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New York Trusts & Estates Litigation

In Terrorem Provisions That Violate Public Policy

Posted in Construction of Wills and Trusts

In terrorem clauses generally provide that, where a beneficiary under a testamentary instrument unsuccessfully challenges the instrument’s validity, the beneficiary will forfeit any interests obtained under the instrument.  Testators include in terrorem clauses in their wills in order to dissuade estate beneficiaries from taking action that is contrary to the testators’ wishes, as expressed in their testamentary instruments.  While a paramount objective of the Surrogate’s Court is to act according to testators’ wishes, in terrorem clauses must be narrowly construed, and certain in terrorem provisions are violative of public policy.  This post provides examples of in terrorem clauses that contravene public policy and, thus, are unenforceable under New York law.

Though in terrorem clauses are intended to prevent attacks on the validity of a will, Surrogate’s Courts have recognized that in terrorem provisions which purport to preclude a beneficiary from seeking the removal or suspension of a fiduciary nominated in the governing instrument, based upon the fiduciary’s misconduct, are violative of public policy (Matter of Rimland, 2003 WL 21302910, at *1-2 [Sur Ct, Bronx County 2003]; Matter of Fromartz, NYLJ, Oct. 22, 2005, at 29, col. 1 [Sur Ct, Kings County]).  Indeed, it “is disingenuous for [a party] to contend that [a testator] intended that [a fiduciary acting under a will] serve [as a fiduciary] even if [the fiduciary] violated [his or] her obligations under [the governing instrument] and [his or] her sacred duties of undivided loyalty” (see Rimland, 2003 WL 21302910, at *1-2). 

Former Surrogate Holzman’s decision in Matter of Rimland is highly instructive.  There, the petitioner, the income beneficiary of a testamentary trust, commenced a proceeding for the appointment of a fiduciary to pursue claims against the trustee (see id.).  In response, the trustee argued that the petitioner had triggered the governing will’s in terrorem clause and, therefore, forfeited her interest in the trust (see id.).  Surrogate Holzman was not persuaded by the trustee’s arguments, holding that the trustee’s interpretation of the in terrorem clause was violative of public policy (see id.).

Much like in terrorem clauses which purport to prevent a beneficiary from seeking the removal or suspension of a fiduciary on the basis of the fiduciary’s wrongdoing are violative of public policy, so too are in terrorem clauses which attempt to preclude a beneficiary from questioning the fiduciary’s conduct (see Matter of Egerer, 30 Misc3d 1229[A], at *1-4 [Sur Ct, Suffolk County 2006]).  As Surrogate Czygier has explained, “any attempt by a testator to preclude a beneficiary from questioning the conduct of the fiduciaries, from demanding an accounting from said fiduciaries or from filing objections thereto will result in a finding that the pertinent language is void as contrary to public policy and the applicable statutes of the State of New York” (see id.).

For example, in Matter of Egerer, Surrogate Czygier construed an in terrorem clause which purported to disinherit a beneficiary under the testator’s will who filed “objections to [the] fiduciaries’ conduct, bad faith or for any other basis” (see id.).  The Surrogate found that the in terrorem clause was unenforceable as a matter of public policy, to the extent that it could be interpreted as preventing the beneficiaries from objecting to the fiduciaries’ conduct (see id.).

The lesson to take away from this post is that, while testamentary intentions are entitled to great respect, there are limits to which the Surrogate’s Courts will adhere to the wishes expressed by testators, especially concerning in terrorem clauses.  Practitioners should be mindful of the limitations, including the public-policy based concerns discussed in this article, in advising their clients with respect to in terrorem provisions.

Appellate Division Upholds Equitable Extension of Slayer Rule

Posted in Uncategorized

New York’s “slayer rule” essentially provides that if an individual kills another person, he has automatically forfeited any interest he may have had in his victim’s estate.  The rationale is simple – no one should financially benefit from his own crime. 

As we have explained in prior posts, this longstanding rule was never codified in New York, but is a common law principle emanating from the nineteenth century Court of Appeals decision in Riggs v Palmer, 115 NY 506 (1889). There, a grandson who intentionally killed his grandfather to ensure his inheritance, was barred from profiting from his own wrong. 

Applicability of the rule is generally straightforward, but in certain cases, the lines can become blurred — such as in Matter of Edwards, 2014 NY Slip Op 05873 (2d Dept 2014), where the killer sought to inherit from his victim only indirectly, through the estate of the victim’s post-deceased daughter. 

The facts of Edwards are somewhat complex.  Brandon Palladino pleaded guilty to manslaughter in connection with the death of his mother-in-law, Dianne Edwards.  Brandon’s wife, Deanna, was Dianne’s only child, and the sole beneficiary of her estate.  Less than a year after Dianne’s death, Deanna died, intestate, from an accidental drug overdose.  Brandon was Deanna’s sole distributee.  Accordingly, Brandon stood to inherit his victim’s entire estate indirectly, through his wife’s estate.

In a 2012 decision, Suffolk County Surrogate John M. Czygier, Jr., opined that the slayer rule should be extended upon equitable principles to prohibit Brandon from inheriting in this manner.  Recently, the Appellate Division, Second Department, affirmed. 

Acknowledging that this was a case of first impression, the Second Department was guided largely by its decision in Campbell v Thomas, 73 AD3d 103 (2d Dept 2010).  There, the court held that a surviving spouse forfeited her elective share by her own wrongdoing, having knowingly taken advantage of the decedent in a deathbed marriage for her own pecuniary gain. Although none of the statutory disqualification provisions of EPTL 5-1.2 applied to that situation, the court relied upon principles of equity in making its determination.

The Second Department also relied upon an Illinois case that presented facts analogous to those in Edwards.  In In re Estate of Vallerius, 259 Ill App 3d 350 (5th Dist 1994), the decedent was murdered by two of her grandsons.  Their mother post-deceased mere months later, leaving them as her only heirs.  The Illinois court held that the grandsons could not indirectly benefit from their own crime by inheriting the murdered grandmother’s estate through their mother’s estate, and explained that an intervening estate “should not expurgate the wrong of the murderer or thwart the intent of the legislature that the murderer not profit by his wrong.” 

