New York Law Review

Tag: Trustee Discretion

  • In re Bankers Trust Co., 60 N.Y.2d 584 (1983): Prudent Person Standard for Trustees

    In re Bankers Trust Co., 60 N.Y.2d 584 (1983)

    A trustee’s investment decisions are evaluated under the prudent person standard, requiring the exercise of diligence and prudence that prudent individuals would employ in managing their own affairs, considering the circumstances and express authorizations granted to the trustee.

    Summary

    This case addresses the application of the prudent person standard in evaluating a trustee’s decision to retain shares of stock despite a prior plan to liquidate them. The Court of Appeals affirmed the Appellate Division’s decision, holding that the trustee did not breach its duty. The court emphasized that the trustee’s discretion, as authorized in the trust document, and the overall circumstances, including market conditions, should be considered when assessing prudence. The court clarified that a trustee is not necessarily bound to rigidly adhere to an initial liquidation plan if changing circumstances warrant modification or abandonment of that plan in the exercise of sound discretion.

    Facts

    Bankers Trust Co. served as trustee for a trust that included shares of Coleman. The trust document granted the trustee “absolute discretion” to retain these shares. Initially, the trustee considered a plan to promptly liquidate the Coleman shares. However, the trustee ultimately retained the shares. Beneficiaries of the trust later claimed that the trustee acted imprudently by not selling the shares earlier when it would have been more advantageous.

    Procedural History

    The Surrogate’s Court initially reviewed the trustee’s accounting. The Appellate Division reversed the Surrogate’s Court, finding no breach of the prudent person standard. The Court of Appeals affirmed the Appellate Division’s order.

    Issue(s)

    Whether the trustee breached its fiduciary duty by failing to promptly liquidate the Coleman shares, considering its initial plan to do so and the express authorization granted to the trustee to retain the shares in its absolute discretion?

    Holding

    No, because the prudent person standard allows for modification or abandonment of an initial liquidation plan when circumstances and the trustee’s discretion warrant it, and the trustee exercised the required diligence and prudence in managing the trust assets.

    Court’s Reasoning

    The Court of Appeals agreed with the Appellate Division’s determination that the trustee did not violate the prudent person standard. The court emphasized that even if the trustee had initially planned to promptly liquidate the Coleman shares, the prudent person standard did not mandate rigid adherence to that plan. The court stated: “The standard by which the performance of the trustee is to be judicially measured is whether, in all the circumstances including in this instance the express authorization to the trustee “in its absolute discretion” to retain the Coleman shares, the trustee exercised “such diligence and such prudence in the care and management [of the fund], as in general, prudent men of discretion and intelligence in such matters, employ in their own like affairs” (King v Talbot, 40 NY 76, 85-86; cited with approval Matter of Bank of N. Y., 35 NY2d 512, 518-519).” The court considered the express authorization granted to the trustee to retain the Coleman shares “in its absolute discretion.” This authorization, along with the circumstances surrounding the management of the fund, was critical in determining whether the trustee acted prudently. The court found that the Appellate Division’s determination of no breach of duty aligned with the weight of evidence, indicating that the trustee’s actions were reasonable under the given circumstances.

  • Matter of Gross, 72 A.D.2d 783 (1980): Limits on Creditor Access to Discretionary Trust Funds

    In re Gross, 72 A.D.2d 783 (1980)

    A creditor cannot compel trustees to exercise their discretionary power to distribute trust assets for the benefit of a beneficiary, especially when the trust was established to provide supplemental support rather than primary care.

    Summary

    This case addresses the extent to which a creditor can access a discretionary trust to satisfy a debt owed by the beneficiary. A hospital sought to compel trustees to pay funds from a trust established for the benefit of a patient to cover unpaid hospital bills. The trust granted the trustees “absolute discretion” to use income or principal for the beneficiary’s support. The court held that the trustees did not abuse their discretion in refusing to pay the hospital bill, considering the trust’s terms, the grantor’s intent, and the existence of remaindermen. This case illustrates the limitations on creditor access to discretionary trusts, particularly when the trust is intended to supplement, not supplant, other forms of support.

    Facts

    In 1957, a grantor established a trust, directing that income be applied, as the trustees saw fit, for the support and maintenance of her daughter. The trust also permitted the trustees, in their “absolute discretion,” to apply all or part of the corpus for the daughter’s support and maintenance. After the grantor’s death, the daughter was hospitalized at Kings County Hospital for an extended period, incurring substantial public expense. The hospital obtained a judgment of $111,000 against the daughter for the unpaid charges and sought to satisfy this judgment from the trust principal, then valued at approximately $45,000.

    Procedural History

    The Special Term declined to order the trustees to expend the trust funds to satisfy the hospital’s judgment. The Appellate Division unanimously affirmed the Special Term’s decision. The New York Court of Appeals affirmed the Appellate Division’s order.

