Opinion by BARBERA, J.
Petitioners, Barbara Hastings, R. Cort Kirkwood, and Ann K. Robinson are beneficiaries of a testamentary trust who have sued the trustee, Respondent PNC Bank, NA (PNC). Petitioners allege that PNC improperly demanded that each beneficiary execute a broad release agreement prior to distribution and misapplied the provisions of the Maryland Code, Tax-General Article,
In 1995, Marion W. Bevard executed a Last Will and Testament that directed the disposition of his estate by, in part, providing for the establishment of a trust. The will appointed Mercantile Safe Deposit and Trust Company (Mercantile) to serve as trustee and mandated that the trust be divided into four equal shares. The will granted one of those shares to Marion's sister, Rebecca "Reba" Bevard, for the duration of her life (the Trust). Following Marion's death in February 2002, his estate was probated in the Orphans' Court for Baltimore County. Pursuant to the terms of the will, the personal representative of the estate established the Trust and funded it with a $450,450.98 contribution. Under the terms of the Trust, Reba was to receive income from the Trust as well as discretionary distributions of the Trust principal, for life. Upon her death, the remainder of the Trust was to be distributed to Robert B. Kirkwood and, if he died before Reba, the remainder was to be distributed in equal shares to his descendants. The Trust, therefore, had two components: the life estate created for the
Robert B. Kirkwood predeceased Reba, who died on October 11, 2007. Therefore, upon Reba's death, the remainder of the Trust — the subsequent interest — passed to Robert B. Kirkwood's four children: Petitioners Barbara Hastings, R. Cort Kirkwood, and Ann K. Robinson; and their brother, Robert Garth Kirkwood. Because Reba was the testator's sister, the income and principal she received through the Trust was not subject to inheritance tax. See § 7-203(b)(2)(vii). Petitioners and their brother, however, inherited as collateral heirs, so they were obligated to pay ten percent (10%) of the value of the assets on the subsequent interest in the Trust.
With the inheritance tax paid, PNC began the task of distributing the Trust's assets to the beneficiaries. To that end, PNC sent to each Petitioner and Robert Kirkwood a letter that included, among other things, an accounting of the entire Trust and a "Waiver, Receipt, Release and Indemnification Agreement" (Release Agreement). The letter directed that, if the beneficiaries approved of the accounting, they should sign the attached Release Agreement and return it to PNC. The letter further explained that, "[u]pon receipt of the executed Releases from all of the [beneficiaries], we will be in a position to have the cash disbursed."
The Release Agreement provided that "the Trust has terminated; and ... the parties in interest have requested that PNC distribute the Trust assets ... without the filing, audit and adjudication of an account of PNC's administration of the Trust with a court of competent jurisdiction."
By letter dated January 2, 2008, John M. Robinson, an attorney and the husband of one of the Petitioners, Ann K. Robinson, objected on behalf of all four beneficiaries to PNC's plan for distribution of the Trust assets. The objection touched off a flurry of correspondence between Mr. Robinson and PNC during the subsequent four months. Mr. Robinson voiced two major objections on behalf of the beneficiaries: (1) the release and indemnity clause was far too favorable to PNC and the beneficiaries could not be required to execute it before receiving their distributions; and (2) PNC misinterpreted provisions of the Tax-General Article, which caused it to over-calculate its commission and the inheritance tax owed on the Trust assets. The beneficiaries therefore demanded an immediate distribution of the Trust assets and the return of overpaid monies paid to the Register of Wills on the Trust's behalf.
In response, PNC defended its calculation of the inheritance tax and explained that execution of the Release Agreement, including execution of the release and indemnity clause, was not a required step towards obtaining a distribution. PNC advised that, instead of utilizing a private agreement, under Maryland law it could petition a court for a final accounting and termination of the Trust to obtain the protection it had sought in the release and indemnity clause. The agreement and clause were offered to the beneficiaries as a matter of industry practice, "since the majority of beneficiaries prefer to terminate their trust via private agreement instead of petitioning a court." Nonetheless, PNC released a partial distribution of $33,319.97 to each of the beneficiaries, seemingly in response to their objections, while predicating final distributions upon the execution of the appropriate Receipt and Release Agreement or court approval of a final accounting.
Petitioners, contemporaneous with the partial distribution and therefore without knowledge of it, filed a three-count complaint for declaratory judgment in the Circuit Court for Baltimore County.