Notably, in upholding Surrogate Czygier’s extension of the slayer rule, the Second Department rejected arguments that (1) Deanna’s inheritance vested immediately in her upon her mother’s death, allowing her to do what she wished with the property, and (2) extension of the slayer rule would raise “a host of enforceability problems” — for example, if the intervening estate resulted from a death that occurred a decade after the wrongful death or murder. The Court explained that it was unpersuaded by hypothetical scenarios and noted that the rule, as extended, would be applied on a fact-specific basis. 

In sum, the Second Department opined that Edwards was on point with both Campbell and Vallerius in that there was “a clear causal link between the wrongdoing and the benefits sought.”  Accordingly, it affirmed the Surrogate’s Court’s decision to exercise its equitable powers in extending the slayer rule to this case (see SCPA 201[2]).

“Easy” Cases Make Bad Law Too

Posted in Probate

In a decision that could well cause even the most casual trusts and estates practitioners to scratch their proverbial heads in wonder, the Appellate Division, Third Department, in Matter of Buchting, 111 AD3d 1114, 975 NYS2d 794 (3d Dept 2013), recently affirmed the determination of the Surrogate’s Court, Greene County, dismissing a “due execution” objection to probate, notwithstanding that both attesting witnesses invoked their Fifth Amendment rights against self-incrimination and refused to testify at their SCPA 1404 examination concerning the execution of the will, and notwithstanding that the Surrogate determined that summary judgment was improper because of “conflicts in the evidence.”

The petitioner in Buchting was the surviving spouse of decedent, who offered his will for probate shortly after his death.  The respondents were the decedent’s surviving children from a previous marriage. The attorney draftsman of the will (also the attorney who supervised its execution) testified at his SCPA 1404 examination in detail concerning the due execution of the will.  The two attesting witnesses were also called, but upon taking the stand, refused to testify, invoking their Fifth Amendment rights against self-incrimination.

The respondents objected to probate on the grounds of lack of due execution, lack of testamentary capacity, and undue influence.  They moved to dismiss the petition based upon the petitioner’s failure to establish due execution.  The petitioner cross-moved for summary judgment admitting the will to probate.  It appears from the Appellate Division’s decision that the Surrogate denied both motions, determining that summary judgment was improper because of “conflicts in the evidence,” but nevertheless dismissed the respondents’ objections and admitted the will to probate.

On appeal, the Appellate Division first concluded that the Surrogate properly denied the respondents’ motion to dismiss the petition because the petitioner complied with the requirement, imposed by SCPA 1404(1), that she produce the attesting witnesses for examination.  The court rejected the respondents’ argument that an attesting witness who invokes the privilege against self-incrimination and refuses to testify has not been “examined” within the meaning of section 1404.  It relied upon its prior decision in Matter of Hutchinson, 13 AD3d 704 (3d Dept 2004), in which it held that an attesting witness’ invocation of the Fifth Amendment “is akin to a failure to recall the events surrounding a will’s execution” (see id.).  It further noted that a will may be admitted to probate even where no attesting witness recalls it execution.  While the law requires the examination of at least one attesting witness, it imposes no requirements upon the substance of the testimony.

The issue, according to the court, “thus distills to whether there was sufficient other evidence to establish a prima facie case of due execution, and we find that there was.”  In this regard, the court relied exclusively on the testimony of the attorney draftsman and the presumption of due execution that resulted from the attorney’s supervision of the will’s execution.  The court determined that, in light of this presumption, the respondents had the burden to come forward with evidence contradicting the testimony of the supervising attorney.  It further determined that the respondents failed to meet their burden, notwithstanding that they “challenge[d] the veracity of the supervising attorney and argue[d], based upon various minor irregularities in the documents that she drafted, that she was unfamiliar with the necessary procedure. . . .”  Thus, according to the Appellate Division, the Surrogate properly denied the respondent’s motion to dismiss the petition and dismissed the due execution objection. 

Notably, the court stated that “to preclude the probate of a will as a matter of law because both attesting witnesses refuse to testify on constitutional grounds would come perilously close to drawing a prohibited inference from the invocation of the privilege by nonparties” (id.).

The court held that the Surrogate erred, however, in dismissing the remaining objections, grounded in testamentary capacity and undue influence, particularly prior to discovery.

A few thoughts on the Buchting decision. 

First, it seems fundamentally unfair to saddle an objectant with the burden to come forward with evidence to rebut a supervising attorney’s testimony concerning the due execution of a will in order to survive summary judgment where both attesting witnesses — likely the only other persons in the room with the decedent – refuse to testify for fear of self-incrimination.  It is difficult to imagine how an objectant could ever meet that burden.  Forgive me for stating the obvious, but it seems plain that the mere fact that both attesting witnesses have invoked the Fifth Amendment in order to avoid testifying concerning a will’s execution should itself be sufficient to justify further proceedings before admitting the will to probate.  The decision in Buchting essentially ignores that a court is obligated by statute to “inquire particularly into all the facts” in order to satisfy itself “with the genuineness of the will and the validity of its execution” (SCPA 1408).

Second, the court’s decision is grounded in its determination that a witness who has refused to testify concerning the execution of a will for fear of self-incrimination is “akin” to a witness who fails to recall the execution.  However, the decision reveals no substantial authority for that comparison.  The Buchting court cites only Hutchinson as authority — but this is a chain without an anchor, as the Hutchinson court cites no authority (see 13 AD3d at 707 [“In our view, the submission of conflicting affidavits followed by a refusal to testify falls more closely in line with a witness who has ‘forgotten the occurrence’”]).  Another statement of the obvious — failing to recall a will’s execution and refusing to testify concerning the execution for fear of self-incrimination are very different things. 

