|
 |
Announcements
| Articles | The
Counselor
Trusts & Estates:
Rulings Highlight Interplay of Family, Inheritance and Trust
Principles
By Terence E. Smolev and Mary E. Mongioi
September 02, 2008
Two decisions by the Court of Appeals this past term bring
to the forefront the juxtaposition of long-standing principles
of law in two practice areas that many consider unrelated
but which both deal with the relationships between parents
and children. This overlap creates issues of which both
matrimonial and estate attorneys should take note.
Adopted-Out Children
It has long been thought that the rights of adopted-out
children regarding their biological parents' estates has
been settled, especially since the amendments to Domestic
Relations Law §117. The case decided by the Court this
term, involving a supposed heir to the Jell-O fortune (In
re Accounting by Fleet Bank), combined with a Surrogate's
Court decision this year on paternal versus maternal adoptive
parents (In re Estate of Johnson), make it clear that what
seemed settled is still ambiguous and vague.1
In 1899, Orator Francis Woodward purchased rights to Jell-O
from its inventor.2 Orator's daughter, Florence, created
irrevocable trusts in 1926 and 1963, for the benefit of
her daughter, Barbara Woodward Peel. The trusts provided
in part that upon Barbara's death, the trusts would benefit
Barbara's living children. The trusts were worth, at Florence's
death, between $9.7 million and $12 million.3
Barbara, prior to marrying, had an illegitimate daughter,
Elizabeth, adopted by third parties. Barbara subsequently
had two daughters during her marriage. In October, 2004,
after Barbara's death, Fleet Bank, the trustee, filed an
accounting of both trusts. Elizabeth sought to intervene
in that proceeding, seeking an equal distribution of the
trusts' assets with the two legitimate daughters.
The Surrogate's Court and Appellate Division differed in
their opinions based on their interpretations of In re Best,4
which held "a child adopted out of the family by strangers
does not presumptively share in a class gift to the biological
parent's issue established in the biological grandmother's
1973 testamentary trust."5 The Surrogate's Court relied
on Best in denying Elizabeth a share. The Appellate Division
reversed, finding the reasoning in Best to be inapplicable
because the trusts in question were executed prior to the
1963 and 1966 amendments to the Domestic Relations Law that
had been effective in Best.6
In Fleet, the Court of Appeals focused on the ambiguity
in the terms of the subject trusts and the lack of evidence
of Florence's intent to include or exclude an adopted-out
child. The Court examined the Domestic Relations Law and
did not find it instructive because when Florence executed
her trusts, §117 "[did] not create rights for
an adopted-out child to share in a class gift by implication."
Nothing existed in pre-1964 legislative history or case
law that would indicate "that an adopted-out child
would share in a class gift to a biological parent's issue,
descendants or children."
The Court relied on policy considerations in reversing the
Appellate Division, and discussed "the legislative
objective of fully assimilating the adopted child into the
adoptive family and, relatedly, the importance of keeping
adoption records confidential." The Court discussed
the importance of finality, "because there would always
lurk the possibility, no matter how remote, that a secret
out-of-wedlock child had been adopted-out of the family
by a biological parent or ancestor of a class of beneficiaries."
The Court was also concerned with procedural administration
in the event that adopted-out children gained the right
to participate in the class created by a pre-1964 instrument,
which would "create two classes of beneficiaries, those
receiving a gift in an instrument executed before 1964 and
those after."
New York Domestic Relations Law §117(1)(b) applies
to intestate descent and distribution, and provides: "The
rights of an adopted child to inheritance and succession
from and through his birth parents shall terminate upon
the making of the order of adoption except as hereafter
provided." Section 117(2) deals with testate transactions
and states in part that "after the making of an order
of adoption, adopted children and their issue thereafter
are strangers to any birth relatives for the purpose of
the interpretation or construction of a disposition in any
instrument[.]" Thus, unless there is a contrary intention
expressly stated in the subject instrument, adopted-out
children have no rights to the assets of a birth parent.