In Counts II and III Petitioners addressed their challenge to PNC's calculation of the distribution commission and inheritance tax. Petitioners alleged that PNC wrongly based its calculation on the $261,306.72 fair market value of the Trust, because that amount included the income earned on the $218,130.00 remaining principal that had been contributed by Marion's estate. Instead, according to Petitioners, PNC should have computed the tax solely on the amount of principal because § 7-203(j) provides that "[t]he inheritance tax does not apply to the receipt of property that is income, including gains and losses, accrued on probate assets after the date of death of the decedent." PNC's alleged failure to use the correct value resulted in a $4,313.71 overpayment in inheritance taxes and a $69.59 overpayment in the distribution commission. Count II prayed for relief declaring "that PNC must use $218,130.00 as the basis for calculating inheritance tax in this case"; Count III prayed for similar relief in the calculation of PNC's commission. Both counts prayed for monetary damages from loss of income, prejudgment interest, and attorneys' fees.
PNC timely filed an answer and a counterclaim. In the answer PNC raised a number of defenses to liability and in the counterclaim petitioned the Circuit Court to assume jurisdiction over the Trust pursuant to Rule 10-501.
After a period of discovery, the parties filed cross-motions for summary judgment. PNC filed a motion requesting summary judgment on Counts II and III, arguing that Petitioners suffered from a "fundamental misunderstanding of the Maryland Inheritance Tax scheme as it applies to Trusts and remainder interests." PNC asserted that Petitioners' reliance on § 7-203(j) was misguided because that subsection, by its own terms, applies only to "probate assets," and the funds in the Trust were not probate assets. According to PNC, those funds constituted only a subsequent interest, so § 7-210(c), establishing the method for calculating the inheritance tax on a subsequent interest, provided the only proper method for determining the value of the Trust. That subsection states: "[T]he inheritance tax on the subsequent interest shall be determined based on the value of the interest when it vests in possession." PNC argued that, because the Petitioners' interest in the remainder of the Trust vested upon Reba's death and the Trust's fair market value was $261,306.72 on the date of
PNC did not move for summary judgment on Count I because it believed that its counterclaim, asking the Circuit Court to assume jurisdiction over the Trust, "moot[ed]" that issue. PNC agreed with Petitioners that a trustee could not demand the execution of a private release and indemnity clause. PNC argued, though, that it did not demand that the Petitioners sign the Release Agreement or accede to the release and indemnity clause; it requested that the Petitioners do so in order that the Trust could be terminated expeditiously while obtaining the same protection the Trust would have received from a court's accounting. Therefore, according to PNC, the lawfulness of a demand for a release and indemnity clause became moot when PNC withdrew its request and moved, by counterclaim, to terminate the Trust by filing a petition with the Circuit Court.
Petitioners responsively moved for summary judgment on all three counts. On Count I they argued that, by demanding execution of the release and indemnity clause, PNC required the Petitioners to release and indemnify PNC against all losses and expenses that arose from the administration of the Trust. Petitioners asserted that nothing under Maryland law granted PNC the ability to demand as much, and no court in the State could grant an order that released PNC from liability and indemnified PNC for expenses as broadly as the proffered clause. In relation to Counts II and III, Petitioners reasserted that § 7-203(j), excepting the inheritance tax from "receipt of property that is income ... accrued on probate assets after the date of death of the decedent," applied to the Trust. As a result, $218,130.00 was the proper amount on which the inheritance tax should have been calculated.
After a hearing, the Circuit Court issued an order assuming jurisdiction of the Trust. By the same order, the court also granted PNC's motions on Counts II and III and entered judgment on those counts in PNC's favor, agreeing with PNC's interpretation of §§ 7-203(j) and 7-210(c). The court denied Petitioners' motion on all counts and specified in its order, in relation to Count I, that Petitioners "were not required to sign any [Release Agreement]." The court, however, did not enter judgment in favor of either party on Count I, reasoning that there remained a question of whether Petitioners lost income because of PNC's request.
PNC subsequently filed with the court an inventory and final accounting of the assets in the Trust. PNC also filed a Petition for Attorney's Fees and a Petition for Court Approval of Final Account and Termination of Trust and for Discharge of PNC Bank, N.A. as Trustee.
