No "Wiggle Room" In After-Born Statute
In Matter of Gilmore, 1/19/2010 NYLJ 21 (col 1), Nassau County Surrogate John B. Riordan declined to expand the reach of EPTL 5-3.2 (the so-called “after-born statute”) to non-marital children known to, or acknowledged by, the decedent after execution of his will.
In Gilmore, a probate proceeding, two non-marital children sought to have their status as beneficiaries determined as a preliminary matter. The parties consented to have the Court assume the truth of the claimants’ allegations for a determination of whether as a matter of law those allegations stated a cause of action entitling the claimants to after-born status.
The decedent died in January, 2007, survived by eleven children, including three from a first marriage, four from a second marriage, and four alleged non-marital children. The propounded will, however, benefited only one child from the first marriage. That child, also the petitioner and named executor, was to inherit the several-million-dollar estate. The claimants were two non-marital children born prior to the decedent’s execution of the will, but allegedly became known to and were acknowledged by the decedent only subsequent to the will’s execution.
The court explained that EPTL 5-3.2 creates a rule of presumed intent for a testator who may have inadvertently omitted as a beneficiary a child born after he executed his will -- “If he gave something to existing children and the after-born is neither provided for nor mentioned in the will and unprovided for by some settlement, the after-born shares in the gift to existing children.” Pursuant to an amendment to the statute (which merely codified existing case law), non-marital after-born children who can duly establish their inheritance rights are entitled to the same benefits under the statute as marital children.
The claimants in Gilmore alleged -- and it was accepted as true for purposes of the motion -- that nearly a decade after the decedent executed his will he underwent DNA tests which revealed to him for the first time that he was their biological father. Although the claimants were born long before the execution of decedent’s will, they claimed that as they were only known or acknowledged by their father after execution of his will, they should be accorded the same presumption of inadvertent disinheritance as after-born children.
The Court rejected the claimants’ argument, however, noting that pursuant to the clear and unambiguous language of the statute, a child is entitled to after-born rights only if born after execution of the will. The only reported exception to this rule -- for a child adopted after the execution of a will, even though born previously -- had no application to the case at bar.
Because the language of the statute was clear, speaking only of a “child born after the execution of a last will” (EPTL 5-3.2 [a]), the Court refused to extend the scope of the statute to a non-marital child who is known or acknowledged by a decedent only after execution of his will. “To engraft exceptions where none exist,” according to the Court, “are trespasses by a court upon the legislative domain”
Summary Judgment Granted, Dismissing Objections and Admitting Will to Probate
In recent years, Surrogate’s Courts have become increasingly inclined to grant motions for summary judgment in contested probate proceedings when warranted. A decision issued last week in Monroe County is yet another example of this trend. While the evidence presented by the objectants in this particular case appears to be exceptionally weak, the following analysis provides a cohesive illustration of the considerations and standards that Surrogates routinely utilize in analyzing typical objections.
In Matter of Feller, 2010 NY Slip Op 50001(U), eight of the decedent’s eleven known distributees filed objections to probate, alleging the customary lack of due execution, lack of testamentary capacity and undue influence. The decedent executed a last will and testament nine months prior to her death, leaving her estate to ten charities and four individuals in equal shares, and naming the attorney-draftsman as executor. The New York State Attorney General’s Office filed a motion for summary judgment, seeking to dismiss the objections.
Due Execution
The objectants contended that the will was not duly executed within the requirements of EPTL 3-2.1 because the attorney-draftsman/proponent, not the testator, requested that that the witnesses act. But the testimony of the attorney-draftsman demonstrated that the testatrix responded in the affirmative when questioned as to whether she wanted those present to witness the execution of the instrument. The Court opined that this conduct coupled with the circumstances surrounding the execution ceremony satisfied the due execution requirements of EPTL 3-2.1. Indeed, “[a]ttorneys routinely lead their clients through the will execution formalities in order to ensure that the requirements of EPTL 3-2.1 are satisfied . . . and . . . publication and instruction . . . is not required to be in any ‘ironclad ceremonial or ritualistic language’” (Matter of Feller, supra, citing In re Douglas’ Will 193 Misc 623, 631-632 [Sur Ct, Broome County 1948]).
