In Matter of Conklin, 2015 NY Slip Op 25094 (Sur Ct, Nassau County 2015), a contested accounting proceeding, the Nassau County Surrogate’s Court addressed, among other things, whether specifically bequeathed property sold by an attorney-in-fact prior to the decedent’s death, adeemed.  My article entitled Ademption and the Power of Attorney, published in the Fall 2009 New York State Bar Association Trusts & Estates Law Section Newsletter, contains a thorough discussion of the ademption doctrine in the context of conveyances by attorneys-in-fact.  While the article predated revisions to the General Obligations Law intended to curb abuses of power by attorneys-in-fact, this recent decision demonstrates that the law has not evolved significantly on the subject despite such changes.

As explained in my article,

Ademption is the ‘extinction or withholding of some legacy in consequence of some act of the testator which, though not directly a revocation of the bequest, is considered in law as equivalent thereto, or indicative of an intention to revoke.’ A bequest adeems when property that had been specifically devised no longer exists at the time of the testator’s death. (Jaclene D’Agostino, Ademption and the Power of Attorney, NYSBA Trusts & Estates Section Newsletter, at p.7, Vol. 42 [Fall 2009]).

In Conklin, one of the decedent’s two attorneys-in-fact, Lori Conklin (“Lori”) sold his cooperative apartment while he was residing in a nursing or rehabilitation facility. The decedent’s will had specifically devised the apartment to his two children and first wife, with a direction that it be sold after his death and the proceeds divided among the three of them. But a sale prior to death meant that the proceeds would become part of the decedent’s residuary estate, of which Lori’s mother and co-agent, Joan Conklin (“Joan”), was the sole beneficiary.

The attorney who prepared the power of attorney testified at the hearing.  He explained that Lori initially contacted him regarding preparing a power of attorney and doing Medicaid planning for the decedent. Lori and Joan had several meetings with the attorney on the subject– none of which included the decedent. The attorney advised them that the decedent should execute a new power of attorney because the old one (under which Lori and Joan had both been appointed) did not contain a major gifts rider. He further advised that the decedent’s apartment should be sold for purposes of Medicaid planning, and the proceeds thereof be deposited into an account in the decedent’s name.

The decedent executed the new power of attorney on March 24, 2010, at the nursing or rehabilitation facility where he resided.  It named Lori and Joan as co-agents, and contained a major gifts rider, authorizing the agents to make gifts to themselves or others in any amount (see GOL §5-1514).  The attorney met the decedent for the first time on that date, when he supervised the execution of the document. He testified that at that meeting, he discussed with the decedent his recommendation that the apartment be sold.

The attorneys-in-fact subsequently sold the apartment. On the date of the closing, the attorney contacted the decedent to ensure that he was still alive. The agents then deposited the $125,500 proceeds from the sale into an account in the decedent’s name. The decedent died approximately two weeks thereafter.

The proceeds benefitted Joan, as the residuary beneficiary of the estate. Mere days after the decedent’s death, Lori used her power of attorney to close the decedent’s account (a fact that raises its own issues), and utilized the proceeds to pay off Joan’s home equity loan.

Despite the fact that Joan ultimately benefitted from the sale, the court rejected the contention that there had been a breach of fiduciary duty by the attorneys-in-fact in selling the apartment and thus, that the proceeds of the sale should be returned to specific devisees. The court explained the general rule that if a specifically bequeathed item is sold, given away, lost or destroyed during a decedent’s lifetime, then the bequest generally fails, or adeems. “Moreover, ‘it matters not whether [the sale] came to pass because of an intentional or voluntary act of the testator’” (Matter of Conklin, supra at *5 [quoting Matter of Wright, 7 NY2d 365, 367 [1960]). In addition, “once the devise is found to be adeemed, the court is not permitted to substitute something else for it. This includes tracing the proceeds from the sale of the real property” (Matter of Conklin, supra at *6 [relying on Labella v Goodman,198 AD2d 332 [2d Dept 1993]; see also Matter of Wallace, 86 Misc 2d 175, 180 [Sur Ct, Cattaraugus County 1976] [opining proceeds of a sale of specifically bequeathed property “do not constitute the legacy bequeathed,” and thus, “the general rule of ademption applies and the legacy fails”]).

