Each year, this Section spearheads efforts to effectuate trusts and estatesrelated legislative reforms. In past years, some of the more newsworthy examples included the acceptance of DNA testing as proof of paternity (N.Y. Estates, Powers & Trusts Law 4-1.2 (EPTL)), adoption of a simultaneous death statute (EPTL 2-1.6), sweeping overhauls to the General Obligations Law power of attorney provisions (GOL § 5-1501 et seq.) and clarifi cation that a lifetime trust must be executed by a person establishing such a trust but who need not be the “creator” (EPTL 7-1.17).
This year is no different. Currently, there are pending legislative proposals to modify the estate tax laws codifi ed last year in EPTL 2-1.13; to clarify the payment of interest on legacies in EPTL 11-1.5; to provide for incorporation by reference concerning tangible personal property in wills and trusts; to permit directed trusteeships; to codify the common law slayer rule; and to make the state’s trust decanting statute, EPTL 10-6.6, more fl exible. This article outlines in detail these proposals.
- Estate Taxes
The New York City and State Bars are proposing legislation to amend EPTL 2-1.13 and clarify its application1 in light of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the “Act”).2
Section 2-1.13 provides statutory rules of construction for the interpretation of certain formula bequests in testamentary documents of decedents who died while the temporary repeal of the federal estate tax was in effect—namely, by providing that such bequests are to be construed as if made in accordance with the Internal Revenue Code of 1986, as amended and in effect on December 31, 2009.3 The objective of this provision was to preserve the presumed intention of testators to fund credit shelter trusts with the maximum amount permitted under prior law and leave the balance of their estates to surviving spouses, even if the testators had not updated their wills to refl ect the repeal of the estate tax in 2010.
As Laurence Keiser explains in his article on pp. 10-13 in this issue,4 it is unclear how a formula credit shelter bequest should be interpreted under EPTL 2-1.13 when the executor elects out of the federal estate tax (and into the modifi ed carry-over basis regime) for the estate of a decedent dying in 2010, as is now permitted under the Act. In particular, it is unclear whether such a formula is subject to the $3.5 million federal exemption amount under the tax law in effect in 2009 or the new $5 million exemption under the Act.5 Because of this potential confusion, the City and State Bars are urging the legislature to enact clarifying amendments.
Most notably, the proposal is to modify EPTL 2-1.13 “to effect consistency in the interpretation of formula clauses (whether an estate is subject to an estate tax or a modifi ed carry-over basis regime), and clarify that formula clauses will be interpreted with reference to a $5,000,000 federal estate and GST tax exemption amount.”6
Additionally, in the context of generation skipping transfers, the proposal includes the removal of a reference to direct skips to natural persons in EPTL 2-1.13(a) (2) so that 2-1.13 applies to all GST-type transfers.7 The “direct skip to natural persons” language is superfl uous and unnecessary, as EPTL provisions should apply to all GST-type transfers, not just those involving direct skips to natural persons.
Finally, the proposed amendments to EPTL 2-1.13 include the extension of the deadline for commencing a judicial proceeding concerning the rules of construction from 12 months after the testator’s or grantor’s death to the later of 24 months after death or 6 months from the amended statute’s enactment.8 Without such an amendment, the fi duciaries of estates of decedents dying early in 2010 may be precluded from bringing such a proceeding, as the time to do so may have already expired.9
These amendments to EPTL 2-1.13 are needed to avoid unwanted and improper consequences of the statute as currently written and will clarify the purpose and proper application of that statute in construing formula bequests and dispositions.