Testamentary Capacity
With respect to testamentary capacity, the Court noted the presumption in favor of capacity when a will is drafted by, and the execution supervised by, an attorney. In this case, the Court held that the proponent established a prima facie case of the requisite capacity based upon the following facts:
· The decedent herself sought the services of the attorney-draftsman;
· The decedent personally met with the attorney-draftsman and brought detailed notes as to her desired estate plan;
· The decedent told the attorney-draftsman about her familial situation;
· The witnesses were aware of the decedent’s involvement in her estate planning, and testified that she appeared to have no visual, auditory or cognitive difficulties; and
· The decedent made specific and accurate changes to the draft of the will.
In fact, the only basis for the allegation of lack of capacity was one of the objectant’s observations that the decedent had appeared preoccupied, reserved and distracted during a visit that occurred around the time that the will had been executed. Citing holdings of the Appellate Division that evidence of sadness or confusion alone is insufficient to prove lack of capacity, the Court rejected this contention. The Court further explained that a diagnosis of dementia, Alzheimer’s, or simply old age, without more, would also be insufficient to override a prima facie showing of capacity (id., citing Matter of Nofal, 35 AD3d 1132 [3d Dept 2006]; Matter of Castiglione, 40 AD3d 1227 [3d Dept 2007]; Matter of Minasian, 149 AD2d 511 [2d Dept 1989]; Matter of Hedges, 100 AD2d 586 [2d Dept 1984]).
Undue Influence
Addressing the claims of undue influence, the court reiterated that it is an objectant’s burden to demonstrate by a preponderance of the evidence, (1) motive, (2) opportunity, and (3) actual undue influence. Undue influence must amount to “a moral coercion, which restrained independent action and destroyed free agency or which . . . constrained the testator to do that which was against his free will and desire . . .” (id.,quoting Children’s Aid Society of NY v Loveridge, 70 NY 387, 394 [1877])., The Court further noted that undue influence may proved by circumstantial evidence, “but the circumstances must lead to it not only by a fair inference but as a necessary conclusion” (id., quoting In re Will of Henderson, 253 AD 140 [4th Dept 1937]).
The objectants’ claim of undue influence alleged that the proponent persuaded the testator to change her funeral home of choice to one that was a client of the proponent. However, the proponent testified that he made no recommendations regarding the decedent’s testamentary plan, but tried to persuade her to choose another executor. In addition, the record demonstrated that every time the decedent met with the proponent regarding her estate plan, she was not accompanied by anyone. In view of these facts, the Court held that the Objectants failed to meet their burden in connection with their allegations of undue influence (see Matter of Feller, supra).
Interestingly enough, there was no discussion of a confidential relationship between the decedent and proponent in this case, and thus, the burden of proof did not shift. After all, an attorney-client relationship often gives rise to a confidential relationship, and a consequential presumption of undue influence (see e.g., Weber v Burman, 22 Misc 3d 1104[A] [Sup Ct, Nassau County 2008]; Estate of Olson, 5/16/2006 NYLJ 33 [col 4] [Sur Ct, Richmond County]). Perhaps this was not considered because the attorney-draftsman was not a beneficiary, but I would submit that such a relationship is arguably relevant here, in light of the allegations.
Court of Appeals: Extra Deposition Did Not Violate In Terrorem Clause
In a rare venture into the world of trusts and estates and its most significant recent ruling regarding in terrorem clauses, the Court of Appeals in Matter of Singer, 2009 NY Slip Op 09265, reversed both the Surrogate’s Court and the Appellate Division, holding that a beneficiary’s conduct in deposing the testator’s former attorney regarding drafts of prior wills did not violate the in terrorem clauses in the propounded will. Specifically, the Court held that the safe harbor provisions of SCPA 1404 and EPTL 3-3.5 are not exclusive, and must be applied on a case-by-case basis. The decision has essentially set forth a two-prong analysis to determine whether a beneficiary’s conduct triggers an in terrorem clause, consisting of the following inquiries: (1) whether the conduct falls within the statutory safe harbor provisions, and if not (2) whether it violated the testator’s intent.
In Singer, the decedent had executed a last will and testament approximately one year prior to his death, in which he appointed his daughter, Vivien, as executor. He also created a corresponding revocable trust through which he bequeathed to Vivien his home, most of his tangible personal property, and the sum of $200,000. In the trust instrument, the decedent stated that Vivien’s inheritance was in recognition and gratitude for her extreme dedication and constant care. The decedent’s son, Alexander, received one-half of the remainder of the estate, to be split with Vivien, and each of Alexander’s sons was given a $15,000 bequest.
