 14.5-111(e). For example, a court may rule on the limited issue of whether a parent may represent and bind her living and unborn children. Although such a petition would require a court filing, it would disclose fewer details about the trust than a traditional filing.

Likewise, the amendment addresses the second concern by expressly authorizing petitions to determine whether the court could properly approve an NJSA’s terms and conditions. Md. Code Ann., Est. & Trusts § 14.5-111(e).

The amendment does not provide interested parties a mechanism to address the third concern — the risk that an NJSA violates a material purpose of the trust. A party may have difficulty determining whether an agreement that amends an administrative term of a trust, such as a term related to trustees, violates a material purpose of the trust. For example, the comments to the Uniform Trust Code state that a material purpose must be “of some significance,” suggesting that a change of provisions related to the trustee, by itself, would not violate a material purpose. See UTC § 411 cmt. Other authorities, however, suggest certain changes to trustee provisions could violate a material purpose. See, e.g., Restatement (Third) of Trusts § 65 cmts. b, f. As a result, until case law develops, trustees may be uncertain as to whether an NJSA violates a material purpose.

Because Section 14.5-111 does not expressly address this concern, there is a risk that the court may subsequently invalidate the NJSA for violating a material purpose of the trust. Interested parties should balance this risk against the convenience of entering into an NJSA. The resolutions adopted in NJSAs often will not create these risks, and NJSAs are highly advisable in these situations. In uncertain cases, however, trustees may consider bypassing an NJSA and seeking court approval.

NJSAs are a powerful tool to privately resolve trust administration issues. The flexibility they provide has been praised in many jurisdictions for saving costs and reducing time delays. Maryland trustees and beneficiaries should consider these advantages, especially where the objective clearly aligns with the trust purposes and the parties are easily identifiable. However, court approval remains a valuable option in contentious and uncertain situations.