New York Law Review

Tag: Testamentary Substitute

  • 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]).”

  • In re Estate of Riefberg, 58 N.Y.2d 136 (1983): Stockholder Agreements as Testamentary Substitutes

    In re Estate of Riefberg, 58 N.Y.2d 136 (1983)

    A buy-sell provision of a corporate stockholder’s agreement, amended shortly before death to divert proceeds directly to beneficiaries other than the estate, can be a testamentary substitute subject to a surviving spouse’s right of election under EPTL 5-1.1.

    Summary

    The New York Court of Appeals addressed whether a buy-sell agreement, amended just before the decedent’s death, constituted a testamentary substitute subject to the surviving spouse’s elective share. The decedent, Sid Riefberg, amended a stockholder agreement to direct payment of his shares’ value to his former wife and her children instead of his estate, thereby circumventing his current wife’s (Maria’s) right of election. The court held that the amended agreement was indeed a testamentary substitute, emphasizing the decedent’s control over the disposition of the property and the agreement’s impact on estate assets available to the surviving spouse. The court also upheld the lower court’s finding that Maria had not abandoned the decedent, thereby preserving her right to election.

    Facts

    Sid Riefberg’s will left the bulk of his estate to his former wife, Henrietta, and her children, with only a small bequest to his daughter from his second wife, Maria. Sid and his brother were equal shareholders in a close corporation. The original stockholder agreement mandated the corporation to purchase a deceased shareholder’s stock, with proceeds going to the estate. Shortly before Sid’s death, the agreement was amended to direct payment for Sid’s shares to Henrietta and her children, bypassing the estate. Maria had requested that the locks be changed on the marital apartment, and the couple was living apart at the time of Sid’s death.

    Procedural History

    Maria filed a spousal election, which Henrietta (as executrix) challenged based on alleged abandonment. The Surrogate’s Court ruled in Maria’s favor on the abandonment issue. Maria then initiated a proceeding to determine if the stockholder agreement constituted a testamentary substitute. The Surrogate’s Court found it to be a testamentary substitute and directed Henrietta to include the stock’s value in calculating Maria’s elective share. The Appellate Division affirmed both decrees, and Henrietta appealed to the Court of Appeals.

    Issue(s)

    1. Whether Maria forfeited her right to elect by unjustifiably abandoning Sid during his lifetime.
    2. Whether the amended buy-sell agreement constitutes a testamentary substitute under EPTL 5-1.1, thereby subject to Maria’s spousal right of election.

    Holding

    1. No, because the estate failed to prove that Maria’s departure from the marital home was unjustified and without Sid’s consent.
    2. Yes, because the agreement, particularly after the amendment, allowed Sid to retain control over the disposition of his property, effectively circumventing Maria’s elective share.

    Court’s Reasoning

    Regarding abandonment, the court emphasized that more than mere separation is required; the abandonment must be unjustified and without consent. The estate failed to provide sufficient evidence to meet this burden. As the court noted, proving abandonment is difficult without the testator’s testimony due to the Dead Man’s Statute (CPLR 4519). Regarding the testamentary substitute issue, the court delved into the history of EPTL 5-1.1 and its purpose of preventing circumvention of spousal rights. The court reasoned that the “in trust or otherwise” language of EPTL 5-1.1 (subd [b], par [1], cl [E]) should be interpreted broadly to include arrangements that, like the amended buy-sell agreement, allow a decedent to control the beneficial enjoyment of property while stripping the estate of assets. The court rejected the argument that because a contract can be abrogated by mutual consent, that it cannot be considered a testamentary substitute. The court stated, “[T]he agreement here was the means by which the decedent not only controlled the beneficial enjoyment of the property right at stake, but stripped the estate of assets which should have been subject to his surviving spouse’s right to her elective share. Indeed, its ‘express provisions’ enabled the decedent, in terms of an appropriate use of ejusdem generis, to retain a power to ‘revoke’, ‘consume’, ‘invade’, or otherwise ‘dispose’ of the corpus.” The court emphasized that while certain assets are specifically excluded from being considered testamentary substitutes (e.g., pension plans, insurance proceeds), stockholder agreements are not among them. Thus, the amended agreement fell within the statute’s definition of a testamentary substitute.

  • In re Estate of Agioritis, 40 N.Y.2d 646 (1976): Surviving Spouse’s Elective Share and Totten Trusts

    In re Estate of Agioritis, 40 N.Y.2d 646 (1976)

    When a decedent deposits money into a Totten trust account after August 31, 1966, that money is subject to the surviving spouse’s right of election under EPTL 5-1.1, regardless of the source of the funds, even if the funds were transferred from pre-existing Totten trust accounts.

    Summary

    This case concerns the extent to which a surviving spouse can claim an elective share against funds held in Totten trust accounts created by the deceased spouse. The decedent had established numerous Totten trusts for collateral relatives, funded both before and after August 31, 1966 (the effective date of EPTL 5-1.1). The surviving spouse sought to include in her elective share funds deposited after that date, even if those funds originated from older, pre-1966 Totten trust accounts. The Court of Appeals held that any money deposited into Totten trusts after August 31, 1966, is subject to the surviving spouse’s right of election, regardless of its origin, overruling the prior holding in Matter of Halpern. The court reasoned that this interpretation aligns with the Legislature’s intent to protect the surviving spouse and expand the assets subject to the elective share.

    Facts

    The decedent, Nicholas Agioritis, died intestate in 1973, leaving a gross estate of approximately $800,000. A significant portion, over $650,000, was held in Totten trust savings accounts for various relatives in Greece. The decedent retained complete control over these accounts during his lifetime, and the beneficiaries did not contribute to the funds. Florence Agioritis, the surviving spouse, had been married to the decedent since 1950. She filed a notice of intention to take her elective share of the estate under EPTL 5-1.1.