- Interest on Legacies
Under EPTL 11-1.5, interest is not payable on a legacy unless the benefi ciary makes a demand upon the fi duciary for payment before the benefi ciary commences a proceeding to compel payment of the legacy. 10 Unless the testator’s will provides otherwise, the interest rate is fi xed at 6%, commencing seven months from the time that letters, even preliminary and temporary letters, are granted.11 Estates, Powers & Trusts Law 11-1.5 authorizes the Surrogate’s Court “to award interest at the legal or judgment rate [of 9%] set forth in the CPLR if [the fi duciary’s] delay in paying legacies [is] unreasonable.”12
Reasons for amending EPTL 11-1.5 abound. Most notably, the 6% interest rate set forth in EPTL 11-1.5 fails to account for the time value of money. To the extent that interest on legacies is paid from the residuary, the statute’s 6% rate inequitably diminishes the shares of residuary benefi ciaries during diffi cult economic times, such as these, when interest rates are unusually low.13 When the economy is booming and interest rates are high, the 6% fi gure also unfairly penalizes legatees who are not properly compensated for the delay in distributions.14 Former Surrogate Roth recognized this problem in In re Schwartz, when she wisely characterized “any fi xed numerical rate as insuffi ciently fl exible to be fair over time.”15
Moreover, courts have reached confl icting conclusions concerning EPTL 11-1.5’s application.16 On the one hand, some surrogates have held that interest may be awarded even in the absence of a proceeding to compel its payment.17 On the other hand, surrogates have found that interest may not be paid unless a legatee makes a demand for interest before commencing a proceeding to compel payment.18 Still other surrogates have held that there is no need for such a demand.19 Additionally, the surrogates are not even in agreement on whether the payment of interest is discretionary or mandatory20 or whether the residuary benefi ciaries or fi duciaries are responsible for paying the interest. 21 Legislative action is required to resolve these discrepancies.
This Section has proposed legislation to amend the EPTL (by revising 11-1.5 and enacting 11-A-2.1), which would promote greater fairness and certainty concerning the payment of interest on legacies.22 Under the proposal, “interest [would] be paid [from the residuary] starting seven months from the date of issuance of either preliminary or permanent letters, or if letters are not required, seven months from the date of death or other date a benefi ciary is entitled to receive a legacy,” unless the governing instrument provides otherwise, regardless of whether the estate is liquid or illiquid and regardless of whether a demand is made.23 The interest rate would be “set (or reset) on the fi rst business day of each calendar year and fi xed for that calendar year at the Federal funds rate less 1%, but in no event less than ½ of 1%.”24 In addition, the Surrogate’s Court would retain authority to disallow interest or surcharge a fi duciary, thus protecting the sometimes confl icting interests of specifi c bequest benefi ciaries, residuary benefi ciaries and fi duciaries.25
This proposal will ensure greater fairness and uniformity for benefi ciaries, fi duciaries and the courts, as they address administration issues involving interest on legacies. For these reasons, the proposal should be enacted.
- Incorporation by Reference
In many states, extraneous documents may be incorporated by reference into wills “if the reference is distinct and if the writing is identifi ed.”26 Under New York law, however, incorporation by reference generally is not permitted.27 As the Court of Appeals explained long ago, “[i]t is unquestionably the law of this state that an unattested paper, which is of a testamentary nature, cannot be taken as a part of the will, even though referred to by that instrument.”28 The underlying rationale is to avoid the potential for fraud or mistake in relying upon a document not executed in accordance with the statutory formalities for testamentary instruments.29
Despite the general prohibition against incorporation by reference, however, there are limited exceptions, as “not all extraneous writings are to be distrusted.” 30 For example, under EPTL 3-3.7, a testator may dispose of all or part of his estate to a trust, provided that the trust instrument is executed in compliance with EPTL 7-1.17, prior to or at the same time that the testator’s will is executed, and the trust is identifi ed in the will.31
Against this backdrop, a proposal is pending to amend the EPTL (to include 3-3.10 and amend 7-1.17) to permit incorporation by reference concerning tangible personal property into wills and trusts.32 The proposal, which is based upon Uniform Probate Code 2-513 (UPC), would permit a dated, signed written statement or list to be treated as part of a will or trust instrument, if the writing is signed by the testator and it describes the items and the devisees with reasonable certainty.33 The writing could be treated as such whether prepared before or after the will or trust’s execution, and even if altered after the instrument’s preparation.34
Additionally, the writing would have no import other than its effect upon the bequests made in the will or distributions called for in the trust instrument.35 The potential benefi ts of this proposal are many. Most notably, the proposal, if enacted, would allow testators and grantors to adjust their intentions through written statements or lists, without incurring the time and expense of executing new will and trust instruments. 36 By requiring that the statements and lists be dated and signed, the risk of fraud or mistake would increase only marginally.37
The proposal for incorporation by reference of tangible personal property will balance sometimes confl icting goals of convenience and economy for testators and grantors versus a public policy to avoid fraud in wills and trusts. Insofar as the proposal satisfi es these concerns, it is worthy of enactment.