Third, in order to conclude that the petitioner satisfied SCPA 1405(3) – which requires, as a condition for probate, the “examination” of at least one attesting witness – the court essentially determined that a witness who invokes the privilege against self-incrimination and refuses to testify has nevertheless been “examined.”  However, this seems to be in conflict with the Court of Appeals’ statement in Matter of Collins that, historically, the requirement that a witness be “examined” was “fulfilled when the witnesses took the stand and related what they knew of the circumstances” (60 NY2d 466, 471 n.3 [1983]).  Collins provides no authority for the proposition that a witness who refuses to testify altogether has nevertheless been “examined.”   

Fourth, even assuming a non-testifying witness could be deemed to be “examined” within the ambit of section 1405(3), that section requires actual testimony before a will may be admitted to probate.  It provides that where an attesting witness “has forgotten the occurrence or testifies against the execution of the will” the will may nevertheless be admitted to probate “on the testimony of the other witness and such other facts as would be sufficient to prove the will.”  But where the “other witness” invokes the Fifth Amendment, there is no testimony upon which to admit the will to probate.

Fifth, the court’s determination could well put a petitioner whose witnesses refuse to testify for fear of self-incrimination in a better position that a petitioner whose witnesses actually testify against the will.  A grant of summary judgment admitting a will to probate may be inappropriate where one attesting witness testifies against the will, even where the other witness and the supervising attorney testify favorably (see generally Matter of Jacinto, 172 AD2d 664 [2d Dept 1991]).  Why should the result be different where a witness – indeed, where both witnesses – refuses to testify concerning the execution of the will for fear of self-incrimination? 

Sixth, the presumption of regularity should not permit a court to turn a blind eye to facts calling into question a will’s validity.  A court should not employ a presumption where to do so would “elevate a legal construct above common sense” (People v Giordano, 87 NY2d 441 [1995]).  Even the presumption of legitimacy, “one of the strongest and most persuasive known to the law,” will fail if, in the words of Judge Cardozo, “common sense and reason are outraged by a holding that it abides” (Matter of Findlay, 253 NY 1 [1930]).  Depriving an objectant of a trial on the basis of the presumption of regularity, where both attesting witnesses refuse to testify concerning the execution of the will for fear of self-incrimination, offends both common sense and reason.

Of course, courts should resist the “temptation to overlook or ignore fixed legal principles when they are opposed to persuasive equities” because, as the ancient legal proverb teaches, “hard cases make bad law” (Dodd v Anderson, 197 NY 466, 469 [1910]).  However, “it might also be safely said that the occasional easy case makes law that is even worse” (People v Ramos, 40 NY2d 610, 628 [1976] [Jasen, dissenting]).  By placing undue reliance upon the presumption of regularity in order to deprive an objectant of a trial, in the face of facts calling into question the validity of the will, the court in Buchting made the case too easy, and established a troubling precedent.

Testamentary Capacity, Summary Judgment and a Testator’s Diagnosis of Dementia

Posted in Probate

Although summary judgment in a contested probate proceeding historically has been rare, the recent trend has been for Surrogate’s Courts to grant such relief with increasing frequency.  Consistent with that recent trend, Surrogate’s Courts have granted summary judgment dismissing probate objections alleging that a testator lacked testamentary capacity, notwithstanding the testator’s diagnosis of dementia before executing the propounded will.  This post discusses several cases in which a testator’s diagnosis of dementia prior to executing the propounded will was insufficient to raise a triable issue of fact to withstand summary judgment dismissing a capacity objection.

The threshold for establishing testamentary capacity is extraordinarily low (see Matter of Rabbit, 21 Misc 3d 1118[A] [Sur Ct, Kings County 2008]).  This is because the capacity that is necessary to execute a valid will is less than that which is required for any other legal transaction (see id.).  All that is necessary is that a testator: (a) understand the nature and consequences of making a will; (b) know the nature and extent of his or her property; and (c) know the natural objects of his or her bounty and relations with them (see Matter of Kumstar, 66 NY2d 691 [1985]). 

Additionally, as a testator’s mental capacity must be assessed at the precise time of the instrument’s execution (see Matter of Schure, 2012 NY Misc LEXIS 5755 [Sur Ct, Nassau County Dec. 17, 2012]), a testator need only have a “lucid interval” of capacity to execute a valid will (see Matter of Minasian, 149 AD2d 511 [2d Dept 1989]).  Indeed, courts have found that testators had testamentary capacity, even though the testators were afflicted with ongoing mental illness (see Matter of Esberg, 215 AD2d 655 [2d Dept 1995]), progressive dementia (see Matter of Friedman, 26 AD3d 723 [3d Dept 2006]), and physical weakness (see Matter of Swain, 125 AD2d 574 [2d Dept 1986]).  As a result, it should come as no surprise that Surrogate’s Courts have granted summary judgment dismissing capacity objections, despite that the subject testators were diagnosed with dementia before they executed testamentary instruments. 

Case in point, in Matter of Schure (a case in which Farrell Fritz, P.C. represented the proponent of the testator’s will), the testator’s children opposed the proponent’s motion for summary judgment, alleging that a trial was necessary on the issue of capacity because the testator had been diagnosed with dementia several years before he executed the propounded instrument (see Schure, supra).  Nassau County Surrogate Edward W. McCarty, III, did not credit the objectants’ argument and, instead, granted summary judgment dismissing the capacity objection, among all of the other objections (see id.) In admitting the testator’s will, dated December 21, 2005, to probate, Surrogate McCarty cited the following evidence: (a) in July 2005, the testator called the propounded instrument’s attorney-draftsperson and made an appointment to discuss his estate planning; (b) in July 2005, the testator met with the attorney-draftsperson and his associate to discuss his estate planning and family; (c) in late-November 2005, the testator once again met with the attorney-draftsperson, his associate, and another colleague from their firm to discuss the terms of the testator’s will; (c) in early-December 2005, the testator met with one of his treating physicians, who made no notes in his file of the testator having psychological difficulties during their meeting and signed an affidavit stating that he would have noted such difficulties had he observed any; (d) on December 21, 2005, the testator executed the propounded will in the presence of the attorney-draftsperson, his associate, and another experienced trusts and estates practitioner; and (e) the attorneys attested to the fact that the testator was of sound mind at the time that he executed the will (see id.).     

