BILL NUMBER:S5801

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 trust principal;
and to repeal certain provisions of such law relating thereto

This measure is being introduced at the request of the Chief
Administrative Judge upon the recommendation of her Surrogate's Court
Advisory Committee.

This measure would repeal paragraphs (b) through (g) of section 10-6.6
of the Estates, Powers and Trusts Law and add new paragraphs (b)
through (s) to such section. While making some changes, these new
paragraphs retain a great deal of the current language in paragraphs
(b) through (g).

                              Introduction

Section 10-6.6(b) of the Estates, Powers and Trusts Law codified
decisional law that permitted a trustee who has authority to invade
the trust principal to exercise that power by creating new trusts.
The potential uses of this statute support the enactment of a New
York statute that is expansive rather than restrictive in nature, one
              

that permits more flexibility and liberalizes the current statute. At
least nine other state statutes, which were all enacted after the New
York statute, provide greater flexibility than the New York statute.

                          Overview of Changes

This measure makes a number of notable clarifications, changes and
additions to the existing statute. First, the measure permits a
trustee to pay over the principal of a trust to a new trust even if
the trustee does not have absolute or unlimited discretion to invade
the principal of the trust. Second, with respect to an inter vivos
trust, there is no requirement to file the instrument exercising the
power to appoint with the clerk of the court having jurisdiction over
the trust as long as the trust has not been the subject of a
proceeding in the Surrogate's Court. Third, this measure clarifies
the operation of the statute in the context of a multi-beneficiary
trust.
Fourth, the measure protects certain tax results that could otherwise
be lost. Fifth, it prescribes a fiduciary duty and a standard of care.

This measure retains the concept that the exercise of the power to
invade the principal of the trust is considered the exercise of a
special power of appointment. Most important, it retains the ability
of the settler of the trust to override the application of this
statute in the trust agreement. It also retains the present law

provision that the statute not be construed to abridge the right of
any trustee to appoint property in further trust that arises under
the terms of the governing instrument or under any other provision of
law or under common law or as directed by any court having
jurisdiction over the invaded trust. The measure also retains the
present law that a trustee may not exercise a power to decrease or
indemnify against a trustee's liability and further provides that the
appointed trust cannot eliminate a provision in the invaded trust
granting another person the right to remove or replace the authorized
trustee exercising the power.

The measure contains several important new concepts. One clarifies
that no trustee shall be liable for failing to use the statute: in
this respect, the measure states that the existence of the statute
itself is not intended to create an inference or duty that a trustee
of a trust should exercise the powers in the statute. Another new
provision clarifies that the exercise of the power to
invade principal is not prohibited by the fact that the invaded trust
includes a spendthrift clause or a provision that prohibits amendment
or revocation of the trust.

                    Discussion of Proposed Revisions

A. Definitions

The current statute includes only one definition, which is the phrase
"all persons interested in the trust," and otherwise relies on the
incorporation of defined terms by reference to other statutes or
relies on decisional law, common law, and common meaning. EPTL
10-6.6(e).

It would facilitate the use and application of the statute if the
statute specifically included more defined terms. Accordingly, this
measure adds the following definitions: "appointed trust,"
"authorized trustee," "internal revenue code," "current beneficiary
or beneficiaries," "invade," "invaded trust," "person or persons
interested in the invaded trust," "principal," and "unlimited
discretion." Notably, the definition of "authorized trustee"
clarifies and limits the trustees who may exercise the pay over
power; including such a specific definition of trustee limits the
abuse potential of the statute and prevents unintended adverse tax
consequences.

The proposed paragraph (s) includes the following defined terms:

o The term "appointed trust" means an irrevocable trust which receives
principal from an invaded trust under paragraph (b) or (c) 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 7-1.17 that the instrument
be signed by the creator shall be deemed satisfied by the signature
of the trustee of the appointed trust.

o The term "authorized trustee" means, as to an invaded trust, any
trustee or trustees with authority to pay trust principal to or for
one or more current beneficiaries other than (i) the creator or (ii)
a beneficiary to whom income or principal must be paid currently or
in the future, or who is or will become eligible to receive a
distribution of income or principal in the discretion of the trustee
(other than by the exercise of a power of appointment held in a
non-fiduciary capacity).

o References to sections of the "internal revenue code" refer to the
United States Internal Revenue Code of 1986, as amended from time to
time, or to corresponding provisions of subsequent internal revenue
laws, and also refer to corresponding provisions of state law.

o 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.

o The term "invade" shall mean the power to pay directly to the
beneficiary of a trust or make application for the benefit of the
beneficiary.

o The term "invaded trust" means any existing irrevocable inter vivos
or testamentary trust whose principal is appointed under paragraph
(b) or (c).

o The term "person or persons interested in the invaded trust" shall
mean any person or persons upon whom service of process would be
required in a proceeding for the judicial settlement of the account
of the trustee, taking into account section 315 of the surrogate's
court procedure act.

o The term "principal" shall include the income of the trust at the
time of the exercise of the power that is not currently required to
be distributed, including accrued and accumulated income.

o The term "unlimited discretion" means the unlimited right to
distribute principal that is not modified in any manner. A power to
pay principal that includes words such as best interests, welfare,
comfort, or happiness shall not be considered a limitation or
modification of the right to distribute principal.

