Establishes the formula for determining the interest payable on a delayed legacy.
TITLE OF BILL: An act to amend the estates, powers and trusts law, in relation to the payment of interest on delayed legacies; and to repeal paragraphs (d) and (e) of section 11-1.5 of the estates, powers and trusts law and subdivision 7 of section 2102 of the surrogate's court procedure act relating thereto
PURPOSE OF BILL: The purpose of the bill is to change the law regarding the payment of interest on a delayed pecuniary legacy. In addition, this bill proposes to change the interest rate paid on legacies from the statutory rate of six percent, to an interest rate based on the Federal Funds Rate. This way, the beneficiary is compensated according to the time value of money for the delay in payment of their legacy.
JUSTIFICATION: EPTL 11-1.5 currently provides that interest is not payable unless a demand is made upon the fiduciary prior to commencing a proceeding in Surrogate's Court to compel payment of the legacy. The current statute fixes interest at 6% starting seven months from the time that letters testamentary, including preliminary letters testamentary, are granted and permits the Court to award interest at the legal or judgment rate set forth in the CPLR if the delay in paying legacies was unreasonable.
1. 6% Interest Rate Is Unreasonable
Although the testator or settlor of a trust may specify a desired rate of interest, the statutory default rate merely should reflect the time value of money where the delay is not unreasonable and the interest is paid by the estate or trust. Paying interest at too high a rate is unfair to the residuary beneficiaries whose share of the estate is diminished. Likewise, paying interest at too low a rate unfairly enriches the residuary beneficiaries at the expense of the legatee who is not compensated for the delay in payment.
The current statutory fixed rate of 6% is far too high based on current market interest rates and imposes a significant economic burden on the residuary beneficiaries. However, the rate may be deemed to be too low in a different economic environment. Surrogate Roth identified this problem in Matter of Schwarz, 161 Misc. 2d 471, 476 (Sur. Ct., N.Y. Cty. 1994) characterizing "any fixed numerical rate as insufficiently flexible to be fair over time." Similarly, the legislative history surrounding the increase in the interest rate from 3% to 6% during high-interest rate economic environment identifies the problem of undue hardship on beneficiaries when the rate is too low or too high, " '[T]he three percent rate is clearly too low for the present time, when interest rates of nearly ten percent are not uncommon... The proposed figure of six percent in the
case of a reasonable delay in payment of a legacy is appropriate because that amount is a minimum reasonable rate of return for estate assets prudently invested... the proposed changes are intended to encourage prompt payment of outright pecuniary dispositions and to prevent the imposition of undue hardship on beneficiaries of such dispositions.' " (Id, at 47576), Yet, the current rate of 6% just does that: it imposes undue hardship on residuary beneficiaries because estate investments are not earning anywhere near 6%.
In situations where the Court finds the fiduciary's conduct unreasonable, the Surrogate should retain the power to surcharge the fiduciary (as this bill allows), at an appropriate penalty rate. Penalty interest should be paid by the errant fiduciary and not the estate or trust, as there is no justification in these situations to impose an economic burden on residuary beneficiaries; yet, the current statute allows for just that.
2. Current Law Is Unclear
The current statutory scheme is not optimal from the viewpoint of the fiduciary, the legatee and the residuary beneficiary. In fact, the current statute seems to encourage disputes and unnecessary litigation. The courts have added greatly to the uncertainty of how the statute applies when there is a delay in the payment of a legacy. Some courts have allowed payment of interest even when a legatee did not bring a proceeding for payment of interest (Matter of Schwartz, 614 N,Y.S.2d 668 (Sur. Ct., N.Y. Cty. 1994); Matter of Park-Montgomery, NYLJ, 5/19/1997 (Sur. Ct., Nassau Cty.)). Some courts require a legatee to make a demand upon fiduciary for the payment of interest prior to bringing a proceeding for payment of interest (Matter of Erlich, NYLJ, 7/6/2001 (Sur. Ct., Kings Cty.)), while other courts say that the demand is not necessary (Matter of Fisher, NYLJ, 1/21/2003 (Sur. Ct., Westchester Cty.); Matter of Kasenetz, 196 Misc. 2d 318 (Sur. Ct., Nassau Cty. 2003)). Adding to the uncertainty, some courts hold that interest may be awarded (Matter of Park-Montgomery, NYLJ, 5/19/1997 (Sur. Ct., Nassau Cty.)), while other courts deem it mandatory (Matter of Lancaster, NYLJ, 12/27/1996 (Sur. Ct., Suffolk Cty.)). The cases also disagree whether the residuary beneficiaries (Matter of Goodman, NYLJ, 5/19/2000 (Sur. Ct., N.Y. Cty.)) or fiduciary (Matter of Bozzi, NYLJ, 3/31/1999 (Sur. Ct., Nassau Cty.)) pay the cost of interest to the legatee.
The core issue is not which cases were correctly decided. Rather, the fact that the existing law is not clear is itself the crux of the problem, a point addressed by Surrogate Roth in Matter of Schwarz.
