Relates to incorporation by reference, as a testamentary trust

This measure would permit a testator to incorporate into a will, as a testamentary trust, the provisions of a preexisting inter vivos trust that has terminated or been revoked prior to the testator's death by someone other than the testator. This measure would allow the disposition of probate property according to the terms of the trust without having to repeat the terms of the trust in the will.

EPTL 3-3.7, the "pour-over" statute, permits a testator to dispose of or appoint by will all or part of his or her estate ("pour-over assets") to the trustee of an existing trust, including one that is amendable or revocable or both ("receptacle trust"). However, paragraph (e) provides that the revocation or termination of the receptacle trust before the testator's death will cause the disposition or appointment "to fail, unless the testator has made an alternative disposition." Because pour-over wilts customarily provide for the disposition of the testator's entire probate estate or residuary estate to the trustee of an inter vivos trust created by himself or herself or by another person (see, e.g., Matter of Sackler, 145 Misc.2d 950 (Nassau Co. 1989); Matter of Pozarny, 177 Misc.2d752 (Kings Co. 2002)), it is imperative that the testator provide for an alternative disposition in the event that the pour-over fails because the receptacle trust is not in existence at the testator's death. The alternative is distribution in intestacy (EPTL 4-1.1) of the pour-over assets.

Many different circumstances may cause a receptacle trust to terminate or be revoked, the situation governed by paragraph (e). A trust for the testator's grandchildren may terminate and be distributed outright when they become 30 years of age. Or the trust for the testator's aunt, created by the testator's spouse, may be revoked without the testator's knowledge. Or a discretionary inter vivos trust may be exhausted for the support or benefit of the beneficiaries. Or the trust may have been terminated for tax or other reasons, inadvertently or unknowingly, jeopardizing the original estate plan.

To deal with these possibilities, attorneys often provide for an alternative testamentary trust with dispositions identical to those of the revoked receptacle trust. However, without the benefit of the proposed amendment, it is necessary to recite in the will all of the dispositive and other essential terms of the revoked trust in order to foreclose an argument by intestate takers or contingent beneficiaries that the provisions of the revoked trust cannot be "incorporated by reference." The rule prohibiting incorporations by reference was stated succinctly in Booth v. the Baptist Church of Christ (126 NY 215, 297248 (1891)): "It is unquestionably the law of this state that an unattested paper which is of a testamentary nature cannot be taken as a part of the will even though referred to by that instrument."

However, the rule prohibiting incorporation by reference "will not be carried to 'a dryly logical extreme.'" In Matter of Rausch (258 NY 327, 331 (1932)), decided long before the enactment of EPTL 3-3.7, the testator gave one-fifth of his residuary estate to the corporate trustee of an inter vivos trust to be disposed of under the trust agreement "which agreement is hereby made part of this my will." The Appellate Division had determined that the rule forbidding the incorporation of unattested documents had been violated and that the testator had died intestate as to that one-fifth of the residue. Finding that the disposition to the trustee was simply an enlargement of the subject matter of an existing trust, Judge Cardozo rejected the reasoning of the court below that this could not be done unless the terms of the deed of trust were repeated in the will.

In spite of the reasoning and holding in Rausch, whether the terms of a receptacle trust that has terminated or been revoked before the death of the testator can be incorporated by reference to create a testamentary trust may raise issues of first impression. For this reason, as noted above, careful attorneys drafting pour-over wills for their clients repeat in the will all of the terms of the receptacle trust. The result is often an instrument of discouraging length and complexity. The proposed amendment to paragraph (e) would enable the testator to create a testamentary trust as an alternative disposition without undue repetition and prolixity.

The proposed measure accomplishes that end by amending paragraph (e) of EPTL 3-3.7 to allow the testator, by an express direction, to create a testamentary trust to hold or dispose of the pour-over assets by simply incorporating by reference the terms of the revoked or terminated receptacle trust. Because revocation of the receptacle trust by the testator himself or herself is most likely an indication that the disposition in the will to the trust is intended to fail, the amendment's application is limited to termination of the trust and revocation by someone other than the testator. Specifically, the amendment allows the testator to expressly direct in the will that should the receptacle trust terminate or be revoked under EPTL 7-1.17(b) by someone other than the testator, the disposition in the will to the trust does not fail but is a disposition to a testamentary trust with terms identical to the revoked trust. The provision is not applicable to a receptacle trust that has been amended rather than revoked; EPTL 74.17(b) applies to "any amendment or revocation," clearly showing that the two are different concepts and that one is not the other.

Under the proposed amendment, the possibility of fraud is not a concern. EPTL 33.7 requires that the receptacle trust be in writing, executed in accordance with EPTL 71.17 and be in existence and identified by the will at its execution. Amendment or revocation of the trust would also be subject to EPTL 74.17. Thus, the terms of the trust instrument that are incorporated by reference in the will would be capable of validation, thereby eliminating the opportunity for fraud as to the terms of the testamentary trust.{1}

This measure, which would have no fiscal impact upon the State, would take effect immediately and apply to pending or future proceedings involving the interpretation of wills or instruments exercising a

power of appointment made by a testator who died on or after the effective date.

Legislative History: None. New proposal.

{1} The 1967 enactment of EPTL 3-3.7 statutorily validated the pour-over of estate assets by will to a properly executed inter vivos trust that was in existence both at the date of the testator's will and at the testator's death Moreover, EPTL 3-3 7(d) validated dispositions or appointments to the trustee of an inter vivos trust made by testators who died prior to the effective date of this section by simply providing that such disposition or appointment ''shall be construed to create a testamentary trust under and in accordance with the terms of the trust instrument which the testator originally intended should embrace the property disposed of or appointed, as such terms appear in such trust instrument at the date of the testator's death " In other words, in the case of testators who died prior to the effective date of the statute, EPTL 3-3.7(d) created a testamentary trust by incorporating the terms of the intended receptacle trust.