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New York Trusts & Estates Litigation

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.

Tax Considerations in Will Contests

Posted in Probate

The period following someone’s death can be an emotional time. Unfortunately, the period of administration of the decedent’s estate can be just as emotional, though for different reasons. As the intended disposition of the decedent’s assets becomes “public,” the estate’s beneficiaries, and others, may challenge such disposition. The manner in which these challenges are resolved can have significant tax and economic consequences for the decedent’s estate.

Estate Tax

The estate tax is imposed upon the transfer of the assets comprising a decedent’s estate. The taxable estate is determined by subtracting from the value of the gross estate certain deductions authorized by the Internal Revenue Code. Under various conditions and limitations, deductions are allowable for administration expenses, charitable transfers, and transfers to a surviving spouse. Once the taxable estate has been ascertained, the estate tax rates are applied to arrive at the gross estate tax (before authorized credits).

 

In theory, the process of compiling the necessary information for determining the tax is straightforward. In practice, however, it can become challenging. The fiduciary must: identify and “collect” the decedent’s assets; determine the decedent’s outstanding liabilities; and dispose of the decedent’s estate.

 

The starting point for directing the disposition of the decedent’s assets, including the identification of deductible transfers, is the decedent’s last will or revocable trust. These instruments may provide for an outright transfer of property to the decedent’s spouse or a charity. In some cases, they will grant the fiduciary authority to select a charitable recipient. Rather than an outright transfer, the instrument may create a split-interest trust for the benefit of the spouse or a charity, and certain non-marital and non-charitable beneficiaries (usually from the decedent’s family).

 

The Contest

What happens, however, when the validity of the will or trust, or of the dispositions of property provided therein, are challenged? The fiduciary will certainly incur additional legal, accounting and other fees and expenses in defending the instrument. As a result of the legal proceedings, the disposition of the decedent’s assets may change – either by court decision or through a settlement by the parties – and, consequently, the value of the taxable estate. For example, it may be determined that an asset does not belong to the estate, or that a disposition under the will should not have been made to a specific charity. 

 

These determinations have estate tax and other tax consequences of which the fiduciary should be aware because they impact the economic result of the settlement. Frequently, however, not enough attention is paid to the tax treatment of the settlement and, consequently, the economic cost may become more expensive than it otherwise could have been.

 

Estate Tax Return and Payment

The timing of the will contest raises a number of tax considerations. In general, the estate tax return must be filed, and the estate tax paid, within nine months after the decedent’s date of death. If a timely extension application is made, the estate will have an additional six months to file the return. Extensions of time to pay the tax are granted less frequently, and require a showing of good cause.

 

In the event the will contest cannot be resolved before the due date for the return, the fiduciary should disclose the nature of the dispute on the return, since the resolution thereof will likely affect the amount of estate tax owed by the estate. Similarly, the fiduciary will have to determine how much estate tax to remit while the contest is pending. This necessitates consideration of the merits of the claims and of the expected litigation costs. In the case of an “overpayment,” the fiduciary must be mindful of the possibility of claiming a refund. If it appears that the litigation will continue beyond the limitation period for a refund, the fiduciary should consider filing timely a protective refund claim.  

 

Will the IRS respect the Settlement?

Whether the IRS will respect the settlement is an issue characterized by the intersection of state property law and federal tax law.

 

The determination of the federal estate tax is based upon the respective property rights of the decedent (what assets did he own at his death), of his creditors (what liabilities do the decedent and/or his estate owe), and of the beneficiaries of his estate (to whom do the decedent’s assets pass after the satisfaction of these liabilities). These various property rights arise under state law. In the case of a will contest, the adversarial nature of the proceeding is an important factor in determining the federal tax consequences of the settlement, though it may not be determinative; the IRS is generally free to review the applicable state law for the purpose of determining whether the terms of the settlement are, in fact, consistent with the property rights of the parties under such state law. It is important to bear in mind that the IRS may not be bound by a settlement agreement.

 

Litigation-Related Expenses

Administration expenses are those that are actually and necessarily incurred in the administration of the decedent’s estate; for example, for the collection of assets, payment of debts, and distribution of property. These may include legal fees incurred by the fiduciary, which are usually deductible for estate tax purposes. However, expenditures that are not essential to the settlement of the estate, but that are incurred for the individual benefit of the decedent’s heirs, may not be taken as deductions. For the expenditure to be allowable as an administration expense, it must have benefited the estate as a whole, as contrasted with the personal benefit of a beneficiary. This distinction is often difficult to make.

