Surrogate Removes Fiduciary Sua Sponte For Misrepresentations In Petition
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.
Potential Conflict of Interest Insufficient to Disqualify Nominated Fiduciary
“A testator’s choice of executor should be given great deference” (see Matter of Palma, 40 AD3d 1157, 1158 [3d Dept 2007]). This rule is fundamental to the practice of trusts and estates law, yet is often challenged by those who want to disqualify or remove the testator’s nominee -with or without valid basis.
A court will generally issue letters to the nominee who is deemed eligible to serve as a fiduciary pursuant to SCPA §707, unless an interested party makes legitimate objections to the appointment as set forth in SCPA §709. Once letters do issue, removal is a very serious proposition, but it can be achieved if the fiduciary’s conduct falls within the realm of SCPA §711 – including but not limited to wasting or imprudently investing estate assets, acting dishonestly, refusing to obey a court order, or failing to have the necessary qualifications because of “substance abuse, dishonesty, improvidence, want of understanding,” or is “otherwise unfit to serve” (see SCPA §711). Courts may also take the more drastic measure of removing a fiduciary without process under certain circumstances, such as failing to account or refusing to supply information about estate assets despite court orders to do so, being convicted of a felony or judicially declared incompetent, or commingling estate funds with his or her own (see SCPA §719). In all events, however, courts tend to exercise their powers to remove fiduciaries somewhat sparingly.
It is against this backdrop that Matter of Russo, 100 AD3d 1547 (4th Dept 2012), should be considered. There, objections to probate were filed alleging that the petitioner, to whom preliminary letters had already issued, should be disqualified from serving as executor due to a purported conflict of interest “in connection with decedent's interest in Tread City Tire, Inc. (“TCT”) and decedent's classic car collection.”
Regarding TCT, it was alleged that a conflict of interest arose from the decedent’s purported ownership interest in the entity, where petitioner also happened to be a salesperson. With respect to the decedent’s classic car collection, it seems that the purported conflict was asserted because one of the cars was bequeathed to the petitioner - but the Court did not elaborate much on this latter allegation.
Petitioner moved for summary judgment seeking dismissal of the objections, arguing that no conflict existed. In support of the motion, petitioner provided corporate tax returns for TCT along with a third party affidavit, to prove that the decedent had no ownership interest in the entity; rather, it was fully owned by a third party, and the decedent merely managed the business.
Moreover, with respect to the allegations of conflict in connection with the classic car collection, petitioner established that while one car was specifically bequeathed to him, he obtained two appraisals for each car, and two of the cars were sold at prices higher than the appraised price. In addition, petitioner demonstrated that the remaining classic cars were placed in a consignment program with objectant’s consent.
Citing the well-established law giving deference to a testator’s choice of fiduciary absent evidence of his or her actual misconduct, the court granted the petitioner’s summary judgment motion, dismissing the objections to his serving as executor. The court opined that objectant had failed to raise any issue of fact as to whether there had been any actual misconduct, explaining that the objectant did not make even one specific allegation of conflict or misconduct.
Accordingly, in view of the great deference given to the testator’s selected fiduciary, this case serves to reiterate the longstanding rule that actual misconduct is the key to the disqualification of a fiduciary; potential misconduct is not enough. Nonetheless, it should be noted that this is not an ultimate roadblock for a beneficiary who has legitimate concerns about the fiduciary’s ability to serve. Indeed, if the fiduciary subsequently displays one or more of the characteristics set forth in SCPA §711 or SCPA §719 as explained above, then he may be removed for cause during the course of his stewardship.
Appellate Division Decides Case of First Impression Concerning "Adopted Out" Child's Right Of Inheritance
The term “adopted-out” child, commonly used by the courts, refers to a child adopted out of his or her biological family, i.e., a child placed for adoption by his or her biological family. A detailed discussion of the inheritance rights of adopted-out children is available here. Recently, in a case of first impression, Matter of Svenningsen, the Appellate Division, Second Department, addressed the inheritance rights of a child adopted by the decedent (prior to his death, of course) and his spouse, but subsequently re-adopted out to another family eight years after the decedent’s death.
The child, Emily, was born in China on July 7, 1995. The decedent, John Svenningsen, and his wife, Christine, formally adopted Emily in 1996. They entered into a Chinese adoption agreement in which they guaranteed that they would deem Emily to be their biological child; that they would not transfer or have her re-adopted; and that Emily had a right to inherit from their estates.