Given counsel’s advice to sell the apartment, and his contacting the decedent on the date of the closing, the court concluded that there had been no breach of fiduciary duty by the attorneys-in-fact, and thus, the foregoing general rules applied to this situation. Consequently, the specific devisees of the apartment were not entitled to the proceeds of the sale. The bequest had adeemed. Although this result might seem less than equitable on its face, it is in accordance with the laws of New York.

As I wrote in a prior post, dated February 25, 2011, concerning the Estate of Dianne Edwards, the “slayer rule” articulated by the Court of Appeals in Riggs v. Palmer provides that “[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 N.Y. 506, 511 [1889]). Although forfeiture does not occur in cases involving accidental killings, self-defense, and disabilities that negate a culpable mental state, the maxim articulated in Riggs has been utilized to preclude a person who intentionally kills another from taking as a beneficiary of his or her victim’s estate. 

Relying upon Riggs, Suffolk County Surrogate John M. Czygier, Jr. recently held in Matter of Edwards that, under the slayer rule, an intentional killer forfeited his right to inherit not only from the estate of his victim, but also the estate of the victim’s post-deceased legatee (see Matter of Edwards, NYLJ, Apr. 13, 2012, at 35 [Sur. Ct., Suffolk County]). Surrogate Czygier’s finding was noteworthy for a variety of reasons, not the least of which was that the intentional killer was the sole beneficiary of the estate of his victim’s legatee (see id.).

In Edwards, Brandon Palladino (“Brandon”) was convicted of Manslaughter in the First Degree and sentenced to a twenty-five year term in prison in connection with the death of his mother-in-law, Dianne Edwards (“Dianne”) (see Carol MacGowan, “Fight Over Estate Continues After Sentencing”, Newsday, Feb. 3, 2011). Surrogate’s Court litigation arose after a party acting for Brandon’s benefit sought to ensure that Brandon received a substantial portion of Dianne’s estate, as beneficiary of his deceased wife Deanne Palladino’s (“Deanna”) estate (see Edwards, supra).

Dianne died, testate, leaving her entire estate to her daughter, Deanna (see id.). Although Deanna survived Dianne, she died of an accidental drug overdose, leaving no will (see id.). While, under normal circumstances, Brandon, as Deanna’s surviving spouse (with no issue), would have inherited Deanna’s entire estate, including any bequests that she received from Dianne, the circumstances in Edwards were highly unusual (see id.).

Dianne’s surviving relatives argued that, under the slayer rule, Brandon forfeited any interest in Dianne’s estate that he otherwise might have had in the assets of her estate, even indirectly as a beneficiary of Deanna’s estate (see id.). Surrogate Czygier agreed, finding that Brandon could not inherit from Dianne (see id.). In doing so, the Surrogate explained that “one who takes the life of another should not be allowed to profit from his wrongdoing” (see id.). But for Brandon’s wrongdoing, there “would be no inheritance to be obtained through his wife Deanna” (see id.). As a result, considering Brandon’s wrongdoing and his conviction, Brandon forfeited any right he otherwise might have had to inherit Dianne’s property as Deanna’s sole distribute (see id.).

The application of the slayer rule has been extended beyond those situations in which intentional killers seek to take as beneficiaries of their victims’ estates. Indeed, as Edwards demonstrates, the slayer rule has been utilized to deny intentional killers the right to inherit property belonging to their victims, whether directly as beneficiaries of the victims’ estates or indirectly through the estates of the victims’ legatees or distributees. The extension of the slayer rule is consistent with standards of common sense and decency.

 

 

 

Gifting, a fundamental tool of estate planning, is often fodder for estate litigation. This blog post will address two decisions, in particular, respecting the validity of purported gifts that were the subject of motions for summary relief.

