Trusts and Estates Update

March 10, 2004

While front page news of recent decisions is certainly eye-catching, and indeed, may prove significant to practitioners, more frequently than not, decisions relevant to the field of trusts and estates are not presented in Journal headlines, but rather infiltrate its inside pages.

Consider the following:

Matters of Trust : During the past several months, issues pertaining to trusts- – their validity, termination, transfer, and unitrust status- – have been the subject of inside news.

Validity of Trust Determined: In Matter of Marcus Trusts ,New York Law Journal, 12/18/03, p.33 (App. Div. 2d Dept.) , the Appellate Division, Second Department, affirmed an Order of the Surrogate’s Court, Nassau County (Riordan, J.) which, inter alia , sustained the validity of two inter vivos trusts.

Significantly, although Appellants argued that one such trust had not been validly formed because a complete trust agreement had never been executed by the Grantor, the Court held that the elements of an express trust, i.e. a designated trustee, a clearly identifiable res, and delivery of the res by the Grantor to the trustee with the intent of vesting legal title in the trustee, were present.

Beyond these requisites, stated the Court, no particular form of words are necessary to create an express trust- “…it may be created orally or in writing…and it may arise by implication from the settlor’s conduct.” Oreentreich v. Prudential Ins. Co. of America , 275 AD2d 685. Thus, the Court determined that the Grantor’s failure to sign the trust document did not invalidate the trust so created.

Termination of Trust Determined: In In re Estate of Siddy Walter ,New York Law Journal, 12/18/03, p.29 (Surrogate’s Court, Bronx County, Surr. Lee Holzman) , the Court granted an application to withdraw a petition for probate of a purported will of the decedent in order to allow the decedent’s estate to pass pursuant to the laws of intestacy, despite the fact that the instrument created a trust of ? of the residuary estate for the benefit of the proponent.

The record indicated that the nominated co-trustee of the trust, the proponent’s daughter, was given broad powers to invade the trust principal, and that if the will was probated the trust would be funded with only $10,000.

The Court opined that although a testamentary trust may ordinarily not be terminated, even on the consent of all the interested parties, if it appears that this would contravene the intent of the testator, where the trust is economically impractical to administer, the corpus may be distributed outright to the beneficiary.

With this in mind, the Court noted that the testator’s primary intent was to benefit his daughter, and the modest value of the trust principal would be dissipated prematurely by the costs of its administration. Accordingly, the Court concluded that granting the relief requested would be in keeping with the testator’s intent.

Furthermore, the Court held that it would not compel the probate of a testamentary instrument where all persons interested consented to an intestate distribution and no practical purpose would be served by probate.

Transfer of Situs: In Matter of Bush ,New York Law Journal, 1/7/04, p. 28 (Surrogate’s Court, New York County, Surr. Eve Preminger) , the Court denied the application of the trustee, on consent of all interested parties, to transfer the situs of two trusts to Delaware in order to avoid imposition of the New York State fiduciary income tax. In a prior application with respect to the subject trusts, the Court granted leave to the trustee to resign and appointed a Delaware corporation to serve in its place and stead.

In refusing to grant the trustee’s present request, the Court noted that while a transfer of situs has been allowed for the purpose of removing a trust from the imposition of a New York State tax on income and capital gains, on October 7, 2003, the Governor signed into law legislation applicable to tax years beginning on or after January 1, 1996, which permitted a New York resident trust of intangible property to be treated as a non-resident trust for tax purposes, if all the trustees are domiciled outside the State. Based upon this legislation, the Court found that transfer of the trust situs was not needed in order to accomplish the trustee’s goal of eliminating the imposition of a New York State fiduciary income tax.

Further, the Court found that the relief sought was contrary to the explicit direction by the testator and grantor of the respective trusts to have New York courts supervise their administration. The Court noted, in this regard, that while a foreign court may be required to apply the substantive law of New York, it cannot be required to apply New York’s procedural law. The trustee had advanced no compelling reason for the Court to cede its jurisdiction in derogation of the maker’s intent that all trust beneficiaries be guaranteed the full procedural protections afforded by New York law.