The decedent died on May 28, 1997, survived by Christine, five biological children, and Emily. He left a Last Will and Testament dated March 17, 1997 (which was admitted to probate in July of that year), as well as two irrevocable inter vivos trusts for his children, dated July 20, 1995, and October 29, 1996.
In the 1995 trust, created prior to Emily’s adoption, the decedent directed the division of the trust assets equally among his children, when the oldest child reached the age of 30. The trust defined the term “children” to include the decedent’s four living children (the fifth had not yet been born), identified by name, “and any additional children born to or adopted by [the decedent] after the creation of this Trust.”
The 1996 trust established six equal and separate irrevocable trusts, one for each of the decedent’s children. Each child, including Emily, was expressly named as a beneficiary. The trust instrument identified Emily as the sole beneficiary of her separate irrevocable trust, denominated as “The Emily Fuqui Svenningsen Trust.”
The decedent’s Will created two testamentary trusts – a credit shelter trust and a marital trust. The credit shelter trust was for the benefit of the decedent’s “then living issue, per stirpes. . . .” The marital trust was to be funded upon Christine’s death for the benefit of the decedent’s “then living issue, per stirpes. . . .” The Will defined the term “issue” as including “children who have been legally adopted at the date of my death as well as children with respect to whom legal adoption proceedings had been commenced prior to the date of my death though not completed at the time of my death.”
In 2003, approximately six years after the decedent’s death, Christine enrolled Emily in a school for children with special educational needs. Christine’s attorneys contacted school administrators, inquiring about putting Emily up for adoption. Ultimately, Maryann Campbell, a school official, and Fred Cass, her husband (for ease of reference, the “Petitioners”), agreed to adopted Emily. Christine terminated her parental rights with respect to Emily in 2004. The re-adoption was consummated in 2006 by court order. When they adopted Emily, the Petitioners were unaware of the provisions of the decedent’s will or trusts, although they were ultimately advised that the decedent had arranged money for Emily’s education and medical needs.
In November, 2007, Christine’s financial advisor requested the Petitioners’ consent to separate Emily’s interest in the decedent’s estate from those of the decedent’s biological children, through the creation of a spray trust. In connection with that request, the advisor provided the Petitioners with a list of estimated values of estate assets, and estimated Emily’s interest in the trusts at $842,397. Ultimately, the Petitioners examined the files of the Westchester County Surrogate’s Court and learned that the decedent’s estate had an estimated value, on the estate tax return, of $250,000,000. The Petitioners commenced proceedings seeking to compel accountings with respect to Christine’s administration of the decedent’s estate, and with respect to the 1995 and 1996 trusts.
The respondents in each of the proceedings asserted affirmative defenses based on Emily’s alleged lack of standing. The Petitioners moved for summary judgment compelling the accountings and the respondents cross-moved for summary judgment dismissing the petitions. Among other things, respondents argued that Emily’s contingent interests in the trusts were extinguished upon adoption. The Surrogate’s Court, Westchester County, granted the Petitioners’ motion and denied respondents’ cross-motion. The court directed the respondents to account. An appeal ensued.
The Second Department affirmed, in a decision authored by Justice Leonard B. Austin.
The court began its analysis with a review of the law concerning the inheritance rights of adopted and adopted-out children, including a detailed discussion of Domestic Relations Law § 117 and Estates, Powers and Trusts Law 2-1.3. It then turned to the Court of Appeals’ decision in Matter of Best, 66 NY2d 151 [1985]). At issue in that case was the right of an adopted-out child to inherit from his biological maternal grandmother. The Court held that, absent a contrary indication in the will, an adopted-out child is not entitled to share in a class gift to issue in the will of a biological relative. The Appellate Division explained that Best “remains relevant for the policy considerations enunciated in support of termination of an adopted-out child’s right of inheritance.”
The court summarized the issues before it as “whether the decedent expressly intended to include Emily as a beneficiary under the subject trusts and whether Emily’s interest in those trusts vested prior to her being adopted by the petitioners.” The court answered both those questions in the affirmative.
First, as to the decedent’s intent, the court noted that Emily was expressly named in the 1996 trust; and although she is not mentioned specifically by name in the Will or in the 1995 trust, “she is plainly referred to by status in both instruments” -- referring to definitions of the term “issue” in the trust instrument and in the Will. The court rejected respondents’ argument that the court should dismiss as “mere surplusage” the inclusion of adopted children in the definition of “issue.” In sum, the court concluded that
Emily’s adoption by the petitioners did not, and was not intended to, terminate her interest in the Marital Trust or the 1995 Trust. The decedent expressed an intention to include his adopted child in the absence of any reason to believe that his status as the parent of Emily would be terminated by her subsequent adoption many years after his death. Further, at the time of the decedent’s death, Emily was not an “adopted-out” child but instead was, and remained, his issue, as defined by the Trust instruments, despite the subsequent unforeseeable actions of Christine.
