What's happening
This bill clarifies that a lapse of a power of withdrawal over a trust created by another person does not count as creating or funding the trust for creditor and judgment purposes.
Why it matters
Protects beneficiaries from creditor claims. The bill ensures that if someone has a temporary (lapsed) right to withdraw assets from a trust created by another person, this does not make them the “creator” of the trust for the purposes of creditor or judgment claims. This helps shield trust assets from being seized to satisfy that individual's debts.
Closes a potential loophole. By clarifying that a lapsed withdrawal power doesn’t constitute funding or creating a trust, the bill eliminates ambiguity that might have allowed creditors to argue that beneficiaries inadvertently exposed themselves to liability.
Applies retroactively. The law explicitly states it applies to all New York trusts, regardless of when they were created. This means it impacts existing trusts, providing immediate certainty and protection to current and future beneficiaries.
Reinforces trust law stability. By declaring this is merely a clarification of existing law (not a change), the bill aims to maintain consistency and reliability in how trusts are interpreted and administered in New York, benefiting estate planners, trustees, and beneficiaries alike.
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Who cares
Headline styles
Clarify Trust Withdrawal Rules
Plain English, a few words. Used as the page title.
Sponsors
No co-sponsors yet.
History
- Referred to judiciary
- Referred to judiciary
Companion bill
The same bill in the other chamber. A bill becomes law when one version passes both houses and the governor signs it, so either number can carry it.
Clarify Trust Withdrawal Rules
In Assembly Committee · Judiciary · Sponsor David Weprin
Full text
1 pageUnderlined is new[Struck] is removedOfficial text on nysenate.gov ↗
STATE OF NEW YORK
6065
2019-2020 Regular Sessions
IN SENATE
May 16, 2019
Introduced by Sen. HOYLMAN -- read twice and ordered printed, and when printed to be committed to the Committee on Judiciary
AN ACT to amend the estates, powers and trusts law and the civil practice law and rules, in relation to clarifying and declaring as the existing law of the state of New York the provisions of rules relating to the lapse of a power of withdrawal over the income or principal of a trust
The People of the State of New York, represented in Senate and Assembly, do enact as follows:
Section 1. Paragraph (a) of section 7-3.1 of the estates, powers and trusts law, as amended by chapter 108 of the laws of 1987, is amended to read as follows:
(a) A disposition in trust for the use of the creator is void as against the existing or subsequent creditors of the creator. No individual shall be treated for purposes of this section as having made a disposition in trust for the use of that individual by reason of a lapse of a power of withdrawal over the income or corpus of a trust created by another person.
§ 2. Paragraph 1 of subdivision (c) of section 5205 of the civil practice law and rules, as amended by chapter 93 of the laws of 1995, is amended to read as follows:
1. Except as provided in paragraphs four and five of this subdivision, all property while held in trust for a judgment debtor, where the trust has been created by, or the fund so held in trust has proceeded from, a person other than the judgment debtor, is exempt from application to the satisfaction of a money judgment. For purposes of this section, a judgment debtor shall not be treated as creating or funding a trust by reason of the lapse of a power of withdrawal over the income or principal of a trust created and funded by a person or persons other than the judgment debtor.
§ 3. This act shall take effect immediately and shall be enforceable as to all trusts created under New York law, regardless of when created, as it is declaratory of existing New York law.
EXPLANATION--Matter in italics (underscored) is new; matter in brackets
[ ] is old law to be omitted.
LBD08397-01-9
Reflowed for reading: line numbers and page breaks removed. Cite the official text.
Sponsor's memo
Title of bill
An act to amend the estates, powers and trusts law and the civil prac- tice law and rules, in relation to clarifying and declaring as the existing law of the state of New York the provisions of rules relating to the lapse of a power of withdrawal over the income or principal of a trust
Purpose or general idea of bill
This bill clarifies and declares the existing law of the state of New York; the provisions of rules relating to the lapse of a power of with- drawal over the income of a trust.