B. Trustee's Power to Make Distributions under Terms
of Invaded Trust

Unless the terms of a trust expressly provide otherwise, a trustee
must have "absolute discretion" to invade the principal of a trust
for the benefit of a beneficiary. The current statute provides as
follows:

"A trustee who has the absolute discretion, under the terms of a
testamentary instrument or irrevocable inter vivos trust agreement,
to invade the principal of a trust for the benefit of one or more
proper objects of the exercise of the power,
may exercise such discretion by appointing all or part of the
principal of the trust in favor of a trustee of a trust under an
instrument other than that under which the power to invade is created
or under the same instrument, provided, however, that the exercise of
such discretion (A) does not reduce any fixed income interest of
any income beneficiary of the trust, (B) is in favor of the proper
objects of the exercise of the power, and (C) does not violate the
limitations of 11-1.7;" EPTL 10-6.6(b)(1).

Conceptually, the ability to distribute principal outright inherently
includes the ability to distribute principal in a more limited
manner, including in further trust, unless the terms of the governing
instrument expressly provide otherwise. To enhance flexibility, the
ability to invade principal for any purpose, rather than the ability
to invade principal only if the trustee has absolute discretion,
should trigger the ability of the trustee to pay from one trust to
another. So long as the trustee has the ability to distribute
principal for, some purpose, for example, if the trustee may make
principal distributions for a beneficiary's health, education,
maintenance, and support, but may not otherwise invade principal, the
trustee should have the ability to pay the trust funds to a new trust
for the same purpose. This opportunity should exist regardless of
whether a beneficiary has the current need for funds.

Relevant Portions of the Proposed Amendments

(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).

(c) An-authorized trustee with the power to invade trust principal but
without unlimited discretion may appoint part or all of the principal
of the trust to a trustee of an appointed trust, provided that the
current beneficiaries of the appointed trust shall be the same as the
current beneficiaries of the invaded trust and the successor and
remainder beneficiaries of the appointed trust shall be the same as
the successor and remainder beneficiaries of the invaded trust.

(1) If the authorized trustee exercises the power under this
paragraph, the appointed trust shall include the same language
authorizing the trustee to distribute the income or invade the
principal of the appointed trust as in the invaded trust.

(2) If the authorized trustee exercises the power under this paragraph
to extend the term of the appointed trust beyond the term of the
invaded trust, for any period after the invaded trust would have
otherwise terminated under the provisions of the invaded trust, the
appointed trust, in addition to the language required to be included
in the appointed trust pursuant to paragraph (c)(1), may also include
language providing the trustees with
unlimited discretion to invade the principal of the appointed trust
during such extended term.

(d) An exercise of the power to invade trust principal under
paragraphs (b) and (c) shall be considered the exercise of a special
power of appointment as defined in 10-3.2.

(e) The appointed trust to which an authorized trustee appoints the
assets of the invaded trust may have a term that is longer than the
term set forth in the invaded trust, including, but not limited to, a
term measured by the lifetime of a current beneficiary.

(f) If an authorized trustee has unlimited discretion to invade the
principal of a trust and the same trustee or another trustee has the
power to invade principal under the trust instrument which power is
not subject to unlimited discretion, such authorized trustee having
unlimited discretion may exercise the power of appointment under
paragraph (b).

(g) An authorized trustee May exercise the power to appoint in favor
of an appointed trust under paragraphs (b) and (c) whether or not
there is a current need to invade principal under the term of the
invaded trust.

(h) An authorized trustee exercising the power under this section has
a fiduciary duty to exercise the power in the best interests of one
or more proper objects of the exercise of the power and as a prudent
person would exercise the power under the prevailing circumstances.
The authorized trustee may not exercise the power under this section
if there is substantial evidence of a contrary intent of the creator
and it cannot be established that the creator would be likely to have
changed such intention under the circumstances existing at the time
of the exercise of the power. The provisions of the invaded trust
alone are not to be viewed as substantial evidence of a contrary
intent of the creator unless the invaded trust expressly prohibits
the exercise of the power in the manner intended by the authorized
trustee.

(k) This section shall not be construed to abridge the right of any
trustee to appoint property in further trust that arises under the
terms of the governing instrument of a trust or under any other
provision of law or under common law, or as directed by any court
having jurisdiction over the trust.

(m) A power authorized by paragraph (b) or (c) may be exercised,
subject to the provisions of paragraph (h), unless expressly
prohibited by the terms of the governing instrument, but a general
prohibition of the amendment or revocation of the invaded trust or a
provision that constitutes a spendthrift clause shall not preclude
the exercise of a power under paragraph (b) or (c).