- Directed Trusteeships
A trustee generally is accountable for all aspects of trust administration and must maintain continuing oversight over a trust.38 Although a trustee may delegate investment authority under EPTL 11-2.3, the trustee is not necessarily absolved of liability when doing so.39 Generally speaking, under New York law a trustee may delegate but not abdicate investment authority.
That the trustee may face liability for investment decisions even after delegating authority for them gives rise to a number of problems, not the least of which is that it deters corporate fi duciaries from administering trusts in New York.40 This is bad for New York State in that it contributes to the loss of trust business (law, accounting and bank related), tax revenue and jobs to states that have more trust-friendly laws.41 Those more trust-friendly states have enacted directed trust statutes to balance the desire of corporate fi duciaries not to be liable for the poor investment decisions of others charged in trust instruments with making them, the grantors’ desire that someone other than the trustee make the investment decisions and the right of benefi - ciaries to seek redress for damages arising from poor investment decisions.42
A directed trusteeship involves the appointment in a trust instrument of an investment advisor to exercise responsibility for trust investments and an administrative trustee to supervise all other aspects of trust administration.43 The concept is not novel, and several courts, perhaps most notably Surrogate Radigan in In re Rubin, have recognized it.44
In Rubin, the testator’s will named his daughter and son as co-executors.45 The will further provided that to the extent the executors disagreed on an estate administration matter, they should consult two advisors whose decision would be binding upon the executors. 46 In rendering a decision on a dispute concerning the son’s exclusive right to manage the testator’s real estate holdings, the advisors noted that the son was intimately involved in doing so during the testator’s life.47 The advisors also determined that the son could sign business checks himself, but that the signatures of both executors would be required for estate checks.48 The daughter objected, asserting that as co-executor, she had an equal right to supervise the administration of the estate.49
In ruling for the son, Surrogate Radigan reiterated the maxim that a “grantor or testator may give his gift subject to any terms and conditions he chooses, unless the terms are contrary to public policy or some such restriction applies.”50 Thus, the grantor or testator can withhold certain powers from the principal fi duciary and grant them to an advisor or co-fi duciary.51
Consistent with those principles, Surrogate Radigan explained that the advisors selected by the testator were akin to fi duciaries, “somewhat in the nature of…cotrustee[s]” and went on to say:
Since the relationship between the fi - duciary and advisor is that of a cotrustee, with the advisor having controlling power, the fi duciary is justifi ed in complying with the directives and will not generally be held liable for any losses unless the instructions given him are improper or in violation of fi duciary duties owing to the benefi ciaries.52
Accordingly, the Surrogate held that the testator’s designation of the advisors to make controlling decisions with respect to the co-executors was a valid limitation of the co-executors’ authority.53
A proposal is pending that would codify Surrogate Radigan’s well-reasoned decision in Rubin by authorizing the bifurcation of trustee investment responsibilities. If enacted as EPTL 11-2.2A, the proposal would provide that the trustee charged in an instrument with administering the trust but not with making investment decisions would be absolved of liability for the imprudent investments of the advisor nominated in the trust. The liability would be reserved for the investment advisor. This is fundamentally fair, as the fi duciaries would only incur liability for their own decisions.
Additionally, the proposal specifi es that the investment advisor would be entitled to “such compensation as may be reasonable.” Depending on whether the administrative trustee is an individual or corporation, the administrative fi duciary would be entitled to commissions under Surrogate’s Court Procedure Act 2312 or 2309 (SCPA).
This proposal should be enacted because it represents a codifi cation of existing case law, will clarify the duties and potential liabilities of trustees and investment advisors nominated in trust instruments and will make New York State a more attractive jurisdiction for those wishing to create and administer trusts.