Monroe County Surrogate Edmund A. Calvaruso’s decision in Matter of Petix is also instructive (see Matter of Petix, 15 Misc 3d 1140[A] [Sur Ct, Monroe County 2007]).  There, the testator died on April 29, 2005, just six months after executing his last will and testament on November 2, 2004 (see id.).  Inasmuch as the testator’s son was the nominated executor and sole beneficiary under the propounded will, the testator’s granddaughter, the daughter of his predeceased daughter, filed probate objections, alleging that the testator lacked testamentary capacity, among other things (see id.).  The bases for the capacity objection were the following: “a medical note by a Dr. Blackburn, dated 12/19/02, which stated that [the testator] was demented to the point where his driving was impaired;” and “two police reports, one where [the testator] had lost his car, and one where [the testator] had lost his wallet” (see id.). 

Notwithstanding the granddaughter’s proof that the testator had been diagnosed with dementia, Surrogate Calvaruso granted summary judgment dismissing the testamentary capacity objection (see id.).  In doing so, the court found that the granddaughter failed to offer proof to suggest that at any time on November 2, 2004, the date upon which the will was executed, the testator lacked capacity to make a will (see id.).  The court also noted that “a dementia diagnosis and lack of testamentary capacity are not one in the same” (see id.).  Accordingly, summary judgment dismissing the testamentary capacity objection was warranted (see id.).

To withstand a motion for summary judgment dismissing a capacity objection, a probate objectant generally will need to do more than show that a testator was diagnosed with dementia prior to executing the propounded will.  In light of Schure and Petix, among other decisions, a diagnosis of dementia may not be sufficient to raise a triable issue of fact to survive a motion for summary judgment on the issue of capacity.

 

 

To be Family or Not to be Family? That is the Question

Posted in Construction of Wills and Trusts

Two recent decisions from the New York County Surrogate’s Court attempt to answer this question.  In Estate of Weisberg, decided on April 8, 2014, the court addressed the issue of marriage. Faced with competing petitions for letters of administration, the court was asked to find as a matter of law, that the cross-petitioner was the decedent’s wife and sole distributee of the decedent’s estate.  In Levien v Johnson, 2014 NY Slip Op 30995(U), decided on April 14, 2014, the court considered whether two adults adopted by the decedent’s grandchildren constituted “great-grandchildren” under the decedent’s will.  In both cases, the court was asked to find that these familial relationships existed as a matter of law. However, as these cases demonstrate, that is not always the case.

In Estate of Weisberg, the cross-petitioner moved for summary judgment for a determination that she was the decedent’s surviving spouse, and thus entitled to letters of administration. The movant made the following two arguments: (1) the court was bound by a judicial finding in Family Court that she and the decedent were married; and (2) she and the decedent were married in an Islamic ceremony which created a legal marriage under New York law.  The court was not persuaded by either position.

First, it declined to apply the doctrines of res judicata or collateral estoppel to the Family Court determination because that finding was not on the merits. Rather, it was an administrative action made solely for the purpose of assigning the matter to a referee. Indeed, because the parties reconciled, the Family Court never rendered any finding, either on the merits or as necessary to the relief sought, that the parties were married. Without that determination, the court was not bound by the Family Court’s determination, and it refused to consider it.

Regarding the validity of the Islamic ceremony, the court found that there was no material issue of fact that the petitioner and decedent participated in an Islamic marriage ceremony. The court noted, however, that it could not, as a matter of constitutional law, decide that the ceremony constituted a valid religious marriage ceremony. On the other hand, the court could consider whether that religious ceremony constituted a valid marriage under New York law.  However, it found that the movant’s proof in that regard was deficient because there was no evidence that the requirements for a valid marriage under the Domestic Relations Law were complied with; to wit, that the petitioner and decedent solemnly declared that they take each other as husband and wife, or that the Imam who performed the ceremony had the religious authority to do so. Thus, the court could not rule as a matter of law that the cross-petitioner was the decedent’s spouse.  

The issue in Levien was different, but raised an interesting question about familial relations in the estate context. The proceeding centered around a trust created under the decedent’s will which provided that upon the termination of the trust, distribution of the remainder would go to the decedent’s great-grandchildren per capita. Approximately  2½ years before the trust terminated by its terms, two of the decedent’s grandchildren (Stephen and Harlan) brought a proceeding to compel the trustees to invade the trust and make distributions to them from the trust principal to pay for ongoing medical expenses (they both suffered from muscular dystrophy).  That proceeding was resolved by a stipulation of settlement in July 2012, in which Stephen and Harlan agreed to relinquish all rights as beneficiaries of income and/or principal of the trust.  Three months later they each adopted an adult in Texas. They notified the trustees of the adoptions and sought to have those adopted adults declared the decedent’s great-grandchildren who were entitled to share in the remainder of the trust. It should come as no surprise that the trustees refused to recognize the adoptions, and they commenced a proceeding seeking a decree that the adopted children were not entitled to share in the trust. Interestingly, the trustees did not challenge the validity of the adoptions in the Surrogate’s Court proceeding.  They argued instead, among other grounds, that recognizing the adopted children as the decedent’s great-grandchildren would violate the terms of the decedent’s will and the decedent’s intent; that the adoptions were “unique and unforeseeable” which should have been disclosed during the settlement negotiations; and Stephen and Harlan were using the adoptions as a means to circumvent the settlement agreement.

