New York Law Review

Tag: power of appointment

  • In re Estate of Reynolds, 87 N.Y.2d 633 (1996): Testamentary Substitutes and Retained Powers of Appointment

    In re Estate of Reynolds, 87 N.Y.2d 633 (1996)

    A trust in which the deceased spouse retained a limited power of appointment, excluding herself, her spouse, her creditors, or her estate, constitutes a testamentary substitute subject to the surviving spouse’s right of election under EPTL 5-1.1.

    Summary

    This case concerns whether an inter vivos trust, where the deceased spouse retained a limited power of appointment, is a testamentary substitute that violates the surviving spouse’s right of election. The Court of Appeals held that such a trust does constitute a testamentary substitute. Dorothy Reynolds created a trust, retaining the right to appoint beneficiaries (excluding herself, her spouse, etc.), and transferred most of her assets to it. Upon her death, her husband, William Reynolds, exercised his right of election, challenging the exclusion of the trust assets from the estate. The Court determined that the retained power of appointment gave Dorothy Reynolds meaningful control over the trust during her lifetime, making it a testamentary substitute subject to the elective share.

    Facts

    Dorothy Reynolds created an inter vivos trust to qualify for Medicaid, naming her children as trustees and remainder beneficiaries. She transferred the majority of her assets to the trust but retained the right to appoint remainder beneficiaries, excluding herself, her spouse, her creditors, or her estate. The trust terminated one day before her death. She left her entire estate to her children from a previous marriage. Her husband, William Reynolds, exercised his right of election, claiming the trust assets should be included in the estate for calculating his elective share.

    Procedural History

    The Surrogate’s Court initially admitted Dorothy Reynolds’ will to probate and gave effect to William Reynolds’ notice of election. William Reynolds then objected to the exclusion of the trust assets from the estate accounting. The Surrogate sustained the objection, including the trust assets in the estate. The Appellate Division reversed, holding the trust was not a testamentary substitute. The Court of Appeals granted leave to appeal.

    Issue(s)

    Whether an inter vivos trust, in which the deceased spouse retained a limited power of appointment (excluding herself, her spouse, her creditors, or her estate), constitutes a testamentary substitute subject to the surviving spouse’s right of election under EPTL 5-1.1?

    Holding

    Yes, because Dorothy Reynolds’ retained power of appointment, though limited, left her with meaningful control over the trust during her lifetime, contravening the statute’s intended protection for surviving spouses.

    Court’s Reasoning

    The Court focused on EPTL 5-1.1(b)(1)(E), which defines testamentary substitutes as transfers where the decedent retained a power to revoke or dispose of the principal at the date of death. The legislative intent behind this statute was to prevent the circumvention of the surviving spouse’s right of election through inter vivos transfers. The Court emphasized that the settlor’s retained power allowed her to essentially make testamentary transfers to specific beneficiaries of her choosing, which is equivalent to a power to dispose of the principal. The court distinguished Matter of Crystal, noting that it predated the relevant testamentary substitute statute. The fact that the power of appointment terminated one day before death was deemed an illusory limitation, as the termination date was temporally indeterminate until after the settlor’s death. The Court found that a narrow construction of the statute would frustrate the legislature’s remedial intent to protect surviving spouses. The court stated, “This was a functional substitute allowing disposal of the entire trust corpus by way of one or a series of specific bequests that constitute a forbidden reserved ‘power to consume, invade or dispose’ (EPTL 5-1.1 [b] [1] [E]).”

  • Matter of Snowden, 39 N.Y.2d 322 (1976): Adoptees’ Inheritance Rights Under Trust Agreements

    Matter of Snowden, 39 N.Y.2d 322 (1976)

    When a trust agreement grants beneficiaries a broad power of appointment, indicating a lack of strict adherence to bloodlines, adopted children may be included in the term “issue” for inheritance purposes, even under former Section 114 of the Domestic Relations Law.

    Summary

    This case concerns whether adopted children can inherit from a trust established in 1922, based on the interpretation of “issue” in the trust agreement and the application of former Section 114 of the Domestic Relations Law. The court held that because the trust agreement gave beneficiaries a broad power to appoint the trust corpus to anyone they chose, the settlor demonstrated a lack of strict adherence to bloodlines, implying an intent to include adopted children within the definition of “issue.” Thus, the adopted children were entitled to their deceased father’s share of the trust.