As discussed below, the court in In re Rella, NYLJ, Apr. 10, 2012 , at 22 (Sur. Ct. New York County)(Sur. Anderson) granted an application for partial summary judgment and recognized the validity of the alleged gift, while in In re Goodwin, NYLJ, Apr. 10, 2012, at 31 (Sur. Ct. Suffolk County)(Sur. Czygier), the court granted summary judgment finding the alleged gifts to be invalid, and directed the return of the assets to the decedent’s estate.

In re Rella was a contested accounting proceeding in which the executor moved for partial summary judgment dismissing the objections contesting a gift that was made to him several months before the decedent’s death.

The decedent died, testate, survived by 5 children. Her husband had predeceased her in 1992. Pursuant to the terms of her Will, the decedent divided her estate equally among four of her children, and named her fifth child, Gilbert, together with Gilbert’s daughter, who died during the pendency of the proceeding, as co-executors. Prior to her death, the decedent purportedly transferred to Gilbert her 50% interest in a real estate holding company, the sole asset of which was a business operated by Gilbert. The remaining 50% interest in the company had been purchased by Gilbert from her late father’s business partner.

The decedent’s transfer of her interest to Gilbert was implemented by her as a corporate officer pursuant to a donative plan crafted by her attorney. A gift tax return was filed in connection with the transaction.

The objectant maintained that the decedent lacked the capacity to effect the foregoing transfer, and that it was procured by undue influence. The court disagreed.

With respect to the issue of capacity, the court opined that the donee bears the burden of proving by clear and convincing evidence that the donor knowingly made a present transfer of property. This burden is buttressed by the presumption that every individual has capacity, and the law’s recognition that mere old age or even mental weakness is not necessarily inconsistent with a lack of capacity to transfer property.

Assessing the record within this context, the court found the deposition transcripts of three disinterested individuals reinforced the presumption of capacity. Notably, the testimony of the decedent’s internist of more than 15 years revealed that he had examined the decedent two days before the subject transfer, and had found the decedent to be alert and cogent. Additionally, the decedent’s attorney of more than 50 years, who had handled the transfer on her behalf, testified that he and the decedent’s accountant had met with the decedent to discuss the gifts for two hours, during which time the decedent stated that she had wanted to transfer the property for some time. Based upon this record, together with the presumption of capacity, the court concluded that Gilbert had established a prima facie case that the decedent had the capacity to make the subject gift. On the other hand, the court noted that the objectants lacked personal knowledge of facts regarding the subject transfer. Moreover, the court found upon review of the objectants’ proof, that the objectants had failed to submit any evidence that would create a question of fact regarding the capacity of the decedent to make the subject transfer.

As for the issue of undue influence, the court found that Gilbert had established prima facie that the decedent had made the transfer in issue freely and voluntarily. The court rejected objectants’ claims that a confidential relationship existed between Gilbert and the decedent, as well as objectants’ contention that an inference of undue influence arose by virtue of the fact that Gilbert was present for a part of the time that the decedent had discussed the subject gift with her attorney and accountant. Significantly, the court concluded that any inference of undue influence in this regard was countermanded by the fact that the professionals were the decedent’s long-time advisors. Indeed, the court found none of the indicia of undue influence present; there was no evidence that Gilbert had isolated the decedent from family and friends, nor was their proof that the decedent was so dependent upon Gilbert as to be subject to her control.

Accordingly, based on the totality of evidence, partial summary judgment was granted in the executor’s favor.

Before the court in In re Goodwin was a motion for summary judgment in a proceeding by the decedent’s son, pursuant to SCPA 2105, to discover and compel the turnover of property withheld by the decedent’s daughter, the executrix of the estate. In support of the application, the petitioner alleged that the executrix, while acting as the decedent’s attorney-in-fact, made certain transfers of the decedent’s money to various bank accounts held jointly between herself and the decedent in violation of her fiduciary duties. Notably, the subject powers of attorney were silent as to the gift-giving authority of the agent.

