This bill has been amended

Bill S3790-2013

Relates to the exercise of a power of appointment and an authorized trustee's authority to invade trust principal

Relates to the exercise of a power of appointment and an authorized trustee's authority to invade trust principal.

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  • Feb 15, 2013: REFERRED TO JUDICIARY

Memo

BILL NUMBER:S3790

TITLE OF BILL: An act to amend the estates, powers and trusts law, in relation to the exercise of a power of appointment and an authorized trustee's authority to invade a trust

This is one in a series of measures being introduced at the request of the Chief Administrative Judge upon the recommendation of her Surrogate's Court Advisory Committee. This measure would make technical corrections and clarifying amendments to chapter 451 of the Laws of 2011, which substantially altered New York's so-called "decanting statute" - EPTL 10-6.6, enacted in 1992. Section 10-6.6(b) codifies decisional law that permitted a trustee who has authority to invade the trust principal to exercise that power by creating new trusts. This effectively allows the rewriting of an irrevocable trust by permitting trust assets to be "appointed" or "decanted" to another trust. Chapter 451 enacted provisions to make the statute more flexible and more explicit with respect to the procedure required to effect a decanting.

(1) Exclusion of Successor or Remainder Beneficiaries

L. 2011, c. 451 enacted a new paragraph (b) to EPTL 10-6.6, to provide as follows:

"(b) An authorized trustee with unlimited discretion to invade trust principal may appoint part or all of such principal to a trustee of an appointed trust for, and only for the benefit of, one, more than one or all of the current beneficiaries of the invaded trust (to the exclusion of any one or more of such current beneficiaries). The successor and remainder beneficiaries of such appointed trust shall be one, more than one or all of the successor and remainder beneficiaries of such invaded trust (to the exclusion of any one or more of such successor and remainder beneficiaries)." (emphasis added.)

In light of the language of the second sentence of paragraph (b), the question has arisen whether the interests of all the successor or remainder beneficiaries of the original ("invaded") trust may be excluded in the new ("appointed") trust.

Although it can be argued that the phrase "to the exclusion of any one or more" literally can be read to encompass "to the exclusion of all", more importantly, permitting the exclusion of all of such successor or remainder beneficiaries appears more in keeping with the probable intent of the original grantor. A grantor who intentionally provides a trustee with the unlimited discretion to distribute the entire trust property outright to one or more "current beneficiaries" has thereby rendered the interests of the "successor or remainder beneficiaries" inherently susceptible to exclusion. In addition, it is highly improbable that a grantor would intend that a trustee have the power to exclude all but one of any number of successor or remainder beneficiaries (as is clearly allowed under the present statutory language), but not have the power to exclude all such beneficiaries.

It is therefore proposed that paragraph (b) of EPTL 10-6.6 be amended to read as follows:

(b) An authorized trustee with unlimited discretion to invade trust principal may appoint part or all of such principal to a trustee of an appointed trust for, and only for the benefit of, one, more than one or all of the current beneficiaries of the invaded trust (to the exclusion of any one or more of such current beneficiaries). The successor and remainder beneficiaries of such appointed trust (shall) may be one, more than one or all of the successor and remainder beneficiaries of such invaded trust (to the exclusion of any one (or), more than one or all of such successor and remainder beneficiaries)."

(2) Requirement of Majority or Unanimity in the Decanting, Decision

Although the new statute is silent on the matter, the Legislative Memorandum to the statute recites that the decision to decant requires only a "majority" of trustees ("Unless expressly limited by the terms of the invaded trust, a majority of the trustees.... may pay part or all of the principal of the invaded trust to an appointed trust." P.6 of Legislative Memo).

On the other hand EPTL 10-6.7 provides that, unless the instrument provides otherwise, unanimity is required for the exercise of a "power of appointment" held by "two or more" persons. EPTL 10-6.7 would literally apply to the decanting power because such power is specifically denominated as a "power of appointment" under 10-6.6(d) ("An exercise of the power to invade trust principal under paragraphs (b) and (c) of this section shall be considered the exercise of a special power of appointment as defined in section 10-3.2 of this article").

However, under 10-6.6(h) a trustee has a "fiduciary duty to exercise the power in the best interests of the objects of the power" and it would therefore appear that the default rule should be the rule contained in EPTL 10-10.7, which applies to powers held jointly by fiduciaries, and which allows a majority decision to govern where there are "three or more fiduciaries", unless the instrument provides otherwise.

It is therefore proposed that EPTL 10-6.6(d) be amended to read as follows:

(d) An exercise of the power to invade trust principal under paragraphs (b) and (c) of this section shall be considered the exercise of a special power of appointment as defined in section 10-3.2 of this article provided. however. that such exercise shall be governed by the provisions of section 10-10.7 of this article.

(3) Obsolete Reference to EPTL 7-1.17

L. 2011, c. 451 enacted a new paragraph (s)(1) to EPTL 10-6.6, to provide as follows:

"(s)(1) The term "appointed trust" means an irrevocable trust which receives principal from an invaded trust under paragraph (b) or (c) of this section including a new trust created by the creator of the invaded trust or by the trustees, in that capacity of the invaded trust. For purposes of creating the new trust, the requirement of section 7-1.17 of this chapter that the instrument be signed by the

creator shall be deemed satisfied by the signature of the trustee of the appointed trust." (emphasis added.)