    Facts

    James and Marian Snowden created a separation and trust agreement in 1922, funding a trust for the benefit of Marian and their children. Upon Marian’s death, the trust corpus was to be divided per stirpes among the surviving children and the “issue” of any deceased child. Each child’s share was held in trust with distributions at ages 30, 35, and 40. If a child died before the trust terminated, their share would be paid to appointees by will, or lacking that, to their living “issue,” or lacking that, to their next of kin. James Snowden died in 1930, Marian in 1969. One daughter died in 1943 survived by natural children. The son died in 1964 survived by two adopted children. Another daughter, childless, survived her mother.

    Procedural History

    The case began as a proceeding to settle the trustee’s account after Marian Snowden’s death. The lower court ruled against the adopted children, denying them their father’s share of the trust. The Appellate Division affirmed, with a divided court. The dissenting justices in the Appellate Division disagreed, leading to this appeal to the New York Court of Appeals.

    Issue(s)

    Whether, under the terms of the 1922 trust agreement and considering former Section 114 of the Domestic Relations Law, the term “issue” includes adopted children, thereby entitling them to inherit their deceased father’s share of the trust corpus.

    Holding

    Yes, because the settlor granted his children a broad power of appointment, demonstrating an intent not to limit inheritance strictly to blood relatives, which implies that adopted children should be included within the meaning of “issue.”

    Court’s Reasoning

    The court reasoned that the “precautionary addendum” of former Section 114, which restricted adopted children’s inheritance rights to protect remaindermen, should be narrowly construed. The court cited Matter of Rockefeller (12 N.Y.2d 124) stating it did not apply if it “affirmatively” appeared from the context of the trust instrument or from extraneous facts “that the grantor intended to include adopted children”. The court emphasized that the key consideration is the settlor’s intent. Here, the settlor’s grant of a broad power of appointment to his children indicated he was not solely concerned with preserving the trust corpus for his bloodline. As the court stated, “Since the settlor had authorized his child to appoint those not of his blood, it is difficult to believe that he did not intend adopted, as well as natural, children to be included in the word, ‘issue,’ wherever used in the trust instrument.” The court distinguished cases like Matter of Carll, where the trust explicitly limited the remainder to the grantor’s bloodlines. The court also noted the 1963 amendment to the Domestic Relations Law, which favored including adopted children in generic terms like “issue,” unless the instrument specifically provided otherwise, reflecting a public policy of integrating adopted children into their new families for inheritance purposes.

  • In re Acheson’s Trust, 28 N.Y.2d 155 (1971): Full Faith and Credit to Domiciliary’s Will Construction

    In re Acheson’s Trust, 28 N.Y.2d 155 (1971)

    A New York court must give full faith and credit to a California court’s construction of a will executed by a California domiciliary, especially when the interested parties have submitted to the California court’s jurisdiction, even if the will exercises a power of appointment over a New York trust.

    Summary

    This case concerns the application of full faith and credit to a California court order construing the will of a California domiciliary, Acheson, which exercised a power of appointment over a trust located in New York. Acheson’s will created a trust for his daughter, Linda Belle, potentially violating the rule against perpetuities. The California court construed the will to avoid this violation. Acheson’s other children challenged this in New York. The New York Court of Appeals held that the California court’s construction was entitled to full faith and credit because the California court had personal jurisdiction over the contesting parties, and its interpretation of the testator’s intent was binding.

    Facts

    Margaret Maher Acheson created a trust in New York with Morgan Guaranty as trustee, providing a life interest for her son, Edward Jr., then a share for her grandson, Acheson, with a power of appointment to Acheson. Acheson, domiciled in California, died in 1965, exercising the power of appointment in his will to create trusts for his wife, Helen, and daughter, Linda Belle. Linda Belle’s trust was to last for 21 years after the death of the last survivor of his wife, daughter, and the daughter’s children living at his death, potentially violating the rule against perpetuities.

    Procedural History

    Morgan Guaranty initiated a proceeding in New York to settle its account. Acheson’s executor, Bank of America, started an heirship proceeding in California to construe the will to avoid violating the rule against perpetuities. The New York court stayed its proceeding pending the California decision. The California court construed the will to terminate Linda Belle’s trust 21 years after Helen’s death. Acheson’s other children sought relief from the California order, which was denied. The New York Special Term gave full faith and credit to the California order, which the Appellate Division affirmed.