The will contained a typical, broad in terrorem clause, which stated, “if any beneficiary, shall, in any manner, directly or indirectly, contest, object to or oppose, or attempt to contest, object to or oppose the probate or validity of [the] will or revocable trust created by [the decedent], or any part of [his] estate plan, or any gifts made by [him], . . .” that beneficiary’s share of the estate would be forfeited (id. at *2). The decedent also included a second in terrorem clause that was explicitly directed at Alexander. That clause directed that Alexander “not take [decedent’s] daughter . . . to a . . . (religious court) or to any other court for any reason whatsoever . . . ,” and stated that if he did, the result would be the forfeiture of his and his sons’ inheritance (id.).
Continue Reading...Potential Court Approval of Religious Divorce Is Irrelevant to Right of Election
A recent decision emanating from the Kings County Surrogate’s Court provides another interesting application of the rules on entitlement to an elective share. In Matter of Atiram, 2009 NY Slip Op 52356(U), the petitioner sought a determination as to her right of election under EPTL 5-1.1A. She had married the decedent in 1952, but thirty-eight years later, the couple participated in a Jewish religious divorce under the supervision of the Rabbinical Alliance of America in New York. The Ministry of Religion of the State of Israel allegedly recognizes this type of divorce. New York, however, does not.
Pursuant to EPTL 5-1.2, a divorce disqualifies an individual from obtaining an elective share when “a final decree or judgment of divorce . . . recognized as valid under the laws of this state [that] was in effect when the deceased spouse died.” New York does not recognize a rabbinical divorce as a valid termination of a marriage because the laws of this state require divorce by “due judicial proceedings.” In light of this rule, the objectant in Atiram sought a stay of the petitioner’s application pending an Israeli court’s determination of the validity of the divorce by the laws of that jurisdiction which, she argued, would qualify as the requisite “judicial proceeding” for New York. The Court disagreed, and opined that the outcome of the Israeli proceeding was irrelevant to the petitioner’s right of election.
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Specifically, the Court held that even if the Israeli court were to ultimately recognize that the decedent and the petitioner had been divorced under the laws of that country, such a determination would not have been in effect upon the decedent’s death. Therefore, because the marriage existed on the date of the decedent’s death, petitioner remained entitled to her elective share (see Matter of Atiram, citing Bennett v Thomas, 38 AD2d 682 [1st Dept 1971]; Matter of Berk, 20 Misc 3d 691 [Sur Ct, Kings County 2008]).
Posthumously Voided Marriage Negates Right of Election
Last year, we posted an entry on Matter of Berk, 20 Misc 3d 691 (Sur Ct, Kings County 2008), a decision in which the court granted an elective share to a surviving spouse notwithstanding evidence that the marriage to the decedent, who was 99 years old at the time, occurred under highly questionable circumstances. The court’s rationale was that the marriage was voidable, not void. The Surrogate held that because the marriage was not invalidated prior to the decedent’s death, the right of election could not be disturbed.
In Matter of Kaminester, 2009 NY Slip Op 29429 (Sur Ct, New York County), the court addressed a similar set of facts, but with one distinguishing factor: prior to his death, the decedent had been adjudicated incapacitated in an Article 81 proceeding. This fact allowed for an entirely different result than that reached in Berk.
In Kaminester, the decedent’s estate sought a determination as to the validity of the elective share pursuant to SCPA §1421. As in Berk, the marriage remained a secret until the decedent’s death, and occurred mere months prior thereto. But in this case, the marriage also occurred two and a half months after a Texas court appointed a temporary guardian for the decedent, and during the pendency of an Article 81 proceeding in New York. Within the context of the Article 81, a temporary restraining order had been imposed with respect to removing the decedent from the State, among other things. The Article 81 proceeding resulted in the appointment of a temporary guardian, and a stipulation on the record that the decedent lacked capacity to marry. The decedent’s new “wife” was in the courtroom with her attorney at the time of the stipulation, but neither one revealed the existence of the couple’s recent marriage.
Notably, during this time period, the beneficiary designation on the decedent’s life insurance policy, worth over $1 million, was changed to favor his new “wife.” In addition, a deed was executed transferring the decedent’s Westhampton property to the couple as joint tenants with right of survivorship.