Because no judgment had been entered on Count I, Petitioners renewed their Motion for Summary Judgment as to Count I. After a second hearing, the Circuit Court granted in part PNC's Petition for Attorney's Fees, awarding PNC $20,000 in fees, and issued an order terminating the Trust, directing distribution of the Trust assets, and discharging PNC from further responsibility following the distribution. Finally, the court denied Petitioners' renewed motion for summary judgment, specifically finding that PNC requested, rather than "required," that the release and indemnity clause be executed. Because the court could not "find ... any Maryland Law against a fiduciary requesting a [Release Agreement] as was done in this case," the court entered judgment in favor of PNC on Count I and dismissed the complaint with prejudice.
In this appeal, the Circuit Court entered summary judgment in favor of PNC on Counts I and II
Petitioners' challenge to the Court's judgment in PNC's favor on Counts I and II are grounded in purely legal arguments, to which we accord a non-deferential standard of review.
Petitioners' first challenge relates to the Release Agreement that PNC sought to have Petitioners and their brother execute. They focus on the following clause in the Agreement, which we restate for clarity and ease of reference:
(Emphasis added by Petitioners.)
Petitioners argue that PNC demanded unanimous execution of the release and indemnity clause "as a condition precedent to any distribution," and such a demand "violates the Maryland law of trusts by
Generally, to determine whether a trustee wields lawful authority to take certain actions in connection with trust matters we look to three different sources: (1) the instrument that creates the trust; (2) applicable statutes; and (3) the common law. See ET, § 15-102(b)(2); see also Restatement (Third) of Trusts § 85 (2007)
Preliminarily, nothing in the testator's will precluded the trustee from exercising whatever authority the trustee was already allowed by law. The law of Maryland, moreover, permits a trustee to request a release, and Petitioners do not argue the contrary. As for Petitioners' assertions of breach of fiduciary duty and overbreadth, both fall short.
A trustee owes to the beneficiaries of a trust duties of administration, prudence and loyalty. The trustee's duty of loyalty — as the duty is known in this state — is well-established in the common
Of course, it is equally well-established that the restrictions associated with the duty of loyalty are not absolute. See, e.g., Goldman v. Rubin, 292 Md. 693, 705-06, 441 A.2d 713, 720 (1982); Turk v. Grossman, 176 Md. 644, 666, 6 A.2d 639, 650 (1939). A trustee may engage in an otherwise-prohibited course of action if authorized "by statute, by the instrument creating the trust, or by the court having jurisdiction of the subject matter." Goldman, 292 Md. at 706, 441 A.2d at 720 (quoting Harlan v. Lee, 174 Md. 579, 593, 199 A. 862, 869 (1938)); accord Restatement, supra § 78 cmt. (a); 3 Austin Wakeman Scott et al., Scott and Ascher on Trusts, § 17.2 at 1084 (5th ed.2007). Likewise, and important for the purposes of this appeal, a trustee may engage in a self-interested course of action so long as the beneficiaries provide valid, informed consent. Goldman, 292 Md. at 706, 441 A.2d at 720; Grossman, 176 Md. at 666, 6 A.2d at 650; accord Restatement, supra § 78 cmt. (c)(3) ("A particular transaction that would otherwise violate a trustee's duty of loyalty may be authorized by consent properly obtained from or on behalf of all of the trust beneficiaries.").
It almost goes without saying that, if the law countenances consent to what would otherwise be a breach of the duty of loyalty, the law also must countenance requests for consent. If not, then a trustee would be unable to solicit consent without first breaching the duty. Put simply, one must be able to ask for permission in order to obtain it. It is easy to see, then, that PNC could not have breached its duty of loyalty in this case merely by asking Petitioners and their brother to execute a reasonable release and indemnity clause.
The terms of the release and indemnity clause, moreover, are not so broad and one-sided as to place impermissibly PNC's interests before those of Petitioners. The clause, as we read it, contains two terms: First it "[r]eleases" PNC, "in its corporate capacity and as Trustee," from "any claims," "demands," and "causes of actions" arising from the administration of the Trust; and second, it requires that
Maryland Rule 10-501 authorizes a fiduciary or any "interested person"
Moreover, a trustee is generally entitled to indemnity for expenses incurred reasonably and properly in the course of administering a trust. Restatement, supra § 38(2). Maryland law provides explicitly for this right to indemnification, mandating that "a trustee ... [i]s entitled to reimbursement from trust property for reasonable expenses incurred in the performance of fiduciary services." ET § 14-405(m)(1). Satisfaction of the trustee's right to indemnification can be accomplished by lien; that is, the trustee gains a security interest in the trust's assets upon incurring reasonable and proper expenses on the trust's behalf. 4 Scott, supra § 22.1.1 at 1627. This security interest takes priority over the interest of the beneficiaries, so "[t]he beneficiaries are not entitled to distribution of the trust property until the trustee has been indemnified." Id. at 1629. Finally, the amount of indemnification to which a trustee is entitled can be "enlarged or diminished by agreement between the trustee and the
All this is to say that, before PNC presented the Release Agreement to Petitioners and their brother, PNC was legally entitled to some measure of protection and indemnity. With or without the consent of Petitioners, PNC was free under Rule 10-501 to begin judicial proceedings to audit and terminate the Trust. Those proceedings eventually would have resulted in a court order that would have barred, as res judicata, all matters disputed and open to dispute in settling the Trust account. Moreover, PNC was entitled to indemnification for "reasonable expenses incurred in the performance of fiduciary services," ET § 14-406(m)(1), before distribution of the Trust's corpus took place. No matter what occurred in connection with the Release Agreement, then, Petitioners, in this narrow and specific context, would have ended up in a position where their interest in the distribution of the Trust's funds was subordinated to PNC's interest in protection from legal liability and indemnification for costs.
