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PNC wins fight over trust-fund distribution

Trustees may request that beneficiaries release them from liability as a condition of distributing trust funds, Maryland’s high court ruled Thursday.

In its 4-3 decision, the Court of Appeals said a trustee does not breach its “duty of loyalty” to beneficiaries by requesting that they hold the trustee harmless for “any and all” losses, claims and costs before they can get their money.

The court also held, unanimously, that income on a trust established by will is taxable as inheritance tax. This tax treatment differs from income derived by an estate, which is exempt from inheritance tax as a “probate asset” under the Maryland Tax-General Article, Judge Mary Ellen Barbera wrote for the court.

The decision affirmed a ruling in favor of the trustee, PNC Bank N.A., which refused to distribute all the money in the late Marion W. Bevard’s trust because the remainder beneficiaries would not sign a release.

The majority pointed out that the law clearly allows beneficiaries to give their “valid, informed consent” to what would otherwise be a breach of the duty of loyalty. Therefore, “the law also must countenance requests for consent…,” Barbera wrote. “Put simply, one must be able to ask for permission in order to obtain it.”

Beneficiaries, however, cannot waive the trustee’s liability for fraud, material mistake or irregularity, the court said.

In dissent, Judge Sally D. Adkins said the waiver should be invalid because beneficiaries cannot consent to a breach of loyalty in advance but only after having full and complete information related to a specific breach.

“We should not condone the practice of a bank’s asking beneficiaries to provide the bank insurance against the bank’s own blunders,” Adkins wrote.

The court’s decision “will encourage more widespread use of such unlawful releases, and enable banks and other trustees to cite this case to justify other breaches as one of degree rather than kind,” Adkins added.

Chief Judge Robert M. Bell and Judge Clayton Greene Jr. joined Adkins’ dissent.

However, estates attorney Kenneth S. Aneckstein, who was not involved in the litigation, agreed with the majority’s decision on liability releases.

“From a practical perspective, trust remainder beneficiaries want to receive their funds as quickly as possible, and a broad release facilitates that as it allows the trustee to move as expeditiously as possible to distribute funds without fear of reprisal by the beneficiaries during or after the distribution process,” Aneckstein, of DLA Piper U.S. LLP in Baltimore, stated in an email.

“If the [dissent’s] position became law, you would see far more judicial accountings, which would delay distribution to the beneficiaries and in the aggregate be economically inefficient.”

Richard L. Lyon, PNC’s attorney and a Bethesda solo practitioner, declined to comment on the decision. The beneficiaries’ lawyer, Baltimore solo John H. Doud III, did not return telephone messages seeking comment.

In its tax ruling, the court agreed with PNC — and the state — that income to a trust fund is taxable as inheritance tax.

“The assets of the trust … were only ‘probate assets’ during the administration of Marion’s estate,” Barbera wrote. “Once the administration concluded and the assets were contributed to the trust, to be administered by a trustee, the assets lost their character as ‘probate assets’ and became simply trust assets.”

The suit was brought by three children of Robert B. Kirkwood, who were remainder beneficiaries of the trust Brevard established in 1995. In 2007, when the primary beneficiary died, the trust had a fair market value of $261,306 — including $42,200 in income after principal, according to PNC.

PNC asked the beneficiaries to sign the waiver before funds would be distributed. The beneficiaries’ attorney objected and PNC made a partial distribution of $33,319.97 to each of them, but conditioned final distribution upon the signing of the release.

The beneficiaries sought a declaratory judgment that PNC’s demand was unlawful, and also that no inheritance taxes should be deducted.

The Baltimore County Circuit Court rejected those arguments and the intermediate Court of Special Appeals agreed, as did the Court of Appeals.

WHAT THE COURT HELD

Case:

Hastings et al. v. PNC Bank, NA, CA No. 109, Sept. Term 2011. Reported. Opinion by Barbera, J. Dissent by Adkins, J. Argued April 6, 2012. Filed Sept. 27, 2012.

Issues:

(1)Can a trustee request a liability waiver from remainder beneficiaries as a condition for the disbursement of funds? (2) Is income on a trust fund subject to inheritance tax?

Holding:

Yes. (1) Because beneficiaries can consent to a trustee’s breach of loyalty, a trustee may ask for such consent so long as it is valid and informed. (2) Once the estate’s administration ended, the income ceased to be “probate assets.”

Counsel:

John H. Doud III for petitioner; Richard L. Lyon for respondent.

RecordFax # 12-0927-20 (49 pages).