Summary of provisions
These amendments amend section § 7-3.1 of the Estates, Powers and Trusts Law and section 5205 of the Civil Practice Law and Rules to clarify and declare as the existing law of the State of New York that a beneficiary of a trust does not become the settlor of the trust merely because of a lapse of the beneficiary's right to withdraw trust property.
Read the full memo (907 words)
Justification
One of the most widely used estate tax planning devices is the "irrev- ocable life insurance trust." In order to avoid estate tax inclusion of the death benefit payable under a life insurance policy, many opt to have the policy owned by an irrevocable trust. As long as the trust is funded with a new policy, or the grantor transferred his or her existing policy into the trust prior to three years before death, the proceeds will escape estate tax.
Once the trust is in place, the grantor typically gives the trustee money for the trust to pay the life insurance premiums. This transfer of property to the trust is considered to be a gift to the beneficiaries (usually the grantor's children and/or grandchildren). In order for the grantor to be able to utilize his or her annual exclusions from federal gift tax (currently $11,000 per donee), the beneficiaries must be given a present interest in the property transferred to the trust. This is usually accomplished by giving the beneficiaries a limited power of appointment that permits the beneficiary to elect to withdraw the great- er of $5,000 or 5% of contributions made to the trust each year (but not exceeding $11,000). These powers of withdrawal are referred to "Crummey" powers in light of the discussion in Crummey v. Comer, 397 F.2d 82 (9th Cir. 1968). The IRS in Rev. Rul. 73-405, 1973-2 C.B. 321 has assented to the legitimacy of the arrangement.
The power of withdrawal causes a beneficiary to be deemed the owner of the property for federal estate tax and gift tax purposes. Normally, this would mean that the property subject to the power would be included in the estates of beneficiaries. However, the Internal Revenue Code (S 2041(b)(2) and2514(e)) permits the power of withdrawal to lapse if not exercised by the beneficiary.
Thus, gifts to a life insurance trust may qualify for the gift tax annu- al exclusion by granting the trust beneficiaries powers of withdrawal, which will lapse without tax consequence to the beneficiary if he or she (hopefully) does not exercise the withdrawal power.
It is at this juncture that an ambiguity in New York State law may cause a problem for the beneficiaries. EPTL § 7-3.1 and CPLR § 5205 provide that contributions to a self-settled trust are permanently subject to the grantor's creditors. Applied to the life insurance example, the concern is that a beneficiary whose power of withdrawal lapses will be treated as a "grantor" with respect to the property "contributed" by virtue of the unexercised or lapsed withdrawal power. This would theoretically allow the beneficiary's creditors to access the lapsed withdrawals. This, in turn, could result in estate tax inclusion, notwithstanding the lapse protections of Internal Revenue Code §§ (2041 (b)(2) and 2514(e)). This is because IRC Section 2041 provides that property subjected to a "general power of appointment" is includable in one's estate. For estate tax purposes, a general power of appointment is defined, in part, as property that a power holder can appoint to his or her creditors. In this context, NYEPTL § 7-3.1 could potentially allow a beneficiary's creditors to attach property over which the beneficiary has the power to withdraw. It is the lapse of this power which can cause a beneficiary to be treated as the grantor of a self-settled trust.
Thus, subject to creditor claims under state law, the beneficiary is deemed to have a general power of appointment over the property, which will, in turn, subject it to inclusion in his or her estate.
In order to avoid this result, New York State law should be clarified to provide that our creditors rights' doctrine does not apply to property contributed to a trust merely by reason of a lapse, waiver, or release of a power of withdrawal valued at less than 5% of the aggregate value of the trust.
Without this clarification, estate planning attorneys may be hard pressed not to suggest that an irrevocable life insurance trust be created under the laws of such states as AK, DE, NE or TX which do not pose the possible dangers described herein.
Prior legislative history
02/09/17 referred to judiciary 01/03/18 referred to judiciary
Fiscal implications
none
Effective date
This act shall take effect immediately and shall be enforceable as to all trusts created under New York law, regardless of when created, as it is declaratory of existing New York law.
Summaries, headlines and scores are AI-generated from the official bill text. How we score bills. Source: NYS Open Legislation.