One of the most important considerations in creating a trust is selecting the appropriate trustee. Oftentimes this involves determining whether a corporate trustee is appropriate as either the sole trustee or together with one or more individual co-trustees. A corporate trustee’s experience and sophistication in both investment and administrative matters are commonly cited reasons for appointing such a trustee. A corporate trustee may further provide a level of objectivity that may be difficult for family members or other individual trustees to match.

In Matter of Sinzheimer, 2017 NY Slip Op 31379(U) (Sur Ct, New York County 2017), the Court held a corporate co-trustee that had been “removed” pursuant to the terms of the trust agreement was not required to deliver the trust’s assets to the sole individual trustee where the individual defied the instruction in the trust instrument to appoint a successor corporate co-trustee. The perceived objectivity on the part of the removed corporate trustee figured prominently in the Court’s decision sustaining its decision to withhold delivery of trust assets to the individual trustee until a new corporate trustee had been appointed.

The relevant facts in Sinzheimer are as follows. Ronald and Marsha, husband and wife, established an irrevocable trust which provided for income and principal to be paid to Marsha in the discretion of the trustees for her “health, support maintenance and education.” On Marsha’s death, the trust remainder is payable to a further subtrust which terminates after the death of the last surviving issue of the parents of Ronald and Marsha. The remainder is payable to certain named individuals or their estates.

Ronald died in 1998, about a year after the trust was established. Thereafter, an individual trustee resigned and Andrew, the son of the grantors, Ronald and Marsha, was appointed in his place. Before Andrew’s predecessor resigned, he exercised his power to remove the corporate co-trustee (the “Bank”), but no corporate co-trustee was appointed to serve in its place.

Andrew maintained that a successor corporate co-trustee is not required and declined to appoint one. With respect to the issue before the Court as to the Bank’s turnover of trust assets to Andrew, the Court noted, “[t]he issue is consequential because Andrew has announced his intention to exercise his discretion to distribute all principal to Marsha if permitted to serve alone, thereby terminating the Trust” (id. at 2). The Court further noted that after Andrew became a trustee, but before his refusal to appoint a corporate co-trustee, he and his mother, Marsha, requested a discretionary distribution to Marsha of all the assets in the trust. A Bank officer asked for the standard documentation to initiate the discretionary request process, but Andrew and Marsha refused to provide the information.

The Court found it was clear from the trust instrument that the settlors intended that a corporate trustee would serve at all times after Ronald’s death. The authorities on which Andrew relied were distinguished because none involved a direction in the instrument to replace a corporate trustee with another corporate trustee, as was the case here, which, the Court stated, was “a significant difference because the professional management and independence uniquely afforded by a bank could affect a court’s analysis of such a provision” (id. at 5).

The Court next proceeded to dismiss Andrew and Marsha’s claim that the Bank converted the trust assets by not turning them over to Andrew as trustee. The Court found that the Bank never asserted title to the trust account which is an essential element of a claim for conversion. Rather, the issue was the Bank’s right, under these facts and circumstances, to temporarily withhold delivery of the trust assets to Andrew. The record established that the Bank never unequivocally denied that Andrew, as trustee, had a right to the assets, but asked only that he first appoint a corporate co-trustee to serve with him or obtain a court order determining his right to serve alone. The Court held:

Particularly given Andrew’s stated intent to terminate the Trust without regard to the rights of the remainder beneficiaries – a class that does not include himself, a measuring life – the Bank’s position was reasonable. … The Bank’s uncontroverted conduct here was prudent and appropriate in the circumstances, particularly in consideration of its fiduciary duty to the remainder beneficiaries… (id. at 8)

Although the Bank had been purportedly removed pursuant to the terms of the instrument, it, nevertheless, had an ongoing fiduciary duty to the remainder beneficiaries. The Court found the Bank fulfilled that duty by resisting its removal and not turning the trust assets over to the sole individual trustee.

Notably, the Bank’s withholding of the trust assets from Andrew was found prudent notwithstanding that co-fiduciaries have an equal right to custody of an estate fund (Matter of Slensby, 169 Misc. 292, 295 [Sur Ct, Kings County 1938] (“every estate fiduciary, by virtue of his office, is entitled to the custody of the assets of the estate or fund. When there are two or more fiduciaries, each possesses an equal right in this regard …”); see also Matter of Schwarz, 240 AD2d 268, 269 [1st Dept 1997]). The justification for departing from this rule in Sinzheimer was clear. The Bank faced potential exposure to claims from the trust’s remainder beneficiaries if it delivered property to the individual trustee who may later be found to be without the authority to exercise discretion alone, as he said he would by terminating the trust in favor of his mother.

Having a corporate trustee is not appropriate for all trusts. The cost of a corporate trustee’s services is an important factor to consider in determining if one is appropriate. The personal family knowledge possessed by a family member or dear friend of the grantor usually serves as a compelling basis to select such an individual to administer a trust for his or her family. On the other hand, a corporate trustee is less likely to be influenced by emotions, personal agendas, conflicts of interest and bias, all of which can impair the orderly administration of a trust consistent with the grantor’s intentions.