- Slayer Statute
As articulated by the Court of Appeals in Riggs v. Palmer, the so-called “slayer rule” provides that “[n]o one shall be permitted to profi t by his own fraud, or to take advantage of his own wrong, or to found any claim upon his own iniquity, or to acquire property by his own crime.”54 Although Riggs’s maxim is most of-ten applied in cases concerning the intentional or reckless killing of another, its application is anything but straightforward,55 resulting in a rich and sometimes confl icting body of case law.56
Riggs and its progeny have resulted in the forfeiture of, among other things, the killer’s right to receive the proceeds of a victim’s life insurance policy,57 to benefi t as a legatee under the victim’s will or as an intestate distributee of the victim58 and to take sole title to property that was held jointly with the victim with right of survivorship.59 Conversely, it is now settled law that forfeiture will not arise when the killer acts in self-defense,60 by accident61 or under a disability that negates any culpable mental state, i.e., insanity.62
However, the issue of the extent to which killings that fall short of voluntary manslaughter will result in forfeiture remains open,63 as does the question of whether an intentional or reckless killer forfeits all interests (or just those that pass due to the killing) in property held with the victim as tenants-by-the-entirety. 64 Courts have reached confl icting conclusions on these issues.65
In order to “synthesize the rich body of New York case law addressing…the ‘homicidal heir’ problem,” this Section has proposed legislation that would codify the notion that one who intentionally and feloniously kills another should not benefi t from the victim’s estate. 66 Based upon UPC § 2-803, the proposal would treat all types of dispositions, including those under wills, intestate distributions, life insurance proceeds, revocable trust distributions and jointly held property, similarly,67 thereby remedying discrepancies between the treatment of dispositions under Riggs and, for example, EPTL 4-1.6.68 The proposal also would delineate the rights of third parties, including payors and bona fi de purchasers, affected by forfeiture and would vest the Surrogate’s Court with discretion to decide issues that are not specifi cally addressed in the statute.69
If enacted, the proposal will ensure greater consistency in the disposition of property in cases involving intentional homicide while still protecting the rights of estate benefi ciaries who do not intentionally and feloniously kill the decedents. And it will preserve the discretion of Surrogate’s Court to resolve these matters in the most equitable manner possible. Accordingly, the proposal should be enacted into law.
Decanting is the process of transferring all or part of a trust’s assets into a new trust with different terms.70 Under New York’s current decanting statute, EPTL 10-6.6, a trustee who derives “absolute power [through either a will or trust instrument] to invade principal for the benefi t of an income benefi ciary may exercise the power by creating a new trust for the benefi ciary,”71 provided that the exercise of this discretion “does not reduce any fi xed income interest of any income benefi ciary of the trust,” “is in favor of the proper objects of the exercise of the power” and “does not violate the [exoneration] limitations of [EPTL] 11-1.7.”72 Although the statute was originally intended to aid in generation-skipping transfer tax planning,73 it has been used to appoint trust principal to supplemental needs trusts,74 to avoid real property transfer taxes75 and to minimize liabilities.76
To have “absolute discretion” under EPTL 10-6.6, a trustee’s authority to invade must be unrestricted; the trustee must be bound only by the implicit duties of good faith and reasonableness.77 If the trustee’s power to invade is subject to an ascertainable standard (such as health, education, maintenance or support), it is not absolute and EPTL 10-6.6 does not authorize decanting. 78 Instead, the trustee must adhere to the testator or grantor’s expressed wishes.79
In conjunction with the Offi ce of Court Administration’s Surrogate’s Court Committee and several committees of the New York City Bar Association, this Section has joined in supporting a proposal that would make New York’s decanting statute more fl exible.80 If enacted, the proposal would be codifi ed as EPTL 10-6.6-A, which would replace EPTL 10-6.6.
Under the proposed legislation, a trustee would have the authority to decant trust principal to another trust, even if the trustee lacks absolute discretion to invade principal, or the instrument contains a spendthrift provision or proscribes its amendment or revocation.81 Conversely, the trustee would not face any liability under the amended statute for failing to decant.82 Among other provisions to protect benefi ciaries, the proposal requires that all trust benefi ciaries with vested rights receive notice of the trustee’s intention to exercise any decanting power. Although the benefi ciaries’ consent would not be required for the trustee to be able to decant, their interests would be protected through the right to compel the trustee to account and to object to the trustee’s accounting.83
The proposal should be enacted into law. It increases fl exibility of trustees to address circumstances that the testator or grantor did not foresee while respecting the intentions of testators and grantors and protecting the rights of vested benefi ciaries. Furthermore, it will bring New York State in line with more popular trust jurisdictions and thereby enhance New York as a situs for trusts.
The proposals discussed above are six of the legislative reforms that are being supported by this Section. If enacted, these proposals will advance New York’s trusts and estates laws and enhance New York’s stature as a desirable trust jurisdiction. You can lend your support by contacting your state senator and assemblyman and by getting active in the Section.