October 15, 2013

NEW YORK COUNTY LAWYERS’ ASSOCIATION

ESTATES, TRUSTS AND SURROGATE’S COURT PRACTICE SECTION

Comments re: Legislative Proposal by NYSBA Trusts and Estates Law Section

The New York County Lawyers’ Association’s Estates, Trusts and Surrogate’s Court Practice Section (the “Section”) submits the following comments regarding a May 3, 2013 legislative proposal by the Trusts and Estates Law Section of the New York State Bar Association (the “Proposal,” annexed hereto as Exhibit A).

The Proposal

The Proposal recommends that EPTL § 3-3.5 be amended so as to extend that statute’s “safe harbor” provisions to protect beneficiaries of inter vivos trust instruments in addition to testamentary instruments. Specifically, the Proposal recommends that EPTL § 3-3.5 be amended to read as follows:

A condition qualifying a disposition of property is operative despite the failure of the testator or grantor to provide for an alternative gift to take effect upon the breach or non- occurrence of such condition.

A condition, designed to prevent a disposition from taking effect in case the validity of a will or trust is contested by the beneficiary, is operative despite the presence or absence of probable cause for such contest, subject to the following:

Such a condition is not breached by a contest to establish that the will or trust is a forgery or that it was revoked by a later will or trust, provided that such contest is based on probable cause.

An infant or incompetent may affirmatively oppose the probate of a will or contest the validity of a trust without forfeiting any benefit there under.

The following conduct, singly or in the aggregate, shall not result in the forfeiture of any benefit under the will or trust:

The assertion of an objection to the jurisdiction of the court in which a will was offered for probate.

The disclosure to any of the parties or to the court of any information relating to any document offered for probate as a last will, any document constituting a trust, or any document relevant to the validity thereof.

A refusal or failure to join in a petition for the probate of a document as a last will, or to execute a consent to, or waiver of notice of a probate proceeding.

The preliminary examination, under SCPA 1404, of a proponent’s witnesses, the person who prepared the will, the person who prepared a trust in the case of a pour over will, the nominated executors and the proponents in a probate proceeding and, upon application to the court based upon special circumstances, any person whose examination the court determines may provide information with respect to the validity of the will that is of substantial importance or relevance to a decision to file objections to the will or to petition to determine the validity of a trust in the case of a pour over will.

The institution of, or joining or acquiescence in a proceeding for the construction of a will, a trust, or any provision thereof.

The Proposal recommends that the foregoing shall be effective upon enactment and shall apply to all testamentary and inter vivos trust instruments on or after the effective date.

Recommendation

For the following reasons, this Section recommends that no amendment be made to EPTL § 3-3.5(b)(3)(D), and otherwise endorses the amendments recommended in the Proposal.

This Section agrees that, as set forth in the Proposal, inter vivos trusts are gaining prevalence in estate planning. Further, such trusts may be drafted to include in terrorem clauses. This Section, therefore, agrees that in order to balance the interests of trust grantors wishing to forestall challenges to their trusts on one hand, and the interests of beneficiaries seeking to make informed decisions as to whether to risk triggering in terrorem clauses contained in such trusts on the other hand, a legislative extension of EPTL 3-3.5’s safe harbor provisions to protect the beneficiaries of lifetime trusts is warranted under certain circumstances. Moreover, as set forth in the Proposal, New York case law appears to support such a legislative extension. See Oakes v. Muka, 31 A.D.3d 834 (3d Dept. 2006); Matter of Shamash, 6/16/2009 N.Y.L.J. 38, (col. 2) (Surr. Ct. N.Y. Cty.).

SCPA 1404’s applicability, however, is limited to probate proceedings. See SCPA 1404(4):

…Any party to the proceeding [for probate of a will], before or after filing objections to the probate of the will, may examine any or all of the attesting witnesses, the person who prepared the will, and if the will contains a provision designed to prevent a disposition or distribution from taking effect in case the will, or any part thereof, is contested, the nominated executors in the will and the proponents….

Further, a proceeding for probate of a testamentary instrument does not bring up for review the validity of an inter vivos trust in the case of a pour over will.

Conclusion

It is this Section’s position that the safe harbor provision under EPTL 3- 3.5(b)(3)(D), providing that a beneficiary under a will offered for probate may conduct the preliminary examinations of, inter alia, the witnesses, attorney draftsperson, nominated executors and proponents of such will without triggering an in terrorem clause under such will, should not be extended to beneficiaries of an inter vivos trust in the case of a pour over will. Subject to this exception, the Section supports the Proposal.