Unitrust Status: In In re Estate of Jacob Heller ,New York Law Journal, January 23, 2004, p. 25 (Surrogate’s Court, Westchester County, Surr. Anthony A. Scarpino, Jr.) , the Court, inter alia , denied petitioner’s motion for summary judgment annulling and setting aside the trustees’ decision to elect unitrust status pursuant to EPTL Sec. 11-2.4, but granted her application to the extent that she sought a determination that the unitrust election could not be made retroactive to January 1, 2002.

The record reflected that pursuant to the provisions of his will, the decedent bequeathed his residuary estate in trust for the benefit of his wife for life. Specifically, the decedent directed that his wife receive annually, in quarterly installments, the greater of $40,000 or the entire income of the trust, with any shortfall to be paid from principal. Upon the wife’s death, any remaining principal was bequeathed to the decedent’s four children from a prior marriage, two of whom were co-trustees of the wife’s trust.

From the time of the decedent’s death in 1984 to January 1, 2002, the decedent’s wife received the total income from the trust which in recent years was substantial, averaging $190,000 per annum.

On March 1, 2003, the trustees filed a notice with the court electing to invoke the optional unitrust provisions of EPTL 11-2.4 and to apply the section retroactively to January 1, 2002. As a result, the widow’s income from the trust was reduced to less than $70,000 per year.

The widow, by her attorney-in-fact, instituted the proceeding sub judice to annul the election, contending that it was a self-interested act that directly benefitted the trustees to the detriment of the income beneficiary. Further, the decedent’s spouse maintained that the trustees had no intention of complying with the Prudent Investor Act upon making the election, in that they were no going to diversify the trust’s portfolio, which presently consisted of income-producing real estate interests, in order to invest for total return. Finally, the decedent’s spouse claimed that the trustees’ election was invalid inasmuch as it could not be retroactive to January 1, 2002.

In addressing the arguments raised, the Court reviewed the nature and purpose of the unitrust option, noting that there is a rebuttable presumption in its favor. However, in determining whether the unitrust option should apply to a trust, the Court opined that consideration should be given to the factors enumerated in EPTL 11-2.4 (e)(5)(A). Based upon these factors, the Court held that questions of fact existed which precluded granting summary judgment on the issue of whether the unitrust option was available to the subject trust.

Moreover, although the Court held that the trustees, despite their self-interest, were not precluded as a matter of law from exercising the unitrust option, it concluded that the issue as to whether they abused their discretion in electing the option was an issue of fact to be decided.

Finally, the Court annulled the trustees’ election to apply the unitrust option retroactively to January 1, 2002. Based upon the provisions of EPTL 11-2.4 (e)(4)(A) and the legislative history of the statute, the Court held that the proper an intended application of the unitrust election, as it relates to preexisting trusts is prospective, and shall commence as of the first day of the first year of the trust beginning after the election is made. This being the case, the Court determined that the election with respect to the subject trust applied as of January 1, 2004, and directed that the trustees pay to the decedent’s spouse the income she would have received from the trust from January 1, 2002 to January 1, 2004.

Other Matters of Interest : Matters of Trust were not the only decisions of interest which made their way into the inside pages of the Journal. Discussion of two such decisions follows:

Turnover Proceeding/ Summary Judgment Denied Bank Depository: In a contested discovery proceeding, the fiduciary of the estate, the New York County Public Administrator, and the respondents, the beneficiary of certain totten trust accounts and the banking institution which held the subject accounts, moved and cross-moved for summary judgment.

The record revealed that a year and a half before her death, the title on several bank accounts were changed from the decedent’s name to the decedent’s name in trust for a named individual. Two days before her death, while the decedent was hospitalized in critical condition, the said individual used a durable power of attorney in order to remove $230,000 from an account in the decedent’s name, alone, and deposited said funds in the totten trust accounts previously established for her benefit. The issues presented by the discovery proceeding were the validity of the transfer using the power of attorney, the decedent’s capacity, and alleged fraud and undue influence by the named beneficiary of the accounts.