Against this backdrop, the terms of PNC's release and indemnity clause are not a radical departure from the common law protection and statutory right to which PNC already was entitled. To be sure, the release and indemnity clause sought protection for PNC in its role as trustee and "in its corporate capacity."
It is also worth noting that, no matter the terms of the clause itself, the Release Agreement could not protect PNC from liability arising from fraud, material mistake or irregularity on PNC's part. See Allen v. Ritter, 424 Md. 216, 229-30, 35 A.3d 443, 450-51 (2011). Had PNC presented a fraudulent or inaccurate accounting to a court, that court's order approving the accounting, distribution, and termination of the trust would not have stood as a res judicata bar to those matters fraudulently or inaccurately represented. See Restatement, supra § 83 cmt. (c) ("Because a trustee has an affirmative duty to disclose relevant information, a matter involving sensitive issues must be revealed in the accounting with sufficient clarity to invite attention to the issue if the court order is to protect the trustee as a matter of issue preclusion."); see also, 4 Scott, supra § 23.1 at 1645 ("Of course, a trustee
We therefore hold that the Circuit Court correctly denied Petitioners' motion for summary judgment as to Count I. PNC's request for execution of the release and indemnity clause was only that — a request for consent to take a certain course of action. Moreover, PNC's request, though expanding upon an interest already possessed, was not in its terms so one-sided as to place impermissibly its own interests ahead of those of Petitioners. PNC's action, not prohibited by statute, was likewise lawful under the common law. The Circuit Court properly entered judgment in PNC's favor on Count I of the complaint.
We turn next to Petitioners' challenge to the Circuit Court's grant of summary judgment in favor of PNC on Count II of the complaint, which assailed the method used by PNC to calculate the amount of inheritance tax due the Register of Wills prior to distribution. On this issue the parties are generally in accord. They agree that Petitioners are collateral relatives of Marion Bevard, owing a ten percent inheritance tax on the value of the Trust assets.
The parties part company, though, on the value of the assets upon which the tax rate should be calculated. Petitioners argue that the tax should be assessed on the $218,130.00 that constitutes the remainder of the original contribution from Marion's estate, while PNC asserts that $261,306.72, which includes income accrued on that contribution, is the correct figure. Understanding how each party arrives at its respective figure necessitates a brief explanation of the application of inheritance taxes in Maryland.
Section 7-202 of the Tax-General Article imposes a ten percent inheritance tax "on the privilege of receiving property that passes from a decedent and has a taxable situs in the State." See § 7-204(b) ("The inheritance tax rate is 10% of the clear value of the property that passes from a decedent."). The tax applies broadly to property passing by devise, including property held in trust. See § 7-201(d)(1)(i). A devisee need not hold a vested, absolute interest in the devised property for the inheritance tax to apply; by law, the inheritance tax is applicable to a range of future and non-absolute interests. See §§ 7-208, 7-209. Pertinent to this case, the inheritance tax applies to property in which a devisee holds only a "subsequent interest," which is defined as "a vested or contingent remainder, executory or reversionary interest, or other future interest that is created by a decedent and will or may vest in possession after the death of the decedent." § 7-201(e)(1). Because operation of Marion's will granted the beneficiaries a remainder interest that vested only upon the deaths of Reba Bevard and Robert Kirkwood, Petitioners and their brother each held only a subsequent interest in the assets of the Trust.
