Court of Appeals: Fiduciary's Legal Fees to be Equitably Allocated among Beneficiaries
In Matter of Hyde, 2010 NY Slip Op 05676, decided June 29, 2010, the Court of Appeals held that SCPA 2110 gives Surrogate’s Courts discretion to determine the allocation of attorneys fees paid from the trust or estate to the fiduciary in defending against objections, assuming the fiduciary’s conduct was not deemed so egregious as to require him to be individually responsible for payment.
The facts in Hyde are summarized in detail in a prior post that addressed the Appellate Division’s decision, which has now been modified by the high court. In short, the beneficiaries who decided not to interpose objections to the trustees’ accountings sought an order directing that the trustees’ legal fees in defending against the objections be deducted solely from the objecting beneficiaries’ shares – not from the trust estates generally. That way, the beneficiaries who did not object would not have their inheritance diminished by litigation in which they decided not to participate, and from which they would not benefit.
Although the Surrogate’s Court dismissed all objections to the accountings, it relied on the Court of Appeals’ earlier holding in Matter of Dillon, 28 NY2d 597 (1971), and held that the trustees’ legal fees were to be paid from the trusts generally, and not simply from the objecting beneficiaries’ shares. The Appellate Division affirmed.
Surprisingly, the Court of Appeals did not simply distinguish Dillon from the case before it; the Court reconsidered Dillon. It opined that its decision in Dillon, where it held that SCPA 2110 mandated that the entire estate or trust be charged with the fiduciary’s legal fees, apparently ignored the plain meaning of the statute.
SCPA 2110[2] provides that “ . . . [t]he court may direct payment for [a fiduciary’s legal fees] from the estate generally or from the funds in the hands of the fiduciary belonging to any legatee, devisee, distributee, or person interested.” Noting that legislative intent should be ascertained from the plain meaning of the statute, the Court explained that there exists a presumption against legislative intent for an unjust or unreasonable result. It further stated that its decision in Matter of Ungrich, 201 NY 415 [1911], rather than Dillon, should be used as a guide. Matter of Ungrich, like the Court’s holding in Hyde, focused on fairness. There, it was held that courts should have the discretion to direct whether a fiduciary’s legal fees should be paid by him individually, from the estate generally, or from individual beneficiaries’ shares.
In deferring to the plain meaning of the statute, the Hyde Court directed that Surrogates should assess the sources from which fees are to be paid, considering various factors such as:
(1) whether the objecting beneficiary acted solely in his or her interest or in the common interest of the estate; (2) the possible benefits to individual beneficiaries from the outcome of the underlying proceeding; (3) the extent of an individual beneficiary’s participation in the proceeding; (4) the good or bad faith of the objecting beneficiary; (5) whether there was justifiable doubt regarding the fiduciary’s conduct; (6) the portions of interest in the estate held by the non-objecting beneficiaries relative to the objecting beneficiaries; and (7) the future interests that could be affected by reallocation of fees to individual beneficiaries instead of to the corpus of the estate generally.
According to the Court, none of the above factors are determinative.
In view of the foregoing, the Court of Appeals remanded Hyde to the trial court for an analysis in accordance with its newly established guidelines, and an ultimate determination as to who would bear the cost of the trustees’ legal fees in defending their accountings.
This decision has clearly implemented a process that should result in more equitable allocations of a fiduciary’s legal expenses where applicable. But it may also have the effect of causing potential objectants to weigh the pros and cons of litigation even more carefully, especially when all beneficiaries are not on board with the decision.
Fiduciary Relationship Leads to Allegations of Constructive Fraud
In a recent case, a New York County Surrogate denied a motion for summary judgment, holding that a trial was necessary to determine whether the founder of the Benihana restaurant chain, Rocki Aoki, was the victim of constructive fraud perpetrated by his conflicted lawyers. The issue in Estate of Aoki, 5/17/2010 NYLJ 18 (col 3), was the enforcement of releases to a testamentary power of appointment, which, if valid, would deny Mr. Aoiki’s surviving spouse any interest in the Benihana restaurant empire. The movants were two of Mr. Aoki’s children, Devon and Steven.
