NEW YORK STATE ASSEMBLY MEMORANDUM IN SUPPORT OF LEGISLATION submitted in accordance with Assembly Rule III, Sec 1(f)
BILL NUMBER: A7061
SPONSOR: Braunstein (MS) 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 Surro-
gate'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 stat-
ute" - EPTL 10-6.6, enacted in 1992. Section 10-6.6(b) codifies deci-
sional 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 added 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 remain-
der beneficiaries)." (emphasis added.)
In light of the language of the second sentence of paragraph (b), the
question arises whether the interests of all the successor or remainder
beneficiaries of the original ("invaded") trust may be excluded in the
new ("appointed") trust.
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 effectively rendered the interests of
all of the "successor or remainder beneficiaries" inherently susceptible
to exclusion. Such grantor would, therefore, most probably intend that a
trustee who decants to a new trust have the same power to exclude all of
such successor or remainder beneficiaries, and not (as the statute
literally permits) just all but one.
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 or, 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 may be one, more than
one or all of the successor and remainder beneficiaries of such invaded
trust (to the exclusion of any one, more than one or all of such succes-
sor and remainder beneficiaries).
(2)
STATUTE OF LIMITATIONS
A proceeding to compel an accounting by a fiduciary is governed by a
six-year statute of limitations. CPLR § 213
1: Matter of Barabash, 31
N.Y.2d 76 (1972) (statute begins to run on repudiation of the trust
relationship); (Tydings v. Greenfield, Stein & Senior, LLP, 11 N.Y.3d
195 (2008) (statute begins to run on known termination of trust
relationship by appointment of successor trustee)).
When a trustee exercises a "decanting" power under EPTL 10-6.6, invading
the corpus of an old ("invaded") trust and distributing it to a new
("appointed") trust, the question arises whether the six-year statute of
limitation begins to run from the effective date of the decanting on the
ground that there has been a "repudiation" under Barabash, or a "termi-
nation" under Tydings.
Presently, the only provisions contained in EPTL 10-6.6 with respect to
the relationship between decanting and accountings is that the failure
of a beneficiary to object to the exercise of the decanting power at the
time of the decanting does not deprive such beneficiary of the right to
compel the trustee "to account for such exercise" or prevent such bene-
ficiary "from objecting to an account or compelling a trustee to
account". The statute does not, however, contain any provision which
would warn the beneficiary that the statute of limitations on an action
to compel an accounting may have begun to run.
It could be argued that any time a trustee transfers the corpus of the
"invaded trust" to an "appointed trust", the fiduciary relationship with
respect to the "invaded trust" has been "repudiated" or "terminated"
under Barabash/Tydings and, thus, that the six year statute begins to
run at that point.
There are, however, many different types of decanting. With respect to
some, it would be unreasonable to expect a beneficiary to consider that
there has been a "repudiation" or "termination". With respect to others,
such expectation would not be unreasonable. For example, if a trustee
decanted to a new trust which had the same trustee and all of the same
provisions of the old trust except for the addition of a minor adminis-
trative provision, it would be unreasonable to expect a beneficiary in
such a situation to consider such a decanting to be a repudiation or
termination of the old trust despite the fact that the corpus has been
transferred out of the old trust and into the new trust.
On the other hand. suppose the new trust (1) had a new trustee, and (2)
contained provisions substantially changing the terms of the old trust.
In such a situation it would not be unreasonable to expect the benefici-
aries to consider that the old trust relationship was ended.
In light of the many different forms that decanting can take, it would
be unwise to attempt a statutory definition as to which decantings
should begin the statute and which should not. However, it is desirable
that the decanting statute indicate to the beneficiaries that a decant-
ing may start the running of the six-year statute. As the Court of
Appeals pointed out in Tydings, the beneficiaries need not await a final
accounting but can ask for an accounting at any time.
It is therefore proposed that the statute (EPTL 10-6.6) be amended as
follows:
(1) The following sentence shall be added at the end of EPTL 10-6.6
(j)(5):
Whether the exercise of a power under paragraph (b) or (c) begins the
running of the statute of limitations on an action to compel a trustee
to account shall be based on all the facts and circumstances of the
situation.
and
(2) The following sentence shall be added at the end of EPTL 10-6.6
(j)(6):
The instrument shall state that in certain circumstances the appointment
will begin the running of the statute of limitations that will preclude
persons interested in the invaded trust from compelling an accounting by
the trustees after the expiration of a given time.
(3)Obsolete Reference to EPTL 7-1.17
L. 2011, c. 451 added 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."
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 require-
ment 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 convey-
ance of real property or, in lieu thereof, executed the presence of two
witnesses who shall affix their signatures to the trust instrument."
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 executed and acknowledged by the
person establishing such trust shall be deemed satisfied by the
execution and acknowledgment of the trustee of the appointed trust.
DISCRETIONARY INCOME BENEFICIARIES
L. 2011, c. 451 added 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 or 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 remain-
der beneficiaries)."
Because paragraph (s)(4) of the new 10-6.6 defines a "current benefici-
ary" as someone "to whom the trustees may distribute principal at the
time of the exercise of the power", the question has arisen whether the
interest of a discretionary beneficiary to whom income, but not princi-
pal, 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 inter-
est of a beneficiary to whom income, but not principal, may be distrib-
uted in the discretion of the trustee of the invaded trust may be
continued in the appointed trust.
(4)
GRANTOR TRUSTS
When a trustee exercises a "decanting" power under EPTL 10-6.6 by invad-
ing the corpus of an existing trust ( the "invaded trust") and distrib-
uting it to a new trust (the "appointed trust"), the statute prohibits
the addition of a "new" beneficiary in the appointed trust.