The Johnson Court highlights how §117(1)(e) of the
Domestic Relations Law permits inheritance by adopted-out
children if "(1) the decedent is the adoptive child's
birth grandparent or is a descendent of such grandparent
and (2) an adoptive parent (i) is married to the child's
birth parent, (ii) is the child's birth grandparent, or
(iii) is descended from such grandparent[.]"7
In Johnson, the decedent was the biological mother of the
adopted-out child. The petitioner was another daughter of
the decedent who was not adopted-out. The respondent, the
adopted-out child, was adopted by a paternal aunt, not a
maternal ancestor. The petitioner argued that, because there
was no maternal relationship between the aunt and the decedent,
the respondent was not permitted to inherit from her birth
mother. Instead, the court held that "the language,
legislative history, and policies underlying DRL §117(1)(e)"
permitted the adopted-out daughter to inherit from her birth
mother's estate.
While the Fleet and the Johnson cases further define the
rights of adopted-out children, questions arise about what
estate planning attorneys should consider. With many marriages
ending in divorce and subsequent remarriages resulting in
families having children from different marital partners,
care should be taken in preparing wills and trusts regarding
descendants, children and issue, and how those terms are
defined in the documents.
Generally, estate planning attorneys use the terms descendants,
issue and children without investigating whether or not
a client had out-of-wedlock children or adopted-out children.
While it may be a sensitive and difficult subject to broach,
the draftsman should consider a more specific designation
of who should be inheriting from the testator or testatrix.
It now appears with the Fleet and the Johnson cases that
all the possible vagaries of Domestic Relations Law §117
and potential claims by adopted-out children have been settled.
It is hard to believe at this time that another issue regarding
adopted-out children and inheritance from biological parents
could arise that has not now been dealt with in the Fleet
and Johnson decisions when read in conjunction with Domestic
Relations Law §117.
Parent and Fiduciary
The Court of Appeals recently examined the dual role of
a parent with existing child support obligations (including
payment of educational and medical expenses), who also acts
as a fiduciary of a trust that permits invasion of principal
for the same purposes.
In examining whether the Surrogate's Court can approve the
use of trust funds by the fiduciary in lieu of his personal
legal obligation to pay the expenses, the Court of Appeals
answered with a resounding "maybe" and remanded
the case for further hearing. The outcome of that hearing,
to examine the intent of the fiduciary at the time of invasion
of the trust, impacts both the manner in which the matrimonial
bar formulates separation agreements and stipulations of
settlement, and how the attorney/draftsman of testamentary
and other trusts which permit invasion for health and educational
expenses, practices his or her craft.
In In the Matter of the Estate of Burton Wallens,8 Charles
Wallens, co-trustee of a testamentary trust established
by his father, Burton Wallens, for the benefit of Charles'
daughter Maggie, filed a judicial accounting with Surrogate's
Court upon his daughter's petition demanding same.
After the execution of Burton Wallens' will creating the
testamentary trust, Maggie's parents divorced. Maggie's
father agreed, pursuant to a separation agreement, incorporated
but not merged into the Judgment of Divorce, to pay child
support, including educational expenses and any and all
uninsured medical expenses for his daughter.
Upon Burton Wallens' death, the trust, which permitted the
trustees to distribute monies "as the Trustee shall
deem advisable for her proper support, education, maintenance
and general welfare," was funded. Thereafter, the father
who became the custodial parent post-divorce, petitioned
for a reduction of his child support obligations, including
his obligation to pay the cost of Maggie's college education.
This petition was granted, and the Supreme Court directed
that "the trust established by the [testator] for the
benefit of the child shall be used to pay for normal and
customary college costs and expenses."
The fiduciaries however, invaded trust principal to pay
for both secondary school and college expenses as well as
certain unreimbursed medical expenses. After Maggie demanded
an accounting of trust assets by the co-fiduciaries, she
filed objections, specifically to the payment of all educational
and health expenses from trust assets, which, she asserted,
were the personal legal obligation of her father. The Surrogate's
Court allowed the college expenses, but held that "all
pre-college education expenses which [were] set forth in
[the] accounting . . . must be disallowed as unlawful expenditures
from the trust, and [the fiduciary/Maggie's father was]
required to repay the same, together with interest thereon
. . . "9
The Appellate Division held that the Surrogate properly
granted the motion "insofar as it dismissed the objections
to use of trust funds for college education[,]" but
erred in finding that the other expenses should not have
been paid from the trust. The Fourth Department stated "such
expenditures were in keeping with the testator's intent,"
highlighting the fact that "the testator was aware
of [Maggie's parents'] divorce but nevertheless did not
change the terms of his will during the two years between
[the] divorce and the testator's death."