(n) An authorized trustee may not exercise a power authorized by
paragraph (b) or (c) to effect any of the following:

(1) To reduce, limit or modify any beneficiary's current right to a
mandatory distribution of income or principal, a mandatory annuity or
unitrust interest, a right to withdraw a percentage of the value of
the trust or a right to withdraw a specified dollar amount, provided
that such mandatory right has come into effect with respect to the
beneficiary. Notwithstanding the foregoing, but subject to the other
limitations in this section, an authorized trustee may exercise a
power authorized by paragraph (b) or (c) to appoint to an appointed
trust that is a supplemental needs trust that conforms to the
provisions of 7-1.12.

(2) To decrease or indemnify against a trustee's liability or
exonerate a trustee from liability for failure to exercise reasonable
care, diligence and prudence.

(3) To eliminate a provision granting another person the right to
remove or replace the authorized trustee exercising the power under
paragraph (b) or (c) unless a court having jurisdiction over the
trust specifies otherwise.

(4) To make a binding and conclusive fixation of the value of any
asset for purposes of distribution, allocation or otherwise.

(p) An authorized trustee may not exercise a power described in
paragraph (b) or (c) in violation of the limitations under 9-1.1,
10-8.1 and 10-8.2, and any such exercise shall void the entire
exercise of such power.

Unless expressly limited by the terms of the invaded trust, a majority
of the trustees, acting in a fiduciary capacity, who have authority
under the terms of an invaded trust to invade principal, whether or
not there is a current need to invade principal under any standard
stated in the invaded trust, may pay part or all of the principal of
the invaded trust to an appointed trust. The principal that may be
appointed may include the income of the trust that is accrued,
accumulated, or otherwise on hand at the time of the exercise of the
power that is not required to be distributed.

Interests in the trust that are vested absolute may not be affected by
paying the assets to a new trust or by the grant of a power of
appointment in the appointed trust (see discussion in D, below); if a
beneficiary has the right to receive all of the income of the trust,

that right to receive all of the trust income must continue in the
appointed trust. This limitation applies if the person is referred to
by name or by another label, or falls within the class of persons who
have a vested right.

Similarly, if the invaded trust does not give a trustee unlimited
discretion, for example if the trust states a standard for
distributions within the meaning of section 674(b)(5)(A) of the
internal revenue code, the appointed trust must include the same
standard. This means that if the invaded trust provides that
beneficiaries are entitled to receive distributions for their health,
education, and support, the appointed trust must also provide that
those same beneficiaries are entitled to receive distributions for
their health, education, and support. This is not necessary if the
trust also gives a trustee the unlimited discretion to invade
principal; if a trustee has
unlimited discretion to invade principal and the same trustee or
another trustee has the power to invade principal which is not
unlimited discretion, the authorized trustee may exercise the power
of appointment as if the trustee only had unlimited discretion as
unlimited discretion trumps any stated standard.

Furthermore, notwithstanding the foregoing, a "change" in the
dispositive terms of the invaded trust effected by paying to a new
trust under the proposed provision may not reduce, limit, or
otherwise change mandatory distributions of income, or mandatory
annuity or unitrust interests, or a right annually to withdraw a
percentage of the value of the trust, or a right annually to withdraw
a specified dollar amount after such annual right to withdraw a
percentage or specified dollar amount has come into effect with
respect to the beneficiary. Changes that impact such mandatory rights
may be made only when the trust pays over to an appointed trust that
is a supplemental needs trust that conforms to Section 7-1.12 of the
EPTL, but such changes may not be made if the change would jeopardize
any tax benefit expected in the invaded trust.

Our Advisory Committee recognizes that the exercise of a trustee's
authority under this statute could raise a greater number of issues
in the context of a trust for multiple beneficiaries than in the
context of a trust with only a single beneficiary, but concluded that
the interests of multiple beneficiaries could adequately be protected
under the new statute.

This measure also specifically provides that the appointed trust to
which an authorized trustee appoints the assets may have a term that
is longer than the term set forth in the invaded trust, including a
term measured by the lifetime of a current beneficiary.

Proposed paragraph (II) codifies both a fiduciary duty and a standard
of care. The measure imposes a fiduciary duty on the authorized
trustee to exercise the power in the best interests of one or more
proper objects of the exercise of the power. In addition, because the

power enables the authorized trustee to adjust to changing
circumstances, the exercise of the power is not unlike the exercise
of substituted judgment. Accordingly, the measure also prescribes a
standard of care, in the form of the objective test for substituted
judgment, that the trustee be guided by how a prudent person would
exercise the power under the prevailing circumstances.

The authorized trustee may not exercise the power under this section
if there is substantial evidence of a contrary intent of the creator
and it cannot be established that the creator would be likely to have
changed such intention under the circumstances existing at the time
of the exercise of the power. Thus, this measure provides the
opportunity to establish that the creator would be likely to have
changed such intention under the circumstances prevailing at the time
of the exercise of the power. The provisions of the invaded trust
alone are not to be viewed as "substantial evidence of a contrary
intent" unless the invaded trust expressly prohibits the exercise of
the power in the manner intended by the authorized trustee.

C. Beneficiaries of the Appointed Trust

The current statute provides that "[a] trustee who has the absolute
discretion, under the terms of a testamentary instrument or
irrevocable inter vivos trust agreement, to invade the principal of a
trust for the benefit of one or more proper objects of the exercise
of the power, may exercise such discretion by appointing all or part
of the principal of the trust in favor of a trustee of a trust ...
provided, however, that the exercise of such discretion (B) is in
favor of the proper objects of the exercise of the power..."(EPTL
10-6.6(b)(1)).

