While the removal of a fiduciary has long been the subject of Surrogate’s Court opinions, it is not often that the Appellate Division weighs in on the issue. However, in Matter of Epstein, 2022 NY Slip Op 00658 (2d Dep’t 2022), the Second Department did just that. The opinion is an important guidepost for the kind of conduct that warrants a fiduciary’s removal.
In Matter of Epstein, the Appellate Division, Second Department, reversed a decree of the Surrogate’s Court, Suffolk County which, after a nonjury trial, inter alia, denied the petitioner’s request to revoke the letters testamentary issued to her co-fiduciary, and modified the decree of the same court, which denied the petitioner’s request to revoke the letters of trusteeship issued to her co-trustee, and substituted therefor a provision that the application be granted.
The decedent died, testate, on August 17, 2008, survived by two daughters (the petitioner and the respondent, respectively), and three grandchildren. Pursuant to the pertinent provisions of his will, the decedent created generation skipping trusts (GST) for the benefit of his grandchildren and devised and bequeathed the residue of his estate in equal shares to his daughters. Upon admission of the decedent’s will to probate, letters testamentary and of trusteeship issued to the petitioner and the respondent, as the nominated executors and trustees thereunder.
Among the decedent’s assets at death were two LLC’s. Within a year after his death, a 10% interest in the entities was distributed to the petitioner and respondent, as beneficiaries, and $150,000 was deposited into each of the GST trusts in partial satisfaction of the bequests to the grandchildren. Thereafter, disagreements arose between the co-fiduciaries regarding distribution of the estate, which resulted in a July, 2011 agreement signed by all the beneficiaries, and the co-fiduciaries in their roles as trustees.
Nevertheless, the disputes between the co-fiduciaries continued. A little over a year after the agreement was signed, one of the LLCs sold its primary asset, and the petitioner, over objection by the respondent, instructed the managing member to allocate and distribute the estate’s shares in the company in accordance with the agreement. Further, the respondent refused to make distributions from the GST trusts to the grandchildren, and to create additional GST trust accounts for the grandchildren in order to comport with the FDIC limit. Additionally, the co-fiduciaries disagreed with respect to the filing of the estate tax return and payment of estate taxes, causing the petitioner to seek an order of the court to permit the payment of taxes.
Thereafter, proceedings were instituted by the petitioner to revoke the letters testamentary and of trusteeship issued to the respondent, amongst other things, and the respondent filed proceedings seeking petitioner’s removal, as well as an order compelling the grandchildren to return estate assets representing alleged overfunding of the respective GST trusts and excess cash distributions. The Surrogate’s Court denied both petitions, and the petitioner appealed.
The Court opined that the removal of a fiduciary pursuant to SCPA 711 and 719 must be exercised sparingly, and only where the record demonstrates a danger to the estate or trust administration. To this extent, removal will be ordered when conflict and hostility between co-fiduciaries impedes their stewardship.
The Court noted that the respondent repeatedly refused to countersign the estate tax return and checks in order to avoid penalties and interest being incurred by the decedent’s estate, claiming that the taxes were improperly calculated. To this end, she threatened to sue the estate’s bank for honoring checks for tax payments written by the petitioner, prompting the bank to freeze the estate accounts, and causing the petitioner to seek a court order to have the funds released in an amount sufficient to cover the estate’s tax liabilities.
The Court found that irrespective of her claims that the GST trusts were overfunded, the respondent’s conduct endangered the assets of the estate, and directed her removal as executor.
Further, with respect to her role as co-trustee, the Court found that the respondent placed her own interest above her fiduciary duty to act in the best interests of the GST trusts and their beneficiaries. Indeed, even accepting the respondent’s protestation that her only goal was to fund the trusts properly, the Court concluded that she was required to pursue this goal consistent with her stewardship by distributing funds to the grandchildren, and acceding to the creation of accounts to insure balances were less than the FDIC limits. In view thereof, the Court concluded that the respondent’s conduct thwarted the administration of the trusts, and held that the Surrogate’s Court improvidently exercised its discretion in denying petitioner’s application for her removal.