A technical correction is needed to the second sentence of paragraph (s)(1) because, pursuant to a 2010 amendment to 7-1.17(a), the requirement that "the instrument be signed by the creator" has been changed, and 7-1.17(a) now provides as follows:

"Every lifetime trust shall be in writing and shall be executed and acknowledged by the person establishing such trust and, unless such person is the sole trustee, by at least one trustee thereof in the manner required by the laws of this state for the recording of a conveyance of real property 07; in lieu thereof executed in the presence of two witnesses who shall affix their signatures to the trust instrument." (emphasis added.)

It is therefore proposed that paragraph (s)(1) be amended to provide as follows:

(s)(1) The term "appointed trust" means an irrevocable trust which receives principal from an invaded trust under paragraph (b) or (c) of this section including a new trust created by the creator of the invaded trust or by the trustees, in that capacity, of the invaded trust. For purposes of creating the new trust, the requirement of section 7-1.17 of this chapter that the instrument be (signed by the creator) executed and acknowledged by the person establishing such trust shall be deemed satisfied by the (signature) execution and acknowledgment of the trustee of the appointed trust.

(4) Discretionary Income Beneficiaries

L. 2011, c. 451 enacted a new paragraph (b) to EPTL 10-6.6, to provide as follows:

(b) An authorized trustee with unlimited discretion to invade trust principal may appoint part or all of such principal to a trustee of an appointed trust for. and only for the benefit of one. more than one or all of the current beneficiaries of the invaded trust (to the exclusion of any one or more of such current beneficiaries). The successor and remainder beneficiaries of such appointed trust shall be one, more than one or all of the successor and remainder beneficiaries of such invaded trust (to the exclusion of any one or more of such successor and remainder beneficiaries)." (emphasis added.)

Because paragraph (s)(4) of the new 10-6.6 defines a "current beneficiary" as someone "to whom the trustees may distribute principal at the time of the exercise of the power", (emphasis added) the question has arisen whether the interest of a discretionary beneficiary to whom income, but not principal, may be paid under the original ("invaded") trust, can be continued in the new ("appointed") trust.

Although such continuation may seem literally prohibited under the first sentence of paragraph(b), there appears to be no reason why a grantor would want to prohibit a trustee from continuing such an interest in the new trust.

It is therefore proposed that paragraph (s)(4) of 10-6.6 be amended to read as follows:

(4) The term "current beneficiary or beneficiaries" means the person or persons (or as to a class, any person or persons who are or will become members of such class) to whom the trustees may distribute principal at the time of the exercise of the power., provided however that the interest of a beneficiary to whom income, but not principal. may be distributed in the discretion of the trustee of the invaded trust may be continued in the appointed trust.

This act shall take effect immediately.

Legislative History: None. New proposal.


Text

STATE OF NEW YORK ________________________________________________________________________ 3790 2013-2014 Regular Sessions IN SENATE February 15, 2013 ___________
Introduced by Sen. BONACIC -- (at request of the Office of Court Admin- istration) -- read twice and ordered printed, and when printed to be committed to the Committee on Judiciary AN ACT to amend the estates, powers and trusts law, in relation to the exercise of a power of appointment and an authorized trustee's author- ity to invade a trust THE PEOPLE OF THE STATE OF NEW YORK, REPRESENTED IN SENATE AND ASSEM- BLY, DO ENACT AS FOLLOWS: Section 1. The opening paragraph of paragraph (b) of section 10-6.6 of the estates, powers and trusts law, as added by chapter 451 of the laws of 2011, is amended to read as follows: An authorized trustee with unlimited discretion to invade trust prin- cipal may appoint part or all of such principal to a trustee of an appointed trust for, and only for the benefit of, one, more than one or all of the current beneficiaries of the invaded trust (to the exclusion of any one or more of such current beneficiaries). The successor and remainder beneficiaries of such appointed trust [shall] MAY be one, more than one or all of the successor and remainder beneficiaries of such invaded trust (to the exclusion of any one [or], more THAN ONE OR ALL of such successor and remainder beneficiaries). S 2. Paragraph (d) of section 10-6.6 of the estates, powers and trusts law, as added by chapter 451 of the laws of 2011, is amended to read as follows: (d) An exercise of the power to invade trust principal under para- graphs (b) and (c) of this section shall be considered the exercise of a special power of appointment as defined in section 10-3.2 of this arti- cle PROVIDED, HOWEVER, THAT SUCH EXERCISE SHALL BE GOVERNED BY THE PROVISIONS OF SECTION 10-10.7 OF THIS ARTICLE. S 3. Subparagraphs 1 and 4 of paragraph (s) of section 10-6.6 of the estates, powers and trusts law, as added by chapter 451 of the laws of 2011, are amended to read as follows:
(1) The term "appointed trust" means an irrevocable trust which receives principal from an invaded trust under paragraph (b) or (c) of this section including a new trust created by the creator of the invaded trust or by the trustees, in that capacity, of the invaded trust. For purposes of creating the new trust, the requirement of section 7-1.17 of this chapter that the instrument be [signed by the creator] EXECUTED AND ACKNOWLEDGED BY THE PERSON ESTABLISHING SUCH TRUST shall be deemed satisfied by the [signature] EXECUTION AND ACKNOWLEDGMENT of the trustee of the appointed trust. (4) The term "current beneficiary or beneficiaries" means the person or persons (or as to a class, any person or persons who are or will become members of such class) to whom the trustees may distribute prin- cipal at the time of the exercise of the power, PROVIDED HOWEVER THAT THE INTEREST OF A BENEFICIARY TO WHOM INCOME, BUT NOT PRINCIPAL, MAY BE DISTRIBUTED IN THE DISCRETION OF THE TRUSTEE OF THE INVADED TRUST MAY BE CONTINUED IN THE APPOINTED TRUST. S 4. This act shall take effect immediately.

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