    Issue(s)

    Whether the trustees of a discretionary trust abused their discretion by refusing to pay the trust corpus to a creditor who obtained a judgment against the beneficiary for unpaid hospital charges.

    Holding

    No, because the grantor’s intent, as gleaned from the trust indenture and surrounding circumstances, indicated that the trust was intended to supplement, not supplant, other forms of support for her daughter, and the trustees’ decision was therefore a valid exercise of their discretion.

    Court’s Reasoning

    The court emphasized that the trustees had been granted “absolute discretion” in determining how to apply the trust funds for the daughter’s welfare. The court looked to the grantor’s intent as a guiding factor, reasoning that the grantor was aware of her daughter’s disability yet made no amendment to the trust provisions, which suggests she intended the trust to be supplementary rather than the primary source of support. The court referenced Matter of Escher, 52 NY2d 1006 and Restatement, Trusts 2d, § 187, highlighting the principle that courts should respect the discretionary power granted to trustees unless they abuse that discretion. The court found no such abuse, stating that the lower courts’ findings had support in the record. In essence, the court respected the grantor’s intent to provide supplemental support for her daughter while also protecting the interests of the remaindermen of the trust. The court implicitly recognized a policy consideration of not allowing creditors to automatically deplete discretionary trusts intended for long-term supplemental care, especially when other public resources are available.

  • Matter of Flyer, 23 N.Y.2d 579 (1969): Trustee’s Discretion to Consider Beneficiary’s Resources Before Invading Trust Principal

    Matter of Flyer, 23 N.Y.2d 579 (1969)

    When a trustee has sole discretion to invade a trust’s principal for the support of a beneficiary, the trustee may consider the beneficiary’s independent resources before deciding to invade the principal, unless the will indicates an absolute gift of principal or an intent that the beneficiary’s needs are irrelevant.

    Summary

    This case addresses whether a trustee with absolute discretion to invade the principal of a trust for the life beneficiary’s support must consider the beneficiary’s private resources before invading the principal. The New York Court of Appeals held that the trustee could consider the beneficiary’s independent resources, because the testator’s will did not create an absolute gift of principal and indicated that invasion of the principal depended on the beneficiary’s needs. The court emphasized that the testator’s intent, gleaned from the entire will and surrounding circumstances, is paramount in determining the scope of the trustee’s discretion.

    Facts

    Jacob Flyer created a trust for his wife, Elsie, giving his daughter as trustee discretion to use income and principal for Elsie’s support and maintenance. Elsie suffered a severe stroke and was institutionalized. Besides the trust, Elsie had approximately $10,000 in assets and $1,800 annual income from Social Security. Elsie’s sister, acting as her committee, argued that the testator intended an absolute gift of both income and principal, irrespective of Elsie’s independent resources, and requested the trustee pay Elsie’s outstanding hospital bills. The trustee, one of the testator’s daughters, contended that the testator intended Elsie’s private income to be used first.

    Procedural History

    The Surrogate’s Court agreed with Elsie’s sister, holding that the trustee must pay for Elsie’s support from the trust without regard to her private resources. The Appellate Division affirmed this decision. The dissenting justices in the Appellate Division argued that the trustee should consider Elsie’s independent income. The New York Court of Appeals reversed the Appellate Division’s order.

    Issue(s)

    Whether a trustee, vested with sole and absolute discretion to invade the principal of a trust for the support of the life beneficiary, may take the latter’s private resources into account before deciding to effect an invasion.

    Holding

    No, because the testator’s will did not create an absolute gift of principal, made the prime gift income and the testator intended that the invasion of the principal be dependent upon the needs or requirements of the beneficiary.

    Court’s Reasoning

    The court emphasized that the testator’s intent controls, and this intent should be determined from the entire will and the surrounding circumstances, not merely from the specific language granting the trustee discretion. The court stated, “A trustee, particularly when given uncontrolled discretion to invade principal… may, before deciding to effect an invasion, take into account the beneficiary’s independent resources where there is no ‘absolute’ gift of principal, the prime gift being that of income, and the testator intended that the ‘invasion of the principal… [be] dependent upon the needs or requirements of the beneficiary.’” The court distinguished this case from those where the testator intended a gift of principal as broad as the gift of interest, without any condition of need. Here, the court reasoned that the testator’s primary concern was for his daughters and their children, and he intended to preserve the estate for them. The court noted that any income not needed for Elsie’s support was to be added to the principal that the daughters would inherit, and elaborate provisions were made for gifts over to grandchildren. Additionally, the testator used Elsie’s Social Security payments for her care while he was alive, indicating an expectation that those resources would continue to be used for her support. Therefore, the trustee was permitted to consider Elsie’s independent income before invading the principal.