The “wife” filed a notice of election within weeks of the decedent’s death. Thereafter, the executor of his estate sought an order from the Article 81 court to hold her in contempt for violating its TRO. In response, the court invoked Section 81.29(d) of the Mental Hygiene Law, and “revoked and voided” the marriage, the designation of the “wife” as beneficiary on the decedent’s life insurance, and the deed that transferred to her a joint tenancy interest in his Westhampton property. The First Department affirmed these portions of the Article 81 court’s decision, accepting the posthumous voidance of the decedent’s marriage.
Surrogate Glen of New York County subsequently addressed the issue of the elective share, and thus the validity of the marriage, in light of these events. She discussed Section 7 of the Domestic Relations Law (“DRL”), the statute that had been relied upon in Berk, and compared it to Section 81.29(d) of the Mental Hygiene Law (“MHL”). DRL §7 provides that a marriage involving an individual “incapable of consenting to a marriage for want of understanding” is voidable, and becomes a nullity as of the date it is annulled. In contrast, Section 81.29(d) of the MHL “permits the court that appoints an article 81 guardian for an incapacitated person to “’revoke any previously executed . . . contract. . . . made by the incapacitated person prior to the appointment of the guardian if the court finds that the previously executed . . . contract. . . was made by the person was incapacitated’” (Matter of Kaminester, 2009 NY Slip Op 29429 at *5). Thus, the Article 81 adjudication was the lynchpin of the Kaminester decision.
In her decision, the Surrogate questioned whether the legislature had intended MHL §81.29(d) to override DRL §7. She also recognized that while she was bound by the First Department’s determination, the Second Department had previously taken the position that it had inherent power to override DRL § 7 by posthumously voiding a marriage due to the decedent’s mental incapacity (see Campbell v Thomas,36 AD3d 576 [2d Dept 2007]). Nonetheless, because of the First Department’s determination that the decedent’s marriage had been void ab initio as a result of his incapacity, the Surrogate opined that there existed no right to an elective share.
Notably, the result in Kaminester rendered the marriage in issue void, as opposed to voidable, which was the characterization in Berk. A voidable marriage is a nullity upon the court’s declaration, whereas a void marriage is deemed to never have existed. This distinction was based upon the fact that there had been an Article 81 adjudication in Kaminester, allowing for the application of MHL §81.29(d) after the decedent’s death.
Adoption Records Unsealed to Determine Distributee Status
A couple of months ago, we posted an entry discussing the unsealing of adoption records in New York State, and the manner in which courts must weigh the State’s interests of confidentiality and maintenance of the adoptive parent-child bond against an applicant’s interests in unsealing his or her records. Prompting that discussion was Matter of Victor M.I., 23 Misc 3d 1103A (Sur Ct, Nassau County 2009), a case in which the Nassau County Surrogate’s Court permitted the unsealing of adoption records for purposes of proving the petitioner’s Hungarian lineage to establish Hungarian citizenship.
More recently, in Matter of B.F., 674, an application was brought before the Nassau County Surrogate’s Court to unseal an adoption file and obtain a certified copy of the order of adoption to determine whether the adoptive child was distributee of an estate. Specifically, in a proceeding for letters of administration in a Queens County estate, the petitioner sought to demonstrate that a sibling of the decedent had been adopted out of the family in the late 1930’s or early 1940’s.
In its decision, the Court discussed its discretionary power to unseal records upon a showing of “good cause”. Although it recognized that “good cause” has no particular definition, it noted that section 114(4) of the Domestic Relations Law provides a statutory basis for the unsealing of adoption records for obtaining medical history when serious health issues arise. In non-medical situations, it appears that an applicant has a higher burden to prove that his or her interest outweighs that of the State, as applications are granted only on rare occasions (Matter of B.F., 674).
The Surrogate granted the application after an analysis of the State’s interest in confidentiality for purposes of maintaining anonymity for the natural parents, protecting the bond between the adoptive parents and child, and shielding the adoptive child from potentially unsettling information. It was noted that these factors were largely irrelevant in this case (id.).
The adoptive child was born in 1927, so the Court opined that both the natural and adoptive parents were likely deceased. In addition, confidentiality was not an issue inasmuch as the applicant already possessed all information in the one document requested from the file. The court distinguished between the more typical cases, in which an applicant seeks identifying information, and the circumstances presented; the petitioner was aware of the adoptive child’s identity but simply sought a document to legally determine the decedent's heirs at law (id.).