Turning to the issue of whether Emily’s rights in the trusts vested prior to her re-adoption, the court concluded that “while the rights of Emily and the other beneficiaries may be inchoate, they are, nevertheless, vested by their inclusion in the trust document. Thus, Emily’s interests under the decedent’s will and the 1995 Trust fully vested, subject only to the condition of her survival as provided for in the instruments (citation omitted).”
The court further noted that SCPA 2205 permits a “a person interested” to compel an accounting. A “person interested” is defined by SCPA 103(39) as “[a]ny person entitled or allegedly entitled to share as beneficiary in the estate.” The court concluded that Emily was a “person interested” and entitled to an accounting. Therefore, absent a genuine issue of fact requiring a trial, the Surrogate’s Court properly granted summary judgment in the Petitioners’ favor.
One thing is clear from the Svenningsen decision. Regardless of how convoluted the facts of a given case, or how complex the law governing its resolution, when it comes to inheritance rights, the courts are guided predominantly by the decedent’s intentions.
Attorney-In-Fact has Authority to Amend an Irrevocable Trust Pursuant to EPTL 7-1.9
Estate planning attorneys who prepare durable New York powers of attorney for their clients often counsel them to exercise care in allowing the use of such instruments because they grant the attorney-in-fact broad and sweeping authority. As a shorthand way of describing a power of attorney, an estate planner might tell a client that it allows the attorney-in-fact to do pretty much anything the client could do. The recent Appellate Division decision in Matter of Perosi v. LiGreci illustrates the accuracy of this shorthand description. In that case, the court held that the authority granted to an attorney-in-fact under a New York statutory power of attorney includes the power to amend an irrevocable trust with the consent of the beneficiaries, pursuant to EPTL 7-1.9.
In 1991, Nicholas LiGreci created an irrevocable trust for the benefit of his three children, including his daughter Linda. Nicholas named his brother, John LiGreci, as the trustee. On April 20, 2010, Nicholas executed a durable New York statutory short-form power of attorney naming his daughter Linda as his attorney-in-fact. The power of attorney included authorization for “estate transactions,” as construed under GOL § 5-1502G and “all other matters,” as construed under GOL § 5-1502N. Nicholas also signed a major gifts rider.
One month after the power of attorney was created, Linda, as attorney-in-fact for Nicholas LiGreci, executed an amendment to the irrevocable trust naming her son, Nicholas Perosi, as trustee instead of her uncle, John LiGreci. New York EPTL 7-1.9 allows the creator of a trust to “revoke or amend the whole or any part thereof” by an acknowledged instrument and with the written consent of all the trust beneficiaries. Pursuant to EPTL 7-1.9, each of the beneficiaries of the irrevocable trust consented to the amendment. John LiGreci did not consent to the amendment, nor was his consent required, as he was not a beneficiary.
Nicholas LiGreci passed away on June 3, 2010, never having personally signed the trust amendment. On July 28, 2010, Linda and her son, Nicholas Perosi, as the successor trustee, petitioned for an accounting from John LiGreci; for the removal of John LiGreci as trustee; and for turnover of the trust assets and records to Nicholas Perosi. John LiGreci moved to set aside the trust amendment, arguing that the trust was irrevocable and Linda did not have authority under the power of attorney to amend the trust. The Supreme Court agreed, holding that a power of attorney is a “forward looking” instrument and does not grant an attorney-in-fact authority to amend estate planning devices created prior to the execution of a power of attorney. The Supreme Court also found that the right to amend or revoke an irrevocable trust is a right that is personal to the creator and cannot be exercised by an agent unless the power of attorney expressly provides.
On appeal, the Appellate Division, Second Department, reversed (Matter of Perosi v. LiGreci, 2012 NY Slip Op 05533, decided July 11, 2012). Justice John Leventhal, in opinion joined by Justices Skelos, Balkin and Lott, explained that the irrevocable trust agreement did not specify any procedure by which the trust could be amended, and therefore EPTL 7-1.9 is applicable and allowed Nicholas LiGreci to amend the trust with the consent of the beneficiaries. Examining the power of attorney granted to Linda, the court quoted Zaubler v Picone, 100 AD2d 620, 621 (2d Dept 1984), in which it stated that “[a]n attorney in fact is essentially an alter ego of the principal and is authorized to act with respect to any and all matters on behalf of the principal with the exception of those acts which, by their nature, by public policy, or by contract require personal performance.” The court listed the “few exceptions” to the powers granted to an attorney-in-fact: the execution of a principal’s will, the execution of a principal’s affidavit upon personal knowledge, and the entrance into a principal’s marriage or divorce. Amending or revoking a trust with the consent of the beneficiaries, on the other hand, was not found to be an act which requires personal performance of a principal. The court, therefore, held that Linda, as attorney-in-fact and alter ego of Nicholas LiGreci, properly amended the irrevocable trust.