    Issue(s)

    Whether a California court order construing the will of a California domiciliary, which exercises a power of appointment over a New York trust, is entitled to full faith and credit in New York, where the construction avoids a potential violation of the rule against perpetuities and the interested parties submitted to the California court’s jurisdiction.

    Holding

    Yes, because the California court had personal jurisdiction over the appellants, and the full faith and credit clause requires New York to respect the California court’s interpretation of the testator’s intent under California law.

    Court’s Reasoning

    The court reasoned that New York law dictates that the law of the testator’s domicile governs the interpretation of their will regarding personal property. Since Acheson was domiciled in California, California law controls the interpretation of his will. The California Superior Court, with full authority to interpret wills of California domiciliaries, construed Acheson’s will to terminate the trust for Linda Belle within 21 years after Helen’s death, thus avoiding the rule against perpetuities.

    The court emphasized that the appellants, Acheson’s other children, had submitted to the California court’s jurisdiction by seeking to vacate the instruction order, constituting a general appearance. This barred them from re-litigating the issue in New York. The court quoted Milliken v. Meyer, 311 U.S. 457, 462, stating that courts in other states are precluded from “any inquiry into the merits of the cause of action, the logic or consistency of the decision, or the validity of the legal principles on which the judgment is based.”

    The court also addressed the argument that Morgan Guaranty, the New York trustee, was an indispensable party in the California proceeding. It stated that the California court did not rule on the validity of the trust indenture itself or Acheson’s exercise of his power of appointment, so the trustee was not a necessary party. The California court merely directed the California executor to receive the trust corpus if and when the New York court ordered the turnover.

    In conclusion, the court found that the California instruction order, to the extent it interprets the will by finding an intention to limit the duration of the trusts to avoid violating the rule against perpetuities, is entitled to full faith and credit concerning all appellants in the New York proceeding. The court noted, “[P]arties may not a second time challenge the validity of their adversaries’ right which has ripened into a judgment.”

  • In re Estate of King, 22 N.Y.2d 470 (1968): Tax Apportionment and Powers of Appointment

    In re Estate of King, 22 N.Y.2d 470 (1968)

    A testator can direct that the estate tax burden generated by a power of appointment, even if unexercised, be borne by the appointive property, and this direction can extend to requiring charitable beneficiaries of the appointive property to pay their proportionate share of such taxes.

    Summary

    Albert King’s will addressed the estate tax implications of a power of appointment granted to him in his wife Grace’s will. Albert chose not to exercise this power, which would have distributed a trust to charities and a secondary trust for his daughter. His will stipulated that taxes on his estate, excluding the appointive property, be paid from his residuary estate, while the excess taxes generated by the appointive property should be paid from the appointive property itself. The Surrogate initially ruled that Albert couldn’t shift the tax burden to the appointive property without exercising the power. The Court of Appeals reversed, holding that Albert’s will validly directed the appointive property to bear the tax burden and that the charities must pay their proportionate share of the tax.

    Facts

    Grace King’s will created a marital-deduction trust for her husband, Albert, granting him a testamentary power of appointment over the trust’s principal, exercisable only via a will executed after Grace’s death.
    In default of appointment, the trust principal was to be divided, with one-third going to named charities and two-thirds to a trust for their daughter, Louise.
    Albert King’s will left his New York property to his daughter, explicitly stating that it was not an exercise of his power of appointment.
    However, Albert’s will acknowledged that the appointive property would be included in his estate for tax purposes and specified that the excess taxes resulting from the inclusion of the appointive property should be paid from the principal of that property.
    Albert died without exercising the power of appointment; the appointive fund was valued at approximately $2,500,000, while Albert’s gross estate was approximately $88,000.

    Procedural History

    After Albert’s death, disputes arose regarding the allocation of estate taxes between Albert’s estate and the appointive property.
    The Surrogate’s Court concluded that Albert could not shift the tax burden to the appointive property without exercising his power of appointment and ordered ratable apportionment of the tax between Albert’s residuary estate and the appointive fund.
    The Appellate Division affirmed the Surrogate’s decision.
    The New York Court of Appeals reversed, holding that Albert’s will effectively directed the appointive property to bear the entire burden of taxation generated by the power of appointment and that the charities must pay their proportionate share of the taxes.