Taxation of a subsequent interest proceeds differently than taxation of a present possessory interest because a subsequent interest does not vest into possession when it is created. Under Maryland law, a subsequent interest can be taxed by either of two methods. A personal representative administering an estate that contains a subsequent interest may prepay the inheritance tax or defer payment. Prepayment is accomplished when the personal
In terms of the present case, prepayment could have occurred at some reasonable time after Marion's death in 2002, when Marion's estate was administered and the Trust was established. Deferred payment could only happen after Reba's death in 2007, when Reba's life estate terminated and the beneficiaries' remainder interest vested in their possession. The personal representative of Marion's estate opted not to prepay the tax upon creation of the Trust. Petitioners, moreover, filed no application to prepay. They, therefore, necessarily chose to defer payment. This choice is important for a number of reasons, chief among them is that the value used for the calculation of the inheritance tax differs depending on whether a devisee prepays or defers payment.
Pursuant to § 7-210, the general rule for calculating inheritance tax on a subsequent interest is as follows: after a personal representative elects when to pay, the inheritance tax payment is made in the amount of ten percent of the value of the subsequent interest at the time of the payment. This is because Maryland law provides that for inheritance tax purposes, a subsequent interest is valued at the time of the payment, § 7-210(a)(1) & (c)(1)(i), and the tax amount is based on that timely value, § 7-210(a)(2) & (c)(1)(iii). In practice, this means that, if a personal representative prepays, the personal representative pays a ten percent tax on the value of the interest at the time of the devisor's death. More important, if a personal representative defers payment, the remainderman pays a ten percent tax on the value of the interest when it vests, regardless of whether the interest has appreciated or depreciated from its original valuation, Shaughnessy v. Perlman, 198 Md. 619, 626, 85 A.2d 38, 41 (1951), because the inheritance tax is a tax on "the estate as it passes to the beneficiary, and not merely ... the estate as it passes from the person who dies `seized and possessed thereof.'" Lilly v. State, 156 Md. 94, 104-05, 143 A. 661, 665 (1928) (quoting Safe Deposit & Trust Co. v. State, 143 Md. 644, 648, 123 A. 50, 51 (1923)).
Petitioners argue that PNC miscalculated the amount of inheritance tax due on the assets of the Trust. Specifically, they argue that, in addition to § 7-210, § 7-203(j) applies to the taxation of subsequent interests. That provision states: "The inheritance tax does not apply to the receipt of property that is income, including gains and losses, accrued on probate assets after the death of the decedent." Petitioners thus argue that, when a devisee chooses to defer payment, the devisee pays inheritance tax on the value of the interest at the time it vests less any income gained or lost during the running of the prior estate. In other words, according to Petitioners, the value of a vested subsequent interest is derived only from the property that was devised from the devisor to the devisee and not from any income that may have accrued during the intervening estate. Consequently, they assert, PNC should have calculated the inheritance tax on the $218,130.00 value of the beneficiaries' interest that constituted property devised from the estate, instead of using the $261,306.72 figure that included the principal plus accrued income.
In support of their reading of the Tax-General Article, applying § 7-203(j) to the taxation of subsequent interests, Petitioners
In support of the former assertion, Petitioners rely on a treatise definition of "probate assets" that includes "remainder interests." In support of the latter assertion, Petitioners argue that the structure of § 7-210 itself provides for what they claim is the proper result.
PNC disagrees with Petitioners' reading of the Tax-General Article, as does Amicus Curiae State of Maryland.
PNC provides the better interpretation of the pertinent provisions. The primary goal of statutory interpretation is to effectuate the intent of the legislature. Allen, 424 Md. at 223, 35 A.3d at 446. The task of interpretation begins with an examination of the plain language of the statute. Id., 35 A.3d at 446. "A plain reading of the statute assumes none of its language is superfluous or nugatory." Newell v. Runnels, 407 Md. 578, 640, 967 A.2d 729, 766 (2009) (quoting Bost v. State, 406 Md. 341, 350, 958 A.2d 356, 361 (2008)). We do not add or delete words from an unambiguous statute, nor do we entertain a forced or subtle interpretation that extends or limits a statute's meaning. Id. at 640-41, 967 A.2d at 766. "When a statute's plain language is unambiguous, we need only to apply the statute as written, and our efforts to ascertain the legislature's intent end there." Carven v. State Ret. & Pension Sys., 416 Md. 389, 407-08, 7 A.3d 38, 49 (2010) (quoting Crofton Convalescent Ctr., Inc. v. Dep't of Health & Mental Hygiene, 413 Md. 201, 216, 991 A.2d 1257, 1266 (2010)).