 

A settlement may establish the amount of a claim or expense for tax purposes, provided that the expenditure is allowable under local law, the settlement resolves a bona fide issue in a genuine contest, and it is the product of arm’s-length negotiations by parties having adverse interests with respect to the claim or expense. No deduction will be allowed for amounts paid in settlement of an unenforceable claim. A consent decree should be accepted as fixing a claim when the consent was a bona fide recognition of the validity of the claim – not a mere “cloak” for a gift to a family member – and was accepted by the court as satisfactory evidence upon the merits. However, if a local court does not adjudicate the merits of a claim, its decision as to its deductibility will not necessarily be accepted by the IRS.

 

The foregoing assumes that the settlement payment represents an expense. A review of the underlying claim may indicate otherwise. For example, if a payment is made by the estate to someone claiming a share of the estate as a beneficiary, it is likely that the payment will not be deductible as an expense for estate tax purposes (though it may qualify for the marital or charitable deduction).

The Psychiatric Expert in Probate Proceedings

Posted in Evidence, Probate

In probate proceedings involving the issue of testamentary capacity, parties frequently present testimony at trial from an expert psychiatrist.  It is often the case that that psychiatrist never saw or treated the testator, and develops his or her expert opinion solely by reviewing various documents, including the testator’s medical records.  

This expert psychiatric testimony is admissible, but courts have routinely and consistently held that it is afforded very little weight, if any, and is unreliable.  This appears to be an “equal-opportunity” standard. In other words, this type of testimony is given little weight regardless of which party relies on it. For example, in Matter of Swain, 125 AD2d 574 (2d Dept 1986), the objectant’s expert psychiatrist testified that based solely on an examination of the medical records, which notably did not include the month when the will was executed, the testator was so impaired by a stroke that she could not have known the nature and extent of her assets or the natural objects of her bounty. The jury returned a verdict denying the will to probate on the grounds, inter alia, that the testator lacked testamentary capacity. The Second Department reversed, finding that the psychiatrist’s testimony was purely speculative, contradicted by the testimony of the testator’s treating physician, and was entitled to no weight. Thus, it concluded that the objectant failed to rebut evidence that the testator possessed testamentary capacity.

 

In Matter of Slade, 106 AD2d 914 (4th Dept 1984), however, the proponent of the will relied on a psychiatrist’s testimony that the testator possessed testamentary capacity.   That witness had never examined the testator, nor discussed her condition with any treating physicians. He simply reviewed her medical records. At the close of the proponent’s case, the objectant’s moved for a directed verdict pursuant to CPLR § 4404, which the court granted on the issue of lack of testamentary capacity, because the proponent failed to meet his burden. Affirming that decision, the Fourth Department stated that “such testimony is the weakest and most unreliable kind of evidence,” and noted that it contradicted the facts—which must prevail.

Attorney’s Fees: Not for the Taking

Posted in Legal Profession

While attorney’s fees incurred by the fiduciary are generally reimburseable from an estate as a reasonable and necessary expense of administration, this is not the rule with respect to the legal fees incurred by a beneficiary. The different standard that applies was recently examined by Surrogate Mella in In re Frey, NYLJ, July 25, 2013, p. 25 (Sur. Ct. New York County).

Before the court was an application brought by counsel for a beneficiary to have its legal fees fixed for services rendered to the beneficiary in connection with her interest in the estate of her late mother. The executor of the estate did not oppose the application provided that the fees were charged to the beneficiary’s interest in the estate.

           

The record revealed that the services performed by counsel over a two year period resulted in its client in receiving emergency and regular distributions from the estate, loans against her legacy, and personal property that she was unable to obtain previously.  Since completing its work, counsel has not been able to contact its client and has not been paid.