Our Advisory Committee believes that the integrity and sanctity of the
trust and the wishes of the settlor could be undermined if the
trustee could reconstitute a trust with different beneficiaries. As
discussed in B, above, conceptually, the ability to distribute
principal outright inherently includes the ability to distribute
principal in a manner short of outright, including in further trust.
Paying to a trust that includes a provision granting a beneficiary
otherwise entitled to receive the property outright a general power
of appointment is consistent with current law and would also be
consistent with the goal of the statute; because the beneficiary
could receive the principal outright, it would be consistent to
permit the beneficiary to exercise a general power of appointment and
appoint all or a portion of the trust to new or different
beneficiaries as the beneficiary sees fit, including the power to add
a class of beneficiaries broader than and different from the current,
successor, and remainder beneficiaries of the invaded trust. In this
way, the beneficiary may, for example, avoid or postpone the
imposition of a generation-skipping transfer tax on a trust by
exercising a power of appointment to add a non-skip person to
the class of beneficiaries. This same rationale should apply when the
appointed trust authorizes distributions that are not based on an

unlimited standard. Our Advisory Committee has concluded, however,
that if the invaded trust does not give the trustee unlimited
discretion to invade principal, the ability to alter the
beneficiaries of the invaded trust or grant a power of appointment
must be limited in order that the settlor's wishes are not
undermined. We have endeavored to develop a bright line test for this
approach.

Relevant Portions of the Proposed Provision: EPTL Section 10-6.6(b)
and (c)

(b)(1) An authorized trustee exercising the power under this paragraph
may grant a discretionary power of appointment as defined in
10-3.4(c) (including a presently exercisable power of appointment) in
the appointed trust to one or more of the current beneficiaries of
the invaded trust, provided that the beneficiary granted a power to
appoint could receive the principal outright under the terms of the
invaded trust.

(2) If the authorized trustee grants a power of appointment under
paragraph (b)(1), except as otherwise provided in paragraph (b)(3),
the granted power may only exclude as permissible appointees one or
more of the beneficiary, the creator, or the creator's spouse, or any
of the estates, creditors, or creditors of the estates of the
beneficiary, the creator or the creator's spouse.

(3) If the authorized trustee exercises the power under paragraph (b),
the appointed trust may grant any power of appointment included in
the invaded trust provided such power has the same class of
permissible appointees as the power of appointment in the invaded
trust and is exercisable in the same fashion as the power of
appointment in the invaded trust.

(4) If the beneficiary or beneficiaries of the invaded trust are
described by a class, the beneficiary or beneficiaries of the
appointed trust may include present or future members of such class.

(c)(3) If the beneficiary or beneficiaries of the invaded trust are
described by a class, the beneficiary or beneficiaries of the
appointed trust shall include present or future members of such class.

(4) If the authorized trustee exercises the power under this paragraph
and if the invaded trust grants a power of appointment to a
beneficiary of the trust, the appointed trust shall grant such power
of appointment in the appointed trust and the class of permissible
appointees shall be the same as in the invaded trust.

In the case of a trust where a trustee has unlimited discretion, the
proposed provision continues the requirement of the current statute
that the appointed trust must be for the benefit of one, more or all
of the current beneficiaries of the invaded trust. It is not
necessary for the appointed trust to be for the benefit of all of the

current beneficiaries of the invaded trust unless the beneficiaries
have certain rights to withdraw or receive income or principal under
the terms of the invaded trust (see discussion in B, above). The
successor and remainder beneficiaries of the appointed trust do not
have to be the same as the successor or remainder beneficiaries of
the invaded trust; rather, the successor or remainder beneficiaries
of the appointed trust must fall within the class of such
beneficiaries identified in the invaded trust. In other words, the
class of successor or remainder beneficiaries may be more narrow than
those named in the invaded trust.

The trustee may exclude any current beneficiary and any successor or
remainder beneficiary of the invaded trust as a beneficiary of the
appointed trust only if the trustees have unlimited or absolute
discretion. If, however, the invaded trust does not give the trustee
unlimited or absolute discretion to invade principal, the authorized
trustee may not pay to an appointed trust with fewer than all of the
current, successor and remainder beneficiaries of the invaded trust
or grant a beneficiary a power to appoint. (In addition, the
appointed trust must include the same stated standard included in the
invaded trust.)