The first defect in Petitioners' interpretation is the definition Petitioners assign to "probate assets," as that term is used in § 7-203(j). We agree with the State, amicus in this appeal, that income earned by a trust during the life tenancy of a beneficiary is not income "accrued on probate assets." As the State points out, neither the Tax-General Article nor the Estates and Trusts Article explicitly defines "probate assets," but ET § 1-301 provides insight into the term's meaning. That section, in outlining the type of property subject to the provisions of the Estates and Trusts Article, provides that "[a]ll property of a decedent shall be subject to the estates of decedents law, and upon the person's death shall pass directly to the personal representative, who shall hold the legal title for administration and distribution." ET § 1-301(a). We can surmise then, that whether an asset is a "probate asset" is linked inexorably to whether legal title to that asset is held by a personal representative for administration and distribution.
We agree with PNC and the State that the personal representative of the estate did not hold legal title to the assets of the Trust after Reba's life estate was established. The personal representative only held title to those assets during the administration of the estate. The assets of the Trust, therefore, were only "probate assets" during the administration of Marion's estate. Once the administration concluded and the assets were contributed
The assets also could not qualify as "probate assets" because such a reading of § 7-203(j) would conflict with the mandates of § 7-210. As our colleagues on the Court of Special Appeals illustrated, Petitioners' reading of § 7-210 forces an interpretation that does not comport with the statute. Specifically, § 7-203(j) can only be made to harmonize with § 7-210 if the latter, parallel to § 7-203(j), excepts income from the calculation of inheritance tax on subsequent interests. In order to read § 7-210 as doing that, one would need to accept that § 7-210(a)(2) governs the determination of inheritance tax when the personal representative defers payment. There is no conceivable support for such a contention.
Subsections (a) and (c) of § 7-210 are distinct subsections. Subsection (a) governs the valuation and calculation of inheritance tax for personal representatives who elect to prepay, while subsection (c) does the same for those who defer payment. Subsection(c)(1)(i) begins by directing that "the whole property shall be valued when the subsequent interest vests in possession." Subsection (c)(1)(ii) then adds that "the value of the subsequent interest shall be valued when it vests in possession in the manner stated in subsection (a)." The last six words of that subsection — "in the manner stated in subsection (a)" — direct the reader to the provision in subsection (a)(1) that prescribes how a subsequent interest is valued ("subtracting the value of all preceding and concurrent interests from the value of the whole property"). Contrary to Petitioners' argument, those six words do not direct the reader to subsection (a)(2), which describes how the inheritance tax is calculated.
Instead, § 7-210(c)(1)(iii) provides explicitly for the determination of inheritance tax when a personal representative defers payment. That subsection states that "the inheritance tax due on the subsequent interest shall be determined based on the value of the interest when it vests in possession and on the relationship of the original decedent to the person in whom the interest ultimately vests in possession." (Emphasis added). It is clearly intended to be the sole provision governing deferred payment, never sharing that duty with § 7-210(a)(2). Simply put, if, as Petitioners argue, § 7-210(c)(1)(ii) directed that § 7-210(a)(2) governed the calculation of inheritance tax for a personal representative who deferred payment, it would directly conflict with and render nugatory the provision in subsection (c) that explicitly mandates how to calculate inheritance tax after deferring payment. Reading § 7-210(c)(1)(ii) as Petitioners do essentially reads § 7-210(c)(1)(iii) out of the law, which we are not permitted to do.
Only § 7-210(c)(1)(iii) was intended by the General Assembly to govern the determination of the amount of inheritance tax owed on a subsequent interest when a personal representative chooses to defer payment. Under Petitioners' interpretation, § 7-210 cannot be harmonized with § 7-203(j). Section 7-203(j) excepts income from the inheritance tax, and we have repeatedly interpreted the language of § 7-210(c)(1)(iii) as including income in the inheritance tax calculation. See Mercantile-Safe Deposit & Trust Co. v. State, 264 Md. 455, 464, 287 A.2d 502, 507 (1972) (noting that when payment is postponed under Article 81 § 161, which is now § 7-210(c), the remainderman "pays a tax on the value of the interest at the time it comes into possession"); Shaughnessy, 198
PNC correctly included the income that accrued on the assets of the Trust in its valuation of the Trust for inheritance tax purposes. The Circuit Court properly entered judgment in PNC's favor on Count II.