A nominated executor is obliged to secure estate assets even before the issuance of letters testamentary, or preliminary letters testamentary (see Matter of Schultz, 104 AD3d 1146 [4th Dept. 2013]).  Courts have recognized that “an executor’s duties are derived from the will itself, not from the letters issued by the Surrogate” (Estate of Skelly, 284 AD2d 336 [2d Dept. 2001]).  Thus, as we have noted in a prior post, executors have been subject to surcharge for a loss sustained to estate property in the period between the decedent’s death and the executor’s receipt of letters from the Surrogate’s Court (see, e.g., Matter of Donner, 82 NY2d 574 [1993] [surcharging nominated executors for investment losses based on date of death values]; Matter of Kranzle, N.Y.L.J. 11/7/1991 p. 28, col. 1 [Sur Ct, Suffolk Co.] [surcharging nominated executor for interest and penalties on taxes due several months after decedent’s death, but before the probate proceeding commenced]).

Decisions addressing a nominated executor’s obligations in respect of estate assets before formal appointment by the Court usually arise from the fiduciary’s failure to act. A recent case, however, addressed the nominated executor’s obligations not in the context of an omission, but, instead, involved the fiduciary’s expenditure of funds to safeguard property that ended up not being estate property (Matter of Timpano (Brough), 2016 NY Slip Op 51770(U) [Sur Ct, Oneida Co.]).  Although the nominated executor’s actions may have been misdirected, the Surrogate permitted an allowance from the estate for these expenses as the actions were undertaken in good faith and, further, the Court cited the need to avoid deterring other nominated executors from taking immediate measures to safeguard estate property.

In Estate of Skelly, supra, the fiduciary was notified at the decedent’s funeral in May 1995 that she had been named executor.  It was undisputed that she failed to probate the will until November 1996, over one year after decedent’s death.  During that time, decedent’s real property, which was bequeathed under the will, was vandalized and damaged.  The person to whom the property was bequeathed sought damages for the loss.

The Surrogate denied the executor’s motion for summary judgment dismissing the objections, and the Second Department affirmed.  Even though title to the real property may have vested with the objectant on the death of the decedent, the Second Department found “there are issues of fact as to whether the [executor] failed to assess the assets of the estate and neglected to preserve the premises prior to probate.” (Skelly, 284 AD2d at 337).

In Timpano, the decedent’s sister, Georgianna, lived in a mobile home in Florida across the street from one in which decedent resided. Decedent died in April 2010 survived by his three children, Mark, Kelly and Robert. His will named Georgianna as executor.

Probate of decedent’s will was delayed by SCPA 1404 examinations and, following the testimony of one attesting witness, Georgianna withdrew her probate petition. Ultimately, the Oneida County Chief Fiscal Officer (the “CFO”) was appointed as administrator of the estate.

Believing decedent owned the mobile home in which he lived, beginning in April 2010 (the month of decedent’s death), Georgianna used her personal funds to pay lot rent to avoid confiscation of the mobile home and its contents. She further paid for electrical service to run the air conditioning to avoid mold and mildew so as to further protect the mobile home and decedent’s possessions therein. At no time did any of decedent’s children object to her covering these expenses.

In January 2011, decedent’s son Robert informed Georgianna that he had searched the title to the mobile home and found that his name was on the title. Upon learning this, Georgianna removed the decedent’s possessions from the mobile home and placed them in storage. She further stopped paying lot rent and electric bills.

When the CFO submitted its final accounting, decedent’s daughter Kelly objected to Georgianna being reimbursed for the expenses for lot rent and electric service. Kelly testified in support of her objections and, significantly, acknowledged that she too believed the mobile home was estate property before being told otherwise in January 2011

The Surrogate found Georgianna’s actions following decedent’s death evidenced her understanding that a nominated executor has an obligation to secure assets of an estate prior to formal appointment, citing Schultz, supra. Even though the will was not ultimately admitted to probate, the Surrogate noted, “Georgianna would have had no basis to anticipate this outcome when she acted to preserve decedent’s assets throughout 2010 and into early 2011.”

The Surrogate recognized that Kelly’s claim that if the estate did not own the property, it could not be responsible for related expenses, is true in a technical sense. The Surrogate, however, noted that to rule in Kelly’s favor would ignore the circumstances of the case.

After reviewing the cases holding that an individual who expends personal funds in good faith in furtherance of her fiduciary responsibilities is entitled to reimbursement, the Surrogate found Georgianna acted in good faith and should be entitled to reimbursement from the estate.[1] The Court reinforced its decision by reference to the following policy consideration: “to sustain the objections would be to instill a chilling effect on the work of nominated executors who are tasked with preserving an asset believed in good faith…to belong to the estate” (Timpano, supra).

 

 

[1] The Court directed that part of the expenses be charged against Robert’s share of the estate.

