In re Heller, 6 N.Y.3d 649 (2006)
A trustee who is also a remainder beneficiary is not automatically barred from electing unitrust status for a trust, but such an election will be subject to heightened scrutiny by the courts to ensure fairness to all beneficiaries.
Summary
This case concerns a trustee’s ability to elect unitrust status for a trust under New York’s EPTL 11-2.4, even when the trustee is also a remainder beneficiary. Jacob Heller created a trust for his wife, Bertha, with his sons, Herbert and Alan, as trustees after his brother’s death, and his daughters and sons as remainder beneficiaries. The trustees elected unitrust status, reducing Bertha’s income. Bertha challenged the election, arguing the trustees’ self-interest invalidated it. The Court of Appeals held that a trustee’s status as a remainder beneficiary does not automatically invalidate the election, but it necessitates careful scrutiny. The court also decided that the unitrust election could be applied retroactively.
Facts
Jacob Heller’s will created a trust for his wife, Bertha, with income paid to her during her life. The remainder would be split between his four children. He appointed his brother Frank as trustee, followed by his sons, Herbert and Alan. After Frank’s death, Herbert and Alan became trustees. Bertha’s average annual income was approximately $190,000. In 2003, the trustees elected unitrust status, applying it retroactively to January 1, 2002. This reduced Bertha’s annual income to approximately $70,000.
Procedural History
Sandra Davis, Bertha’s attorney-in-fact, moved for summary judgment to annul the unitrust election and remove Herbert and Alan as trustees. Surrogate’s Court voided the retroactive application but denied the other relief requested. Davis appealed, and the Hellers cross-appealed. The Appellate Division affirmed the denial of Davis’s motion and reversed the annulment of the retroactive application. The Court of Appeals granted leave to appeal.
Issue(s)
1. Whether trustees who are also remainder beneficiaries are barred from electing unitrust status for a trust.
2. Whether trustees can elect unitrust status retroactively to January 1, 2002, the effective date of EPTL 11-2.4.
Holding
1. No, because the Legislature did not include a prohibition against interested trustees electing unitrust treatment in EPTL 11-2.4, unlike a similar prohibition in EPTL 11-2.3(b)(5) regarding adjustments between principal and income.
2. Yes, because the Legislature structured EPTL 11-2.4 to allow for retroactive application, giving trustees the authority to specify the effective date of unitrust elections.
Court’s Reasoning
The Court reasoned that the 2001 legislation aimed to facilitate investment for total return under the Prudent Investor Act. While the common law prohibits self-dealing by fiduciaries, the trustees here owed duties to all remainder beneficiaries, not just themselves. The Court emphasized that the absence of a specific prohibition against interested trustees in EPTL 11-2.4, in contrast to EPTL 11-2.3(b)(5), indicated legislative intent not to create a per se ban. The court noted, “the trustees owe fiduciary obligations not only to the trust’s income beneficiary, Bertha Heller, but also to the other remainder beneficiaries, Suzanne Heller and Faith Willinger. That these beneficiaries’ interests happen to align with the trustees’ does not relieve the trustees of their duties to them.” However, the Court cautioned that such elections would be subject to close scrutiny to ensure fairness, referencing EPTL 11-2.4 (e) (5) (A) factors. Regarding retroactivity, the Court pointed to EPTL 11-2.4(b)(6), which instructs trustees to determine the unitrust amount payable for any preceding year. The court stated that this provision “envisages retroactive application of a unitrust regime. The required recomputation of preceding years’ beneficial interests would serve no purpose if retroactive application were barred.”