New York Law Review

Tag: inter vivos trust

  • In re Gilbert, 39 N.Y.2d 663 (1976): Interpreting Inter Vivos Trusts and Grantor Intent

    In re Gilbert, 39 N.Y.2d 663 (1976)

    When interpreting an inter vivos trust, a court must ascertain and give effect to the grantor’s intent as manifested in the trust documents, especially when tax considerations appear to have influenced the grantor’s decisions.

    Summary

    This case concerns the interpretation of two trust instruments executed by Abbey E. Gilbert, specifically whether an “addendum” to the original trust created a separate trust that terminated after ten years, or whether it amended the original trust. The court held that the addendum created a separate trust, terminating ten years after its creation, due to the grantor’s clear intent to obtain tax advantages associated with Clifford trusts, the explicit language of the addendum, and the lack of proper consent for amending the original trust. This decision upheld the grantor’s probable intention and ensured the intended tax benefits.

    Facts

    On December 28, 1961, Abbey E. Gilbert created an irrevocable trust (the “Trust Indenture”) naming Elizabeth M. Guenther, his wife, as the income beneficiary for life, with a provision for his children to receive income if she died within ten years. The trust corpus would revert to Gilbert, if living, or to his children. Elizabeth consented to this trust. Eleven days later, on January 8, 1962, Gilbert executed an “Addendum,” conveying identical securities to the same trustees, stating the term was “for a period of ten years from the date of this Addendum * * * and not longer.” Elizabeth did not consent to the addendum. Gilbert died in 1964.

    Procedural History

    In 1973, Gilbert’s children petitioned for a construction of the “addendum” to terminate on January 8, 1972. Elizabeth opposed, arguing it should be part of the original trust which existed for her lifetime. Special Term held that the “addendum” terminated on January 8, 1972. The Appellate Division affirmed. This appeal followed.

    Issue(s)

    1. Whether the “Addendum” to the trust created a separate trust that terminated ten years from its creation, or whether it amended the original trust to extend for the life of Elizabeth?

    Holding

    1. Yes, the “addendum” created a separate trust terminating on January 8, 1972, because the grantor’s intent, as evidenced by the instruments, was to secure tax advantages associated with Clifford trusts; the addendum explicitly stated a ten-year term “and no longer”; and Elizabeth did not properly consent to an amendment of the original trust.

    Court’s Reasoning

    The court emphasized that the grantor’s intent, as evidenced by the instruments themselves, is paramount in construing an inter vivos trust. The court noted the grantor’s likely intent to establish a Clifford trust, which allows trust income to be taxed to someone other than the grantor while allowing the grantor to retain management and receive the principal upon termination. To qualify as a Clifford trust, the reversionary interest must not take effect within ten years or until the income beneficiary’s death. Here, the court found the 11-day gap between the two instruments suggested the grantor aimed for the $3,000 annual federal gift tax exclusion. While the first instrument provided for an alternative termination date (Elizabeth’s death), the second explicitly stated a ten-year term “and not longer.” The court reasoned that the second instrument could not amend the first without Elizabeth’s properly executed written consent, which was lacking. The court stated: “In fact, the second instrument could not have served as an amendment, since our statutes require that there must be a properly executed written consent to an amendment of a trust by all persons beneficially interested in it.” Furthermore, construing the second instrument as a separate trust upheld the instrument, in line with the principle that “where two different constructions are possible, that is to be chosen which upholds and does not destroy the instrument.” The court emphasized that termination of the second trust after ten years would not cause the corpus to vest in unintended beneficiaries, as the children were the contingent beneficiaries under both instruments. The court concluded that the operative language of the second instrument, rather than its title, governed, affirming the lower court’s decision.

  • Seidel v. Werner, 81 Misc. 2d 220 (N.Y. 1975): Enforceability of Agreement to Exercise Power of Appointment

    Seidel v. Werner, 81 Misc. 2d 220 (N.Y. 1975)

    An agreement to exercise a power of appointment that is not presently exercisable is unenforceable under EPTL 10-5.3, regardless of whether the power is associated with a testamentary or inter vivos trust and even if the donee of the power is also the grantor of the trust, provided the grantor does not retain an unlimited power to revoke the trust.

    Summary

    This case concerns the enforceability of a decedent’s agreement to exercise two testamentary powers of appointment in favor of his son. The decedent had agreed in 1944 to exercise these powers, associated with both a testamentary trust from his mother and an inter vivos trust he created himself, but his 1964 will appointed the trust assets to his estate, excluding his son. The court held that under EPTL 10-5.3, the agreement was unenforceable for both trusts because the statute prohibits contracts to appoint powers not presently exercisable. The court reasoned that while an exception might exist where the grantor-donee retains unlimited power to revoke the trust, this was not the case here, and the statute’s prohibition applied regardless of the grantor-donee relationship when such revocation power is absent.

    Facts

    The decedent was the donee of two powers of appointment: one over a testamentary trust created by his mother’s will, and another over an inter vivos trust he created. In 1944, to resolve family issues, the decedent agreed to exercise these powers in favor of his son, James, and executed a will reflecting that agreement. However, in 1964, the decedent executed a new will that appointed the assets of both trusts to his estate, effectively disinheriting his son.

    Procedural History

    The son sought to enforce the 1944 agreement after the decedent’s death. The Surrogate’s Court held the agreement unenforceable under EPTL 10-5.3 for both trusts. The Appellate Division reversed in part, enforcing the agreement against the inter vivos trust but upholding the Surrogate’s decision regarding the testamentary trust. The New York Court of Appeals reversed the Appellate Division, reinstating the Surrogate’s Court decision.

