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

(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 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) 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"(10-6.6(j)(5)). The statute does not, however, contain any provision which would warn the beneficiary that the statute of limita- tions 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 teens 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." (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 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 in the presence of two witnesses who shall affix: their signatures to the trust instru- ment." (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.

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 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.)

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", (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 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.Rul.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) and (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) (Judiciary)