In the end, the court rejected all of the trustees’ arguments.  On the issue of the decedent’s intent, the court stated that EPTL § 2-1.3(a) makes clear that the term “children” includes adopted children, unless the decedent “expresses a contrary intention.” The court then determined that there was nothing in the will indicating that the decedent intended for his great-grandchildren to be only those who were blood relations.  The court found that the will’s silence on the issue of adoption did not create an ambiguity. The court similarly rejected the trustees’ “unforeseeability” argument, given New York’s long-standing recognition of adoption as a means to create a parent-child relationship as a matter of law, and here, that the adoptions did not affect the rights of the remainder beneficiaries, but merely added to the class thereof.  Even if Stephen and Harlan had a duty to disclose the adoptions during the settlement negotiations, the court found that their failure to do so was not a basis for the court’s determination as to the status of the adopted children as remainder beneficiaries under the trust.

Rejecting the “sham adoption” argument, the court found that to the extent the trustees were claiming that the adoptions resulted from fraud, they needed to address that in the Texas courts. Unless and until that issue is determined in Texas, the court would give full faith and credit to the Texas adoptions. Furthermore, it found that the only way in which the adoptions would circumvent the settlement agreement, thereby paving the way for Stephen and Harlan to share in the assets of the decedent’s estate, is if their adopted children voluntarily share those assets with them, which the court was powerless to prevent.

 

Charitable Pledges: Not Found Money, You Have to Earn Them

Posted in Fiduciaries, Uncategorized

A donor writes in a pledge amount, signs the pledge card, hands it over to the charity, and is absolutely committed to that amount; end of story, right?  Not necessarily.  A recent case emanating from Kings County Surrogate’s Court, Matter of Kramer, N.Y.L.J. April 21, 2014, p. 24 (col. 6), shows that certain charitable pledges may not be as binding as they appear on paper.  The case provides an excellent primer on the operation of specific charitable pledges under the theory of unilateral contracts, and serves as a stark reminder to charities that to have the right to enforce a pledge that they must do more than just secure a signature on a pledge card.  The case also underscores to estate administrators the importance of scrutinizing and potentially challenging seemingly credible claims against an estate.

Kramer involved a motion by a charity, Educational Institute Oholei Torah-Oholei Menachem, for summary judgment dismissing objections to its petition to determine the validity and enforceability of its claim against the estate of Isaac Kramer.  The charity’s claim was based upon a pledge card and promissory note, in the face amount of $1,800,000, allegedly signed by the decedent approximately a year and a half before his death, and ostensibly payable six months prior to the decedent’s death.  The pledge was allegedly given for the purpose of supporting a building campaign proposed by the charity to construct a new ritualarium, or mikveh, for use of the charity’s members.  No payment on the pledge had been made by the decedent or demanded by the charity prior to the decedent’s death.  Representatives of the charity claimed they consciously withheld demands for payment because of the decedent’s illness shortly before his death.

Objections to the charity’s petition were filed by each of the Kings County Public Administrator, as fiduciary of the decedent’s estate, and four additional groups representing various purported testamentary legatees and distributees.  The respective objections raised multiple theories for rejection of, and affirmative defenses against, the charity’s claim including (i) forgery of the decedent’s signature, (ii) lack of due execution, (iii) lack of consideration, (iv) lapse upon the decedent’s death, (v) laches and unclean hands, (vi) expiration of the statute of limitations, (vii) fraudulent inducement, and (viii) the decedent’s lack of capacity.  Upon the charity’s summary judgment motion, two of the respondents cross moved for summary judgment upon an additional theory of the charity’s failure to demonstrate acceptance of the pledge by taking action in reliance thereon.

The Court granted the charity’s motion for summary judgment concerning the objections based upon lack of due execution, laches, unclean hands, expiration of the statute of limitations, and fraudulent inducement, because none of the respondents supported or addressed these objections in their responsive papers.  Thus, these objections were deemed abandoned.  The Court also found that no triable issue of fact was raised concerning the decedent’s capacity, and that the burden of proving the decedent’s incompetence was not met.  Accordingly, the charity’s motion for summary judgment was granted concerning the objections based upon capacity.  The charity also prevailed concerning objections based upon forgery of the decedent’s signature, as the Court found that the handwriting analysis report raised no triable issue of fact concerning its genuineness.

The final objection considered by the Court, lack of consideration, however, turned out to be dispositive against the charity.  It was clear from the facts and on the face of the pledge that it was made in furtherance of a specific purpose, namely a building project, rather than for the charity’s general educational and religious work.  As such, the Court noted that the pledge must be examined under the theory of a unilateral contract.  Under this theory, the signed pledge card is not the contract itself, but merely an offer to make a contract which the charity must then accept by taking action in reliance upon the offer.  The pledge, then, will not become binding until the charity has sufficiently acted upon the pledge so as to incur liability on the part of the donor. 

The Court stated that it has been the “noted policy of the courts to sustain the validity of subscription agreements whenever a counter promise of the donee can be sustained from the actions of the parties or it can be demonstrated that any legal detriment has been sustained by the promise in reliance upon the promised gift.”  For instance, charitable subscriptions have been deemed enforceable where the donee has made some substantive progress towards the charitable goal for which the pledge was made.  This would include starting construction, employing architects and paying for plans, raising additional pledges based upon the disputed pledge, or taking on a construction loan for the project.  The donor’s partial payment of the pledge, whether alone or in conjunction with concrete action on the part of the charity, has also been deemed sufficient to indicate acceptance of the unilateral contract.