The court acknowledged that there may be policy considerations for prohibiting an attorney-in-fact from amending or revoking an irrevocable trust “based upon the premise that a creator knows what is best for his or her trust and overall estate plan.” It concluded, however, that “such a policy is for the Legislature to enact, not the courts.”
Fiduciary Beware: Contested Accounting in the Face of Exoneration Clause Results in Liability for Inter Vivos Trustee
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.
Who May Serve as Fiduciary?
The newly elected Surrogate for Nassau County, Edward W. McCarty III, recently issued a decision in what appears to be a gut-wrenching case involving an infant decedent. In the Estate of Jessica Fernandes, Surrogate McCarty attempts to get to the bottom of two commonly encountered issues in an infant decedent’s estate, that is 1) who should serve as administrator of the decedent’s estate; and 2) whether one of the decedent’s parents should be barred from receiving estate assets.
In most estates, the answer to the question of who will serve as fiduciary is straightforward. Where a decedent dies having executed a last will and testament, the will identifies the nominated executor (or co-executors). The nominated executor will serve unless the Court finds that he or she is ineligible to serve for the reasons set forth in SCPA § 707. Every person interested in the estate has the opportunity, pursuant to SCPA § 709, to object to the appointment of the nominated executor. Where a person dies intestate, a person interested in the estate may object to the appointment of an administrator on one or more of the grounds set forth in SCPA § 707. Article 10 of the SCPA governs the order of priority of who is entitled to serve as an administrator of an intestate estate.
In Fernandes, the decedent was a 12 year-old girl who succumbed to respiratory failure. She had been incapacitated since birth, and her mother had been appointed her personal needs guardian, as well as co-guardian of her property along with an attorney, pursuant to Article 81 of the New York Mental Hygiene Law. The decedent had recovered in excess of $3.5 million in the settlement of a medical malpractice action. All else being equal, the decedent’s mother and father have equal priority to serve as administrator of her estate pursuant to SCPA § 1001, and the Court may appoint, in its discretion, one or both of them.
Following the decedent’s death, her mother petitioned for letters of administration and requested that the decedent’s father be disqualified, pursuant to EPTL § 4-1.4, from taking an intestate share of decedent’s estate on the basis of his alleged failure to provide for, and abandonment of, the decedent. The decedent’s father struck back, denying that he had abandoned the decedent, objecting to the decedent’s mother’s appointment as administrator of the decedent’s estate pursuant to SCPA § 707 on the grounds that the decedent’s mother had engaged in fraud and dishonesty, and cross-petitioning for letters of administration. The decedent’s mother appears to have also alleged that the decedent’s father is a non-domiciliary alien and thus ineligible to serve as administrator pursuant to SCPA § 707 (1) (c), and that he cannot read or write in English, and that the Court should thus, in its discretion, find him ineligible to serve pursuant to SCPA § 707 (2). The decedent’s mother also alleged that decedent’s father’s open hostility to her rendered him ineligible to serve.
Judge McCarty’s decision indicates that he is poised to address the factual allegations that the parties have made. He explained that summary judgment was inappropriate; the papers before him left several issues of fact to be resolved at a hearing (the hearing may have already been held). Aside from untangling the issue of the decedent’s father’s immigration status, it seems that the Surrogate will be faced with determining whether each of the decedent’s parents can read and write in the English language, and, if not, whether this should affect their ability to serve. In this inquiry, he may be informed by a recent decision from the Surrogate’s Court, New York County, Matter of Torbibio.
Moreover, while dishonesty is one of the grounds set forth in SCPA § 707 (e) as a basis to render someone ineligible to receive letters, dishonesty as contemplated by the statute is not dishonesty in answering questions such as “how big was that fish that you caught last fall?” but, as the First Department recently explained, dishonesty in money matters from which a reasonable apprehension may be entertained that the funds of the estate would not be safe in the hands of the contemplated fiduciary. As for the decedent’s mother’s claim that the decedent’s father’s hostility renders him ineligible, as countless Surrogate’s Court practitioners have explained to their clients, mere hostility is simply not enough. It is well-settled that an individual will only be barred from being appointed fiduciary where friction or hostility interferes with the proper administration of the estate, and future cooperation is unlikely.