Mr. Aoki died in 2008 at age 69, survived by his third wife, Keiko, and six children from various relationships. Not bad for a guy who gained notoriety by flipping shrimp tails into his hat and shirt pockets.
Given his less than traditional family tree, it is hardly surprising that Mr. Aoki’s heirs are now litigants in the Surrogate’s Court.
The power of appointment in issue pertained to the Benihana Protective Trust (“BPT”), to which Mr. Aoki transferred all of his rights in Benihana of Tokyo, Inc., a publicly traded company of which he was the sole owner. The trust instrument named Mr. Aoki and his children as discretionary beneficiaries, and provided him with an unlimited testamentary power of appointment over the corpus. Trust and estates attorney Norman Shaw drafted the agreement. He was retained by, and received instructions from, Darwin C. Dornbush, Mr. Aoki’s personal lawyer for 30 years. Mr. Shaw had never met Mr. Aoki.
Mr. Aoki married Keiko in July 2002, four years after the BPT was created. Not surprisingly, Mr. Aoki’s children were concerned that his new wife might influence him to deprive them of some or all of the inheritance they expected. Two of them -- Kevin and Kana -- discussed their concerns, including the lack of a pre-nuptial agreement, with Dornbush. They then proposed to Keiko that she and the decedent sign a postnuptial agreement, apparently acting on Dornbush’s advice. Mr. Aoki did not participate in the conversation, and Keiko refused the request. Kevin and Kana then approached Dornbush and Shaw about protecting their interests as potential beneficiaries of the BPT.
Following a meeting at Dornbush’s office attended by the decedent, Kana and Kevin, the four met again, on September 24, 2002, for Mr. Aoki to sign a codicil to his will and an unrelated consent to an amendment of the BPT. During that brief meeting, Shaw arrived and presented the decedent with a one-page document entitled “Partial Release of Power of Appointment Under New York Estates, Powers & Trust Law §10-9.2.” By signing that document, the decedent “irrevocably” limited his power of appointment to permit him to appoint only his descendants.
Nobody advised the decedent that the release was irrevocable, nor did anyone advise him of the substantial tax consequences of foregoing the marital deduction.
Continue Reading...Estate Fiduciary Wrongly Deprived of Counsel of Choice?
A recent decision emanating from the Appellate Division, Second Department, Matter of Venezia, implicates two fundamental -- and seldom conflicting -- legal principles. The first of these is that a testator has the right to designate a legally qualified person to administer his or her estate, and that designation is entitled to great deference. And, secondly, a party’s entitlement to be represented by counsel of its choice is a valued right, and any attempt to restrict that right must be carefully scrutinized.
Matter of Venezia was a probate proceeding in which the Surrogate’s Court, Kings County, after a hearing, granted the motion of the objectant to disqualify the nominated executrix from serving as such and reinstated letters of administration previously issued to the objectant.
The objectant’s proffered basis for removal of the petitioner as executrix -- which was accepted by the Surrogate’s Court -- was that the petitioner’s selection of counsel rendered her unqualified to serve. The objectant argued that he and the petitioner’s counsel had been adversarial in a prior conservatorship proceeding and that they had a hostile relationship.
The Appellate Division began its analysis by noting that “the right of a testator or testatrix to designate, among those legally qualified, who will settle his or her affairs, is not to be lightly discarded[,]” although “the Surrogate may disqualify an individual from receiving letters of administration where friction or hostility between such individual and a beneficiary or a co-administrator or co-administratrix, especially where such individual is at fault, interferes with the proper administration of the estate, and future cooperation is unlikely” (citations omitted).
The court noted, however, that the evidence adduced at the hearing demonstrated that the objectant -- not the petitioner’s counsel -- was the source of the hostility between them. That fact, combined with the fact that there was no evidence that the petitioner was unqualified to serve as executrix or that she committed misconduct, lead to a determinations that the Surrogate’s Court erred in disqualifying the petitioner from serving as executrix.
Nevertheless, the Appellate Division directed that the petitioner retain new counsel to represent her, “given the hostility the objectant harbors for the petitioner’s counsel, and since it is unlikely that the objectant will cooperate with counsel in the future. . . .” Notably, the court made this determination notwithstanding its observation that “the record does not demonstrate that counsel retained by the petitioner acted improperly[.]”
