As the year draws to a close, I sometimes recall the stresses of final exam season from my law school days. In the spirit of reminiscence, I’ll pose a quick final-exam-like fact pattern:
Jane owned a parcel of real property in New Hyde Park, title to which she transferred in June 2002 to her irrevocable lifetime trust. Jane listed the New Hyde Park property on Schedule A to the trust agreement, and also executed and recorded a deed transferring the property to her trustees. The trust agreement provides that upon Jane’s death, the remaining corpus of the trust is to be divided among her two children, Nancy and Thomas, in equal shares per stirpes. Nancy and Thomas are specifically named as remainder beneficiaries under the trust agreement.
In February 2013, Thomas predeceased Jane, leaving no spouse or issue, and having no will.
In January 2014, Jane created a will which included a general bequest of all of her real property and her residuary estate to her three grandchildren, Scott, John and Jessica, the children of Nancy.
Jane died in July 2014. At Jane’s death, her irrevocable trust was still in existence and the deed to the New Hyde Park property was still in the name of the trustees of Jane’s trust. Scott sought admission of Jane’s January 2014 will to probate and received preliminary letters testamentary. Assuming admission of Jane’s January 2014 will to probate, who will receive title to the New Hyde Park property?
If you want to cheat, the answer can be found in a recent Nassau County Surrogate’s Court decision, Matter of Wilder (NYLJ, September 3, 2015, p.25, col.6). The crux of the dispute decided by Surrogate McCarty was that both Nancy, as trustee and beneficiary of Jane’s irrevocable trust, and Scott, as preliminary executor and a legatee of Jane’s estate, claimed an interest in the New Hyde Park property.
Nancy asserted that the property was owned solely by the trust and should pass 100% to her. As the trust distribution is to be per stirpes, she referred to EPTL 1-2.14, which provides:
“The property so passing is divided into as many equal shares as there are (i) surviving issue in the generation nearest to the deceased ancestor which contains one or more surviving issue and (ii) deceased issue in the same generation who left surviving issue, if any. Each surviving member in such nearest generation is allocated one share.”
Nancy claimed that the per stirpetal division and distribution should be made at her generation level, as it was the nearest to Jane and contained both surviving and deceased members. Since Thomas did not leave issue, Nancy argued only one share should be created, passing entirely to her as the sole surviving trust beneficiary.
Conversely, Scott asserted that 50% of the New Hyde Park property was owned by Jane at her death and should pass to her grandchildren pursuant to her January 2014 will. Scott claimed that because the trust was irrevocable and the remainder over to Nancy and Thomas was not conditioned upon their survival, a 50% interest in the New Hyde Park property vested immediately and absolutely in Thomas upon transfer of the real property to the trust. When Thomas died, his estate owned that 50% real property interest and it ultimately passed by intestacy to his sole intestate distributee, his mother Jane. Thus, Scott argued, when Jane bequeathed her real estate by her will, this 50% interest in the New Hyde Park property passed to her grandchildren.
Who was right? Neither, party entirely. As with many final exam questions, the fight over interests in the New Hyde Park property was a red herring. The Surrogate clarified that the dispute at issue was properly over a 50% remainder interest in Jane’s trust, not a 50% interest in the New Hyde Park property. Whether Thomas had any interest when he died, it would only have been an interest in the remaining trust property, not the New Hyde Park property transferred to the trust. For example, the New Hyde Park property could have been sold by the trustee and neither Thomas, nor his estate, would have standing to prevent that.
But the question still remained whether Thomas had any remainder interest in Jane’s trust even though he predeceased Jane. Surrogate McCarty noted EPTL 2-1.15 which provides that when the remainder of a trust passes to two or more designated beneficiaries and such remainder provision is ineffective in part, without an alternative disposition, the ineffective portion passes to the remaining designated beneficiaries. Thus, if the trust remainder provision was ineffective as to Thomas, due to his predeceasing Jane, the trust remainder would pass entirely to Nancy as the sole remaining beneficiary. If, however, the trust remainder portion for Thomas vested both immediately and indefeasibly, the trust remainder provision would have been effective despite Thomas’ death, and EPTL 2-1.15 would not apply.
The Surrogate next determined that Thomas’ remainder interest in the trust vested immediately upon the trust’s creation because Thomas was specifically named, and this creates a strong inference of vesting. As for whether the vesting was indefeasible, the words “per stirpes” created a potential condition for defeasance of Thomas’ vested interest, because they indicated Jane’s intent that Thomas’ death might lead to his issue taking his previously vested share. Thus Thomas’ lack of issue became the deciding factor.
The Surrogate rejected Nancy’s interpretation of the per stirpes provision under EPTL 1-2.14. The term per stirpes provides for division among a class of persons, and it is not possible to make a per stirpetal ‘division’ among one person. If Thomas had died with issue, then a class would have existed and a per stirpetal division could have been made. Since Thomas had no issue, the per stirpes provision is not operative. Moreover, the “per stirpes” qualification language in the trust agreement meant that Thomas’ vested interest would only be defeated if Thomas both (1) died before Jane, and (2) died leaving issue surviving him. Since both conditions were not satisfied, Thomas’ previously vested interest in the trust remainder was not defeated by his death. As a result, Thomas’ estate would be entitled to a 50% remainder interest in the trust, which would pass to Jane by intestacy and be disposed of by her will.
How did you score on the exam? More importantly, perhaps, despite the legal logic of the result, do you think this is the result Jane intended? Jane’s property ultimately remained in her family, but would your answer to that final question have been different if Thomas had made a will giving his property to a non-family member? As with most exam-type fact patterns, careful trust drafting could have prevented the dispute.