           

The court noted that in a proceeding for the fixation of fees pursuant to SCPA 2110, the court is authorized to direct the source of payment either from the estate generally, or from the funds in the hands of the fiduciary belonging to the legatee. In examining this issue, the court relied on the factors outlined by the Court of Appeals in Matter of Hyde, 15 NY3d 186 (2010), that is: (1) whether the objecting beneficiary acted solely in his or her own interest or in the common interest of the estate; (2) the possible benefits to the individual beneficiaries from the outcome of the underlying proceeding; (3) the extent of the individual beneficiary’s participation in the proceeding; (4) the good or bad faith of the beneficiary; (5) whether there was justifiable doubt regarding the fiduciary’s conduct; (6) the relative interest of the objecting beneficiary in the estate; and (7) the effect of allocating fees on the interest of the individual beneficiary.

 

Based on this criteria, the court concluded that in pursuing her claim against the fiduciary, the beneficiary was not seeking to benefit or enlarge the estate, but only to secure her legacy. The court determined that there was no possibility that the other beneficiaries of the estate would benefit from the legal services performed, and thus, that it would be unfair to assess the other beneficiaries with the fees incurred.

Accordingly, the court fixed the fees and disbursements of counsel and directed that they be paid from its client’s share of the estate.

Reformation Proceeding – Brigati Irrevocable Insurance Trust

Posted in Trusts

In Matter of Brigati, Surrogate Czygier of Suffolk County addressed an application to reform the decedent’s life insurance trust, which contained a significant amount of insurance. The instrument contained a number of terms which could cause inclusion in the decedent’s gross estate. Among other things, it provided that upon the death of the Grantor, the life insurance policy proceeds should be distributed to the Grantor’s executor “so he may pay any estate, inheritance, transfer, succession or death taxes.” 

The court had before it an affidavit from the Trust draftsman indicating that he knew the Grantor for a number of years and the purpose of the Trust was to exclude assets from his taxable estate. On top of that, the instrument itself had an article entitled “Overriding Tax Purpose,” which specifically stated that the purpose of the Trust was to exclude the life insurance proceeds from the Grantor’s gross estate for federal estate tax purposes. 

The court, reciting the general law allowing it to correct mistakes, and relying heavily on the clearly stated purpose of the Trust instrument, allowed reformation to replace the erroneous language with substitute language which would carry out the purpose of the Trust. 

When a Black Letter Rule Meets a Gray Area: the “Slayer Rule” and the Insanity Defense

Posted in Probate

Most estate attorneys are familiar with the concept of the so-called “slayer rule” whereby a person responsible for the murder of an individual cannot benefit from the murdered individual’s estate. This rule has its genesis in the Court of Appeals decision of Riggs v Palmer, in which the Court stated “[n]o one shall be permitted to profit by his own fraud, or to take advantage of his own wrong, or to found any claim upon his own iniquity, or to acquire property by his own crime” (Riggs v Palmer, 115 NY 506, 511 [1889]).

Though this equitable rule would appear to be relatively unambiguous in application, questions of its interpretation arise from time to time in the Surrogate’s Courts. Previous entries on this blog have discussed the Suffolk County Surrogate’s Court’s decision to expand the rule by barring a murderer from benefitting not only from his victim’s estate but also the estate of a post-deceased legatee of the victim. 

In an upcoming Nassau County Surrogate’s Court hearing, Surrogate McCarty, on the other hand, will be tasked with assessing the possible boundaries of the slayer rule vis a vis the insanity defense. The hearing, scheduled for August 15, 2013, concerns the case of Leatrice Brewer who in 2008 drowned her three children in a bathtub (see Newsday July 12, 2013). Ms. Brewer admitted to killing her children and in 2010 entered a plea of “not responsible by reason of mental disease or defect” in her criminal proceeding. Thereafter, Innocent Demesyeux, the father of two of the deceased children, received limited letters of administration concerning his children’s estates and sued Nassau County for wrongful death. The suit settled for $250,000 and the father petitioned the Nassau County Surrogate’s Court to compromise the wrongful death action and settle his account. As part of his petition, Mr. Demesyeux has requested that Ms. Brewer be held to have forfeited any interest in her children’s estates by virtue of the slayer rule. The hearing this month will determine this request. 

In a recent pre-hearing decision concerning access to Ms. Brewer’s court files, Surrogate McCarty addressed and previewed some of the issues that will likely be argued in the upcoming hearing (see Matter of Demesyeux, 350391/A, NYLJ 1202598464881, at *1 [Sur Ct, Nassau County, Decided March 29, 2013]). In order to respond to Mr. Demesyeux’s petition, the guardian ad litem assigned to represent Ms. Brewer’s interests in the proceeding attempted to view Ms. Brewer’s Family Court and criminal proceeding records but was told such records were sealed. The guardian ad litem thereafter filed a report in Surrogate’s Court seeking a court-order to unseal the records.