Barring a settlement, it appears that the Court will reach the second issue, whether the decedent’s father should be disqualified from sharing in the decedent’s estate, at the close of discovery. His decision contains a granular analysis of disputes among the parties as to documentary discovery - the kind of analysis that is helpful to lawyers when they get down to the task of drafting demands for documents.
Lessons From the Bench: Remedies for Breach of Fiduciary Duty
The role of a fiduciary - an executor, an administrator, a trustee, and even a guardian - brings with it essential duties and responsibilities of loyalty, honesty, and good faith. Through the decision in In re Brissett, 7/26/2010 NYLJ 26 (col 6) (Sur Ct, Bronx County) we learn that a fiduciary who fails to fulfill this role can be removed from office, or worse yet, held in contempt of court and face imprisonment.
In In re Brissett, the Surrogate’s Court, Bronx County, held the executrix of the estate in contempt for failing to timely file an accounting. The record revealed that the decedent died in 2004 survived by her spouse, who post-deceased her. Her Will was admitted to probate several years after her death, and letters testamentary issued to her niece, as the named executrix.
Following the issuance of letters testamentary, a proceeding was instituted to compel the executrix to account. The application was granted, and the executrix was ordered to account within thirty days of service upon her of a certified copy of the court’s order. When no account was filed, a petition was filed requesting that the executrix be held in contempt. The application was granted upon the default of the executrix, and the court authorized the issuance of a warrant of commitment without further notice in the event the executrix failed to account within thirty days of service upon her of the court’s order with notice of entry.
Thereafter, a warrant of commitment issued and the executrix was brought before the court by the Sheriff of the City of New York. At that time, counsel for the executrix stated that the their client’s failure to account was attributable to their law office failure rather than her willful disregard of the court’s order. Based on counsel’s representations, the court temporarily vacated the order of commitment, provided that in the event the executrix failed to account by a date certain, the warrant would once again issue. A warrant of commitment was again issued as a result of the executrix’s failure to account, and yet another stay was granted until a date certain.
However, in lieu of filing her account, the executrix moved for an extension of time to file her account and for another stay of the warrant of commitment pending the outcome of the application.
In opposition to the relief requested by the executrix, the respondents maintained that she transferred to herself all estate assets, contrary to the provisions of the decedent’s Will, and requested that the court, inter alia, issue an order revoking the letters testamentary of the executrix, appointing one of them as the fiduciary of the estate, and imposing sanctions.
The court opined that although a warrant of commitment remained outstanding, the remedies afforded by the provisions of SCPA §2205 were likely to prove more fruitful than the imprisonment of the executrix for failure to comply with the court’s directives. Accordingly, the court denied the request by the executrix for another extension of time to account, suspended the letters testamentary issued to her, directed that a hearing be held on the issue of whether the executrix’s letters testamentary should be revoked and one of the respondents be appointed in her place and stead, and ordered that on the hearing date the parties be prepared to discuss a turnover of the books and records of the estate, and whether a trial date should be fixed for the successor fiduciary to take and state the account of the suspended executrix.
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Practice Tip: Absent grounds for disqualification, a duly nominated executor is entitled to preliminary letters testamentary to provide for the immediate administration and protection of the assets of the estate in instances where there may be a delay in probate. See In re Rullan, 11/15/2010 NYLJ.19 (col 2) (Sur. Ct. Bronx County).
Construction, Exoneration, Delegation, and Fiduciary Duty
One of the first reported Surrogate’s Court decisions of 2011 comes from Monroe County. The decision is interesting in that the court addresses various legal issues in the context of what it describes as “a power-sharing arrangement that is rather unconventional, even by today's standards of Trust and Estate practice.” The decision addresses an exoneration clause, the delegation of investment responsibility, the overriding duty of loyalty of fiduciaries, the Prudent Investor Act, the construction of wills and trust instruments, and the status of an “advisor” as a de facto trustee.
The inter vivos trust at issue was created in 1945, in conjunction with the grantor’s outright gift to the University of Rochester to create a clinic under the auspices of the University’s Department of Psychiatry. The grantor directed that Trust income be used to operate and maintain the clinic. The grantor named an institutional trustee (“Trustee”) and also created an “Investment Advisory Committee” comprised of three individuals, two to be named by the University of Rochester and one by the Trustee.
