In terrorem provisions, which are more commonly known as “no contest” clauses, generally state that beneficiaries forfeit their interests in estates and trusts by contesting the validity of the governing instruments (see Matter of Kalikow, 23 Misc3d 1107[A], at *2 [Sur Ct, Nassau County 2009] [discussing in terrorem clauses]). While strictly construed, such clauses are enforceable in New York (Matter of Ellis, 252 AD2d 118, 127-28 [2d Dept 1998]). They serve several important purposes, such as preventing challenges to wills which might result in trials, jeopardize the testator or grantor’s testamentary or inter vivos plans, or harass other beneficiaries (Matter of Singer, 17 Misc3d 365, 370 [Sur Ct, Kings County], aff’d, 52 AD3d 612 [2d Dept 2008], leave granted, 11 NY3d 716 [2009]; Tumminello v Bolten, 59 AD3d 727, 728 [2d Dept 2009]). 

In Shamash v Stark, Surrogate Kristin Booth Glen of the Surrogate’s Court, New York County, recently addressed an issue of first impression in New York (Shamash v Stark, NYLJ, 6/16/2009, at 38, col. 2 [Sur Ct, New York County]). The issue was whether will and trust contests in Florida, where no contest clauses are void as against public policy (F.S.A. § 732.517), triggered an in terrorem clause contained in a New York trust instrument (Shamash, supra).[1] 
 

In Shamash, the decedent’s revocable trust, which was governed by New York law, provided that any beneficiary who contested his will or trust would forfeit his or her interest in the trust (id.).  After contesting the will and trust in Florida, the petitioner commenced an accounting and removal proceeding with respect to the trust in the New York Surrogate’s Court (id.). The respondents moved to dismiss the Surrogate’s Court proceeding, arguing that the petitioner was not a beneficiary of the trust estate, and therefore lacked standing to maintain the proceeding, because he had triggered the trust’s in terrorem clause by contesting the will and trust in Florida (id.). In opposition, the petitioner asserted, among other things, that he did not trigger the in terrorem clause because no contest clauses are void under Florida law (id.).

 

The Surrogate’s Court dismissed the petition, holding that the petitioner lacked standing to seek an accounting or removal with respect to the trust (id.). The court reasoned that: (1) the trust is governed by New York law; (2) in terrorem clauses are enforceable in New York; and (3) the petitioner triggered the trust’s in terrorem clause by contesting the decedent’s will and trust in Florida (id.). The fact that no contest clauses are void as against public policy in Florida was immaterial (id.).

           

The lesson to take away from Shamash is that the contest of a will or trust in another state, where in terrorem clauses are not enforceable, may trigger such a clause in a New York instrument and result in the forfeiture of a beneficiary’s interest in the subject estate or trust.

 

 


[1]   This firm represented the respondents in the Surrogate’s Court proceeding.

New York law allows individuals to limit their liability to creditors by arranging their affairs in a manner that legally protects their assets. One of the ways this is accomplished is by “making irrevocable transfers of their assets, outright or in trust, as long as such transfers are not in fraud of existing creditors . . .” (Matter of the Joseph Heller Inter Vivos Trust, 613 Misc 2d 369 [Sur Ct, 1994]). The circumstances under which a trust’s assets will be validly protected are limited to the existence of specific parameters in the trust instrument.

According to EPTL §7-3.1, “[a] disposition in trust for the use of the creator is void as against the existing or subsequent creditors of the creator.” In other words, an individual cannot transfer his or her assets to a trust and continue to retain control or enjoy the benefits of that trust, while simultaneously enjoying protection from creditors. Instead, transfers to irrevocable trusts will only be deemed valid for purposes of sheltering the assets from creditors where the grantor does not reserve a power to revoke the trusts or to dispose of the property during his lifetime, and where the transfers to the trust did not make the grantor insolvent (see Matter of Granwell, 20 NY2d 91 [1967]; Debtor Creditor Law §273). 

