This study investigates the estimation of direct and maternal genetic (co)variances, accounting for environmental covariances between direct and maternal effects. Estimated genetic correlations between direct and maternal effects presented in the literature have often been strongly negative, and their validity has been questioned. Explanations of extreme estimates have focused on the existence of environmental covariances between dam and offspring. As a solution, models including a regression on dam-phenotype have been proposed, but have yielded biased estimates. The performance of models that implement the variance structure arising from the classical model of Willham, however, has not been evaluated. This study investigated the covariance structure of the parts of the residual term that arise from Willham's model. Results show that a correlation between the residual of the record of an individual and that of its dam is a direct consequence of combining Willham's model with the usual assumption that phenotypic covariances between different traits are the sum of additive genetic and environmental covariances. Stochastic simulations show that fitting this structure yields unbiased estimates of the genetic (co)variances. When correlated residuals were ignored in the cases investigated, the bias in the estimated genetic correlations was approximately equal to the value of the environmental correlation. In contrast to models including a regression on dam-phenotype, there were no difficulties with interpretation of results, and the approach was consistent with standard quantitative genetic theory. The use of Willham's model while accounting for correlated residuals is conceptually appealing and yields unbiased results, with no need for regression on dam phenotype. Inclusion of the ability to fit the residual variance structure required for maternal effects into existing software packages would be helpful to animal breeders.