Exoneration clauses seek to excuse fiduciaries, most notably executors and trustees, from liability for the failure to exercise reasonable care (cf. Margaret Valentine Turano, Practice Commentary: EPTL § 11-1.7 [2008] [discussing exoneration clauses]; Matter of Knox, 98 AD3d 300, 312-13 [4th Dep’t 2012]). Until recently, Estates, Powers and Trusts Law (“EPTL”) § 11-1.7 provided that exoneration clauses in testamentary instruments (i.e., wills and codicils) were void as against public policy, but did not address whether similar provisions in lifetime trust instruments were enforceable. In late-August 2018, Governor Cuomo signed into law amendments to EPTL § 11-1.7, which my colleague, Ilene S. Cooper, and I drafted as members of the New York State Bar Association’s Trusts and Estates Law Section, and which provide that exoneration clauses in lifetime trust instruments executed after August 24, 2018 are void as against public policy. This blog post discusses EPTL § 11-1.7 and the August 2018 amendments to that statute.

Prior to August 2018, EPTL § 11-1.7 prohibited a testator from exculpating an executor or trustee of a testamentary trust nominated in the testator’s will from liability for failing to “exercise reasonable care, diligence and prudence”. Will provisions that purported to do so were deemed void as against public policy (see Matter of Egerer, 30 Misc3d 1229[A], at *3 [Sur Ct, Suffolk County 2006]). Surrogate’s Court judges have described exoneration clauses in testamentary instruments as “toothless tiger[s]” (see Matter of Lubin, 143 Misc2d 121, 122 [Sur Ct, Bronx County 1989]), and “nothing more than a waste of good white paper” (see Matter of Stralem, 181 Misc2d 715, 719-20 [Sur Ct, Nassau County 1999]).

Although EPTL § 11-1.7 unquestionably applied to exoneration clauses in testamentary instruments before August 2018, the statute was silent as the enforceability of exculpatory provisions in lifetime trust instruments until August 24, 2018. That statutory silence led courts to conclude that exoneration clauses in inter vivos trust instruments generally were enforceable, except to the extent that they sought to excuse a trustee from liability for gross negligence, reckless indifference, self-dealing, or bad faith (see Matter of Tydings, 32 Misc3d 1204[A], at *6 [Sur Ct, Bronx County 2011]; Boles v Lanham, 55 AD3d 647, 648 [2d Dep’t 2008] [opining that a “trustee is liable if he or she commits a breach of trust in bad faith, intentionally, or with reckless indifference to the interests of the beneficiaries”]).

Fortunately, the August 2018 amendments to EPTL § 11-1.7 fill the aforementioned silence in the statute, and make clear that EPTL § 11-1.7 applies to executors, trustees of testamentary trusts, and trustees of lifetime trusts. Going forward, trustees of inter vivos trusts will not be able to rely upon exoneration clauses in order to avoid liability for losses that arise from their negligence, provided that the lifetime trust instruments under which they act are dated on or after August 24, 2018. In short, the August 2018 amendments to EPTL § 11-1.7 provide greater protection to beneficiaries of lifetime trusts who suffer losses as a result of negligence on the part of the trustees who administer their trusts.

The Pre-Nuptial Agreement entered into by decedent provided that on his death, 70% of the value of his gross estate would be left to trusts to be established for his children “upon such terms and conditions as husband shall specify in his Last Will and Testament.” He died a number of years later at a young age as a result of an accident, leaving two infant children. He died without a Will. 

The Westchester County Surrogate’s Court in Matter of Bruan, 2012 NY Slip Op 22020 decided on January 26, 2012, granted an application to permit payment from the Estate to a proposed inter vivos trust to be created for the children despite the lack of specificity in the Pre-Nuptial Agreement as to the terms of the Trust. In what appears to have been an uncontested application, the Court was asked to approve the transfer of funds to two proposed irrevocable trusts for each of the infant children, each of which provided the Trustees with full discretion to pay or apply income or principal for the benefit of the particular child with payments of principal at ages 25, 30 and 35. The beneficiaries were granted a Power of Appointment, and in default the remainder is payable to his or her descendants and if none, to the surviving sibling. Citing Matter of Topping, 36 Misc 2d 991 (Sur Ct, Suffolk County 1962), the Court stated that “no particular words are required in order to create a trust. What matters is that decedent’s intent to create a trust relationship is established” (Matter of Bruan at *3). The Court found that the agreement clearly set forth three of the necessary elements of a trust: (1) designation of beneficiaries; (2) identification of trustees; and (3) the subject matter of the trust.

The Court, however, noted that the proposed inter vivos trust contained clauses which the Court believed would not be enforceable had the decedent created them under a will. These included an exoneration of the fiduciary under certain circumstances (not permitted in a will under EPTL §11-1.7); Waiver of Court approval for resignation (SCPA §715); waiver of the duty to account; and a prohibition from removing Trust assets from New York (SCPA §710(4)).

The Court granted the application to fund the Trust subject to the revisions noted. 

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.