Upon remittal for a hearing on the use of trust funds for
secondary school and health care expenses, the Surrogate's
Court ordered the $100,553.36 previously repaid to the trust
by the father/trustee be returned to him. Maggie then appealed
both the Surrogate's Court decision and the prior decision
of the Fourth Department to the Court of Appeals.
The obligations of the father as a fiduciary/trustee of
the testamentary trust, who invaded trust principal to pay
personal child support expenses, brings competing provisions
of the Domestic Relations Law and the Estates, Powers and
Trusts Law before the Court. The remittal to Surrogate's
Court leaves the conflict unresolved at this time.
Estate practitioners, intimate with the standards of fiduciary
responsibility imposed upon trustees, would likely argue
that the father breached his duty of care when he expended
trust funds for the support of his daughter, given his legal
obligation to support her out of his own separate assets.
They would point to the long-established rule of law that
a "fiduciary owes a duty of undivided and undiluted
loyalty to those whose interest the fiduciary is to protect."10
This "sensitive and 'inflexible' rule of fidelity [bars]
not only blatant self-dealing, but also [requires] avoidance
of situations in which a fiduciary's personal interest possibly
conflicts with the interest of those owed a fiduciary duty."
The informed practitioner would also certainly be aware
that "a trustee is under a duty to the beneficiary
to administer the trust solely in the interest of the beneficiary"11
and that "the trustee . . . cannot compete with the
beneficiaries for the benefits of the trust corpus."12
Certain in the knowledge that these principles are routinely
upheld by the Court, practitioners would expect the Court
to rule that this fiduciary/father clearly breached his
duty of loyalty by using trust funds for his daughter's
support while he had the ability and obligation to support
the beneficiary with his own assets.
Yet, the Court relied upon equally well-established principles
which dictate that the intent of the testator to provide
trust assets for the beneficiary's educational, general
welfare and medical expenses, control in determining whether
a trustee's distribution of trust assets was proper. The
Court of Appeals found that although the objected to educational
and medical expenses "fall within the class of expenditures
authorized by the trust, since the terms of the trust explicitly
permit trust funds to be used for Maggie's 'support, education,
maintenance and general welfare,'" the "trustee
is still required to act reasonably and in good faith in
attempting to carry out the terms of the trust."13
Thus, the matter was remitted "for a hearing to determine
whether the expenditures were authorized in good faith and
in furtherance of the beneficiary's interests."
As practitioners, where does this leave us? How are we to
prepare matrimonial settlement agreements so that parents
cannot avoid child support obligations and benefit from
trusts established by others that provide for those same
obligations to be met? How are we to draft trust instruments
so that parents, in their role as fiduciaries of trusts
established for the benefit of their children, cannot exhaust
trust principal to pay for educational and other expenses
which they have the personal legal obligation to pay? The
simple answer seems to be not to appoint a parent as fiduciary
of a child's trust, but that is not always practical and
may be cost-prohibitive. For an estate practitioner, the
key may be to discuss with the testator the nature of the
trust and advise of the possible use of trust principal
to supplement or pay for expenses that are viewed as the
personal legal obligations of a parent.
It would certainly behoove members of the matrimonial bar
to be aware of any trusts that may exist for the benefit
of the minor children of a marriage. Once informed, one
may proceed to artfully draft agreements such that a monied
parent may not avoid legal obligations through the exercise
of discretion as a fiduciary to invade trust principal to
pay for those same obligations. The Wallens Court warns
that if a parent is able to characterize an invasion as
an act "in good faith and in furtherance of the interests
of a beneficiary" the parent can perhaps avoid his
or her child support obligation. Thus, the only individual
who may benefit from the trust is the fiduciary/parent,
a result that may not have been the intent of the testator
or grantor in establishing the trust.
Terence E. Smolev is partner in charge of the tax, trusts
and estates department of Forchelli, Curto, Crowe, Deegan,
Schwartz, Mineo & Cohn, in Mineola. Mary E. Mongioi
is counsel to the firm. Danielle Gatto, a law clerk at
the firm and a third-year student at Hofstra Law School,
assisted in the preparation of this article.
|
|
|
