Understanding the Maryland Trust Act: Discretionary Trusts, Creditor Protection, and Drafting Pitfalls

The Maryland Trust Act (MTA) offers one of the strongest frameworks in the country for protecting beneficiaries of discretionary trusts. If you’re an estate planning attorney, financial advisor, or savvy family member involved in trust administration, understanding how Maryland defines and governs these trusts is essential.

This post breaks down the key provisions, planning implications, and real-world concerns, especially when a beneficiary or trustee moves out of state.

✅ What Is a Discretionary Trust?

Under Md. Code, Estates & Trusts § 14.5-103(e), a discretionary trust is one in which the trustee has discretion to make distributions, whether or not that discretion is guided by a standard (like HEMS—Health, Education, Maintenance, and Support).

The MTA recognizes two primary types:

1. Pure Discretionary Trust

   • Trustee has complete discretion, with no standards required.

   • Example: “Distributions shall be made in the trustee’s sole discretion as the trustee deems advisable.”

2. Discretionary Support Trust

   • Trustee has discretion, but within the bounds of a standard like HEMS.

   • Example: Trustee may distribute assets for the beneficiary’s health, education, support, and maintenance.

⚖️ Trustee Powers and the “Reasonableness” Standard

The MTA makes clear that trustee discretion is never absolute. Md. Code § 14.5-814(b) requires all discretionary decisions to be objectively reasonable under the circumstances, even if the trust uses terms like “absolute” or “uncontrolled.”

Contrast this with states like Virginia or D.C., which follow the Uniform Trust Code and apply a subjective “good faith” standard, often looking for bad faith rather than unreasonableness.

👤 When the Beneficiary Is Also the Trustee

Under § 14.5-504(d), if the beneficiary also serves as trustee, their distribution powers are automatically limited to the HEMS standard. This:

• Avoids estate tax inclusion

• Maintains creditor protection

• Keeps the trust classified as discretionary

🛡️ Creditor Protection: One of Maryland’s Strongest Assets

Discretionary trusts in Maryland provide significant shielding from creditors , as long as the assets remain in trust.

Key protections include:

• § 14.5-502 & § 14.5-504: Creditors cannot compel distributions — they must wait until the beneficiary receives them.

• § 14.5-508: Even exception creditors (like those owed child support, alimony, or taxes) cannot reach discretionary trust assets.

• Beneficiaries do not own a property interest in discretionary trust assets, so they cannot assign or transfer them.

🧾 Crummey Withdrawal Rights & Creditor Risk

If the trust includes limited Crummey rights (e.g., 30-day withdrawal periods), those are typically safe from creditor attachment.

However, unlimited withdrawal rights (where the beneficiary can access all trust assets at any time) eliminate creditor protection entirely. Be careful here: flexibility often comes at the cost of vulnerability.

🚫 Self-Settled Trusts: Not Allowed in Maryland

Maryland does not permit Domestic Asset Protection Trusts (DAPTs). Under § 14.5-511, if the settlor is also a beneficiary and contributes to the trust, their contributed assets are not protected from creditors.

States like Delaware, Nevada, and Virginia do allow self-settled spendthrift trusts, but Maryland explicitly does not.

🌐 What If the Beneficiary Leaves Maryland?

This is one of the biggest long-term concerns for Maryland-based trusts. Even if the trust is governed by Maryland law (§ 14.5-107), that may not control if:

• The beneficiary or trustee moves

• The trust is administered in another state

• The assets are held elsewhere

Most UTC jurisdictions will apply their own standards, which may be less protective. Including a Maryland governing law clause, Maryland situs, and Maryland-based trustee can help — but not guarantee — that protections remain intact.

⚠️ A Word About Old Case Law: Kakamezi

The Kakamezi case (unpublished) wrongly ruled that discretionary trust assets could be treated as marital property in divorce. This result would not be possible today under the MTA, which clearly excludes discretionary trust interests from marital division.

Still, this case serves as a caution: equity courts may try to stretch for “fair” outcomes — especially in divorce, alimony, or child support scenarios.

💡 When to Use Each Trust Type

Use a Pure Discretionary Trust when:

• Planning for special needs

• Granting wide discretion to corporate trustees

• Maximum creditor protection is a goal

Use a Discretionary Support Trust when:

• Ensuring basic support is a priority

• Clients want some minimum guarantees

• The trustee-beneficiary overlap is a concern

📚 Key Statutory References

Section	Subject
§ 14.5-103(e)	Definition of Discretionary Trust
§ 14.5-504	Discretionary vs. Mandatory Provisions
§ 14.5-502	Spendthrift Protections
§ 14.5-508	Exception Creditors
§ 14.5-511	Self-Settled Trust Limitations
§ 14.5-814	Trustee Reasonableness Standard
§ 14.5-107	Governing Law Provisions

Final Thoughts

The Maryland Trust Act is a powerful tool for shielding beneficiaries and promoting trustee flexibility — but it’s not a silver bullet. If a beneficiary moves out of state, UTC laws may override Maryland protections, undermining your planning goals.

By carefully choosing trust type, distribution standards, trustee residency, and situs language, you can build stronger, longer-lasting protections for your clients and their families.

📞 Need help drafting or reviewing a Maryland-based trust? Contact us for guidance that anticipates both current laws and future risks.