So, let’s get this straight. The duly nominated fiduciary of a decedent’s estate hired an attorney of her choice. That attorney did nothing improper. Yet, due to “hostility” between the attorney and the objectant -- hostility created by the objectant -- and the fact that the objectant was not likely to cooperate with the petitioner’s counsel in the future, the court directed the petitioner to retain new counsel.
The Court of Appeals has made clear that a party’s entitlement to be represented by counsel of its choice is “a valued right and any restrictions [thereto] must be carefully scrutinized” (S&S Hotel Ventures Ltd. Partnership v 777 S.H. Corp., 69 NY2d 437 [1987]). It is not clear from the Appellate Division’s decision that it adequately considered this principle when it deprived the petitioner of her counsel of choice.
Beneficiary Participation Irrelevant to Allocation of Trustees' Litigation Costs
Beneficiaries often question the circumstances under which a trustee or executor’s legal fees are chargeable against their inheritance, especially when those fees are incurred in defending the fiduciary’s alleged misconduct.
The law provides that fiduciaries who are guilty of a breach often remain entitled to have their litigation costs covered by the estate or trust for which they serve (see Estate of Casey, 6/21/93 NYLJ 33 [col 6][Sur Ct, Westchester County]; Matter of Kettle, 73 AD2d 786 [4th Dept 1979]). Although Surrogate’s Courts have the discretion to charge legal fees against the fiduciary personally “as an expense caused by their wrong”, these determinations are generally limited to cases where the court finds an act of bad faith (see Matter of Hidden, 243 NY 499 [1926]). It is therefore logical that the legal fees of a fiduciary who is not guilty of any misconduct are chargeable to the estate or trust. This was the case in Matter of Hyde, 2009 N.Y. Slip Op 02491(3d Dept 2009). There, however, the beneficiaries who had not contested the trustees’ accounting sought to have the trustees’ litigation costs borne solely by the shares of the objecting parties.
Matter of Hyde dealt with two trusts, the Hyde Trust and the Cunningham Trust, of which two families, the Renz family and the Whitney family, were beneficiaries. Specifically, the Hyde Trust provided that the Hyde grandchildren, Louis Whitney (“Whitney”) and Mary W. Renz (“Renz”), were each to receive equal shares of trust income during their respective lifetimes. Upon the death of either beneficiary, the principal of the deceased beneficiary’s share was to be distributed to each of Hyde’s great-grandchildren. Whitney died in January 2008, providing each of Hyde’s five great-grandchildren with a one-fifth interest in the remaining principal of Whitney’s half.
The Cunningham Trust also provided income for Whitney and Renz, each receiving a one-sixth interest therein, with a contingent remainder of one-sixth of the principal upon termination of the trust if the beneficiary were still living.In 2001, the trustees of the Hyde Trust commenced a proceeding for an intermediate accounting. Thereafter, in 2003, the trustees of the Cunningham Trust commenced a proceeding to settle their intermediate accounts. The Whitney children filed objections to each accounting, seeking to deny trustees’ commissions and to surcharge for failure to diversify investments. The Warren County Surrogate’s Court dismissed the objections, and said dismissal was affirmed on appeal.
Because the objections and subsequent trial were pursued solely by the Whitney children, the Renz children sought to charge only the Whitney portion of the trust with legal fees in connection with the defense of said objections. The Surrogate denied the motion, and charged each of the trusts as a whole with all litigation expenses.
SCPA 2110[1] authorizes the Surrogate to fix litigation costs in connection with legal services provided to a fiduciary. In addition, pursuant to SCPA 2110[2], the Surrogate may “direct payment therefor from the estate generally or from the funds in the hands of the fiduciary belonging to any legatee, devisee or person interested.” Here, the Surrogate charged the trusts as a whole with the attorneys’ fees incurred defending in both accounting proceedings, despite the nonparticipation of the Renz beneficiaries. The Third Department affirmed.