The existing statute leaves all parties uncertain as to what is appropriate regarding payment of interest. For example, fiduciaries pay interest on a legacy at their peril in the absence of a judicial proceeding. As a practical matter, only legatees of larger cash bequests will institute a judicial proceeding to compel payment of interest. Most fiduciaries wish to satisfy cash legacies as soon a practicable. When legacies cannot be paid promptly, many fiduciaries pay interest because they believe it is the proper course, irrespective of the vagaries of the existing statute. Moreover, since most estate accountings are settled non-judicially, requiring a
judicial proceeding for the Surrogate's Court to authorize payment of interest seems wasteful. However, the existing statute seems to indicate that a residuary beneficiary has a valid claim against the fiduciary if interest was paid without judicial authorization.
Thus, the existing law often puts the residuary beneficiary in a quandary in that this beneficiary may feel that payment of interest in the absence of Court authorization is an impermissible benefit to the cash legatee. In situations where the residuary beneficiary is an institution, its governing body may be placed in an awkward position vis-a-vis its shareholders, members or other constituents. When the residuary beneficiary is a charitable organization, the Attorney General's presence as an interested party further complicates matters.
In short, the existing New York law requires each leg of the triangle - the fiduciary, the legatee, and the residuary beneficiary - to safeguard his or her interests which may result in expensive legal proceedings. In the majority of situations where judicial proceedings do not take place, there is a lack of uniformity of practice and outcome. This is not desirable and therefore, the statute should be revised to provide predictability.
3. Accrual of Right to Interest
Unless the governing instrument provides otherwise, interest should be paid starting seven months from the date of issuance of either preliminary or permanent letters, or if letters are not required, seven months from the date of death or other date a beneficiary is entitled to receive a legacy. The legatee should not be required to make a formal demand or institute a judicial proceeding. It is unfair to require a legatee to institute a judicial proceeding in order to collect interest on a delayed payment of a legacy. If the law requires a judicial proceeding, then, as a practical matter, only the legatees who are the most aggrieved will institute a proceeding and collect interest. Most likely, larger sums will be involved. If interest can only be awarded at the discretion of the Court, then most legatees will never receive interest because someone must institute a proceeding in order to get the Court involved. In New York, many estates - large or small, upstate or downstate - have no Court involvement following the probate of the will.
The payment of interest on a delayed payment of legacy should apply to all estates, including illiquid estates. An executor has a duty to make the estate assets productive, and the prior underproductive property rule has been replaced by the flexible power to adjust. In certain situations, the residuary estate may be illiquid causing difficulty in paying debts, taxes, administration expenses and legacies. Many of these cases are the result of faulty estate planning or poor drafting, and interest on delayed payment of a legacy is not the focal issue. The cash shortfall for payment of the legacy itself is the central issue here, and not payment of interest on that legacy - which is only a small fraction of the legacy. Furthermore, requiring a judicial proceeding in this situation seems counterproductive, as the legal fees incurred will exacerbate the liquidity problem.
In other situations, there may be a probate contest or other litigation preventing a bequest from promptly being paid. Unless the testator provides otherwise, interest should run with the legacy, even in cases where the legatee filed objections to the will, thereby causing the delay. In the absence of language in the will akin to an in terrorem clause, there is no reason why such a legatee should not receive interest - which is nothing more than compensation for the time value of money. It is not a windfall as the residuary estate is earning income on its assets, or should be. If a proceeding is pending in Surrogate's Court, be it a will contest or a judicial accounting, the Court always has discretion to disallow interest or surcharge a fiduciary.
The bill does not intend to change existing law with respect to the right of election by a surviving spouse (In re Kasenetz, 196 Misc.2d 318 (Sur. Ct. Nassau Cty. 2003)) and does not affect the Court's right to surcharge the fiduciary in abusive cases, thereby preserving useful judicial oversight. However, the right to surcharge is not a part of this bill since additional specific statutory language is not required for a surcharge action.
4. Applicable Interest Rate
The interest rate on delayed legacies should not be permanently fixed by statute, but should fluctuate depending on current economic conditions. This is critical to the fairness of this proposed statutory reform. There is no one correct interest rate to use as a reference. Therefore, this proposal requires the interest rate be set (or reset) on the first business day of each calendar year and fixed for that calendar year at the Federal funds rate less 1%, but in no event less than 1/2 of 1%.
As of January 27, 2011 the Federal funds rate (.25%) less 1% was a negative number, so the bill would fix the interest rate at 1/2 of 1%. Three month risk-free treasury bills yielded .14%, and money market funds yielded a negligible amount. By having the rate reset once each year, fiduciaries can easily comply with the statute and do the necessary computation. It should not be necessary to engage an accountant or other professional to compute the interest. Moreover, the legatee will receive a competitive interest rate based on current economic conditions in light with what the estate should be earning. There will be no need for the Surrogate's Court to compute or verify interest, absent formal objections to the computation within an accounting or other proceeding.