EXHIBIT A

NEW YORK STATE BAR ASSOCIATION

TRUSTS AND ESTATES LAW SECTION

Proposed Legislation

It is recommended that EPTL § 3-3.5 be amended to read as follows:

(a) A condition qualifying a disposition of property is operative despite the failure of the testator or granter to provide for an alternative gift to take effect upon the breach or non-occurrence of such condition,

(b) A condition, designed to prevent a disposition from taking effect in case the validity of a will or trust is contested by the beneficiary, is operative despite the presence or absence of probable cause for such contest, subject to the following:

(1) Such a condition is not breached by a contest to establish that the will or trust is a forgery or that it was revoked by a later will Qt trust, provided that such contest is based on probable cause.

(2) An infant or incompetent may affirmatively oppose the probate of a will or contest the validity of a trust without forfeiting any benefit there under.

(3) The following conduct, singly or in the aggregate, shall not result in the forfeiture of any benefit under the will or trust:

(A) The assertion of an objection to the jurisdiction of the court in which !! will was offered for probate.

(B) The disclosure to any of the parties or to the court of any information relating to any document offered for probate as a last will, any document constituting a trust, or any document relevant to the validity thereof.

(C)A refusal or failure to join in a petition for the probate of a document as a last will, or to execute a consent to, or waiver of notice of a probate proceeding.

(D) The preliminary examination, under SCPA 1404, of a proponent’s witnesses, the person who prepared the will, the person who prepared a trust in the case of a pour over will, the nominated executors and the proponents in a probate proceeding and, upon application to the court based upon special circumstances, any person whose examination the court determines may provide information with respect to the validity of the will that is of substantial importance or relevance to a decision to file objections to the will or to petition to determine the validity of a trust in the case of a pour over will

(E) The institution of, or the joining or acquiescence in a proceeding for the construction of a will, a trust, or any provision thereof.

The foregoing shall be effective upon enactment, and shall apply to all testamentary and inter vivas trust instruments on or after the effective date.

Memorandum in Support

In terrorem clauses – or so-called “no contest” provisions – are conditions on dispositions in testamentary and inter vivas trust instruments, which are intended to discourage frivolous disputes concerning the validity of the instruments; to settle estates quickly and smoothly; and to prevent waste of estate assets. Under certain circumstances, in terrorem clauses provide for beneficiaries to forfeit their interests in estates or trusts, to the extent that the beneficiaries trigger the conditions contained in the governing instruments. Though disfavored and strictly construed, in terrorem clauses generally are enforceable under New York law.

In order to balance the competing interests of testators to avoid challenges to their testamentary wishes and of beneficiaries to make informed decisions as to the merits of any probate objections they might file, Estates, Powers and Trusts Law (“EPTL”) § 3-3.5 sets forth a non-exhaustive list of “safe harbor” provisions which shield beneficiaries from triggering in terrorem clauses contained in testamentary instruments. Although EPTL § 3-3.S’s safe harbor provisions unquestionably protect beneficiaries under testamentary instruments from triggering in terrorem clauses contained therein, there is no analogous statutory protection for similarly situated beneficiaries under inter vivos trust instruments encompassing in terrorem provisions.

For the reasons explained more fully below, EPTL § 3-3.5 should be amended in the form annexed to this memorandum. Doing so will ensure that EPTL § 3-3.S’s safe harbor provisions apply with equal force to in terrorem clauses contained in testamentary and inter vivas trust instruments alike, as lifetime trusts become more prevalent for estate planning purposes.

EPTL§3-3.5

EPTL § 3-3.5 contains a non-exhaustive list of “safe harbor” provisions, which enumerates “a number of activities that will not result in the forfeiture of a bequest by a beneficiary under a will containing [an in terrorem] clause.” The list includes: (a) “[t]he assertion of an objection to the jurisdiction of the court in which the will was offered for probate”; (b) “[t]he disclosure to any of the parties or to the court of any information relating to any document offered for probate as a last will, or relevant to the probate proceeding”; (c) “[a] refusal or failure to join in a petition for the probate of a document as a last will, or to execute a consent to, or waiver of notice of a probate proceeding”; (d) “[t]he preliminary examination, under (Surrogate’s Court Procedure Act (“SCPA”) § 1404], of a proponent’s witnesses, the person who prepared the will, the nominated executors and the proponents in a probate proceeding and, upon application to the court based upon special circumstances, any person whose examination the court dete1mines may provide information with respect to the validity of the will that is of substantial importance or relevance to a decision to file objections to the will”; and (e) “[t)he institution of, or the joining or acquiescence in a proceeding for the construction of a will or any provision thereof.”