As Surrogate Riordan recited, “[w]hether [good cause] exists, and the extent of disclosure that is appropriate, must remain for the courts to decide on the facts of each case” (Matter of B.F., quoting Matter of Linda F. M.,52 NY2d 236, 240 [1981]). In view of this rule, it would be interesting to see how a court handled a petition with the same cause, i.e., a determination of a decedent's heirs at law, if the adoptive child were younger and some of the confidentiality concerns remained. But then again, if the applicant had enough information to pursue the inquiry, it is probable the he or she, like the applicant in Matter of B.F., already possessed identifying information.
Action Dismissed For Failure to Join Beneficiaries
A notable decision has been rendered by the Second Department, dismissing a trust rescission action as a result of Plaintiff's failure to join certain remainderpersons and charitable beneficiaries as parties.
In Estate of Nowitz v. Nowtiz, 2009 NY Slip Op 06660 (2d Dept 2009), the Decedent had commenced an action during his lifetime to rescind an irrevocable trust agreement without the consent of the trustee. After a jury trial entering a judgment in favor of the Plaintiff’s Decedent, the Defendant appealed seeking a dismissal for failure to join necessary parties and the expiration of the statute of limitations. The Second Department remitted the case to the Supreme Court for a determination (see Estate of Nowitz v. Nowtiz, 37 AD3d 788 [2d Dept 2007]).
According to the lower court, one of the remainderpersons and two of the charitable beneficiaries had waived any appearance on the matter. It further opined that plaintiff’s failure to join the remaining four beneficiaries was excusable due to their notice of the action before it proceeded to trial, and failure to intervene (Estate of Nowitz v. Nowtiz, 2009 NY Slip Op 066600 [2d Dept 2009]).
Relying on CPLR 1001(b), the Appellate Division reversed. It explained that according to statute, courts may excuse failure to join a necessary party upon consideration of five factors:
· Whether there exists another remedy for the petitioner if the action is dismissed due to nonjoinder;
· The prejudice to the party who has not been joined;
· Whether and by whom prejudice may have been, or may in the future be, avoided;
· Whether a protective provision in the judgment is feasible; and
· Whether an effective judgment may be rendered in the absence of the party that was not joined (see CPLR 1001[b]).
Although the Court recognized that the first factor was in favor of excusing the nonjoinder because the plaintiff had no other effective remedy, it determined that a consideration of the remaining factors weighed against proceeding in the absence of the beneficiaries that had not been joined (Estate of Nowitz v. Nowtiz, 2009 NY Slip Op 066600).
Specifically, in light of the second and third factors, the Court held that the beneficiaries would be greatly prejudiced if the trust were rescinded without their participation in the action, and that the plaintiff could have avoided prejudice to the beneficiaries by timely joining them as defendants. The Appellate Division rejected the Supreme Court’s conclusion that the nonjoinder was excusable because the beneficiaries could have avoided any prejudice by seeking to interve; instead holding that this fact was outweighed by the absence of a reasonable excuse for failure to join (id.).
In contemplating the forth CPLR 1001(b) factor, the Court opined that the facts were not in favor of proceeding in the absence of beneficiaries; a protective provision in an ultimate judgment was not feasible because rescission of the trust would directly affect their economic interests. Finally, the Court held that the efficacy of a judgment would be questionable without the participation of the beneficiaries who had not been joined, thus rendering the fifth factor against nonjoinder as well (id.).
Because four of the five CPLR 1001(b) factors weighed against proceeding without those who had not been joined in the action, the Appellate Division held that these beneficiaries were indispensible parties. Coupling this with the fact that the applicable statute of limitations had expired, the Court dismissed the action (id.).
The foregoing serves as a caveat to trust and estate litigators, emphasizing the importance of joining all beneficiaries in a proceeding. Although dismissal is never desirable for the petitioner or plaintiff, a dismissal predicated on failure to join an indispensible party is especially unpleasant considering the ease of avoiding such a result. Indeed, where the CPLR 1001(b) factors render a party to be necessary, a beneficiary’s failure to intervene upon notice of the proceeding is no excuse. Inclusion of all indispensable parties is the responsibility of the party commencing the action.
Court Cites Flaws in Article 17-A in Denying Guardianship Application
A recent decision from New York County in which Surrogate Glen denied an Article 17-A guardianship petition, Matter of Chaim, A.K., 8/26/2009 NYLJ 41 (col 1) (Sur Ct, New York County), has clarified the proper use of the proceeding.