    Issue(s)

    Whether a testator can direct that the estate tax burden generated by a power of appointment, even if unexercised, be borne by the appointive property.
    Whether such a direction can require charitable beneficiaries of the appointive property to pay their proportionate share of such taxes.

    Holding

    Yes, because Section 2207 of the Internal Revenue Code allows the testator to “direct otherwise” regarding the apportionment of taxes generated by a power of appointment.
    Yes, because the testator’s direction in his will indicated that the entire excess of taxes attributable to the appointive fund would be paid from the principal of the property, without distinguishing between the shares distributable to the charities and the daughter’s trust.

    Court’s Reasoning

    The Court recognized that apportionment of taxes is generally a matter of state law, but that federal law governs the apportionment of taxes attributable to property subject to a power of appointment under Section 2207 of the Internal Revenue Code.
    Section 2207 allows a testator to direct otherwise regarding the apportionment of taxes generated by the power of appointment. The court interpreted the language “unless the decedent directs otherwise in his will” broadly, concluding that it allows the testator to charge the appointive property with more than its prorata share of taxes.
    The Court rejected the Surrogate’s interpretation that the testator had to exercise the power of appointment to shift the tax burden, noting that the considerations prompting Congress to enact Section 2207 are present whether or not the power is exercised. The court emphasized that if a donee could not shift the taxes generated by the power of appointment to the appointive property, his own estate would be diminished, often to the detriment of the natural objects of his bounty, by taxes on property which was not his and which did not pass under his will.
    The Court distinguished Matter of Shubert, emphasizing that Shubert involved a statutory policy favoring exoneration of charitable bequests from taxes, whereas Section 2207 allows a testator to direct a contrary outcome.
    The Court found that Albert King’s will clearly directed that the charities bear their prorata share of the taxes, as he treated the principal of the appointive property as a single fund without distinguishing between the shares distributable to the charities and the share distributable to his daughter’s trust. The Court noted Internal Revenue Code § 2055(c), recognizing that a charity may have to contribute to a tax, in which event the amount contributed is not allowable as a charitable deduction.

  • In re Slosson’s Estate, 216 N.Y. 79 (1915): Elective Inheritance Rights Under Power of Appointment

    In re Slosson’s Estate, 216 N.Y. 79 (1915)

    When a will grants a power of appointment and the donee partially exercises that power, beneficiaries who would have taken in default of appointment can elect to take under the original will for the portion they would have received in default, even if the donee validly appointed a portion of the estate to others.

    Summary

    This case addresses whether children can elect to take under the original grantor’s will when their mother (the donee of a power of appointment) partially exercises that power, diverting some of the trust estate to other beneficiaries. The court held that the children could elect to take under the original will for the portion they would have received in default of appointment, despite the mother’s partial exercise of the power. This is consistent with the principle that a valid, partial exercise of a power of appointment does not preclude beneficiaries from taking the remaining portion under the original grant.

    Facts

    Peter Naylor’s will created a trust for Josephine Slosson, granting her the power to dispose of the trust estate via her will. The will stipulated that if Josephine did not exercise this power, the trust estate would pass to those who would have received it had Josephine died intestate and owning the property. Josephine’s will disposed of about two-thirds of the trust estate to her children (who would have taken in default) and about one-third to others. The children elected to take the two-thirds share under Naylor’s will, not their mother’s.

    Procedural History

    The Surrogate’s Court held that Josephine’s will was a valid disposition of the trust estate due to the diversion of one-third to other beneficiaries and thus the children’s shares were subject to a transfer tax. The Appellate Division affirmed this conclusion. The case then went to the New York Court of Appeals.

    Issue(s)

    Whether the valid disposition by Josephine of a portion of the trust estate to individuals who could only receive it through such disposition negates the right of her children to elect to take the remaining portion of the trust estate under the original will of Naylor?

    Holding

    No, because the valid exercise of a power of appointment as to a part of a trust estate, coupled with either an ineffectual attempt or a failure to exercise it as to the remaining part, does not prevent those entitled from receiving their shares under the original will, as diminished by the exercise of the power.