Despite this broad policy in favor of enforcement, the charity in Kramer was unable to meet the burden to show that it had meaningfully acted in reliance upon the pledge.  Indeed, it was undisputed that no actual construction had begun on the proposed building project.  Nor was there any specific date upon which construction was to begin, or any reasonable timeframe for completion of the project.  The Court characterized the construction project as more of a “hoped-for occurrence” than an actual plan.  Moreover, despite its claims to the contrary, the charity could not prove that it had expended any sums of money on any construction related expenses, such as soil samples or architectural plans.  Nor could the charity produce any contracts or engagement letters from architects, engineers, or contractors.  There was also no proof of building permit or zoning applications.  Finally, though the charity claimed to have used the decedent’s pledge to solicit other pledges, no independent evidence of receipt or fulfillment of such additional pledges was offered.  In sum, the Court found that the charity had done nothing meaningful or substantive in reliance on the decedent’s pledge.  Thus, the charity’s motion for summary judgment on the consideration issue was denied and the cross-motions dismissing the charity’s petition were granted.

 The Kramer case should serve as a useful guide for charities in satisfying the requirements for establishing enforceability of specific charitable pledges.  It also gives estate administrators helpful factors to look for when challenging charitable pledges

How “Absolute” is Absolute Discretion?

Posted in Fiduciaries

Sometimes language contained in wills and trusts can be misleading to the lay person. 

For example, while they are good for a chuckle, provisions in wills that unequivocally and forcefully direct the executor to hire a certain lawyer in connection with the testator’s estate’s administration are unenforceable.  Who would believe that such will provisions usually direct that the executor hire the lawyer who drafted the will?

As my colleagues explain, “exoneration clauses,” which are provisions in wills and trusts that purport to provide ironclad insulation from liability to an executor or trustee, are “not all they are cracked up to be.” 

What about a trust that grants the trustee “absolute discretion” to make distributions?  What do those words mean to a beneficiary who is seeking a distribution?

As the New York County Surrogate’s Court held in Matter of Hammerschlag, NYLJ April 26, 2013 at p.37, the broad grant of  absolute discretion to a trustee to make distributions is “not unbounded.”   The court explained the well-settled law that a court is empowered to review the exercise or non-exercise of a discretionary power (such as the absolute discretion to make distributions of principal and income from a trust) conferred upon a trustee so as to prevent any abuse in the exercise of that power. 

In Hammerschlag, a beneficiary of a trust sought to compel trust distributions.  The beneficiary alleged that she was in dire straits, homeless and with no means of support.  She asserted that the trustee improperly exercised his absolute discretion when he declined to make distributions.  Specifically, the beneficiary argued that the trustee merely relied on information (or misinformation) received from her estranged mother in deciding whether to make distributions – that he acted arbitrarily and without appropriate inquiry into relevant circumstances.  The trustee argued that he was acting in good faith and desiring to preserve trust assets, guarding against the beneficiary’s improvidence.  The court scheduled a hearing on the issue of whether the trustee failed to exercise his independent judgment or adequately evaluated the beneficiary’s needs in good faith before exercising his absolute discretion and refusing to make distributions. 

Matter of Mark, C.H., 83 Misc 3d 363 (Sur Ct, New York County 2012), provides an example of what the New York County Surrogate’s Court viewed as an indefensible attempt to rely on the broad grant of “absolute discretion.”  In that case, at trust beneficiary was one of the most vulnerable among us, suffering from profound disabilities.  There, Court first observed that the trust at issue empowered the trustees with absolute discretion to withhold or pay out income, and, in the event of an income shortfall, to pay trust principal for the “care, comfort, support and maintenance” of the beneficiary and his descendants. Then the Court found as follows:

The trustees left [the beneficiary] to languish for several years with inadequate care, despite the fact that the [trust] had abundant assets. In so doing, the trustees failed to exhibit a reasonable degree of diligence toward [the beneficiary]. Courts will intervene not only when the trustee behaves recklessly, but also when the trustee fails to exercise judgment altogether (“even where a trustee has discretion whether or not to make any payments to a particular beneficiary, the court will interpose if the trustee, arbitrarily or without knowledge of or inquiry into relevant circumstances, fails to exercise the discretion”) (citation omitted). That is, sadly, precisely what occurred here.

 Absolute discretion is the broadest grant of discretion, and courts are deferential to a trustee’s exercise of such discretion– courts do not lightly substitute their own judgment for that of a trustee.  However, in exercising absolute discretion, a trustee must not act arbitrarily, but must use his judgment and act in good faith with knowledge of or inquiry into relevant circumstances.  In a case like Hammerschlag,  the trustee’s decision-making process is critical.  Was the decision to decline to make distributions arbitrary or the result of a process of consideration and the exercise of the trustee’s independent judgment, or was it arbitrary and made without consideration or inquiry? 

 

 

 

 

Appellate Division: Issue of Fact Prevents Summary Disposition of Abandonment Allegations

Posted in Right of Election

My most recent blog post, titled No Sex, No Elective Share?, discussed a recent case involving allegations of constructive abandonment as a basis for disqualifying a surviving spouse from receiving an elective share. In that post, I also discussed, briefly, actual abandonment as a basis for disqualification. Unlike constructive abandonment, actual abandonment requires proof that the surviving spouse lived apart from the decedent, without consent.

In early January, the Appellate Division, Third Department, decided Matter of Yengle, 2014 NY Slip Op 00156 (3d Dept, Jan. 9, 2014). In that case, the decedent’s sister sought to disqualify the respondent as the decedent’s surviving spouse, and to remove her as administrator of the decedent’s estate, on the ground that she had abandoned the decedent. The Appellate Division determined that the Surrogate’s Court improperly granted the respondent’s motion for summary judgment dismissing the petition.


It appears to have been undisputed that the decedent and the respondent, although legally married, lived separately for about a decade. The respondent, according to the Appellate Division, made out a prima facie case for summary judgment by offering proof that that she and decedent resided together for some time following their marriage, during which the decedent drank heavily and abused her, physically and mentally, occasionally requiring police intervention; the decedent would leave their home for periods of time and the respondent ultimately suggested that they live separately; following their separation, the decedent and the respondent mostly communicated by telephone every couple of months and saw each other occasionally; and the decedent was aware that the respondent had two affairs during their marriage, and was not angry. This evidence, according to the Court, was sufficient to meet the respondent’s threshold burden on her summary judgment motion, thus shifting the burden to the petitioner to demonstrate the existence of a question of fact for trial.