    Procedural History

    The Surrogate’s Court initially ruled against the surviving spouse’s claim regarding funds transferred from pre-1966 accounts. The Appellate Division reversed this decision, holding that all deposits made after August 31, 1966, are subject to the right of election. The case then proceeded to the New York Court of Appeals.

    Issue(s)

    Whether money deposited in Totten trust savings accounts after August 31, 1966, from funds previously held in similar accounts before that date, is subject to the surviving spouse’s right of election under EPTL 5-1.1.

    Holding

    Yes, because the Legislature intended to expand the rights of the surviving spouse by including Totten trust bank accounts as testamentary substitutes. A change of either the beneficiary or the depositary bank constitutes a new deposit of money within the meaning of the statute.

    Court’s Reasoning

    The court examined the legislative history of EPTL 5-1.1, noting that it was enacted to address the inadequacy of prior law in protecting surviving spouses from disinheritance through inter vivos transfers, particularly Totten trusts. Prior to the enactment of EPTL 5-1.1, the case of Matter of Halpern (303 N.Y. 33 (1951)) held that Totten trusts were not illusory and could be used to defeat a spouse’s elective share. The Legislature, in enacting EPTL 5-1.1, explicitly overruled the Halpern doctrine.

    The court emphasized that the statute’s language explicitly states that all “[m]oney deposited, after August thirty-first, nineteen hundred sixty-six…in a savings account in the name of the decedent in trust for another person” is a testamentary substitute subject to the surviving spouse’s right of election. The court reasoned that a “change of either beneficiary or depositary bank constitutes a new deposit of money within the meaning of the statute.”

    The Court drew an analogy to Matter of Greenberg (261 N.Y. 474 (1933)), where a codicil executed after the effective date of a statute subjected an entire will to the statute’s provisions, even though the original will predated the statute. Similarly, the court reasoned that re-depositing money after August 31, 1966, subjects it to EPTL 5-1.1.

    The Court also held that withdrawals should be accounted for using a first-in, first-out (FIFO) method, meaning that withdrawals are deemed to come from the oldest deposits first. This method further supports the legislative intent to increase the assets subject to the elective share. The Court stated: “[W]e would apply a first-in— first-out method since it fosters the Legislature’s intention to increase the assets subject to elective rights. A contrary holding would preserve an exemption despite the decedent’s intentional withdrawal of the funds.”

  • In re Estate of Crystal, 39 N.Y.2d 934 (1976): Illusory Transfer Doctrine and Spousal Right of Election

    39 N.Y.2d 934 (1976)

    Agreements for the installment purchase of stock and retirement benefits are not illusory transfers defeating a spousal right of election if the decedent relinquished control over the principal, even if the decedent retained the right to designate beneficiaries.

    Summary

    The case concerns the right of a surviving spouse (Helen Crystal) to elect against certain transfers made by her deceased husband (Max Crystal) before his death. Max had entered into agreements providing for the installment purchase of his stock in close corporations and for retirement benefits, designating beneficiaries other than Helen. The New York Court of Appeals held that these agreements were not illusory transfers designed to defeat Helen’s right of election because Max yielded control over the principal, and the retained right to designate beneficiaries did not create testamentary dispositions violating the Statute of Wills.

    Facts

    Max Crystal entered into four agreements to liquidate his holdings in close corporations, providing for deferred payments totaling $500,000 as retirement benefits. Each agreement allowed Max to designate beneficiaries to receive payments if he died before full payment. Max designated beneficiaries other than his wife, Helen. Max and Helen were married in 1955 but were separated for a period. Max obtained a Mexican divorce later declared invalid in New York, and purported to marry another woman. Max then commenced a divorce action in Florida, but died during the proceedings.

    Procedural History

    The executor of Max Crystal’s estate initiated an accounting proceeding. Helen Crystal filed objections, claiming the beneficiary designations were illusory transfers intended to circumvent her spousal right of election under EPTL 5-1.1. The Surrogate’s Court ruled against Helen, and the Appellate Division affirmed. Helen then appealed to the New York Court of Appeals.

    Issue(s)

    Whether agreements providing for installment payments of stock and retirement benefits, with the right to designate beneficiaries, constitute illusory transfers that improperly defeat a surviving spouse’s right of election under New York law.

    Holding

    No, because Max Crystal relinquished control over the principal of the funds to be paid, and the retained right to designate the beneficiary did not create a testamentary disposition that would violate the Statute of Wills.

    Court’s Reasoning

    The Court of Appeals distinguished the case from Newman v. Dore, which involved a trust where the decedent retained significant control. The court found that Max Crystal, by entering into the agreements, yielded control over the principal. The agreements conformed to prior precedents like Matter of Hillowitz and Matter of Gross, where similar arrangements were upheld. The court reasoned that the mere right to designate a beneficiary for remaining balances upon death did not transform the agreements into testamentary substitutes. The dissent argued that the court should focus on whether Max retained substantial control and enjoyment of the property during his lifetime, potentially rendering the dispositions illusory. The dissent emphasized the legislative policy of protecting the surviving spouse from inter vivos divestiture by the decedent and criticized the majority for not adequately applying the doctrine of illusory transfers to protect the widow’s elective rights. The dissent cited legislative intent to enlarge and protect the rights of surviving spouses, noting the abrogation of prior decisions by designating Totten trusts and joint accounts as testamentary substitutes. The court explicitly stated that “On any view decedent yielded control over the principal of the sums to be paid. The retained right to designate the beneficiary of the balances remaining upon decedent’s death did not, for the purposes of the Statute of Wills, create testamentary dispositions”.