In opposition to the motion, the executrix alleged that the transfers in question were made in accordance with the decedent’s directives and in the decedent’s best interests. Although the executrix provided the court with a copy of the deed relative to this transfer, the court noted that the attorney who prepared the deed, a disinterested witness to the transaction, had failed to provide any information as to the circumstances surrounding the transfer. Further, the executrix alleged that the decedent was mentally capable of making decisions, and was generous with her assets, as reflected in the gifts she had made to the petitioner.

In reply, the petitioner claimed that the decedent suffered from dementia at the time the transfers were made, and submitted the decedent’s medical records in support. In addition, the petitioner submitted a copy of a Family Contract that revealed that the subject transfers were made in order to qualify the decedent for government programs, that the assets thereof were to be for the sole benefit of the decedent, and that the funds were to be distributed at her death pursuant to the terms of her will. The agreement was signed by the executrix.

The court opined that gifts and pre-death transfers made by an agent to herself as power of attorney generally carry with them a presumption of impropriety and self-dealing that can be overcome by a clear showing of intent on the part of the principal to make the gift. Further, any such gifts must be made subject to the principal’s best interests to carry out her “financial, estate or tax plans” (see Matter of Ferrara, 7 NY3d 244).

Based upon the record, the court concluded that the petitioner had made a prima facie case in favor of summary judgment. Specifically, the court relied on the presumption of impropriety surrounding the transfers, and the requirement that the transfers be proven in the decedent’s best interests. To this extent, the court noted that by signing the Family Contract, the executrix acknowledged that she would be receiving the decedent’s assets and that such assets were not to be distributed to anyone other than the decedent.

The court found that given the proof submitted, the executrix was the primary witness to the facts and circumstances surrounding the subject transfers and her testimony was barred by the Dead Man’s Statute. Significantly, the court noted that while it could consider evidence otherwise excludable by the Statute in opposition to the motion, the executrix had failed to offer any other corroborating support for her position. Accordingly, the court directed that the assets represented by the transfers in issue be restored to the estate.


 

 

Determining the identity of permissible or necessary parties to an accounting proceeding is often a simple task. But in rare cases, the answer is not always so easy. Most recently, in Matter of Cohen, Nassau County Surrogate Edward W. McCarty III was called upon to determine whether a potential creditor of a trust beneficiary was a “person interested” in a trust accounting proceeding. The Court answered the question in the negative.

Michael S. Cohen, died on March 18, 2002. Under the terms of his will (which was admitted to probate), the decedent directed that a trust be created for the benefit of his adopted son, Kevin Cohen (“Cohen”), the decedent’s only child.  The will further directed that the trust terminate ten years after the decedent’s death, i.e., March 18, 2012, and that all remaining principal and income be distributed to Cohen (or, if he did not survive the termination of the trust, his minor daughters).

Cohen, formerly an attorney, was convicted in 2010 of 37 counts (including second-degree grand larceny, 11 counts of third-degree grand larceny and 10 counts of third-degree forgery) for stealing more than $300,000 from clients who thought he was assisting them in arranging adoptions; but the children did not actually exist. A criminal restitution order under Criminal Procedure Law § 420.10 was entered against him. The Lawyers Fund for Client Protection (the “Fund”)  reimbursed 10 of Cohen’s former clients, all of whom assigned and subrogated their claims against Cohen to the Fund.

In January 2011, the trustee filed an intermediate account with the Surrogate’s Court. The trustee named as an interested party the Nassau County Attorney’s Crime Victims Project, which represented Cohen’s former clients in their claims against him. The County Attorney’s Office represented the interests of the former clients before the Lawyers Fund became involved, and it continued to represent one client who did not seek reimbursement from the Fund.

Both the Fund and the Nassau County Attorney filed objections to the account. The Fund, for its part, maintained that it had an interest in the accounting because of open questions on whether particular estate assets (including an annuity) were part of the trust or owned by Cohen separately.

Wendy H. Sheinberg, Esq., the guardian ad litem for Cohen’s two minor children, moved, inter alia, to amend the petition and account to strike the Nassau County Attorney and the Fund as interested parties, and to dismiss their objections to the account.