In construing an in terrorem provision, or any part of a will, the paramount consideration is identifying and carrying out the testator’s intent.  Although paramount, the testator’s intention will not be given effect if doing so would violate public policy.  For example, an in terrorem provision that purports to prevent a beneficiary from questioning a fiduciary’s conduct is void as contrary to public policy (see Matter of Egerer, 30 Misc 3d 1229[A], at *1-4 [Sur Ct, Suffolk County 2006]).  The recent decision in Matter of Sochurek, NYLJ, July 20, 2016, p. 31 (Sur Ct, Dutchess County June 30, 2016), illustrates the difficulty in reconciling the testator’s intention in respect of an in terrorem condition with the rights of beneficiaries to obtain an accounting or otherwise challenge the actions of their fiduciary.

Sochurek involved a dispute between the decedent’s spouse, who was the executor of his estate, and his two daughters from a prior marriage.  Decedent owned a 50% membership interest in an LLC that owned real property and a business.  The will bequeathed “an estate for life” in the LLC to decedent’s wife, including the right to receive income therefrom.  Upon his wife’s death, “her life interest shall terminate” and the LLC was bequeathed to his two daughters.  The will also contained provisions, likely boilerplate, regarding the executor’s powers to sell estate assets.

After the will had been admitted to probate, the executor/spouse sold the LLC’s real property and business.  The executor and decedent’s daughters entered into a “standstill agreement” providing that any funds the executor received from the sale would be held in a segregated “Life Estate Account” from which no withdrawals would be made for a period while the daughters had an opportunity to appraise the LLC assets and negotiate a reasonable treatment of the proceeds.

Before the standstill agreement expired, the daughters commenced an action against the executor in Supreme Court.  The daughters asserted causes of action for, inter alia, breach of fiduciary duty and an accounting.  An order to show cause enjoined the executor from withdrawing any funds in the “Life Estate Account.”  The ultimate relief sought in the order to show cause was a temporary restraining order and an accounting.  These claims were grounded in the executor’s sale of estate property (assets of the LLC) and actions thereafter as to the proceeds.

The in terrorem provision in the will was directed toward any person who “shall, directly or indirectly, institute or become a party to any proceedings to set aside, interfere with, or make null any provision of this Will, or to offer any objections to the probate thereof . . .” (emphasis added).

The executor commenced a construction proceeding in the Surrogate’s Court contending the daughters’ Supreme Court action interfered with her authority as executor and prevented her from accessing/managing estate assets, thereby triggering the in terrorem clause.  In response, the daughters contended they never contested their father’s will and, to the contrary, conceded its validity.  The daughters asserted that their lawsuit is focused on the executor’s “egregious abuse of her fiduciary duties” and breach of the standstill agreement.

In ascertaining the testator’s intent, the Court reviewed the fiduciary powers article in the Will which gave the executor broad powers to sell, exchange or otherwise dispose of all estate property on such terms as the executor deemed advisable.  Thus, the Court concluded, the executor undoubtedly had the power to dispose of the LLC.  The Surrogate held:

The clear intent of the testator upon a complete reading of the will was to give the executrix of his estate the necessary and broad powers to manage the property as she saw fit.  The Court finds the [daughters] have violated [the in terrorem provision] by commencing an action in the Supreme Court, Westchester County challenging the executrix’s action with regard to the disposition of estate assets, thereby “interfer[ing] with any provision of this Will” [quoting the in terrorem provision]. By interfering with the executrix’s management and ultimate sale of [the LLC], the [daughters] have violated the in terrorem clause of the will and have forfeited their legacies (Matter of Sochurek, NYLJ, July 20, 2016, p. 31 at *8).

The daughters had a beneficial interest in the assets of the LLC which the executor held in a fiduciary capacity.  The relief sought by the daughters in Supreme Court included an accounting and damages for mismanagement of estate assets, including alleged self-dealing.  In Egerer, supra, the Surrogate’s Court held, “any attempt by a testator to preclude a beneficiary from questioning the conduct of the fiduciaries, from demanding an accounting from said fiduciaries or from filing objections thereto will result in a finding that the pertinent language is void as contrary to public policy and the applicable statutes of the State of New York” (Matter of Egerer, 30 Misc 3d 1229[A], *3 [Sur Ct, Suffolk County 2006]).

Thus, following Egerer, had the daughters petitioned the Surrogate’s Court successfully for a compulsory accounting and objected to the executor’s accounting alleging the sale of the LLC assets was self-interested, that the executor misappropriated estate assets and breached an agreement as to the management of estate assets, it does not appear the in terrorem condition would have been triggered.

What about obtaining a provisional remedy, such as a TRO, in the context of the accounting?  It would seem inconsistent to allow beneficiaries the right to pursue objections to an accounting without forfeiting an interest in the estate by triggering an in terrorem condition, but deprive them of the ability to seek a provisional remedy securing their interests in the subject of the proceeding.  While the daughters in Sochurek obtained a TRO that interfered with the executor’s management of estate assets, it was in the context of a plenary action seeking an accounting and otherwise challenging the executor’s conduct (cf. Egerer, supra).

As the Sochurek decision illustrates, the case law on the scope and validity of in terrorem conditions continues to develop, and the outcome of each proceeding depends on the particular provisions of the will and the unique, fact-specific circumstances related to the conduct of the party alleged to have violated the condition.