    Issue(s)

    Whether EPTL 10-5.3 renders unenforceable an agreement to exercise a testamentary power of appointment when the donee of the power is also the grantor of an inter vivos trust, and the grantor does not have an unlimited power to revoke the trust?

    Holding

    No, because EPTL 10-5.3 applies to both testamentary and inter vivos trusts, prohibiting the enforcement of agreements to exercise powers of appointment that are not presently exercisable, even when the donee is also the grantor, provided the grantor lacks an unlimited power of revocation. The explicit provisions of EPTL 10-5.3 apply, and the decedent’s agreement is unenforceable.

    Court’s Reasoning

    The court’s reasoning centered on the interpretation and application of EPTL 10-5.3, which states that a donee of a power of appointment that is not presently exercisable cannot contract to make an appointment. The court acknowledged the argument that the statute might primarily target powers created by someone other than the donee but declined to create a broad exception for inter vivos trusts where the donee is also the grantor. The court suggested that if the grantor had an unlimited power to revoke the trust, the statute’s proscription could be circumvented. However, because the decedent’s 1927 inter vivos trust did not provide such a power, and revocation was not possible under the applicable pre-1951 law due to the contingent remaindermen’s interests, EPTL 10-5.3 applied. The court found the rights of creditors (under EPTL 10-7.4) distinct from those of the grantor-donee in determining enforceability of the agreement. The court emphasized that without a reserved or implied power of revocation, the decedent lacked sufficient dominion over the trust assets to warrant an exception to EPTL 10-5.3. The court stated: “…to say that where the grantor had power to revoke and thus to recapture the trust assets, he nevertheless could not agree to appoint the same assets, would be to exalt form over substance.” The court ultimately held that the agreement to exercise the powers of appointment was unenforceable for both trusts.

  • King v. Pelkofski, 20 N.Y.2d 302 (1967): Equitable Subrogation and Undisclosed Trust Interests

    King v. Pelkofski, 20 N.Y.2d 302 (1967)

    A mortgagee who uses loan proceeds to discharge prior encumbrances is entitled to equitable subrogation to the extent that the funds benefited a party with an undisclosed interest in the property, even if the mortgagee was unaware of that interest.

    Summary

    Rose King, a mortgagee, sought to foreclose on a bowling alley owned by Joseph Pelkofski. Joseph’s wife, Genevieve, claimed a prior beneficial interest via an inter vivos trust. Joseph had borrowed from King, using the funds to pay off prior mortgages, loans, and taxes. King was unaware of the trust. The court addressed whether King was entitled to equitable subrogation for the amounts used to discharge those prior debts, some of which Genevieve was also liable for. The court held that King was entitled to subrogation, as Genevieve would be unjustly enriched if she benefited from the loan proceeds without King being able to recover.

    Facts

    Joseph Pelkofski owned a bowling alley. He obtained a mortgage from National Bank of Kings Park in 1961. Joseph and Genevieve, his wife, then executed an inter vivos trust, granting Genevieve a beneficial interest in the property, which was recorded later. Subsequently, Joseph and Genevieve took out loans from Valley National Bank and Edna Stoothoff. In 1963, Joseph borrowed $75,000 from Rose King, secured by mortgages on the bowling alley. Joseph used King’s loan to pay off the original mortgage, the Valley National Bank loan, the Stoothoff loan (secured by Genevieve’s property), and property taxes. Joseph defaulted on King’s mortgage.

    Procedural History

    King sued to foreclose. The trial court dismissed the complaint, finding the trust valid and King not entitled to subrogation. The Appellate Division reversed, granting subrogation for the initial mortgage and taxes paid. Both parties appealed. The Court of Appeals initially dismissed the appeal as non-final. After the trial court determined the total lien amount, the appeals were renewed.

    Issue(s)

    Whether a mortgagee who uses loan proceeds to discharge prior encumbrances on a property is entitled to equitable subrogation to the extent that the funds benefited a party with an undisclosed beneficial interest in the property, even if the mortgagee was unaware of that interest, specifically including prior loans cosigned by the beneficiary and used for the business.

    Holding

    Yes, because the party with the undisclosed interest would be unjustly enriched if they benefited from the discharge of prior encumbrances without the mortgagee being able to recover the funds expended for that purpose. This extends to prior loans cosigned by the beneficiary and used for the business.

    Court’s Reasoning

    The court relied on the principle of restitution: “Where property of one person is used in discharging an obligation owed by another or a lien upon the property of another, under such circumstances that the other would be unjustly enriched by the retention of the benefit thus conferred, the former is entitled to be subrogated to the position of the obligee or lien-holder.” The court reasoned that Genevieve would be unjustly enriched if King were not subrogated to the rights of the prior creditors whose debts were paid off with King’s loan. Genevieve was a co-signer on the Valley National Bank and Stoothoff loans, and her separate property was pledged as security for the Stoothoff loan. Even though the Appellate Division considered them ‘personal obligations,’ the Court of Appeals noted these loans benefited the business. The court cited cases where subrogation was allowed when a mortgagee’s funds satisfied a senior encumbrance unknown to the mortgagee. The court emphasized fairness, stating that equity would preserve the senior encumbrance for King’s benefit. The court modified the Appellate Division’s judgment to include subrogation for the Valley National Bank and Stoothoff loans, finding it illogical and inequitable to deny it since those loans also benefited Genevieve’s interests. The court’s decision ensures that King is compensated for the funds used to enhance the value of the property in which Genevieve held a beneficial interest.