In upholding the Warren County Surrogate’s decision, the Appellate Division relied on both SCPA 2110, and the Court of Appeals holding in Matter of Dillon, 28 NY2d 597 (1971). Dillon provides that “SCPA 2110 does not authorize payment for legal services rendered a party to be charged against the share of other individual parties” (see Matter of Dillon, 28 NY2d 597, 599). The Renz beneficiaries’ attempt to distinguish Dillon was without avail.
Court Rejects Executor's Attempt to Sell House To Herself For $10
The real estate market might be bad, but it’s not that bad.
In Matter of Karr, NYLJ 2/5/09 (Surrogate’s Court, Kings County), Surrogate Maria López Torrez canceled a deed by which the executor of an estate attempted to convey to herself, in consideration of $10, a house owned by the estate. You can’t make this stuff up.
The defendant in the action, Joan Melluso, was the executor of her father’s estate. He died in 1977, leaving his house in equal shares to his daughter and son, Joan and Donald. He also granted Joan a life estate in the house, and included a clause in his will providing that “[t]he choice when and if to sell shall be hers.” In 2004, Donald died intestate, leaving a wife and four children. In 2007, Joan, in her capacity as the executor of her father’s estate, conveyed the property outright to herself for $10.
Donald’s wife and children filed an action in Supreme Court seeking, among other things, a declaration that the deed conveying the house to Joan was invalid and that they retained a 50-percent tenancy-in-common interest in the house. They moved for summary judgment. Joan cross-moved to transfer the action to Surrogate’s Court. The court denied the motion for summary judgment without prejudice and granted the cross-motion to transfer. Ultimately, the fully briefed motion for summary judgment was submitted for decision to the Surrogate.
Cases of Attorney-Fiduciaries
Within the past year, several decisions have been rendered that impact upon the appointment of the attorney as fiduciary, and provide cautionary tales to the attorney-draftsman of instruments in which counsel is named to serve in a fiduciary role.
In re Estate of Wrobleski, NYLJ, 6/4/08, p. 41 (Sur. Ct. Kings County)(Sur. Johnson), the court was confronted with the issue of whether the acknowledgement of disclosure submitted by the nominated attorney-fiduciary was in compliance with the dictates of SCPA 2307-a.
The court noted that while the statements contained in the acknowledgment did not comply with the current requirements of SCPA 2307-a, they did appear to comport with those required by the statute at the time the acknowledgment was executed.
Nevertheless, the court noted that an essential element missing from the acknowledgment was the signature of the witness to the instrument. It was held that the petitioner’s attempts to cure the defect after-death were insufficient to rectify the attorney-fiduciary’s failure to comply with a material requirement of the statute. Specifically, in this regard, the court held that inasmuch as both model statements included in the statute contained a line for the witness’ signature, the signature was a substantial component of the statutory requirement that could not be overlooked. Since the statute failed to provide any remedy for failure to include the signature of the witness to the statement, the court found, under the circumstances, that the petitioner’s commissions should be reduced to one-half.
In re Estate of Deener, 2008 N.Y. Slip Op 28470, N.Y. Sur., Nov. 28, 2008 (Sur. Roth), the issue before the court was whether the disclosure requirements of SCPA 2307-a were applicable to the proponent, an out-of-state attorney named as fiduciary.
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Tax Apportionment on Gift Tax Recapture
Decedent made substantial gifts and paid gift taxes thereon within three years of his death. Under IRC §2035, the gift taxes are brought back into the estate for estate tax purposes. Who should bear the burden of those additional estate taxes, the donees of the lifetime gift, or the decedent’s estate? This was one of the questions facing Surrogate Scarpino in a recent case in Westchester County Surrogate’s Court. In Matter of Rhodes 208 NY Slip Op 28472 December 1, 2008 (NY Law Journal), the Court found that the burden fell on the donees.
While Congress eliminated the old “contemplation of death” rules for gifts within three years of death, a last vestige remains and that is that the gift taxes on gifts made within three years of death are recaptured into the decedent’s gross estate for estate tax purposes. This provision was meant to eliminate the perceived abuse of people making large death time gifts, which because of the tax inclusive nature of the estate tax versus the tax exclusive nature of the gift tax, would allow the gift tax on assets transferred lifetime to escape the transfer tax system, a result which would not happen if the transfer were made on death by Will.