With certain limitations, in the case of a trust where a trustee has
unlimited discretion, this measure specifically provides that an
authorized trustee may pay to a trust that grants a power of
appointment to one or more of the current beneficiaries of the
invaded trust (including to a person who is a current member of the
class or will become a member of the class in the future) provided
the beneficiary granted a power to appoint could receive the
principal outright. The power of appointment may be exercisable
currently or in the future, provided, however, that the power may not
be effective in a manner that will reduce, limit, or otherwise change
mandatory distributions of income, or mandatory annuity or unitrust
interests, or a right annually to withdraw a percentage of the value
of the trust, or a right annual to withdraw .a specified dollar
amount. Consistent with the concept of the beneficiary's right to
receive the property outright, if an authorized trustee grants a
power to appoint to a beneficiary, the beneficiary must be given a
broad power to appoint in favor of any one in the world, with the
possible exception of one or more of the beneficiary, the creator of
the trust, the creator's spouse, or any of the estates, creditors, or
creditors of the estates of the beneficiary, the creator or the
creator's spouse. These exclusions are intended to avoid adverse tax
and creditor protection consequences. Nonetheless, any narrower power
of appointment included in the invaded trust can be included in the
appointed trust. In the context of a trust where the trustee does not
have unlimited discretion, the trustee must include a power of
appointment in the appointed trust if the invaded trust contemplated
the granting of such a power and the class of permissible appointees
must be the same as the invaded trust.

D. Tax-Saving Provisions

The current statute specifically provides that a trustee may not pay
over to a new trust and reduce any current fixed income interest of
any income beneficiary. EPTL 10-6.6(b)(2) This requirement is often
necessary to avoid an adverse tax effect. Although it seems certain
that the current statute does not permit any changes to the tax
treatment relating to the funding of the invaded trust, to be
effected by paying to a new trust, it is not free from doubt. Paying
to a new trust might adversely impact the tax status of the trust or
a right or power associated therewith as it does not explicitly so
provide.

As a safeguard, it is appropriate that the statute expressly prohibit
any trust changes that would adversely impact tax structuring
relating to the invaded trust.

Relevant Portions of the Proposed Provision: EPTL 10-6.6 (n) and (o)

(n) An authorized trustee may not exercise a power authorized by
paragraph (b) or (c) to effect any of the following:

(5) To jeopardize (A) the deduction or exclusion originally claimed
with respect to any contribution to the invaded trust that qualified
for the annual exclusion under section 2503(b) of the internal
revenue code, the marital deduction under section 2056(a) or 2523(a)
of the internal revenue code, or the charitable deduction under
section 170(a), 642(c), 2055(a) or 2522(a) of the internal revenue
code, (B) the qualification of a transfer as a direct skip under
section 2642(c) of the internal revenue code, or (C) any other
specific tax benefit for which a contribution originally qualified
for income, gift, estate, or generation-skipping transfer tax
purposes under the internal revenue code.

(o) An authorized trustee shall consider the tax implications of the
exercise of the power under paragraph (b) or (c).

This measure includes language that would override the terms of the
appointed trust or a trustee's power under the statute to the extent
that such terms or powers affect any right under the invaded trust
that is necessary or required for tax purposes or to receive certain
tax results or benefits that would otherwise be jeopardized or lost
for income, gift, estate, or generation-skipping transfer tax
purposes under the internal revenue code. The measure confirms that
a trustee shall not have the authority to change the invaded trust in
a manner that would prevent the invaded trust from qualifying for or
would reduce the exclusion, deduction, or other tax benefit which was
originally claimed with respect to that contribution. Specifically
contemplated are contributions that qualified for (a) the annual
exclusion under section 2503(b) of the internal revenue code, (b) the
marital deduction under section 2056(a) or 2523(a) of the internal
revenue code, (c) the charitable deduction under section 170(a),
642(c), 2055(a), or 2522(a) of the internal revenue code, and (d) a
direct skip under section 2642(c) of the internal revenue code. For

example, the appointed trust must retain the right of exercise of any
outstanding withdrawal power
and retain a beneficiary's right to receive the principal of a trust
created under section 2503(c) of the internal revenue code upon
attaining age 21.

Furthermore, this measure specifically directs the authorized trustee
to consider the tax implications of the exercise of the power. For
example, if the invaded trust holds S corporation stock, the
authorized trustee must consider the consequences of paying that
stock to an appointed trust that is not a permitted shareholder
within the meaning section 1361(c)(2) of the internal revenue code,
and unless otherwise appropriate, the assets should not be paid to
such a trust. Similarly, during any period when the invaded trust
owns an interest in property subject to the minimum distribution
rules of Section 401(a)(9) of the internal revenue code, an
authorized trustee must consider the consequences of paying the
interest in such property to an appointed trust that would result in
the shortening of the minimum distribution period to which the
property is subject in the invaded trust.

Although grantor trust status is a benefit from a tax perspective, an
authorized trustee may exercise the power and change the trust from a
grantor trust to a non-grantor trust. There is nothing contained in
the proposed provision that precludes the authorized trustee from
paying assets from a non-grantor trust to a grantor trust.

Our Advisory Committee notes that there may be circumstances when it
might be advisable to modify the terms of an invaded trust in light
of the changed economic or financial situation of the beneficiaries.
For example, it may make economic sense to add a power of appointment
to a trust otherwise exempt from estate tax to make the trust subject
to estate tax in order to avoid generation-skipping transfer tax.
Nothing contained in the statute is intended to preclude such a
modification, so long as the modification does not negatively impact
the tax return previously filed by the creator and the tax effect is
not overall harmful.

E. Assets Subject to Pay-Over to Appointed Trust

The current statute does not address the scope of the assets subject
to the power.