 

The Appellate Division determined that the petitioner did, indeed, raise an issue of fact for trial. The petitioner’s testimony casted doubt onto respondent’s allegations concerning the decedent’s alcoholism and her allegations of abuse. The court noted that the respondent never pursued criminal charges against the decedent, initiated a family offense proceeding, or otherwise sought an order of protection against the decedent as a result of the alleged abuse.  The petitioner further testified that she knew, based upon her conversations with the decedent and her observations of his emotional distress, that he wanted to be with the respondent and would not have consented to her living apart from him.  The record also contained cards that the decedent gave to the respondent, in which he expressed his love for her. Finally, the respondent testified that the decedent had asked her to return to him, but she allegedly refused to do so because of his alcohol abuse. This evidence, according to the Appellate Division, raised a triable issue of fact concerning the decedent’s consent to the respondent’s absence. (Notably, much of this evidence would be potentially excludable at trial, pursuant to the Dead Man’s Statute (CPLR 4519), but nonetheless could be considered on a motion for summary judgment.)

 

As the Appellate Division noted in its decision, quoting authority, “[t]he question of abandonment is one of fact, and often a close one.” Summary judgment in such a case will rarely be appropriate. The party claiming abandonment ultimately bears the burden of proof, and that burden is a heavy one. Evidentiary hurdles, moreover, may prove insurmountable. 

No Sex, No Elective Share?

Posted in Right of Election

A recent decision emanating from the Surrogate’s Court, Kings County, Matter of Nichols, N.Y.L.J., Nov. 15, 2013, p.40, addresses the rarely litigated issue of constructive abandonment (i.e., a spouse’s unjustified refusal to engage in sexual relations) as a basis for disqualifying a surviving spouse from receiving an elective share. This case teaches that a claim of constructive abandonment must be supported by more than hearsay testimony in the record that the decedent told his grandson, on a single occasion, that “the dingbat hasn’t given me any in years.”

Perhaps because of the difficulties in proving — post-mortem — a decedent’s sexual activity, disqualification cases grounded in allegations of constructive abandonment are few and far between (see, e.g., Matter of Reisman, N.Y.L.J., Feb. 8, 2000, p.33, col. 3 [Sur Ct, Nassau County 2000]). Constructive abandonment is most often alleged as a grounds for separation or divorce, in the context of matrimonial law. The disqualification statute — EPTL § 5-1.2 – provides for the disqualification of a surviving spouse if “[t]he spouse abandoned the deceased spouse, and such abandonment continued until the time of death”; the statute contains no definition of “abandonment.” In determining whether a spouse is disqualified, courts generally employ the standard used to determine if a party would be entitled to a decree of separation or divorce on the grounds of abandonment under the Domestic Relations Law (see, e.g., Matter of Hama, 39 Misc 3d 429, 435 [Sur Ct, New York County 2012]).

 

Unlike actual abandonment, which requires proof that the surviving spouse lived apart from the decedent, without consent, constructive abandonment requires no physical separateness. Constructive abandonment is routinely defined as the refusal of one spouse to engage in sexual relations with the other spouse for one or more years, when such refusal is unjustified, willful, and continual, and despite repeated requests for the resumption of sexual relations (see Davis v Davis, 71 AD3d 13 [2d Dept 2009]; Gianis v Gianis, 67 AD3d 963 [2d Dept 2009]). A third type of abandonment, abandonment by lock out, “occurs when one spouse changes the lock on the entrance door of the marital abode, or the place where he or she is living, thus effectively excluding the other spouse, unless the act is justified” (Soldinger v Soldinger, 21 AD3d 469, 470 [2d Dept 2005]).

 

Matter of Nichols involved allegations of all three types of abandonment. The decedent was survived by his spouse, Edlyn, and two adult children of a prior marriage. Edlyn filed a notice of election with the Court, followed by a petition to determine the validity and effect of her election. She alleged that the decedent had made no provision for her, and that at the time of his death the decedent held certain real and personal property, including real property, jointly with his children. The children objected to the petition, alleging disqualification on the grounds, inter alia, of abandonment, constructive abandonment, and abandonment by lock out. The parties could not resolve the matter informally and Edlyn ultimately moved for summary judgment seeking dismissal of the objections and determining the validity of her right of election.

 

While there were differences in their testimony, both children, and the decedent’s grandson, testified that the decedent and Edlyn lived separate and apart from each other, the decedent sleeping in a hospital bed on the first floor of the real property, and Edlyn living with her adult disabled daughter in a separate, locked residence on the second floor of the property. 

 

However, fatal to the children’s abandonment claim, according to the Court, was the absence of evidence that the separation within the property was without justification or without the decedent’s consent. The Court credited the children’s own testimony regarding the impact of the decedent’s failing health on his mobility.

 

The Court likewise disposed of the claim of abandonment by lock out, finding an absence of evidence that the decedent could not enter Edlyn’s locked living quarters when access was required.

 

Addressing the children’s claim of constructive abandonment, the Court noted that such exists when “the abandoning spouse unjustifiably refused to fulfill the basic obligations arising from the marriage contract and that the abandonment continues for at least one year” (id.,quoting Lyons v Lyons, 187 AD2d 415, 416 [2d Dept 1992]). The “refusal must be unjustified, willful, and continued despite repeated requests for continued conjugal relations” (id.). 

 

To establish that Edlyn denied the decedent his conjugal rights in the final years of his life, the children relied solely on the testimony of the decedent’s grandson, Donnell, that, on a single occasion, the decedent told him that “the dingbat hasn’t given me any in years.” The children conceded they never discussed with the decedent his sexual relationship with Edlyn. (Although, as the Court noted in a footnote, one child testified “that the decedent slept alone, on the first floor, in a twin-sized hospital bed, and[opine[d] that it was spacious enough for two people to share, implying that [Edlyn] would have been able to sleep in the hospital bed with the decedent if she so desired.”) 