The Court began its analysis by noting that the statutory definition of “person interested” specifically excludes creditors. Indeed, SCPA § 103(39) provides that “[a] creditor shall not be deemed a person interested.” The Court then reviewed the cases relied upon by the Fund and the County Attorney, determining them to be distinguishable from the case at bar. Instead, the Court relied upon Matter of Lainez, 79 AD2d 78 (2d Dept 1981), in which the Appellate Division, Second Department, held that a creditor of a beneficiary who is still alive is not a proper party to an account in which the beneficiary has an interest.

The Court also rejected the agencies’ argument that affording them “interested person” status “would be a more efficient way for them to uncover information about Cohen’s assets than if they had to use other discovery methods.” However laudable the goal of efficiency, the Court explained, it “does not give rise to a privilege, right, or status which would otherwise be unavailable.”

Accordingly, the Court determined that as mere potential creditors of a living trust beneficiary, the Fund and the Nassau County Attorney were not persons interested in the decedent’s estate or the accounting. It therefore granted to guardian ad litem’s motion.

The Surrogate’s decision does not leave the two agencies without a remedy, however. The Surrogate’s dismissal of the agencies’ objections was explicitly made without prejudice to their commencing a proceeding pursuant to Executive Law §632-a (6) – the so-called “Son of Sam” law – and seeking the issuance of a preliminary injunction restraining the payment of trust principal to Cohen upon the termination of the trust. The Surrogate also directed that no payments from the trust be made to Cohen for 30 days upon its termination (presumably to give the agencies the opportunity to make an application under the Son of Sam law).

Although exoneration clauses in a testamentary trust will not, as a matter of public policy, absolve a trustee of liability for failure to exercise reasonable care, diligence and prudence (EPTL §11-1.7(a)(1)), there is no comparable statutory provision with respect to exoneration clauses in lifetime trusts. Nevertheless, the court, in Matter of Accounting of Tydings, NYLJ, July 7, 2011, at p. 26 (Sur Ct, Bronx County), found reason, despite the exoneration clause in the inter vivos trust instrument, to hold the trustee liable.

In Tydings, the court had the opportunity to opine on the effect of the exoneration clause in the subject trust, commissions, and the legal fees incurred by the petitioner and objectant. The objectant in the proceeding was the grantor and income beneficiary of the trust, with a discretionary interest in the principal. The ultimate remainderman of the trust was the grantor’s infant son.

With regard to the issue of the exoneration clause, the trust instrument authorized, inter alia, the trustee to retain an original investment for any length of time without liability for such retention, and to act on behalf of the trust and herself or another entity with regard to any transaction in which the trustee and the trust or the other entity had an interest. The trust also provided that the trustee would not be responsible for any loss to the trust unless such loss resulted from bad faith or fraud on the part of the trustee, and that the trustee would not be disqualified from acting because the trustee held an interest in any property or entity in which the trust also held an interest. The court noted that several of the objections raised in the proceeding hinged, inter alia, on the enforceability of this exoneration clause.

To this extent, the court opined that despite the absence of a statute applicable to exoneration clauses contained in lifetime trusts (cf. EPTL 11-1.7(a)(1)), the enforceability of such clauses were nevertheless subject to certain defined limitations. For instance, the court observed that a trustee of a lifetime trust who is guilty of wrongful negligence, impermissible self-dealing, bad faith or reckless indifference to the interests of the beneficiaries will not be shielded from liability by an exoneration clause. Moreover, when an attorney, named as trustee, is the draftsperson of the instrument containing an exoneration clause, the clause limiting the trustee’s liability to bad faith acts is void as against public policy. Further, the court noted that while improper self-dealing will not come under the umbrella of an exoneration clause, the rule of undivided loyalty due from a trustee may be relaxed by appropriate language in the trust instrument which directly or indirectly recognizes the trustee may be in a position of conflict with the trust.