In his decision concerning the guardian ad litem’s request, Surrogate McCarty surveyed the history of the slayer rule under Riggs and its progeny noting that, though there is no express statutory statement of the rule, “numerous cases since Riggs v. Palmer have reaffirmed the applicability of the common-law general principle that one should not be permitted to profit by taking the life of another and, in particular, that one who feloniously murders shall not be entitled to share in his victim’s estate” (Matter of Demesyeux at 2). Conversely, the Surrogate noted that application of the rule is not always straightforward and “there is some authority that if the killing was unintentional or accidental, the rule will not be applied” (id. at 3). For instance, the Surrogate cited Matter of Eckhardt (184 Misc 748 [Sur Ct, Orange County 1945]) concerning a somnambulist who killed her husband but was found not to have known the nature and quality of her act.

In connection with the guardian ad litem’s request to view Ms. Brewer’s criminal court files, the Surrogate considered the application of CPL §160.50, which requires that records be sealed if a criminal action is terminated in favor of the accused, ostensibly to spare the accused the social stigma of a criminal prosecution. The question, according to the Surrogate, is whether a termination by reason of an insanity plea can be construed as ‘favorable’ to the accused. Surrogate McCarty quoted the decision of Matter of Anonymous (174 Misc 2d 333 [Sup Ct, Kings County 1997]), which described persons acquitted of a crime via the insanity defense as occupying a special class. Such persons have been proven or have admitted to performance of criminal acts that would ordinarily be subject to punishment. Nevertheless, due to “society’s compassionate belief” that persons with mental defects not be criminally punished, they are spared the penalization they would otherwise justifiably receive. Then again, because they have undisputedly committed criminal acts and are dangers to society, such persons, while spared incarceration, are held in state custody. Balancing the policy considerations of the insanity defense, the court in Anonymous ruled that persons acquitted by reason of an insanity defense have not had their case terminated in their favor. Surrogate McCarty agreed, opining that Ms. Brewer’s criminal records should not be sealed.

No doubt, the upcoming hearing will involve a similar balancing of the equities and policies behind the slayer rule against those behind the insanity defense. Based upon the cases quoted by the Surrogate in Matter of Demesyeux, it appears that the parties will focus on whether or not Ms. Brewer acted with intent and knew the nature of her act. I do not envy the difficult decision Surrogate McCarty will have to make in looking beyond the strong emotional underpinnings of this case. 

Surrogate Removes Fiduciary Sua Sponte For Misrepresentations In Petition

Posted in Fiduciaries

 

 

A recent post to this blog discussed a case in which a court declined to remove a fiduciary based on allegations of a potential conflict of interest, but in the absence of actual misconduct on the part of the fiduciary. While it is certainly rare for a court to remove a fiduciary in the absence of actual misconduct, it is still rarer for a court to do so on its own initiative, i.e., sua sponte. But that is precisely what happened in Matter of Young decided earlier this year by Nassau County Surrogate Edward W. McCarty III.

 

The decedent, Joseph Young, was an acclaimed lyricist of the early 20th Century, having written such classic songs as “I’m Gonna Sit Right Down and Write Myself a Letter,” “Dinah,” and “I’m Sitting on Top of the World.” He died in 1939, intestate, survived by his wife, Ruth Young, and his father, Samuel Young.  Pursuant to the law of intestacy applicable at the time, Ruth and Samuel were the decedent’s only distributees.  Ruth was appointed administrator of the decedent’s estate in 1939 (and she died in 1973).

 

Fast forward 70 years. 

 

In 2009, Nicholas Al Young, allegedly the Decedent’s grandnephew, petitioned the court for letters of administration de bonis non.   (An administrator de bonis non or “d.b.n.” is a successor administrator appointed to administer estate property not yet administered.) Nicholas’s petition alleged that the decedent was not survived by either a spouse or a parent, and that his distributees included 22 nephews/nieces and great-nephews/great-nieces.  He alleged that the value of the assets in need of administration was $9,000. The Court issued letters to Nicholas.