Here are the facts. Mr. Rhodes died on June 18, 2007 survived by three sons and two grandchildren who were issue of a predeceased son. Decedent’s will had a number of pre-residuary bequests both of real property and money and left her residuary estate in equal shares to his three sons. The tax clause in his will provided that taxes on his probate assets would be paid from his residuary estate and that estate taxes on property passing outside his will would be apportioned in accordance with New York State law. The decedent’s federal estate tax return disclosed that a number of lifetime gifts had been made and that gift tax of $1,144,277 had been paid during the three year period prior to his death which tax was accordingly included in his gross estate under IRC § 2035(b). It appears there was a shortfall in the residuary estate and an initial question arose as to whether the shortfall should be borne by the pre-residuary bequests in the Will (which the Will specifically exonerated from taxes) or against the recipients of the gift. The Court found that any shortfall of the residuary estate to cover the estate tax should be paid from the interests bequeathed under Article Fourth of the Will, i.e., the pre-residuary bequests.
With respect to the question of whether the donees of gifts made within three years of death are responsible for paying estate tax attributable to the inclusion of the gift tax paid on those transfers, the Court held that while the phrase gross taxable estate does not technically include adjusted taxable gifts because such gifts are added after the tax computation schedule, gift taxes paid are treated differently and are a component of the gross estate as defined by IRC § 2035 and as such are subject to apportionment under EPTL 2-1.8. The Court thus found that the donees of the gifts made within three years of decedent’s death were responsible for paying their ratable share of the estate tax attributable to the inclusion of the gift tax paid.
Parents of Decedent Have No Rights to Preserved Reproductive Tissue
A unique issue was decided this week by the First Department. In Speranza v Repro Lab Inc., 2009 NY Slip Op 01543, Plaintiffs, as administrators of their deceased son’s estate, sought possession from Defendant, Repro Lab, Inc., of frozen semen specimens that the Decedent deposited prior to his death. He apparently chose to deposit the specimens to preserve his ability to have children in the event that his cancer treatments resulted in infertility. Plaintiffs sought the specimens after their son’s death, in hope of ultimately having a grandchild by a surrogate.
Upon being contacted by Plaintiffs after the Decedent passed away in 1998, the Lab advised them that the specimens were intended for the Decedent’s own use and thus had not undergone the requisite screening to be donated to a member of the public. Nonetheless, it agreed to maintain the specimens as long as Plaintiffs continued to pay the yearly fee, which they did for several years.
In 2005, Plaintiffs requested information from the Lab on obtaining the specimens for purposes of artificial insemination. Only at that time did Defendant produce a contract the Decedent signed, explicitly providing for the destruction of the specimens upon his death. This prompted litigation in which Plaintiffs alleged that the Lab’s acceptance of annual payments to preserve the specimens rendered them property of the estate, and requested a preliminary injunction to direct the Lab to continue preservation of the specimens pending the outcome of the action.
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New Power of Attorney Legislation Effective September 1, 2009
Governor Paterson has signed legislation extending the effective date for the new Power of Attorney statute from March 1, 2009 to September 1, 2009. This provides an additional six months to learn about the significant amendments to GOL 5-1501, which were summarized in a previous posting.
Getting to Know New York's New Power of Attorney Law
Thanks in large part to the efforts of individuals and organizations advocating to curb the epidemic of financial abuse of the elderly, New York Governor, David Paterson, signed into law a broad transformation of Title 15 of the New York General Obligations Law pertaining to Powers of Attorney on January 27, 2009, apparently targeted directly at a reduction in “DPA” or “Durable Power of Attorney Abuse” in New York State.
This new legislation, which was unanimously approved on December 15, 2008 in the senate, is currently scheduled to take effect on March 1, 2009. However, in light of the drastic modifications which this new law portends, many in the legal community are clamoring for a six month reprieve in order to fully digest the implications of this sweeping change. In order to avoid the mass chaos that a retroactive repeal would bring, the new law mercifully provides that these changes do not affect the validity of any power of attorney executed prior to the effective date of this new law. Nevertheless, it is certainly advisable for estate planners and elder law attorneys to familiarize themselves with the new law and incorporate it in into their practice as soon as possible.