 

A transfer resulting in the grantor’s insolvency or one that is made while the grantor is already insolvent may be deemed a fraudulent conveyance (see Debtor Creditor Law §273). In such cases, the creditors may set aside conveyances and reach the assets. But if trust assets remain available for the grantor’s benefit, creditors need not establish fraud to invalidate the transfer (see Vanderbilt Credit Corp. v Chase Manhattan Bank, N.A., 100 AD2d 544 [2d Dept 1984]; Colgate v Guaranty Trust Co. of New York, 159 Misc 664, 666 [Sup Ct, New York County 1936]).   For example, in Vanderbilt Credit Corp. v Chase Manhattan Bank, N.A., 100 AD2d 544 (2d Dept 1984), the Appellate Division held that trust assets are not protected from creditors if the trustee has discretion to make payments to the grantor (see Vanderbilt Credit Corp. v Chase Manhattan Bank, N.A., 100 AD2d 544 [2d Dept 1984]). 

 

Not surprisingly, this concept extends beyond the life of the trust settlor and remains applicable to his or her estate. Indeed, courts recognize that where an individual reserves the power to dispose of trust property during his or her  lifetime, he or she must be regarded as the absolute owner of the funds until death and those funds would be therefore available to pay estate debts” (Estate of Hughes, 3/20/2003 NYLJ 23 [col 2] [Sur Ct, Kings County], citing Matter of Granwell, 20 NY2d 91 [1967]; Matter of Batiste, 5/4/99 NYLJ 30 [col 6]).  Also notable is the fact that, "any property covered by a general power of appointment which is presently exercisable, or a postponed power which has become exercisable, is subject to creditors’ claims" (Estate of Chappell, 7/24/09 NYLJ 26 [col 1] [Sur Ct, New York County], citing EPTL §10-7.2). 

 

In light of the foregoing, it is clear that individuals may legally protect their assets from the claims of creditors, provided they are willing to forego the control and benefits of the funds and of course, do not transfer their assets fraudulently.

One of the great things about contributing to a legal blog is that you get to write about court decisions that, although not particularly noteworthy for the legal ground they break, are really entertaining to read. One such decision recently emanated from the United States District Court for the Southern District of New York. 

In Kennedy v. Trustees, Will of President John F. Kennedy, 08 Civ. 8889 (S.D.N.Y. June 19, 2009), Judge William H. Pauley III dismissed an action in which the plaintiff, John Fitzgerald Kennedy, alleged that he was the illegitimate son of the late President John F. Kennedy and Marilyn Monroe. Although not the basis for its dismissal of the action, the court noted that the plaintiff had no documentary evidence of his kinship claim, despite the fact that he attached a photograph of himself to his complaint, showing his resemblance to President Kennedy. And, in case you were wondering, the plaintiff’s name at birth was John Ruben Burton; he changed it in 1994. You really can’t make this stuff up.

The plaintiff’s initial complaint sought an order directing genetic testing of two members of the Kennedy family (Robert Fitzgerald Kennedy, Jr. and Congressman Patrick Joseph Kennedy) and, upon confirmation of his claim through such genetic testing, an order compelling the Trustees of the testamentary trust created under President Kennedy’s Last Will and Testament to “honor their fiduciary duties.”  The Trustees moved to dismiss the action, for lack of subject-matter jurisdiction and for failure to state a claim upon which relief can be granted. The plaintiff’s amended complaint, filed after the motion to dismiss was briefed and argued, dropped the claim for genetic testing, instead requested an order compelling the Trustees to investigate his claim of kinship and his entitlement to an inheritance.

The court dismissed the action because plaintiff’s claim, for breach of fiduciary duty, was legally insufficient. The court first considered whether the Trustees would owe the plaintiff a fiduciary duty if he were successful in establishing that he was in fact President Kennedy’s son.  In doing so, the court applied Massachusetts law, as President Kennedy was domiciled in Massachusetts at the time of his death, and section 3-5.1 of the New York Estates, Powers & Trusts Law provides that “[i]nterpretation of a testamentary disposition of personal property shall be made in accordance with the local law of the jurisdiction in which the testator was domiciled at the time the will was executed.” 

The court explained that prior to 1987, Massachusetts law provided that words as such as issue, children, and the like meant only children born of a lawful marriage, absent anything indicating a contrary intent (see Decision at 7 [quoting and citing Massachusetts authority]).  And the will at issue (executed long prior to 1987) contained nothing to suggest that President Kennedy intended to include non-marital children as beneficiaries.  Therefore, the court concluded, the plaintiff would not be entitled to inherit under the will even if he were able to prove that he was President Kennedy’s son. As the Trustees could not owe the plaintiff a fiduciary duty, the claim for a breach thereof was legally insufficient and subject to dismissal.