The statute would be clarified to provide that if all assets are paid
from the invaded trust to the appointed trust, any accumulated
undistributed income and subsequently discovered assets or assets
subsequently paid to the invaded trust or subsequently acquired by
the invaded trust would also be transferred to the appointed trust.
Unless specifically contemplated otherwise, to the extent that only a
portion of trust assets are paid over to a new trust, subsequently
discovered assets or assets subsequently paid to or acquired by the
invaded trust would remain assets of the invaded trust.

Relevant Portions of the Proposed Provision: EPTL 10-6.6(i) and (j)

(i) Unless the authorized trustee provides otherwise:

(1) The appointment of all of the assets comprising the principal of
the invaded trust to an appointed trust shall include subsequently
discovered assets of the invaded trust and undistributed principal of
the invaded trust acquired after the appointment to the appointed
trust.

(2) The appointment of part but not all of the assets comprising the
principal of the invaded trust to an appointed trust shall not
include subsequently discovered assets belonging to the invaded trust
and principal paid to or acquired by the invaded trust after the
appointment to the appointed trust; such assets shall remain the
assets of the invaded trust.

(j)(3) The instrument exercising the power shall state whether the
appointment is of all the assets comprising the principal of the
invaded trust or a part but not all the assets comprising the
principal of the invaded trust and if a part, the approximate
percentage of the value of the principal of the invaded trust that is
the subject of the appointment.

This measure provides that if all assets are paid from the invaded
trust to the appointed trust, the exercise of the authorized
trustee's power shall apply to all of the assets comprising the
undistributed income and principal of the invaded trust; any assets
properly belonging to the invaded trust that are discovered
subsequent to the exercise in favor of the appointed trust or
subsequently paid to the invaded trust would also be deemed
transferred to the appointed trust This would include any assets paid
to the invaded trust from a pour-over will, as the appointed trust
should be considered the continuation of the invaded trust. If part
but not all of the assets are appointed to the appointed trust,
subsequently discovered assets properly belonging to the invaded
trust or assets subsequently paid to or acquired by the invaded trust
would remain assets of the invaded trust. The instrument exercising
the power must state whether the appointment is of all the assets
comprising the principal of the invaded trust or a part and if a
part, the approximate percentage of the value of the principal of the
invaded trust that is the subject of the appointment.

F. Beneficiary Notification Requirements and Obligation
to File with the Court

The current statute provides as follows:

"A trustee described in subparagraph (1) of this paragraph may act
thereunder without consent of any interested person and without prior
court approval but is also authorized to seek such court approval,
and the court having jurisdiction of the trust, upon the petition of

the trustee and upon notice to all persons interested in the
trust ..." EPTL 10-6.6(b)(2)

"The exercise of the power to invade the principal of the trust ...
shall be by an instrument in writing, signed and acknowledged by the
trustee and filed in the office of the clerk of the court having
jurisdiction over the trust; and a copy thereof shall be served on
all persons interested in the trust (or on the guardian of the
property, committee, conservator or personal representative of such
persons or the parent or person with whom a minor resides), by
registered or certified mail, return receipt requested, or by
personal delivery or upon application of the trustee in any other
manner directed by the court." EPTL 10-6.6(d)

"For the purposes of this section, the phrase 'all persons interested
in the trust' shall mean all the persons upon whom service of process
would be required in a proceeding for the judicial settlement of the
account of the trustee, taking into account section three hundred
fifteen of the surrogate's court procedure act." EPTL 10-6.6(e)

Although all beneficiaries do not have to be notified when a trustee
makes a distribution of income or principal to a beneficiary and the
trustees continue to be obligated to account to the beneficiaries
when a trust is terminated or a substantial distribution is made, Our
Advisory Committee recommends that the affirmative obligation to
notify beneficiaries included in present law is retained in the
proposed provision, but that the necessity to file any documents with
the court is eliminated with respect to inter vivos trusts so long as
the trust has not been the subject of a proceeding in the Surrogate's
Court. The Committee also recommends that the settlor, if living, and
any person having the right pursuant to the terms of the invaded
trust to remove or replace the authorized trustee exercising the
power, be notified of the exercise of the power. This measure also
clarifies the current law ambiguity about whether such notification
must include a requirement that "all persons interested in the trust"
receive a copy of the invaded trust or the appointed trust, by
stating that it is necessary to provide a copy of both the invaded
trust and the appointed trust to anyone receiving notice.

Our Advisory Committee recognizes that an authorized trustee's power
to pay over assets to a new trust may significantly impact a
beneficiary's rights and expectations, or could be used by the
trustees to make secret changes to the dispositive provisions of the
trust agreement, which are the principal reasons the Committee
concluded that the beneficiaries should continue to be notified of
the pay over. Although no actual consent is required, in light of the
potential impact on beneficiaries, authorized trustees may want
closure regarding the efficaciousness of the pay over without an
accounting by obtaining the prior consent of all of the beneficiaries
to the pay over.