Executor Granted Advance Payment Of Commissions Despite Prohibition In Will
There really is no substitute for good old common sense.
In Matter of Goldberg, NYLJ 1/15/09, a recent case emanating from the Surrogate’s Court, Nassau County, the court was called upon to decide a fiduciary’s petition seeking the advance payment of his executor’s commission during the administration of the estate.
The court began its analysis with reference to SCPA 2311, which allows a fiduciary to make an ex parte application for advance payment of commissions during the administration of an estate. The court noted that a petition seeking advance payment must allege that absent such payment, either the fiduciary or the estate would “be deprived of substantial advantages under the income tax laws of the United States or the state of New York or that [the fiduciary would] suffer inconvenience or hardship or that all persons whose rights and interests would be affected by the payment applied for applied for are persons under no legal disability and have by acknowledged instrument consented thereto” (SCPA 2311).
In the case before the court, the petitioner alleged that he desired advance payment of commissions for purposes of income tax planning, and because of the potential income tax savings associated with payments spread out over separate calendar years. Moreover, the petitioner alleged that the federal and state estate tax returns were filed; that he elected to pay a portion of the estate taxes in installments pursuant to Internal Revenue Code section 6166; that the undeferred portion of the estate taxes has been paid; and that all specific bequests under the decedent’s will have been paid. Moreover, all the beneficiaries -- none of whom was under a disability -- consented in writing to the application.
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New Law - Powers of Attorney in New York
Take a look at the new law applicable to powers of attorney in New York. You will have to go to the New York State Legislature search page , type in the bill number (A06421B), select 2008 from the pop-up menu, and check off the box for "Text." The effective date is currently March 1, 2009 - so you have a month to get up to speed!
Cases of Fiduciary Removal or Disqualification
This past year has been witness to multiple applications for the disqualification or removal of a fiduciary. While a decedent’s choice of a fiduciary is generally accorded great deference, there are, nevertheless, instances in which a testator’s choice is superseded by the best interests of an estate or trust and its beneficiaries. Judicial discretion in these cases is motivated by various concerns as evidenced by the following decisions:
In In re Brody, NYLJ, 10/17/08, p. 31 (Sur. Ct. Nassau County), the decedent’s son petitioned to remove his mother and sister as co-trustees of a testamentary trust created for his benefit on the grounds of hostility. The co-trustees moved to dismiss the petition for failure to state a cause of action and the court converted it to a motion for summary judgment.
In denying the application, the court opined that while hostility may prove to be a basis for disqualifying a person from being appointed fiduciary, this result will only occur when the friction between such person and the beneficiary interferes with the proper administration of the estate. To this extent, the court held that an evidentiary hearing was required in order to determine whether litigation pending between the parties in the Supreme Court impaired the estate’s administration to such a degree as to warrant the removal of the fiduciaries.
In In re Estate of Lurie, NYLJ, 6/4/08, p. 40 (Sur. Ct. New York County), application was made by the three executors named in the propounded Will for preliminary letters testamentary.
Continue Reading...Powers of a Nominated Executor to Litigate Prior to the Issuance of Letters
Questions often arise regarding a nominated executor’s authority to commence an action on behalf of the estate prior to the issuance of letters testamentary. These must be answered on a case-by-case basis.
In general, the authority of an executor “is derived from the will, not from the letters issued by the Surrogate” (see Matter of Yarm, 119 AD2d 754 [2d
Pursuant to EPTL §11-1.3, a named executor of a will that has not yet been admitted to probate “has no power to dispose of any part of the estate of the testator before letters testamentary or preliminary letters testamentary are granted, . . . nor to interfere with such estate in any manner other than to take such action as is necessary to preserve it” (emphasis added). It is the language of this statute, and the similar words of its predecessor, Surrogate’s Court Act §223, that the courts have used as a guide in determining the circumstances under which named executors without letters may commence actions on behalf of the estate for which they are nominated to serve. Because the statute provides that a named executor may take actions that are necessary to “preserve” an estate, courts’ interpretations of the statute have established a fine line between those actions that are commenced for purposes of preservation, and those that constitute “active management” of estate affairs.
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