Maryland Wills & Trusts: December 2005 Summary

Legal Developments

Increased Federal Tax Exemptions (effective January 1, 2006)

Applicable Exclusion Amount: $2,000,000

GST Exemption Amount: $2,000,000

Maryland ILIT Invalidated

The U.S. District Court for the Eastern District of Virginia, applying Maryland law, held that the trustee of an irrevocable life insurance trust did not have an insurable interest in the life of the insured settlor.  Chawla v. Transamerica Occidental Life Insurance Company, Civil Action 03-1215, 2005 WL 405405, E. D. Va. Feb 3, 2005.  The Court held that under the unusual facts, the insurance trust lacked such interest, which is required by Maryland Insurance Law 12-201(b).  The trust was held to lack "a lawful and substantial economic interest in the continuation of the life of the insured, under Maryland §12-201(a)(2)(iii).  [There is no Maryland statutory provision under 12-201(b), recognizing, ipso facto, the insurable interest of a life insurance trust or its trustee.]  The Court did not consider the interest of the trust beneficiary.  Unless and until the Maryland law on insurable interests adopts such a provision explicitly recognizing the interest of a life insurance trust or its trustee as having an insurable interest, without an independent factual demonstration of the trust's economic interest in the life of the insured, there remains a substantial issue as to whether any new or existing Maryland irrevocable trust can rely upon payment of life insurance proceeds on the insured's life pursuant to the terms of the trust.  See Law & Strategy at Question 3 for further discussion.  The full text of the Chawla opinion is available in Resources.  Special warning at Question 3 if ”Irrevocable life insurance trust” chosen.

New Option to Grant Designated Individual the Power to Nominate a Co-personal Representative or Successor Personal Representative.

Sections 5-104 and 5-105 of Estates and Trusts Article of the Maryland Code were amended in 2005 to permit the testator to grant a designated individual the power to nominate a co-personal representative or successor personal representative.  Such power could, for example, be given to a sole personal representative, such as a surviving spouse, in order to give flexibility in the designation of a co-personal representative, based upon evaluation of the prospective co-fiduciary after the decedent's death, rather than when the Will is executed.  Similarly, the sole personal representative may be in a better position to name a successor after the testator's death.  Question 770; New Questions 771 through 774.

New Option to Authorize UTMA Custodian to Transfer Property to a Qualified §2503(c) Trust

Section 13-214(b) of the Maryland Estates and Trusts Law was added to the Uniform Transfers to Minors act in 2005.  It permits the donor of an UTMA account to expressly authorize the custodian for a minor to transfer the custodial property to a qualified trust of which a minor is a sole beneficiary, without a court order, if the trust complies with §2503(c) of the Internal Revenue Code.  Such trust must terminate at age 21.  However, the trust instrument can give the beneficiary the option of continuing the trust.  That option is a choice not previously available under Maryland's UTMA, and is helpful where the amount passing to the UTMA account is substantial and there is concern about forcing the UTMA funds into the hands of a 21 year old.  New Question 881.

On August 22, 2005, the IRS issued eight new Revenue Procedures Addressing the Use of Unitrusts in Charitable Remainder Trusts

These new documents do not change any specific laws, but are a welcome guide for counsel drafting charitable remainder unitrusts.  The full text is provided in Revenue Rulings and Procedures in Resources in the Maryland Wills & Trusts title. They are briefly summarized as follows:

1.  Rev. Proc. 2005-52; 2005-34 IRB 326 One Life Unitrust

2.  Rev. Proc. 2005-53; 2005-34 IRB 339 Term of Years Unitrust

3.  Rev. Proc. 2005-54; 2005-34 IRB 353 Two Life Separate Property Unitrust

4.  Rev. Proc. 2005-55; 2005-34 IRB 367 Two Life Joint or Community Property Unitrust

5.  Rev. Proc. 2005-56; 2005-34 IRB 383 Test. One life unitrust

6.  Rev. Proc. 2005-57; 2005-34 IRB 392 Test. Term of Years Unitrust

7.  Rev. Proc. 2005-58; 2005-34 IRB 402 Test. Two Life Separate Property Unitrust

8.  Rev. Proc. 2005-59; 2005-34 IRB 412 Test. Two Life Joint or Community Property Unitrust.

Rev. Proc. Charitable Remainder Trusts: Question 1.