By the provisions of the Trust instrument, the Advisory Committee has considerable power and control over the investment of Trust assets. The Advisory Committee was granted “sole and exclusive power and control over the investments making up this trust fund, the sale of securities, and the reinvestment of any funds at any time in the trust estate” and given the power to direct the Trustee in writing in connection with such power and control. The Trust instrument also contains an exoneration clause, and provides that “[t]he Trustee shall be charged with no responsibility or duties with respect to the investment or reinvestment of trust funds, other than to carry out the written directions or communications received by it from the Committee.”
Approximately 65 years after the Trust was created, a disagreement arose between the Advisory Committee and the Trustee that required judicial attention. Specifically, the Advisory Committee directed the Trustee to invest all of the Trust assets in the University's long-term investment pool, and the Trustee sought advice from the Court.
The Court made clear that its task was to determine whether the proposed investment in the long term investment pool would frustrate the intent of the grantor. It first addressed the intent of the grantor and the purpose of the Trust. Reading the Trust instrument as a whole, the Court found that that the Advisory Committee and Trustee were required to work in concert to promote the goals of the grantor to fund the operation of the Psychiatry Department. Although the terms of the Trust instrument quoted above confer broad authority upon the Advisory Committee, the Court held that such authority could not be used in contravention of the stated purpose of the Trust, and that the Trustee and the Advisory Committee, as a de facto co-trustee, share the fiduciary obligation to invest and manage the assets in a manner consistent with the purpose of the Trust.
In reaching this conclusion, the Court noted the limits of the Trust instrument’s allocation of investment responsibilities to the Advisory Committee and the concomitant exoneration clause. The Court found that the exoneration clause employed in the Trust instrument, an attempt to render the Trustee completely unaccountable in deference to the Advisory Committee, is inconsistent with the nature of a trust, and void as against public policy. If the Advisory Committee’s control over investment decisions was completely dispositive, there would be little sense in having a trustee. According to the Court, while the Trustee is under a duty to comply with the directions of the Advisory Committee with respect to investment decisions, the Trustee cannot ignore its fiduciary responsibility; the Trustee could be held liable for abiding by the direction of the Advisory Committee where there may be reason to believe that the Advisory Committee is not fulfilling its fiduciary duty.
The Court had several problems with the proposed investment in the long term investment pool. The investment would remove both the Trustee and the Advisory Committee from any role in administering the Trust assets. Trust funds would be transferred to the University's custodian bank, and such bank would have no fiduciary obligation to the Trust. The funds would be managed by numerous investment management firms under the oversight of a subcommittee of the University's Board of Trustees. Once the Trust’s funds were invested in the long term investment pool, neither the Advisory Committee, nor the Trustee, would have input concerning asset allocation, or the discretion to select, retain or sell off any individual assets. Such decisions would be overseen by the subcommittee of the University’s Board of Trustees.
Quoting Meinhard v. Salmon, the Court first noted that two of the three members of the Advisory Committee were employed by the University, and that the proposed investment would place the majority of the Advisory Committee, owing a duty of loyalty to both the University and the Trust, in a position of conflict if questions were to arise as to the handling of Trust funds in the long term investment pool. The Court was “hard-pressed” to allow the majority of the Advisory Committee to be allowed to direct the investment of Trust assets in the long term investment pool under these circumstances. The Court acknowledged that the third member of the Advisory Committee was also in a potential position of conflict as an employee of the Trustee, but found that this third member’s conflict was less of a concern considering the minority status.
The Court also held that while delegation of investment and management functions is permissible under the EPTL, the proposed investment constituted a delegation far afield from what is permitted by statute (EPTL § 11-2.3(c)), and would be inconsistent with the Trust instrument.
This case is certainly worth a read.
Exception to the American Rule: Shifting Objectants' Legal Fees to the Surcharged Fiduciary
Jurisdictions within the United States have generally rejected the British concept of the prevailing party’s shifting the burden of litigation expenses to the losing party. Instead, we follow what is commonly known as the American Rule, under which each party typically bears the burden of his own legal fees, win or lose. However, like most other rules we face in the legal profession, certain circumstances are considered exceptions. Surrogate Glen of New York County recently addressed the question of whether a particular situation rose to the level of such an exception in Matter of Lasdon, 11/19/10 NYLJ 25 (Sur Ct, New York County).
In Lasdon, objectants to two trust accountings sought leave to reargue three of the Court’s rulings in its June decision that addressed the conduct of one of the co-trustees, and resulted in a surcharge. At the core of the contested accounting was the co-trustee’s delay in making the final distribution upon each trust’s termination, which resulted in trust assets declining in value. His delay was intentional, attributable to his desire to resolve certain issues pertaining to other family trusts with his sister and co-trustee, prior to making the distribution.