As a practical matter, with respect to inter vivos trusts that have
never been the subject of a Surrogate's Court proceeding, it is
sometimes unclear which court in which to file the instrument. With
respect to such inter vivos trusts, it is also unclear whether the
invaded trust agreement or the appointed trust agreement must be
filed with the court. Our Advisory Committee recommends that this
ambiguity be addressed by imposing a filing requirement with respect
to inter vivos trusts if the trust has been the subject of a
proceeding in the Surrogate's Court thereby assuring the Court's
right to information concerning the status of trusts under its
jurisdiction and control.

Relevant Portions of the Proposed Provision:
EPTL 10-6.6(j)

(j)(1) An authorized trustee may exercise the power authorized by
paragraphs (b) and (c) without the consent of the creator, or of the
persons interested in the invaded trust, and without court approval,
provided that the authorized trustee may seek court approval for the
exercise with notice to all persons interested in the invaded trust.

(2) A copy of the instrument exercising the power, and a copy of each
of the invaded trust and the appointed trust shall be delivered (A)
to the creator, if living, of the invaded trust, (B) to any person
having the right, pursuant to the terms of the invaded trust, to
remove or replace the authorized trustee exercising the power under
paragraph (b) or (c), and (C) to any persons interested in the
invaded trust and the appointed trust (or, in the case of any persons
interested in the trust, to any guardian of the property, conservator
or personal representative of any such person or the parent or person
with whom any such minor person resides), by registered or certified
mail, return receipt requested, or by personal delivery or in any
other manner directed by the court having jurisdiction over the
invaded trust.

(3) The instrument exercising the power shall state whether the
appointment is of all the assets comprising the principal of the
invaded trust or a part but not all the assets comprising the
principal of the invaded trust and if a part, the approximate
percentage of the value of the principal of the invaded trust that is
the subject of the appointment.

(6) A copy of the instrument exercising the power shall be kept with
the records of the invaded trust and the original shall be filed in
the court having jurisdiction over the invaded trust. Where a trustee
of an inter vivos trust exercises the power and the trust has not
been the subject of a proceeding in the Surrogate's Court, no filing
is required.

This measure retains the provision of present law regarding the duty
of the trustee to exercise the power in a writing, signed and
acknowledged, and to notify persons interested in the invaded trust

of the exercise of the power by providing them with a copy of the
instrument exercising the power to appoint by registered or certified
mail or by personal delivery or in any other manner directed by a
court. The measure also requires the settlor of the invaded trust and
any person having the right pursuant to the terms of the invaded
trust to remove or replace the authorized trustee exercising the
power to receive a copy of the instrument exercising the power to
appoint in the same manner as the persons interested in the invaded
trust. The measure
affirmatively requires a copy of both the invaded trust and the
appointed trust to be provided to the beneficiaries and the settlor
and any person with appointment or removal power of the authorized
trustee exercising the power. The measurer makes the court filing
discretionary as to inter vivos trusts that have never been the
subject of a Surrogate's Court proceeding.

Our Advisory Committee recommends that notice be provided to any
person having the right pursuant to the terms of the invaded trust to
remove or replace the authorized trustee exercising the power, as
such notification will give such person an opportunity to prevent the
authorized trustee from exercising the power by removing the
authorized trustee.

Under this measure, the instrument must also state the assets or
percentage of the value of the principal of the invaded trust that is
subject to the appointment.

G. Effective Date of the Exercise of the Power to
Appoint

The current statute does not address when the exercise of the power to
appoint is effective.

Establishing an effective date of the exercise of the power will avoid
any possible ambiguities and confusion regarding the termination of
the invaded trust and the determination of the assets of the
appointed trust, in particular, what assets are subject to the pay
over when less than all of the assets are paid to the appointed trust.

Relevant Portions of the Proposed Provision: EPTL 10-6.6(j)

(j) The exercise of the power to appoint to an appointed trust under
paragraph (b) or (c) shall be evidenced by an instrument in writing,
signed, dated and acknowledged by the authorized trustee. The
exercise of the power shall be effective 30 days after the date of
service of the instrument as specified in paragraph (j)(2), unless
the persons entitled to notice consent in writing to a sooner
effective date.

The proposed provision retains the provision of present law regarding
the duty of the trustee to exercise the power in a writing, signed
and acknowledged, but also requires that the instrument be dated. The

pay over will be effective on the date that is 30 days after the date
of the service of the instrument in the manner specified. The persons
entitled to notice may also consent to an earlier effective date.

H. Trustee Liability for Exercise of Power

The current statute does
not address the trustee's liability for exercising the power.

The statute should clarify that a trustee's exercise of the power to
appoint under the statute does not relieve the trustee from liability
under the invaded trust and does not relieve the
trustee from the liability to account both for the exercise of the
power and for any action or inaction under the invaded trust.

Relevant Portions of the Proposed Provision: EPTL 10-6.6(j) and (l)

(j)(4) A person interested in the invaded trust may object to the
trustee's exercise of the power under this section by serving a
written notice of objection upon the trustee prior to the effective
date of the exercise of the power. The failure to object shall not
constitute a consent.