In conclusion, PNC's request for execution of the Release Agreement did not contravene Maryland common law. The request was simply that — a request — and it did not ask for a reorientation of the parties' interests. It only asked to redefine the scope of protection and indemnity to which PNC was already entitled, in return for a less costly and more efficient distribution of trust funds. Moreover, PNC was correct in its calculation of the inheritance tax owed on the assets of the Trust. Section 7-203(j), excepting income on "probate assets" from the inheritance tax equation, is not applicable to the tax scenario presented here. The Circuit Court therefore was legally correct in granting summary judgment in favor of PNC.
BELL, C.J., GREENE and ADKINS, JJ., Dissent.
ADKINS, J., Dissenting.
Just last term, this Court reiterated that "in no state are trustees, whether individuals or corporations, held to a stricter account than in Maryland." D'Aoust v. Diamond, 424 Md. 549, 605, 36 A.3d 941 (2012) (citation and quotation marks omitted). The Majority's opinion in this case is a sharp departure from that principle. The Majority sees "material" differences between the protection the trustee sought under a release and indemnification agreement and the protection it could obtain from the court. Despite that, the Majority approved this practice. This 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." Maj. Op. at 29, 54 A.3d at 728.
Alternatively, the Majority holds that, even if the release and indemnification agreement breached the trustee's duty of loyalty, a beneficiary may always consent to a breach of trust. In so holding, the Majority ignored the issue of whether the trustee provided the beneficiaries with full and complete information, which is required in any dealings between trustees and beneficiaries, and concluded all too swiftly that the beneficiaries in this case were in a position to give a "valid, informed" consent.
No one disputes that it is PNC's common practice to seek release and indemnification agreements such as the one at issue in this case. All along, PNC has characterized such agreements as "customary" and "a prevalent practice." In this case, the preamble to the Release and Indemnification Agreement ("Agreement") recited that the Beneficiaries "requested" trust fund distribution "without the filing, audit and adjudication" of the final accounting by a court, when in fact they had not.
No one denies that the Agreement would give PNC broader protection from liability than a court order. The Circuit Court noted that "it must have been frustrating to have this demand for the extremely broad Waiver Release and Indemnity Agreement that was used...."
The Majority acknowledges two aspects in which the Agreement went too far. First, the Agreement "sought protection for PNC in its role as trustee and `in its corporate capacity.'" Maj. Op. at 29, 54 A.3d at 728. The Majority admits that this clause would allow PNC to "effectively use its position as trustee to obtain a release for its securities division, which would appear at odds with the duty of loyalty."
The dichotomy between the Majority's perception of the "material" differences and its holding is striking. The Majority minimizes the differences by later characterizing them as "differences ... of degree rather than kind," id. at 29, 54 A.3d at 728, but this rationalization is unconvincing. In my view, these two "material" differences should have led the Court to conclude that the Agreement was overly broad and entitled the Beneficiaries to declaratory relief in their favor.
Supplementing the two "material" differences noted by the Majority, I add a third, arguably the most significant one: the indemnification of PNC from "any and all liabilities, relating in any way to its administration of the Trust." Unlike a court order approving trust funds distribution, which would have discharged PNC from liability to the Beneficiaries, but not third parties; and unlike the limited common-law indemnity right, this broad indemnification clause shifts all liability for the trustee's actions to the beneficiaries, even if the liability arose out of the trustee's own negligence. This shift is significant because a trustee's negligence is a risk it assumes in undertaking the often-lucrative
The Majority, however, fails to see this third material difference by focusing exclusively on the release clause and whitewashing the indemnification clause, reading it in such a way that it only pertains to
The Majority, however, dilutes the indemnification clause into something it considers palatable by redacting the terms "any claims," "demands," and "causes of action" and limiting it to "surcharges," "costs," and "expenses."
Under common law, upon full disclosure by the trustee, a beneficiary generally may agree to release a trustee from liability for "breach of trust" and "thereby extinguish such cause of action as may exist." George G. Bogert & George T. Bogert, The Law of Trusts and Trustees § 943 (rev.2d ed.1981). Similar to a release, when a trustee or another interested party petitions a court for trust fund distribution under Maryland Rule 10-501, the court's approval of the final accounting "renders res judicata matters which were open to dispute, whether or not actually disputed." See also Restatement (Second) of Trusts § 220 cmt. a (1959). What this means for our purposes is that once the court approves a final accounting, a beneficiary is barred from suing the trustee on a claim that was or could have been addressed by the court in the first instance. See Anne Arundel County Bd. of Educ. v. Norville, 390 Md. 93, 106-07, 887 A.2d 1029, 1036-37 (2005).