In seeking reargument, objectants contended that the Court erred in denying their requests that (1) the co-trustee be barred from receiving his attorneys’ fees from the trust; (2) that the co-trustee be disallowed commissions; and (3) that the co-trustee be directed to absorb the objectants’ legal fees. Addressing the objectants’ motion, the Court explained that it did not misapprehend the law or overlook the facts in determining that the surcharged co-trustee is entitled to annual commissions and to have his legal fees and costs paid by the trusts. Nonetheless, Surrogate Glen noted that the issue that objectants raised in connection with the co-trustee’s payment of their legal fees warranted further discussion.
Although New York courts generally follow the American Rule, Surrogate Glen explained there are some exceptions. Hence, a prevailing party’s litigation costs may be shifted to the loser in situations where there is a statutory or contractual provision that when strictly construed, supports such a shift. Further, and most relevant here, a prevailing party’s legal expenses may be shifted when the losing party is a fiduciary who has been surcharged for causing harm to his estate or trust (Matter of Lasdon, 11/19/10 NYLJ 25 [Sur Ct, New York County], citing Matter of Garvin, 256 NY 518 [1931]; Matter of Hidden, 243 NY 499 [1926]; Matter of Marsh, 265 AD2d 253 [1st Dept 1999]).
The court referred to the Court of Appeals’ holding in the seminal case of Matter of Hidden, supra, as instructive. There, it was determined that the estate of an incompetent suffered a loss as “direct results of wrong found” on the part of her committee. Accordingly, the Court held that the expenses of litigating to protect the estate’s interests were “amounts ‘for which the delinquent fiduciary may be held accountable’” (Matter of Lasdon, supra, at *5 quoting Matter of Hidden, 243 NY 499 [1926]).
The Surrogate went on to explain that the Hidden decision itself gave no indication that every surcharged fiduciary should pay the legal expenses of every objectant, nor have the cases that followed it. Rather, Surrogate Glen interpreted Hidden and its descendant line of cases as warranting exceptions to the American Rule when fiduciaries enrich themselves “at the expense of the funds with which they have been entrusted” (id. at *6), or, in at least one case that did not involve bad faith, where the fiduciary’s actions caused “manifest . . . deficiencies in the administration of the estate” (id. quoting Matter of Campbell, 134 Misc 2d 960 [Sur Ct, Columbia County 1987], aff’d 138 AD2d 827 [3d Dept 1988]).
Applying the foregoing rationale to Lasdon, the court noted that while the co-trustee had been surcharged for his misconduct, there had been no self-dealing. Further, applying the reasoning of Campbell, the court stated that the Lasdon co-trustee’s delaying in the final distribution “[did] not unequivocally bespeak a malign or self-serving purpose” (Matter of Lasdon at *8). Consequently, it held that the facts did not warrant the imposition of the objectants’ litigation expenses upon the surcharged co-trustee.
It appears that the rationale for applying the exception to the American Rule in fiduciary situations is extremely similar to that applied when analyzing whether a fiduciary’s misconduct is so egregious as to result in his individual responsibility for his own legal fees. Indeed, if a fiduciary’s malfeasance rises to the level contemplated by Hidden and he must individually compensate the prevailing party for his litigation expenses, why should the cost of defending his improper actions be borne by the trust or estate that he was entrusted to serve? I would submit that in the vast majority of cases it should not. Thus, litigators should keep this exception to the American Rule in mind. Perhaps requests that a fiduciary be individually charged with his legal expenses when appropriate should routinely be coupled with requests to shift to the fiduciary the litigation costs of the prevailing objectant as well.
Hot Topics in Trusts and Estates
The summer has seen a multitude of significant decisions impacting practice and procedure in the Surrogate’s Court. Aside from the decisions rendered by the Court of Appeals in Matter of Schneider, 2010 N.Y. Slip. Op. 05281 and Matter of Hyde, 2010 N.Y. Slip. Op. 05676, both of which have been the subject of recent postings on this site, consideration should be given to the following decisions of interest.
Life Tenancy versus Right of Occupancy
The distinction between a life tenancy and a right of occupancy has been the subject of numerous Surrogate’s Court opinions. This past June, the court in In re Saviano, N.Y.L.J., 6/4/10, p. 42 (Sur. Ct., Suffolk County) had occasion to determine whether a beneficiary under the decedent’s Will was devised a life estate or merely a right to occupy the decedent’s former residence. The court opined that a life estate conveys exclusive ownership of the land during the lifetime of the life tenant, subject to certain limitations or duties. By comparison, a right of occupancy is a lesser interest in realty, conveying to the recipient a “personal privilege” in the property without the benefits of a life estate.