 

In 2012, Rytvoc Inc. and Warock Corporation — the alleged owners of copyrights in various musical compositions written by the Decedent — commenced a proceeding to revoke Nicholas’s letters.  (In the interest of full disclosure, Farrell Fritz represented Rytvoc and Warock in the proceeding.) Rytvoc and Warock alleged that Nicholas, armed with his letters of administration, was wrongfully interfering with their ownership of the copyrights by attempting to enforce termination rights allegedly available under Federal law.  They sought his removal pursuant to SCPA § 711(4), which provides for the revocation of letters obtained “by a false suggestion of a material fact.” Specifically, they alleged that Nicholas was ineligible for letters; that he obtained them only by virtue of his misrepresentation that the decedent was not survived by a spouse or a parent; that the individuals identified in the petition were not the decedent’s distributees; and, finally, that no administrator was necessary in any event, because the estate had no rights in the compositions for a fiduciary to exercise.

 

Nicholas moved to dismiss Rytvoc and Warock’s petition for lack of standing.  He argued that SCPA § 711, which governs removal proceedings, confers standing only on “a co-fiduciary, creditor, person interested, any person on behalf of an infant or any surety on a bond of a fiduciary.” Rytvoc and Warock, Nicholas argued, were only “adverse parties in possible future litigation over the ownership of copyrights.” Rytvoc and Warock argued that, in fact, they were creditors of the estate, having filed a claim for damages resulting from Nicholas’s alleged wrongful interference with their intellectual property rights. The Court rejected that argument, however, and dismissed the petition for lack of standing.

 

But the song continues.

 

Rytvoc and Warock argued, alternatively, that the issue of standing was a “red herring” because the Court had the authority pursuant to SCPA § 719, and the inherent authority, to revoke Nicholas’s letters. Section 719 provides, in relevant part, that a court may revoke, suspend, or modify letters it issued; it may do so sua sponte, without a petition or the issuance of citation, in certain circumstances, including when any facts provided in SCPA § 711 are brought to its attention. As previously noted, section 711(4), provides for the revocation of letters obtained “by a false suggestion of a material fact.”

 

The Court began its analysis by reviewing the law governing revocation of  letters obtained through misrepresentations, noting that a fiduciary’s removal is appropriate even where the alleged misrepresentation was made inadvertently and without an intent to defraud the court. It concluded, therefore, that “ it is not necessary for the court to ascertain whether Nicholas made the error in bad faith.” (Although it noted that “it appears from the court file that Nicholas did not attempt to deceive the court as to the fact that Ruth Young survived the decedent. Nicholas provided the court with numerous documents evidencing Ruth’s date of death.”)

 

The Court then reviewed the statutory framework governing letters of administration d.b.n., to determine whether Nicholas was eligible for letters. It explained in this regard that SCPA§ 1001 (made applicable to administrators d.b.n. by section 1007) requires that letters be issued to the distributees of an intestate decedent, or, if deceased, to their fiduciaries, or to any eligible “person who is not a distributee upon the acknowledged and filed consents of all eligible distributees, or if there are no eligible distributees, then on the consent of all distributees” (SCPA § 1001[6]).  It also explained that, pursuant to SCPA § 1001(8), where letters are not granted as set forth above, they are properly granted in the following order to: (a) the public administrator, (b) the petitioner, in the court’s discretion, or (c) to any other person or persons. 

 

The Court stated that it “has an obligation to make sure that the proper person is administering the estate.”  It concluded that “[i]t is unclear whether the proper person is administering this estate.” The Court also expressed its concern regarding the petition’s allegation that the value of the Decedent’s assets in need of administration was only $9,000, stating that “[t]he court is concerned that this figure is underestimated as it appears the decedent was a successful songwriter whose estate consisted of royalty interests which may be of a greater value than indicated given the possible copyright battle.”

 

The Court revoked Nicholas’s letters “[b]ased upon such concerns and due to the misstatement in Nicholas’ petition. . . .” It issued letters of temporary administration to the Public Administrator, directing that it “attempt to identify the fiduciaries of Ruth Young’s estate and Samuel Young’s estate who have a prior right to letters of administration de bonis non and to ascertain the value of the assets in need of administration.”

 

The moral of the story is that those seeking appointment as fiduciaries must take great care to ensure the accuracy of the allegations of their petition. A mistake, even one alleged to be innocent, could prove costly.