The Court began its analysis by distinguishing the characteristics of guardianship proceedings brought pursuant to Article 17-A of the Surrogate's Court Procedure Act, and those brought under Article 81 of the Mental Hygiene Law. Specifically, the Court held that the Article 17-A proceeding is not necessarily appropriate in all circumstances where an individual has been diagnosed as developmentally disabled or mentally retarded.
Chaim presented facts typical of Article 17-A cases. Parents were petitioning for guardianship of their son who had reached majority and had been diagnosed by two physicians as developmentally disabled. He was unable to make medical decisions for himself. Indeed, both diagnosing physicians submitted affidavits supporting his parents’ application. However, the additional information before the Court, including psychiatric reports demonstrating psychological and emotional problems, led the Surrogate to question whether an Article 17-A guardianship was appropriate.
In her decision, Surrogate Glen explained the many factors that distinguish Article 17-A proceedings from those commenced under Article 81. She noted the following:
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Article 17-A was originally intended as a vehicle for parents of mentally retarded children to continue to exercise control after the child reached an age of majority, while Article 81 is directed at adults who have lost or diminished capacity;
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Article 81 grants no more power to the guardian than is necessary, while Article 17-A does not allow for the court to grant the guardian a particular degree of control over the ward;
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No hearing is required under Article 17-A, while a hearing is necessary under Article 81, providing the opportunity for cross-examination and independent counsel for the AIP;
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Article 17-A allows for the discretionary appointment of a guardian ad litem, while Article 81 mandates the appointment of an independent court evaluator;
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Article 17-A is silent as to burden of proof, whereas Article 81 requires clear and convincing evidence;
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Article 17-A is largely driven by forms, often providing the court with conclusory statements about the ward’s condition but resulting in ease for applicants who frequently petition pro se, while Article 81 is more complex and thus more likely to require the services of an attorney; and
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Article 17-A guardians are not required to report to the court with any updates after the appointment, whereas Article 81 guardians must file detailed reports ninety days later and subsequently on an annual basis (id.).
Considering Chaim’s particular situation in light of the “all or nothing” nature of an Article 17-A guardianship, Surrogate Glen denied the Petition and suggested that Article 81 may be more appropriate. Her rationale was that the evidence demonstrated that Chaim’s difficulties were attributable more to mental illness than mental retardation, and thus were likely treatable. As a result, the Court opined that it would be unnecessary and inappropriate to give a guardian complete power over Chaim’s affairs pursuant to Article 17-A. Instead, the Court held that “changes in his circumstances . . . may require altered powers in the guardian or perhaps even, someday, no guardian at all” (id.).
This decision has the potential to significantly change the landscape of guardianship proceedings in Surrogate's Courts. It is presently unknown whether Chaim will be the subject of an appeal, but we will keep you informed of any developments.
Triggering In Terrorem Clauses With Out-Of-State Will And Trust Contests
In terrorem provisions, which are more commonly known as “no contest” clauses, generally state that beneficiaries forfeit their interests in estates and trusts by contesting the validity of the governing instruments (see Matter of Kalikow, 23 Misc3d 1107[A], at *2 [Sur Ct, Nassau County 2009] [discussing in terrorem clauses]). While strictly construed, such clauses are enforceable in New York (Matter of Ellis, 252 AD2d 118, 127-28 [2d Dept 1998]). They serve several important purposes, such as preventing challenges to wills which might result in trials, jeopardize the testator or grantor’s testamentary or inter vivos plans, or harass other beneficiaries (Matter of Singer, 17 Misc3d 365, 370 [Sur Ct, Kings County], aff’d, 52 AD3d 612 [2d Dept 2008], leave granted, 11 NY3d 716 [2009]; Tumminello v Bolten, 59 AD3d 727, 728 [2d Dept 2009]).