In reviewing the terms of the Will, the court noted that the beneficiary was devised “the right, during his lifetime, to reside in” the subject premises. The provisions of the Will were otherwise silent as to the nature of the bequest. Nevertheless, the court found it significant that the decedent did not use the words “life estate”, nor the descriptive words “use and occupancy” in making the subject bequest, phrases which are traditionally used to denote a life tenancy, although not dispositive.
Further, there was no language in the instrument defining the duties or limitations imposed upon the beneficiary.
Accordingly, in view of the foregoing, the court held that the beneficiary’s interest in the subject property consisted solely of a right of occupancy.
The Advocate Witness Rule
The issue of whether counsel for a litigant should be disqualified due to his possible role as a witness at the trial of the matter was recently addressed by the Surrogate’s Court, Westchester County in Matter of Popkin, N.Y.L.J., 6/4/10, p. 42 (Sur. Ct., Westchester County). This was a contested probate proceeding in which the objectant moved to disqualify petitioner’s counsel from representing the estate. The record revealed that the decedent died survived by his spouse, who was the petitioner and primary beneficiary under the propounded instrument, and a son from a prior marriage, who was the recipient of a $25,000 bequest. Objections to probate were filed by the decedent’s son
In support of his motion to disqualify petitioner’s counsel, objectant maintained that counsel would be called as a witness in the Will contest; that he had a unique knowledge as to decedent’s mental capacity and the possible exertion of undue influence at the time he executed the propounded Will, and that as one of the two attesting witnesses to the instrument, he could offer key testimony as to due execution. The petitioner opposed the application claiming that it was premature, that nothing had been shown by the objectant to substantiate that his testimony was necessary, and that the advocate-witness rule did not preclude him from representing petitioner in connection with the administration of the estate.
The court opined that the provisions of Rule 3.7 prohibit, inter alia, an attorney from acting as an advocate before a tribunal in a matter in which the lawyer is likely to be a witness on a significant issue of fact. The burden of proof on the issue of disqualification is on the party requesting it, who must demonstrate that the expected testimony of the attorney is necessary and prejudicial to the attorney’s client. Because disqualification impacts upon a party’s right to counsel of his own choosing, disqualification should not be applied mechanically.
Within the foregoing context, the court acknowledged that it had consistently adhered to the majority view that allowed the attorney draftsman in a contested probate proceeding to serve as counsel for the petitioner up until the time of trial. Finding that the language of the new advocate witness Rule was substantially the same as the provisions of the prior disciplinary rule on the subject, the court concluded that established case law authorizing this pre-trial representation continued to be applicable.
Accordingly, the court denied the motion to the extent that it allowed the attorney draftsman of the propounded Will to represent the petitioner up to the point of trial, and otherwise granted the relief requested.
Appointment of Limited Fiduciary to Resolve a Deadlock
The appointment of a limited fiduciary under the SCPA can prove an effective means of resolving hostility between co-fiduciaries. In In re Cushing, N.Y.L.J. 7/7/10 p.34 (Sur. Ct., New York County) (Webber, S.) the court invoked the provisions of the statute in a contested discovery proceeding in which the petitioner moved for summary judgment on the on the issue of the appointment of a third fiduciary for the limited purpose of resolving disputes between the co-executors with respect to the sale of real property.
The said realty was the principal asset of the decedent’s estate. The executors agreed that the property had to be sold, and actively marketed the premises through several real estate brokers since 2004, successively lowering the asking price, though to no avail. In order to cover the cash deficit of the estate, and more particularly the costs of maintaining the property, the fiduciaries, who were also the sole beneficiaries of the estate, entered into an interim agreement to cover the charges from their own funds.
Thereafter, cooperation between the co-fiduciaries broke down, and they were unable to agree on a broker to list the property, the price at which it was to be offered, or payment of the carrying costs. The court found the deadlock between the co-executors to be detrimental to the estate, most particularly to the sale of the real property. While it noted that it had the authority to require a fiduciary to comply with such directions as it may make whenever fiduciaries disagree with respect to any issue affecting the estate (SCPA 2102(6)), it concluded that the sale of the subject property would require active decision-making that a single order could not necessarily address.
Under such circumstances, the court held that the appointment of a third fiduciary was appropriate to break any deadlock through the rule of the majority.
Accordingly, the application of the petitioner was granted.
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.
Continue Reading...
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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