These third-party claims may be significant, too. The Restatement (Second) of Trusts gives examples:
Restatement (Second) of Trusts § 247 cmt. d.
As these examples illustrate, under common law, a trustee's right to indemnification is limited. Indemnity for liability upon a contract with third parties or for liability in tort to third persons is only available to a trustee if the liability "was properly incurred" and the trustee "was not personally at fault in incurring the
Not so for PNC under the Agreement. The Agreement sought to expand PNC's protection — at the Beneficiaries' expense — to include "any and all losses, claims, demands [and] causes of action." In this regard, the Agreement is impermissibly broad. I see no justification for shifting liability for potential misdeeds of the trustee over to the beneficiaries.
The Majority brushes off the Trustee's over-reaching, preferring instead to focus on the doctrine that "a trustee may engage in self-interested course of action so long as the beneficiaries provide valid, informed consent." Maj. Op. at 26, 54 A.3d at 726 (citations omitted). In supporting its conclusion that a valid and informed consent would have negated a breach of the duty of loyalty, the Majority quotes comment c(3) to Section 78 of the Restatement (Third) of Trusts, which, inter alia, states: "A particular transaction that would otherwise violate a trustee's duty of loyalty may be authorized by consent properly obtained from or on behalf of all of the trust beneficiaries." Maj. Op. at 26, 54 A.3d at 726. To the Majority, PNC's efforts to get the Beneficiaries to sign the Agreement are "at bottom, [an] arm's length request to exchange increased protection and indemnity for a quicker and less costly distribution of trust funds." Id. at 29, 54 A.3d at 728. The Majority comforts itself with the idea that the Beneficiaries "retained the choice to accede to that request, ... negotiate one not as broad in its protection of PNC, or simply reject it...." Id.
The Majority's analysis of consent, however, misses an important point: a beneficiary cannot properly consent to a breach of fiduciary duty without having full and complete information relating to the breach.
This is particularly true when the trustee has superior knowledge of the transaction at issue, such as when the trustee is an attorney for the beneficiaries and is "experienced in the law." Id. In those instances, "[t]ransactions for the personal advantage of a trustee ... are even more improper than similar dealings between laymen," and "[t]o sustain such a tranaction [sic] the trustee must show that there was a full and complete disclosure on his part of all the facts essential to an intelligent understanding by the beneficiaries of
PNC did not provide the Beneficiaries with full information explaining their rights or the consequences of their signing of the Agreement.
Furthermore, PNC's demanding tone demonstrates that PNC failed to give the Beneficiaries "full and complete information" or explain that they were free to reject the Agreement's sweeping provisions and go to court. In at least two communications with the Beneficiaries, PNC stated that — unless the Beneficiaries executed the Agreement — it would not be "in a position" to distribute the trust funds. For instance, in the closing line of the letter accompanying the Agreement, PNC stated: "Upon receipt of the executed Releases from all of the distributees, we will be in a position to have the cash disbursed." (Emphasis in original.) Even the Circuit Court, which ultimately held that there was no "demand,"
Unlike the Majority, I do not find comfort in the Beneficiaries' purported ability to reject a disadvantageous proposal. As a fiduciary — and especially as a fiduciary with superior knowledge on the transaction in issue — PNC was only permitted to engage in negotiations of an agreement advantageous to it upon full and complete disclosure to the Beneficiaries of all relevant information. See McDaniel, 206 Md. at 220, 111 A.2d at 210. This record reveals no such disclosure.
For these reasons, I dissent.
Chief Judge BELL and Judge GREENE have authorized me to say that they join this dissenting opinion.
Section § 7-210 provides:
Section 5.2.D.(3), however, is applicable, by its own terms, only to distributions made to minors, disabled beneficiaries, and for education or medical care. It is not applicable to distributions like the one at issue in the present appeal and therefore not applicable to resolution of this case.
In regards to applicable statutes, we have interpreted ET § 9-111 to "allow[] a personal representative to obtain a release from legatees even when acting pursuant to the distribution order of an orphans' court, and such a court may order those legatees to sign the release when the personal representative so requests." Allen v. Ritter, 424 Md. 216, 231, 35 A.3d 443, 452 (2011). ET § 9-111, though, by its own terms, applies only to the power of a personal representative making a distribution from an estate. There exists no comparable subsection in the Maryland Code applicable to trustees making a distribution from a fiduciary trust.