In light of this prohibition, the question arises whether the exercise
of the decanting power which converts a trust from a non-grantor trust
(where the income tax is payable by either the trust or the benefici-
aries) to a grantor trust (where the income tax is payable by the gran-
tor) constitutes the addition of the grantor as a "new beneficiary." The
reason this issue arises is that if a non-grantor trust becomes a gran-
tor trust by virtue of a decanting, then under EPTL 7-1.11, unless
negated by the decanting instrument, the grantor may receive corpus in
the trustee's discretion to reimburse the grantor for income taxes on
the trust's income (allocable to principal). Literally, therefore, it
could be argued that the grantor, as the permissible recipient of trust
corpus, is now a new beneficiary -which would make the decanting inval-
id, under EPTL 10-6.6.
However, despite the fact that the grantor literally could be seen as
the permissible recipient of trust corpus in such a situation, the gran-
tor should not be considered a new beneficiary for the purposes of EPTL
10-6.6, for the following reasons:
First, it seems clear that the legislation enacted in 2005 has already
spoken in principle to this policy. EPTL 7-3.1(a) provides that a
"disposition in trust for the use of the creator is void as against
existing or subsequent creditors". Because the IRS in Rev.Ru1.2006-64
indicated that it could treat a grantor as retaining a beneficial inter-
est for estate tax purposes if EPTL 7-1.11 gave rise to a right in cred-
itors to reach the trust corpus, in 2005 EPTL 7-3.1 was amended to add a
new paragraph (d) to provide:
"(d) A disposition in trust shall not be considered to be for the use of
the creator under paragraph (a) of this section by reason of the trus-
tee's authority to pay trust principal to the creator pursuant to
section 7-1.11 of this article. Nor shall a disposition in trust be
considered to be for the use of the creator under paragraph (a) of this
section where the trustee is authorized under the trust instrument or
any other provision of law to pay or reimburse the creator for any tax
on trust income or trust principal that is payable by the creator under
the law imposing such tax or to pay any such tax directly to the taxing
authorities. No creditor of a trust creator shall be entitled to reach
any trust property based on the discretionary powers described in this
paragraph."
This amendment made it clear that even though a trustee has the
discretion to pay corpus to a grantor to reimburse the grantor for
income taxes on trust income, such a payment was not to be considered a
beneficial interest. The same policy which engendered the 2005 amendment
to 7-3.1 supports the amendment of 10-6.6 to clarify that the possibil-
ity of a corpus reimbursement under 7-1.11 does not, of itself, make the
grantor a "new" beneficiary.
Secondly, economic analysis points in the same direction. To illustrate:
Suppose that when the trust is a non-grantor trust, there is realized a
capital gain. In such a case, the tax is payable by the trust or the
beneficiaries. If, on the other hand, the trust was a grantor trust, and
the trustee reimbursed the grantor for the taxes, the trust, the benefi-
ciaries and the grantor (as well as the government) end up in essential-
ly the same position as if the trust was not a grantor trust. In both
cases the essence of the situation is that the taxes on the trust are
paid to the government out of the trust property, and the grantor gains
nothing.
Therefore, it is proposed that EPTL 10-6.6 be amended to track the 2005
amendment to EPTL 7-3.1 by adding a new subparagraph (10) to paragraph
(s) to read as follows:
(10) The creator shall not be considered to be a beneficiary of an
invaded or appointed trust by reason of the trustee's authority to pay
trust principal to the creator pursuant to section 7-1.11 of this arti-
cle or by reason of the trustee's authority under the trust instrument
or any other provision of law to pay or reimburse the creator for any
tax on trust income or trust principal that is payable by the creator
under the law imposing such tax or to pay any such tax directly to the
taxing authorities.
(5)
REQUIREMENT OF MAJORITY OR UNANIMITY IN THE DECANTING DECISION
Although the new statute is silent on the matter, the legislative histo-
ry of the decanting statute indicates that a decision to decant requires
only a majority of trustees (i.e., that the majority rule provisions of
10-10.7 should apply). However, a technical correction to the statute is
necessary because 10-6.6(d) states that the exercise of the decanting
power "shall be considered the exercise of a special power of appoint-
ment as defined in section 10-3.2", which could be interpreted to invoke
the unanimity requirement provisions of 10-6.7, which governs powers of
appointment.
EPTL 10-6.7 and 10-10.7 would be revised to add the following language
to make clear that 10-10.7 or the terms of the dispositive instrument
will govern on the issue of whether unanimity or majority decision is
required when there are more than two trustees:
10-6.7
Whenever a power of appointment, other than a power in a trustee to
invade trust principal under section 10-6.6 of this article or under the
terms of the dispositive instrument, is created in two or more
donees,...
10-10.7
Unless contrary to the express provisions of an instrument affecting the
disposition of property, a joint power other than a power of appointment
but including a power in a trustee to invade trust principal under
section 10-6.6 of this article or under the terms of the dispositive
instrument, conferred...
Also, since 10-6.6 is silent on the issue, a cross-reference will be
added by a new paragraph (t), as follows:
(t) Cross-reference. For the exercise of the power under paragraph (b)
or (c) of this section where there are multiple trustees see 10-6.7 and
10-10.7 of this article.
This act shall take effect immediately.
2012 Legislative History:
OCA 2012-101
Senate. 7630 (Sen. Bonacic) (Judiciary)
2013 Legislative History: OCA 2013-6
Senate 3790 (Sen. Bonacic)