 

The Court determined that the “evidence” was insufficient to raise a triable issue of fact regarding constructive abandonment, noting that “[t]he respondents rely on a single statement by the decedent to a third party, on some unspecified date, that the movant and the decedent had not engaged in marital relations for an unknown period of time.” Quoting Lyons, an Appellate Division matrimonial case, the Court noted that, “[p]roof that one spouse, in response to a single request, refused to engage in sexual relations, in the absence of proof that the other spouse thereafter repeatedly and unsuccessfully requested a resumption of sexual relations, is insufficient” to warrant a finding of constructive abandonment. The Court noted that the children offered no evidence that the decedent ever requested that Edlyn resume marital relations, even assuming such relations had ceased, or that she refused any such request.

It is likely that “constructive abandonment” spousal disqualification cases will continue to be a rare breed. While determining such cases will almost always involve disputed factual issues, a court will require the party seeking disqualification – the party with the burden of proof – to offer substantial evidence in order to proceed. Parties seeking to disqualify a surviving spouse should be mindful that, as the Nichols court noted, the “statutes granting to a spouse a right of election are remedial and should be construed in the interest of the surviving spouse to give . . . her the broadest possible protection” (quoting Matter of Bartley, 83 Misc 2d 672, 679 [Sur Ct, Cattaraugus County 1975]).

Tax Considerations in Will Contests – Part 2

Posted in Probate

Continuing the discussion of tax considerations in settling probate contests, the following additonal issues should be considered.

Marital Deduction

In determining the taxable estate, a deduction is allowed for the value of property which “passes” from the decedent to his surviving spouse.

If, as a result of a controversy involving the decedent’s will, or involving any bequest or devise thereunder, the surviving spouse assigns or surrenders a property interest in settlement of the controversy, the interest so assigned or surrendered will not be considered to have passed from the decedent to the surviving spouse and, so, will not qualify for the marital deduction.

Conversely, if a property interest is assigned or surrendered to the surviving spouse, the interest will be considered as having passed from the decedent to the spouse and, so, may qualify for the marital deduction, but only if the assignment or surrender was a bona fide recognition of the rights of the surviving spouse in the decedent’s estate that are enforceable under state law, and it meets the other requirements for the marital deduction (for example, the QTIP requirements for a transfer in trust). Thus, a transfer to a surviving spouse may qualify if it is made in settlement of her claim arising under an alleged failure by the estate to fulfill the decedent’s obligations under a prenuptial agreement; in that case, the transfer represents a bona fide settlement of enforceable rights. Such a bona fide recognition is presumed where the transfer is pursuant to a decision of a local court rendered upon the merits in an adversarial proceeding following a genuine contest. 

Charitable Deduction

 

In general, a deduction is permitted for federal estate tax purposes for bequests or other transfers to or for a charitable purpose. In determining whether an interest in property has passed from a decedent to a charity, the rules relating to marital bequests, described above, are applicable.

 

Thus, an amount distributed from an estate to a charity pursuant to a settlement agreement following a bona fide will contest is deemed to have passed directly to the charity from the decedent, and is eligible for a charitable deduction where the charity had a recognizable and enforceable right to a portion of the estate. However, the amount of the deduction cannot be greater than the value of what the charity would have received under the original will if it had litigated its claim to conclusion.

 

If a charitable organization assigns or surrenders a part of a transfer to it pursuant to a compromise agreement in settlement of a controversy, the amount so given up is not deductible as a transfer to that charitable organization. Thus, an estate which settles a will contest from funds in a residuary charitable bequest is required to pay tax on the settlement amount.

 

Gift and Income Taxes

 

The settlement of a will contest may involve several transfers of property, either between the estate and a beneficiary or claimant, on the one hand, or between beneficiaries or claimants, on the other. While each of these transfers may have certain estate tax consequences, as described above, the various parties must also consider the possible gift tax and income tax consequences.

 

In general, it is unlikely that a transfer made pursuant to the settlement of a will contest will be treated as a taxable gift if it is the product of a bona fide, arm’s-length transaction that is free of donative intent. Where that is not the case – as where two beneficiaries agree to “revise” the decedent’s will as it concerns dispositions of properties to themselves ‑ the readjustment of their property interests may be deemed a taxable gift.

 

In light of the facts and circumstances, a payment by the estate to a claimant may be treated, under the terms of a settlement, as taxable compensation for services rendered to the decedent, rather than as a non-taxable bequest.

 

Alternatively, the payment (or distribution) to a beneficiary may result in taxable income to the beneficiary if the estate has distributable net income.

 

It is also possible that beneficiaries who transfer or exchange property, as part of a settlement, will be treated as having sold such property, thereby realizing taxable gain (some of which may be treated as ordinary income, depending upon the asset).

 

If the property is an interest in a pass-through entity, such as an S corporation or a partnership, the transfer of such an interest will effect a change in its ownership (presumably effective from the date of the decedent’s death) which may necessitate the amendment of the returns of both the entity and the owners. This, in turn, may require additional economic outlays among the parties in order to restore any benefits lost (including distributions), or to indemnify any losses incurred by any of the parties.

 

Finally, where the estate holds items of income in respect of a decedent (“IRD”), such as retirement funds, it may behoove the estate to consider distributing such items to a charitable organization in settlement of the organization’s claim to a share of the decedent’s assets; in this way, the estate and its non-charitable beneficiaries may avoid the income tax thereon. 

 

Conclusion

 

The foregoing discussion highlights some of the tax considerations that are attendant to the settlement of a will contest. The manner in which each of these is addressed can have a significant impact on the net economic results realized by the parties to the settlement. It is imperative that the parties and their advisors be aware of the tax implications of their actions throughout the will contest, and especially during the negotiation of the settlement. In this way, the parties may better understand their true economic goals and costs, and their advisors may better manage their client’s expectations.