General Review of Federal Tax Issues by Carlyn McCaffrey and John C. McCaffrey

In the course of developing Lawgic’s New York Wills & Trusts the authors have consulted extensively with Carlyn McCaffrey and John C. McCaffrey.  [For the McCaffreys’ professional biographies see Help > About Our Authors or the Lawgic web site.]  This has led to the addition of new options, clarification of commentary, and the modification of document language primarily in those portions of the program dealing with federal tax issues. 

New Option to Specify treatment of an IRD Gift

You may now specify whether income in respect of a decedent will be treated as a pecuniary gift or as a fractional gift.  New Question 278.

New Options for Five and Five Provisions

You may now specify a “short form” or “long form” five and five provision.  The short form is basically our standard provision from previous releases.  The long form allows payments during the year as advancements against an annual amount with provision for adjustments at the end of the year.  You may also specify whether or not to delay withdrawal rights for fifteen months after death to avoid interfering with any QTIP election.  Questions 327, 331, 403, 407, 450, 454, 501, 505, 545 and 549.

New Option to Specify Trustee Removal Power on Reaching Age

You may now specify whether a single beneficiary for whom a trust has been created shall have the power to remove the trustee upon reaching a certain age.  You may also specify that exercise of this power requires the appointment of an Independent Trustee to serve as successor.  Questions 760 and 761.

New Will Contest Provision

You may include a “No Contest” clause in a Will and specify whether it applies only to the contesting beneficiary or to issue of the beneficiary as well.  New Question 902.

New Option to Defer GRAT Annuity Payments

You may now allow annuity payments to be deferred for up to 105 days.  Note that this deferral is permitted by Treas. Reg. §25.2702-3(b)(4), but there is no guidance what impact, if any, such a provision would have on the valuation of the Grantor's retained interest in the GRAT.  See Law & Strategy.  Question 125.

New Option to specify GRAT Annuity Calculation Method

You may now specify an annuity percentage or use a formula which specifies the total annuity payments as a percentage of the initial FMV of the trust assets.  New Questions 127 and 128.

Date of Will Now Appears on Cover Page

If you leave the day of execution unspecified (e.g. “December ___ 2005”) remember to fill in the actual date on the cover page as well as on the signature page at the time of execution.

Question Tag Expanded for “No Spouse or at SS death: Allocate GST?”

The question tag is the abbreviated version of each question, which is shown in the navigator and at the top of the screen when the question is viewed.  The previous tag was “No Spouse: Allocate GST?”  The expanded tag makes clear that this question applies both if there is no spouse and at the death of a surviving spouse.  Question 302.

"How To" Expanded for GST Exempt Trusts and Special Trusts

“How To” is the first choice at Question 1.  It provides useful instructions and helpful suggestions on many areas of Lawgic use.  One of the most frequently consulted options is “Create various trusts on death.”  The sections on “GST Exempt Trusts” and “Special Trusts” have been expanded for greater clarity.  Question 13.

Upgraded User Interface

Lawgic's user interface now incorporates the latest version of Java, which improves both stability and appearance. You will notice a new title initialization progress bar as answer files are loaded.  If your mouse has a wheel you will now be able to use the wheel to scroll.  More questions are now visible at one time in the Navigator.  In general you will see a greater consistency of font and dialog box appearance.  Before Lawgic is launched the system is checked for misplaced or corrupted files, and the user is alerted if corrections are needed. The consistency and function of accelerator and shortcut keys has also been improved.  To make sure that all your answers are saved the Tab key has been disabled where multiple questions appear on the same screen – to advance to the next question you should either click Continue or place the cursor in the next field with the mouse.  Finally, there is now a direct link to the Lawgic web site on the menu bar labeled Connect.