Within this context, the court held that the petitioner would not be liable with respect to an interest-free loan that pre-existed the creation of the trust and that had been transferred into the trust by the grantor. On the other hand, the court found the petitioner liable for interest-free loans made by the trust subsequent to the inception of her stewardship. To this extent, the court concluded that petitioner’s conduct exhibited a complete indifference to the best interests of the objectant, mandating that she be surcharged for the income lost on the loan transactions.

Additionally, the court found that the exoneration clause in the instrument did not bar the objectant from recovering lost profits from the trustee attributable to her use of trust funds, without consideration, to benefit an entity in which she was personally interested.

As to the balance of the objections, the court concluded that the objectant was either estopped from raising the issues, or did not warrant the imposition of a surcharge.

With respect to the issue of commissions, the court opined that while not every surcharge warrants a denial of commissions, when the fiduciary has engaged in conduct evidencing bad faith, a complete indifference to his/her duties and responsibilities, or some act of malfeasance or misfeasance, commissions will be denied. Based on the record, the court found that the petitioner was lax with regard to managing the financial aspects of the trust. Indeed, although the court concluded that the petitioner had not acted in bad faith, it, nevertheless, held, particularly based on the interest-free loans that had been made, that she had exhibited indifference to her duties, and, accordingly, sufficient misfeasance to warrant a denial of commissions. Further, the court denied the petitioner annual commissions on the grounds that she had failed to establish that she had furnished the objectant with an annual statement pursuant to the provisions of SCPA 2309, that the objectant had waived her right to receive the statement, or that there was sufficient income retained by the trust in any particular year from which she could pay herself income commissions.

Finally, with regard to the issue of legal fees, the court held, in the exercise of discretion, that the petitioner and the objectant should each, individually, bear responsibility for their legal fees and expenses. The court observed that while many of the objections to the petitioner’s account had not been sustained, the petitioner could not seek payment of fees from the trust for defending objections for which she was surcharged. Moreover, the court opined that a strong case could be made for holding the petitioner responsible for the expert witness fees incurred by the objectant in proving petitioner’s liability in connection with the transactions for which she was surcharged. On the other hand, the court noted that the objectant vigorously pursued, and caused the petitioner to defend, numerous objections of which she was aware and had approved prior to their occurrence. Accordingly, under all the circumstances, the court determined it would be most equitable to have the petitioner and the objectant to personally satisfy their own legal fees in connection with the proceeding.

In Estate of Homelsky, 1/20/2010 NYLJ 27 (col 1), a Nassau County Surrogate’s Court case, the Trustee, an attorney, moved to amend his final accounting to include Trustee commissions claimed to be due him.

The Trustee’s proposed amendment sought only that portion of annual Trustee’s commissions allocable to principal, not the income portion. The amount claimed was in excess of $183,000. A Trust beneficiary objected to the proposed amendment, asserting that in a Receipt and Release Agreement circulated prior to the judicial accounting, the Trustee had stated that he was waiving all Executor and Trustee commissions.  The beneficiary further asserted that the Trustee was not entitled to commissions because he failed to provide the beneficiaries with the annual statement required under SCPA §2309(4).

The Court granted the motion. It found that a statement in the proposed Receipt and Release Agreement waiving commissions clearly indicated that it was made to settle the Account without the need for a judicial accounting proceeding. Since not all of the interested parties signed the agreement, the Trustees had to commence a judicial proceeding, which indeed became contested. The Court stated that “under these circumstances . . . the Trustee should not be held to the terms of the agreement.” As to the argument concerning failure to provide an annual statement, such an annual statement under the statute is to be provided to a person receiving income from the Trust. The Court found that since the Trustee was not seeking the commissions chargeable to income, this argument provided no basis upon which to estop the Trustee from seeking commissions.

The Court decided, but did not pass on the assertion made by Petitioner’s counsel that even if the Trustee were deemed to have waived commission, such a waiver may be withdrawn, citing a number of cases such as Matter of Grace, 61 Misc 2d 51 (Sur Ct, Nassau County 1970); Matter of Grace Candis Parris, 5/17/2005 NYLJ 32 (col 2) (Sur Ct. Kings County).