From the perspective of the trust and estate litigator, the court’s analysis of the probate exception to federal diversity jurisdiction warrants some discussion. The probate exception was once described as “one of the most mysterious and esoteric branches of the law of federal jurisdiction” (Dragan v. Miller, 679 F.2d 712, 713 [7th Cir. 1982]). A full discussion of the probate exception is beyond the scope of this blog entry, although you can click here for an article providing more information. Suffice it to say that the exception prohibits federal courts from “interfering with [a] probate proceedings or assum[ing] general jurisdiction of the probate or control of the property in the custody of the state court”(Marshall v. Marshall, 547 U.S. 293, 126 S. Ct. 1735, 1747 [2006]).

Judge Pauley analyzed the scope of the probate exception, determining that the plaintiff’s request for an order compelling the Trustees to investigate his kinship claim was not barred by the probate exception because it neither sought to have the court interference with a probate matter nor exercise control over a res in the custody of a state court (see Decision at 6). If such investigation ultimately established that that the plaintiff was President Kennedy’s son, however, the court would not be permitted to determine the plaintiff’s claim to his inheritance under the President’s will, as to do so would be to exercise control of a res in the custody of a state court (see id.).

While this case may not break any new legal ground, it is worth reading for the court’s analysis of the probate exception to federal diversity jurisdiction — always an interesting read for the estate litigator — and for pure entertainment value. Whoever said that life is stranger than fiction was right on the money.

My post dated December 31, 2008, concerned the trust created by Leona Helmsley, specifically, the two page “mission statement” in which she expressed her desire that the trust funds be used for the care and welfare of dogs and “such other charitable activities as the Trustees shall determine.” My previous post discussed the possibility that the mission statement would not be viewed as a legally binding directive.

While Leona may have been steadfast in her commitment to helping man’s best friend, an article in the New York Times dated February 25, 2009, reports that it is now official — the mission statement is “all bark, no bite.” In an Order dated February 18, 2009, Surrogate Troy K. Webber (of Surrogate’s Court, New York County) confirmed that the trustees can distribute the money as they deem appropriate.  Her determination was grounded in the fact that in addition to expressing Ms. Helmsley’s preference for canine causes, the mission statement also gave the trustees discretion in spending the money.

 

A recent decision from the Westchester County Surrogate’s Court, Edelman v Hatami is an entertaining read. The decision addresses the Statute of Frauds, and provides a good example of how litigants will attempt to employ the equitable doctrines of promissory estoppel and constructive trust in estate litigation. 

In Edelman the defendant sought recovery against a decedent’s estate, claiming breach of contract, promissory estoppel, and constructive trust. According to the decision, the defendant met the decedent sometime in 1995 or 1996, when the defendant became a tenant in a building owned by the decedent. At that time, the defendant was in her early 30s, and the decedent was in his late 60s. They developed what the Court described as an “intimate” relationship that lasted until the decedent died in September 2004 at the age of 77. According to the defendant, in exchange for certain services rendered on her part, the decedent orally agreed to pay her living expenses for a three-year period, to pay her law school tuition, and to transfer to her the apartment in which she resided. The services allegedly provided to the decedent included ensuring that decedent was cared for and fed healthy, nutritious meals; monitoring the decedent’s medical and physical condition; acting as the decedent’s personal confidant concerning all aspects of the decedent’s life; and, acting as decedent’s business confidant. The Court dismissed all of the defendant’s claims. 

The Court’s dismissal of the defendant’s breach of contract, promissory estoppel and quasi-contract claims was based, in part, on its determination that the services provided by the defendant were consistent with the “intimate” relationship that the decedent and the defendant shared. The Court also noted that the defendant received substantial benefits from the decedent in the course of their relationship, such as an allowance of approximately $5,000 per month, nearly $200,000.00 in credit card charges over a period of several years, and a year-long all-expense-paid trip to England.  The Court’s dismissal of the defendant’s constructive trust claim was based on the defendant’s failure to demonstrate a necessary element of a constructive trust; a transfer on the defendant’s part in reliance on a promise of the decedent. If you enjoy reading the decision, stay tuned, as it appears that the defendant may be taking an appeal.