(5) The receipt of a copy of the instrument exercising the power shall
not affect the right of any person interested in the invaded trust to
compel the authorized trustee who exercised the power of appointment
pursuant to paragraph (b) or (c) to account for such exercise and
shall not foreclose any such interested person from objecting to an
account or compelling a trustee to
account.

(1) Nothing in this section is intended to create or imply a duty to
exercise a power to invade principal, and no inference of impropriety
shall be made as a result of an authorized trustee not exercising the
power conferred under paragraph (b) or (c).

This measure provides that the existence of the statute itself is not
intended to create an inference or duty that a trustee of a trust
should exercise the pay over power.

A person interested in the invaded trust may object to the pay over;
the failure to object does not constitute a consent. The receipt of a
copy of the instrument exercising the power by any person interested
in the trust shall not affect the right of any person interested in
the invaded trust to compel the authorized trustee who exercised the
power to account for such exercise and shall not commence any statute
of limitations, or similar doctrine or law that would foreclose any
such interested person from compelling a trustee to account.

I. Trusts to Which this Provision Applies

The current statute does not address specifically to which specific
trusts the statute applies.

The statute would be clarified to provide that it applies to inter
vivos and testamentary trusts initially subject to New York law and
to trusts whose primary administration is transferred to the State of
New York.

Relevant Portions of the Proposed Provision: EPTL 10-6.6(r)

(r) Unless the invaded trust expressly provides otherwise, this
section applies to:

(1) Any trust governed by the laws of this state, including a trust
whose governing law has been changed to the laws of this state.

(2) Any trust that has a trustee who is an individual domiciled in
this state or a trustee which is an entity having an office in this
state, provided that a majority of the trustees select this state as
the location for the primary administration of the trust by an
instrument in writing, signed and acknowledged by a majority of the
trustees. The instrument exercising this selection shall be kept with
the records of the invaded trust.

Unless the invaded trust expressly provides others, this measure
clarifies that the statute applies to (a) any inter vivos or
testamentary trust (including a charitable trust) governed by the
laws of the state of New York, including a trust whose primary
administration initially is in another state but which trust's
primary administration is transferred to New York, and to (b)
trust that has a trustee who is an individual domiciled in this state
or an entity which has an office in this state, if a majority of
the trustees sign an acknowledged instrument kept with the records of
the trust that provides that the primary administration of the trust
will be located in New York.

J. Trustee Commissions

The current statute provides that a trustee may continue to receive
commissions from a trust once the principal is paid over to a new
trust so long as the aggregate annual and principal commissions of a
trustee are not increased. Specifically, the statute provides as
follows:

"Unless the court upon application of the trustee otherwise directs,
the aggregate annual and principal commissions of a trustee shall not
be increased by its action under paragraph (b) of this section." EPTL
10-6.6(c)

It is uncertain under the current statute whether trustees of the
appointed trust may continue to receive compensation if, by virtue of
the pay over, a trust will last for a longer period of time,

permitting the trustee to receive trustee commissions for a longer
period of time. The statute is also uncertain in regard to whether a
trustee may continue to receive the same amount of commissions from
the appointed trust and as to whether the trustee may continue to
receive commissions if the trustee has not been paid the full amount
of commissions the trustee could have received from the invaded trust.

Relevant Portions of the Proposed Provision: EPTL 10-6.6(q)

(q)(1) Unless a court otherwise directs, an authorized trustee may not
exercise a power authorized by paragraph (b) or (c) to change the
provisions regarding the determination of the compensation of any
trustee; the commissions or other compensation payable to the
trustees of the invaded trust may continue to be paid to the trustees
of the appointed trust during the term of the appointed trust and
shall be determined in the same manner as in the invaded trust.

(2) No trustee shall receive any paying commission or other
compensation for appointing of property from the invaded trust to an
appointed trust pursuant to paragraph (b) or (c).

The potential abuse prevented in the current statute is similarly
prohibited in this measure. An authorized trustee may not change the
compensation of any trustee unless the court upon application of the
trustees otherwise directs. The measure clarifies that the trustees
may continue to receive compensation on the same basis as provided in
the invaded trust during the term of the appointed trust, even if the
term of the appointed trust is longer than the term of the invaded
trust. Accordingly, a trustee may not receive compensation from an
appointed trust to the extent the trustee was not entitled to
compensation from the invaded trust; if the invaded trust prohibited
or limited the payment of commissions, the trustee may not pay the
assets to an appointed trust that permits the trustee to receive a
greater amount of commissions.

This measure also provides that the trustee is not entitled to any
commission or other compensation for appointing the property from the
invaded trust to the appointed trust.

                               Conclusion

New York pioneered the realm of powers to appoint by enacting section
10-6.6(b) in 1992. It is time again for New York to act as a vanguard
and update and improve the statute, incorporating important
provisions enacted by the other states or being considered by states,
as well as adding significant, thoughtful, and creative elements,
that are useful to practitioners but do not undermine the tenor of
the statute.

This measure would take effect immediately and apply to trusts whether
created prior to or after such effective date. It would have no
fiscal impact on the State.

2011 Legislative History: OCA 2011-52
Assembly 8297 (M. of A. Weinstein) [Judiciary]