In Shamash v Stark, Surrogate Kristin Booth Glen of the Surrogate’s Court, New York County, recently addressed an issue of first impression in New York (Shamash v Stark, NYLJ, 6/16/2009, at 38, col. 2 [Sur Ct, New York County]). The issue was whether will and trust contests in Florida, where no contest clauses are void as against public policy (F.S.A. § 732.517), triggered an in terrorem clause contained in a New York trust instrument (Shamash, supra).[1]
In Shamash, the decedent’s revocable trust, which was governed by New York law, provided that any beneficiary who contested his will or trust would forfeit his or her interest in the trust (id.). After contesting the will and trust in Florida, the petitioner commenced an accounting and removal proceeding with respect to the trust in the New York Surrogate’s Court (id.). The respondents moved to dismiss the Surrogate’s Court proceeding, arguing that the petitioner was not a beneficiary of the trust estate, and therefore lacked standing to maintain the proceeding, because he had triggered the trust’s in terrorem clause by contesting the will and trust in Florida (id.). In opposition, the petitioner asserted, among other things, that he did not trigger the in terrorem clause because no contest clauses are void under Florida law (id.).
The Surrogate’s Court dismissed the petition, holding that the petitioner lacked standing to seek an accounting or removal with respect to the trust (id.). The court reasoned that: (1) the trust is governed by New York law; (2) in terrorem clauses are enforceable in New York; and (3) the petitioner triggered the trust’s in terrorem clause by contesting the decedent’s will and trust in Florida (id.). The fact that no contest clauses are void as against public policy in Florida was immaterial (id.).
The lesson to take away from Shamash is that the contest of a will or trust in another state, where in terrorem clauses are not enforceable, may trigger such a clause in a New York instrument and result in the forfeiture of a beneficiary’s interest in the subject estate or trust.
Trusts: Legally Protecting Assets from the Settlor's Creditors
New York law allows individuals to limit their liability to creditors by arranging their affairs in a manner that legally protects their assets. One of the ways this is accomplished is by “making irrevocable transfers of their assets, outright or in trust, as long as such transfers are not in fraud of existing creditors . . .” (Matter of the Joseph Heller Inter Vivos Trust, 613 Misc 2d 369 [Sur Ct, 1994]). The circumstances under which a trust’s assets will be validly protected are limited to the existence of specific parameters in the trust instrument.
According to EPTL §7-3.1, “[a] disposition in trust for the use of the creator is void as against the existing or subsequent creditors of the creator.” In other words, an individual cannot transfer his or her assets to a trust and continue to retain control or enjoy the benefits of that trust, while simultaneously enjoying protection from creditors. Instead, transfers to irrevocable trusts will only be deemed valid for purposes of sheltering the assets from creditors where the grantor does not reserve a power to revoke the trusts or to dispose of the property during his lifetime, and where the transfers to the trust did not make the grantor insolvent (see Matter of Granwell, 20 NY2d 91 [1967]; Debtor Creditor Law §273).
A transfer resulting in the grantor’s insolvency or one that is made while the grantor is already insolvent may be deemed a fraudulent conveyance (see Debtor Creditor Law §273). In such cases, the creditors may set aside conveyances and reach the assets. But if trust assets remain available for the grantor’s benefit, creditors need not establish fraud to invalidate the transfer (see Vanderbilt Credit Corp. v Chase Manhattan Bank, N.A., 100 AD2d 544 [2d Dept 1984]; Colgate v Guaranty Trust Co. of New York, 159 Misc 664, 666 [Sup Ct, New York County 1936]). For example, in Vanderbilt Credit Corp. v Chase Manhattan Bank, N.A., 100 AD2d 544 (2d Dept 1984), the Appellate Division held that trust assets are not protected from creditors if the trustee has discretion to make payments to the grantor (see Vanderbilt Credit Corp. v Chase Manhattan Bank, N.A., 100 AD2d 544 [2d Dept 1984]).
Not surprisingly, this concept extends beyond the life of the trust settlor and remains applicable to his or her estate. Indeed, courts recognize that where an individual reserves the power to dispose of trust property during his or her lifetime, “he or she must be regarded as the absolute owner of the funds until death and those funds would be therefore available to pay estate debts” (Estate of Hughes, 3/20/2003 NYLJ 23 [col 2] [Sur Ct, Kings County], citing Matter of Granwell, 20 NY2d 91 [1967]; Matter of Batiste, 5/4/99 NYLJ 30 [col 6]). Also notable is the fact that, "any property covered by a general power of appointment which is presently exercisable, or a postponed power which has become exercisable, is subject to creditors' claims" (Estate of Chappell, 7/24/09 NYLJ 26 [col 1] [Sur Ct, New York County], citing EPTL §10-7.2).
In light of the foregoing, it is clear that individuals may legally protect their assets from the claims of creditors, provided they are willing to forego the control and benefits of the funds and of course, do not transfer their assets fraudulently.