In support of its motion for summary judgment, the bank argued that it was merely a stakeholder in the proceeding with no liability to the two claimants with respect to the funds in issue. Specifically, the bank submitted an affidavit from its branch manager indicating that while it could not locate the signature cards which effected a change in title to the subject accounts, its computer records evidenced the creation of the totten trust accounts. Moreover, the affidavit confirmed that it was the bank’s procedure to require proof of identification from the bank customer to confirm that he/she was, in fact, the person authorized to transact business with regard to a particular account. To the best of the manager’s recollection, he was not informed of any irregularities regarding the change of account titles from the decedent’s name alone to totten trust form.

Based upon the record, the Court granted partial summary judgment in favor of the fiduciary, to the extent of directing the respondent bank to release to the decedent’s estate the sum of $230,000 plus statutory interest from the decedent’s date of death, and otherwise denied the motions for summary relief.

Insofar as the banking institution was concerned, the Court determined that the proof failed to satisfy the provisions of EPTL 7-5.4, upon which the bank relied, in order to absolve itself from liability. In relevant part, this statute provides that a financial institution that pays the beneficiary of a totten trust upon the death of the depositor of the account before a restraining order or injunction “shall, to the extent of such payment, be released from liability to any person claiming a right to the funds.” The Court opined that in order to gain the benefit of this section, there must be payment to a beneficiary which is defined as a “person who is described by the depositor as a person for whom a trust account is established.

While the Court noted that the bank’s computer records were probative, it held that the best evidence of such a transaction would be a signature card of the decedent, or at the very least, some other admissible indication of the decedent’s intent to create the totten trust accounts. Inasmuch as the bank submitted only computer records and the affidavit of a bank manager with no personal knowledge of the transaction in issue, summary relief in the bank’s favor could not be granted.

In re Estate of Carrie Clinton ,New York Law Journal, 1/26/04, p. 26, (Surrogate’s Court, New York County, Surr. Eve Preminger) .

Discovery Proceeding/Subject Matter Jurisdiction Found: In a proceeding brought pursuant to SCPA 2103, the respondent moved to dismiss the petition on the grounds, inter alia , that the Court lacked subject matter jurisdiction.

The decedent died a domiciliary of Florida, leaving a last will and testament that was admitted to probate in that State. The decedent’s spouse was appointed executrix of his estate in Florida, and thereafter appointed ancillary fiduciary in New York. Thereafter, she instituted the discovery proceeding, sub judice , in order to recover rents and profits derived from a condominium apartment in which the decedent owned a ? interest as tenant in common at death. The respondent moved to dismiss on the grounds of inter alia lack of subject matter jurisdiction, which motion was denied in a prior decision of the Court. Subsequent thereto, the petitioner amended her petition in order to request a partnership accounting, and the respondent again moved to dismiss, claiming that the request for an accounting effectively sought the recovery of money and partnership interests- – all of which were personal property not “located” in New York.

In denying the application, the Court opined that an ancillary fiduciary may appropriately commence and prosecute a proceeding concerning the New York assets of a non-domiciliary whether these assets are real or personal property. The Surrogate’s Court has jurisdiction to adjudicate all matters related to a decedent’s estate, including matters pertaining to partnerships between deceased non-domiciliaries an surviving partners where partnership assets are located in New York.

Contrary to the respondent’s contention, the Court held that the decision by the Court of Appeals in Matter of Obregon , 91 NY2d 591, did not require a different result. Unlike the circumstances in Obregon , stated the Court, the very asset which provides the basis for the Court’s ancillary jurisdiction is the source and focus of the proceeding at bar.

In re Estate of Joseph A. Sbuttoni ,New York Law Journal, 1/26/04, p. 33 (Surrogate’s Court, Westchester County, Surr. Anthony A. Scarpino, Jr.)

Editor’s Note: Ilene Sherwyn Cooper is a partner with the law firm of Farrell Fritz, P.C., located in Uniondale, New York. In addition, she is the chairperson of the New York State Bar Association’s Committee on Estate and Trust Administration.

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