Example: The testator died on April 15, 2009. His will provides for a $100,000 cash legacy to A. The executor was appointed on June 16, 2009 and 7 months from the issuance of letters is on January 16, 2010. The legacy was paid on March 14, 2012, with income calculated pursuant to the proposed statutory scheme. The target Federal funds rate on the first business day of each applicable year was as follows:
o January 4, 2010 - .25% (thus .5% rate applies); o January 3, 2011 - .25% (thus .5% rate applies); and o January 3, 2012 - .25% (thus .5% rate applies).
The executor would compute the income due A as follows:
As to 2010: $100,000 x .005 / (349/365) = $478 As to 2011: $100,000 x .005 / 365$ = $500 As to 2012: $100,000 x .005 / (74/366) = $101
Thus, A would be entitled to a payment of $101,079.
5. Deductibility of Interest for Estate Income Tax Purposes
Under current income tax law, the legatee must report the interest as interest income on Schedule B (Form 10991NT issued by the estate), but the estate cannot deduct the interest as an expense due to limitations on deductions for personal interest. Therefore, the current New York statutory scheme is not tax efficient. In order to be tax efficient, the interest paid on delayed payment of a legacy should be characterized under the New York Principal and Income Act (EPTL 11-A) as accounting income, so that its payment will carry out the distributable net income ("DNI") in the same manner that the share of income due a pecuniary legacy in trust carries out DNI.
LEGISLATIVE HISTORY: New bill, 2012.
FISCAL IMPLICATIONS FOR STATE AND LOCAL GOVERNMENTS: None.
EFFECTIVE DATE: This act shall take effect sixty days after having become a law and shall apply only to the estates of decedents who shall have died on or after such effective date.
STATE OF NEW YORK ________________________________________________________________________ 7228--A IN SENATE May 2, 2012 ___________Introduced by Sen. BONACIC -- read twice and ordered printed, and when printed to be committed to the Committee on Judiciary -- committee discharged, bill amended, ordered reprinted as amended and recommitted to said committee AN ACT to amend the estates, powers and trusts law, in relation to the payment of interest on delayed legacies; and to repeal paragraphs (d) and (e) of section 11-1.5 of the estates, powers and trusts law and subdivision 7 of section 2102 of the surrogate's court procedure act relating thereto THE PEOPLE OF THE STATE OF NEW YORK, REPRESENTED IN SENATE AND ASSEM- BLY, DO ENACT AS FOLLOWS: Section 1. Paragraphs (d) and (e) of section 11-1.5 of the estates, powers and trusts law are REPEALED. S 2. Paragraph 3 of section 11-A-2.1 of the estates, powers and trusts law, as added by chapter 243 of the laws of 2001, is amended to read as follows: (3)
[A]UNLESS OTHERWISE PROVIDED BY THE TERMS OF THE WILL OR TRUST, COMMENCING (A) SEVEN MONTHS FROM EITHER THE DATE OF DEATH OR OTHER DATE A BENEFICIARY IS TO RECEIVE A PECUNIARY AMOUNT OUTRIGHT IF LETTERS ARE NOT REQUIRED, OR (B) SEVEN MONTHS FROM THE TIME LETTERS, INCLUDING PRELIMINARY OR TEMPORARY LETTERS, ARE GRANTED IF LETTERS ARE REQUIRED, A fiduciary shall distribute INCOME to a beneficiary who receives a pecu- niary amount outright [the interest or any other amount provided by the will, the terms of the trust, or applicable law], from net income deter- mined under paragraph (2) or from principal to the extent that net income is insufficient [. If a beneficiary is to receive a pecuniary amount outright from a trust after an income interest ends and no inter- est or other amount is provided for by the terms of the trust or appli- cable law, the fiduciary shall distribute the interest or other amount to which the beneficiary would be entitled under applicable law if the pecuniary amount were required to be paid under a will], OF AN AMOUNT EQUAL TO THE PECUNIARY AMOUNT MULTIPLIED BY AN INCOME FACTOR, WHICH SHALL BE SET (OR RESET) ON THE FIRST BUSINESS DAY OF EACH CALENDAR YEAR AND FIXED FOR THAT CALENDAR YEAR AT THE TARGET FEDERAL FUNDS RATE ASEXPLANATION--Matter in ITALICS (underscored) is new; matter in brackets [ ] is old law to be omitted. LBD15478-03-2 S. 7228--A 2
ANNOUNCED BY THE FEDERAL RESERVE BOARD (OR IN THE EVENT THE TARGET FEDERAL FUNDS RATE IS A RANGE OF RATES, THE HIGH OF THAT RANGE) LESS ONE PERCENT, BUT IN NO EVENT LESS THAN ONE-HALF OF ONE PERCENT. S 3. Subdivision 7 of section 2102 of the surrogate's court procedure act is REPEALED. S 4. This act shall take effect on the sixtieth day after it shall have become a law and shall apply to the estates of decedents who shall have died on or after such date.