Establishes the formula for determining the interest payable on a delayed legacy; repealer

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.

I. CURRENT STATUTORY 6% INTEREST RATE IS UNREASONABLE The statutory default interest rate 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 fixed rate of 6% is far too high based on current market interest rates and imposes a significant economic burden on the residuary beneficiaries. In 1985, when the 6% interest was fixed by statute, estates typically earned in excess of 6% on deposits. In situations where the Court finds the fiduciary's delay in paying beneficiaries unreasonable, the Surrogate should retain the power to surcharge the fiduciary, as this bill allows. 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.

II. CURRENT LAW IS UNCLEAR The current statute encourages 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. 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. Still other courts say that the demand is not necessary. Adding to the uncertainty, some courts hold that interest may be awarded, while other courts deem it mandatory. The cases also disagree whether the residuary beneficiaries or fiduciary pay the cost of interest to the legatee. 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.

III. ACCRUAL OF RIGHT TO INTEREST Unless the governing instrument provides otherwise, interest should be paid starting seven months from the date of issuance of 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.

IV: 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. This proposal requires the interest rate be set 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%. 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.

V. 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 1099 INT 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. 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

S.7228-A of 2012: Died on Senate Floor Calendar, Passed Assembly

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.