    Court’s Reasoning

    The court relied on the principle established in Matter of Ripley, 192 N.Y. 536, which held that a valid exercise of a power of appointment regarding a portion of a trust estate, coupled with a failure to exercise it for the balance, does not preclude those entitled from taking their shares under the grantor’s will. The court stated that “It is immaterial whether there is a neglect or failure to exercise the power as to the balance of the trust estate, or an attempt to exercise it ineffectual because of the refusal of the donees to accept the disposition. In either of such cases, there is a failure of disposition under the appointment and the original will effects the transfer of the part of the trust estate undisposed of.” The court also referenced Matter of Lansing, 182 N.Y. 238, clarifying that beneficiaries are not forced to take under the power of appointment if they would have taken in default. Here, the children could elect to take under Naylor’s will for the two-thirds they would have received in default, irrespective of Josephine’s partial appointment to others. The order of the Appellate Division was reversed, and the case was remitted to the Surrogate’s Court to modify its order by deducting the value of the children’s shares from the taxable estate.

  • In re Dows’ Estate, 167 N.Y. 227 (1901): Taxation of Property Transfers Under Powers of Appointment

    In re Dows’ Estate, 167 N.Y. 227 (1901)

    The exercise of a power of appointment by will is a taxable transfer, and the tax is determined by the form of the property at the time the power is exercised, not when the power was created; vested remainders are subject to present taxation even if enjoyment is postponed.

    Summary

    This case addresses whether the exercise of a power of appointment is a taxable transfer under New York’s Taxable Transfer Act, and when such taxes are due. The Court of Appeals held that the exercise of the power of appointment by will is a taxable event. The tax is applied to the property’s form at the time the power is exercised, not when the power was granted. Further, the court found that vested remainders are subject to present taxation, even if the actual possession is delayed. This decision clarifies the application of transfer taxes to property passing through powers of appointment and provides guidance on the timing of taxation for vested remainders.

    Facts

    David Dows, Sr., devised property in trust to his son, David Dows, Jr., for life, granting Dows, Jr., a power of appointment to designate his children as beneficiaries in his will. If Dows, Jr., died intestate, the property would pass to his surviving children. Dows, Jr., exercised this power in his will, granting life estates to three sons with shifting remainders to each other, effectively giving each son one-third of the property absolutely, but with staggered enjoyment. The surrogate imposed a tax on the property transferred under this power of appointment.

    Procedural History

    The Surrogate’s Court imposed a tax on the property passing under the power of appointment. The Appellate Division affirmed the Surrogate’s order. The case was then appealed to the New York Court of Appeals.

    Issue(s)

    1. Whether the tax imposed on transfers made under a power of appointment is a tax on property or on the right of succession, and thus applicable to property invested in tax-exempt securities?
    2. Whether the property’s form at the time of David Dows, Sr.’s death (real estate, which was then exempt) or at the time of David Dows, Jr.’s exercise of the power (personalty) controls taxability?
    3. Whether the remainders created in David Dows, Jr.’s will are subject to taxation before the precedent life estates terminate and the remainders vest in possession?

    Holding

    1. Yes, because the tax is on the right of succession, not the property itself.
    2. No, because the form of the property at the time of the execution of the power of appointment controls.
    3. Yes, because the remainders are vested and their value can be readily computed.

    Court’s Reasoning

    The court reasoned that the tax imposed under the Taxable Transfer Act is a tax on the privilege of succeeding to property, not a direct tax on the property itself. Citing Magoun v. Illinois Trust & Sav. Bank, the court emphasized that “the right to take property by devise or descent is the creature of the law, and not a natural right—a privilege, and, therefore, the authority which confers it may impose conditions upon it.” Therefore, the tax applies even to assets that would otherwise be exempt from property tax.

    Regarding the timing and nature of the property, the court distinguished this case from Matter of Sutton, noting that here, at the time of the exercise of the power of appointment, the property was personalty. Since the taxable event is the execution of the power, the state of the property at that time governs.

    The court determined that the remainders created in David Dows, Jr.’s will were presently taxable because they were vested and their value could be readily computed using annuity tables. The court distinguished Matter of Hoffman, stating that those remainders were contingent. The remainders in this case were absolute and not subject to divestment. As such, they fell outside the exception for contingent interests and were subject to immediate taxation.

    The court emphasized the practical impact of its decision, noting that the remainders were alienable, devisable, and descendible, further solidifying their character as presently taxable interests.