Mindful of the safe harbor provisions set forth in EPTL § 3-3.5, courts have trended toward “[allowing] broad latitude in discovery of matters that could provide the basis for” probate objections. Among other reasons, the courts have done so in order to balance the competing interests of testators who wish to forestall challenges to their wills and of beneficiaries who seek to obtain as much disclosure as possible to make informed decisions on whether to risk triggering in terrorem clauses.

Although EPTL § 3-3.S’s safe harbor provisions unquestionably apply to testamentary instruments, the statute is silent on the issue of whether its protections govern in cases involving in terrorem clauses in inter vivos trust instruments, Given that statutory silence, the recent prevalence of inter vivos trusts for estate planning purposes, and the increased inclusion of in terrorem clauses in lifetime trust instruments, EPTL § 3-3.5 should be amended to reflect that its safe harbor provisions apply to in terrorem clauses in both testamentary and inter vivas trust instruments.

In Terrorem Clauses in Inter Vivos Trusts

With the passage of time, inter vivos trusts have gained increased prevalence for estate planning purposes. Indeed, lifetime trusts “are commonly employed as estate planning tools and are coordinated with [granters’] will[s], functioning in much the same manner as” testamentary instruments. Lifetime trusts may prove desirable for many reasons, including but not limited to the increased privacy afforded to granters’ plans and assets in trust instruments that need not be filed with a court.

Moreover, in cases concerning revocable trusts, Surrogate’s Courts have recognized that such trusts “function essentially as testamentary instruments.” Like testamentary instruments, revocable trusts “are ambulatory during the [grantor’s] lifetime, speak at death to determination of the [grantor’s] property, may be amended or revoked without court intervention and are unilateral in nature.” They are the functional equivalents of testamentary instruments.

Among the other similarities that inter vivas trusts share with testamentary instruments is the inclusion of in terrorem clauses in such instruments. Granters have started including in lifetime trust instruments in terrorem clauses, which provide the trust beneficiaries will forfeit their interests in the trusts, if they contest the validity of wills or trust instruments executed by the grantors.

Considering the increased use of inter vivos trusts in estate planning and the recent inclusion of broad in terrorem clauses in lifetime trusts that purport to prohibit trust beneficiaries from contesting both inter vivos trust and testamentary instruments, it logically follows that the EPTL § 3-3.5 safe harbor provisions governing in terrorem clauses in testamentary instruments should be applied to similar clauses in lifetime trusts.

Application of EPTL § 3-3.S’s Safe Harbor Provisions to Inter Vivos Trusts

Although EPTL § 3-3.5 does not, on its face, apply to inter vivos trust instruments, support exists for extending the protections of its safe harbor provisions to lifetime trusts. The decisions of the Appellate Division, Third Department, in Oakes v. Muka and former New York County Surrogate Kristin Booth Glen in Matter of Shamash are instructive.

In Oakes, in 1994, the decedent created a revocable, lifetime trust, naming himself as the trustee. In 2000, the decedent amended the trust to designate the plaintiff, his daughter-in-law, as successor trustee and named the defendant, his son, among others, as residuary beneficiaries. One year later, in 2001, the decedent-who was unable to care for himself- moved from his home in Texas to the defendant’s home in New York (at the defendant’s urging) in order to avoid being placed in a nursing home or other residential facility. Shortly thereafter, however, the decedent amended the trust to name the defendant as the successor trustee and sole residuary beneficiary, and to make it irrevocable. The decedent was then placed in an assisted living facility.

After the decedent’s death, the plaintiff, the one-time successor trustee of the trust, commenced a state court action against the defendant, Although that action concerned the trust’s validity, it was dismissed for lack of standing due to the fact that the plaintiff was not the successor trustee under the last amendment to the trust. Thereafter, the plaintiff commenced a federal court action against the defendant, which concerned the trust, but was dismissed for lack of subject-matter jurisdiction .

When the plaintiff ultimately commenced a second state court action for a declaration that the prior trust instrument, which named the plaintiff as successor trustee, was in full force and that all subsequent amendments were invalid due to the defendant’s fraud, duress, and undue influence, the defendant moved to dismiss, arguing that the plaintiff lacked standing to sue him, among other things. The Supreme Court declined to dismiss and the Appellate Division affirmed, noting that “the timing and circumstances underlying the complete alteration of the trust and decedent’s other assets, all to the exclusion of his children and grandchildren, warranted its intervention in furtherance of public policy”,

In doing so, the Appellate Division cited one of the safe harbor provisions set forth in EPTL § 3-3.5. The Appellate Division did so, even though Oakes concerned a lifetime trust instrument, not a testamentary instrument, which leads to the conclusion that EPTL § 3-3.5 may

provide safe harbor to beneficiaries under testamentary and inter vivos instruments alike.

Further support for the proposition that the beneficiaries of an inter vivos trust may be entitled to the safe harbor protections of EPTL§ 3-3.5 may be found in Shamash.2In Shamash, former Surrogate Glen dismissed an inter vivos trust beneficiary’s petition to compel a trustee to account, reasoning that the beneficiary triggered the trust’s in terrorem clause by seeking to invalidate both the decedent’s will and the trust in prior Florida proceedings. Despite finding that the beneficiary had triggered the in terrorem clause, however, Surrogate Glen stated that EPTL § 3-3.5 “provides a safe harbor for certain activities that do not trigger a ‘no contest’ provision”, leading, once again, to the conclusion that EPTL § 3-3.5 should provide protection to inter vivos trust beneficiaries, as it does to beneficiaries under testamentary instruments.

In the absence of statutory guidance, EPTL § 3-3.5 should be amended to fill the void in the statute concerning the application of its safe harbor provisions to cases involving inter vivos trusts. Such an amendment will ensure that courts act uniformly in applying EPTL § 3-3.S’s safe harbor provisions to testamentary and lifetime trust instruments containing in terrorem clauses.

Conclusion

As explained above, lifetime trusts have become more prevalent for estate planning purposes in recent years and increasingly contain in terrorem clauses intended to foreclose upon challenges to the instruments’ validity. In order to fill the statutory void that currently exists, EPTL § 3-3.5 should be amended to reflect that its safe harbor provisions protect beneficiaries under testamentary and inter vivos trust instruments alike.

Resolutions

Trusts and Estates Law Section, New York State Bar Association

Opinions expressed are those of the Section preparing these resolutions and do not represent those of the New York State Bar Association unless and until they have been adopted by its Executive Committee.

TO: Executive Committee, New York State Bar Association

FROM: Executive Committee, Trusts and Estates Law Section

DATED: May 3, 2013

RE: Reports for November, 2013 Meeting

RESOLVED, that the NYSBA Trusts and Estates Law Section supports the following amendment:

It is recommended that EPTL § 3-3.5 be amended to read as follows:

(b) A condition, designed to prevent a disposition from taking effect in case the validity of a will or trust is contested by the beneficiary, is operative despite the presence or absence of probable cause for such contest, subject to the following:

(1) Such a condition is not breached by a contest to establish that the will or trust is a forgery or that it was revoked by a later will or trust, provided that such contest is based on probable cause.

(2) An infant or incompetent may affirmatively oppose the probate of a will or contest the validity of a trust without forfeiting any benefit there under.

(3) T11e following conduct, singly or in the aggregate, shall not result in the forfeiture of any benefit under the will or trust:

(A) The assertion of an objection to the jurisdiction of the court in which a will was offered for probate.

(C) A refusal or failure to join in a petition for the probate of a document as a last will, or to execute a consent to, or waiver of notice of a probate proceeding.

(D) The preliminary examination, under SCPA 1404, of a proponent’s witnesses, the person who prepared the will, the person who prepared a trust in the case of a pour over will, the nominated executors and the proponents in a probate proceeding and, upon application to the court based upon special circumstances, any person whose examination the court determines may provide information with respect to the validity of the will that is of substantial importance or relevance to a decision to file objections to the will or to petition to determine the validity of a trust in the case of a pour over will.

(E) The institution of, or the joining or acquiescence in a proceeding for the construction of a will, a trust, or any provision thereof.

RESOLVED, that the NYSBA Trusts and Estates Law Section is in favor of the above amendment for the reasons set forth in the accompanying Memorandum in Support, without further comment.

Resolution Prepared By: Ilene S. Cooper, Robert M. Harper, Jennifer F. Hillman, Ian W. MacLean, and Lori A. Sullivan

Approved By: Vote of the Executive Committee of the NYSBA Trusts and Estates Law Section

Section Chair: Carl Baker, Esq.

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