The New York “trust decanting statute” (EPTL 10-6.6) was significantly revised in August 2011. Although commentary and analysis of the new statute appeared almost immediately from practitioners, it was not until late 2013 that the judiciary joined the conversation. In Matter of Kroll,1 the Surrogate’s Court of Nassau County was faced with a challenge to a trustee’s exercise of appointing trust assets from a lifetime trust to a supplemental needs trust (SNT). The decision is noteworthy not only because it is the first to analyze the revised statute, but also because it serves as an important reminder for all trustees and attorneys to draft flexible trust instruments, to stay current with the needs of beneficiaries, and not to delay when changed circumstances necessitate a change to the trust.
A. Statutory Background
In 1992, New York was at the forefront of trust law when it enacted EPTL 10-6.6, which allowed trustees with unlimited discretion over distributions of principal to appoint trust assets to another trust. The statute was essentially unchanged for almost 20 years, during which time it became evident that the statute had limited applicability. The revised statute now permits all trustees, regardless of their scope of authority, to decant, but they must maintain certain provisions of the original trust in the new trust and cannot eliminate or reduce the interests of current beneficiaries.
B. The Decision
Matter of Kroll presented the Surrogate’s Court with two issues concerning EPTL 10-6.6: (1) the meaning of “authorized trustee,” and (2) when the decanting becomes effective.2
In Kroll, the beneficiary’s grandfather created a lifetime trust (the “invaded trust”) for his grandson shortly after his grandson was born. All distributions from the invaded trust were discretionary until the beneficiary attained age 21, at which time he would be entitled to receive income and the right to withdraw principal at any time. After the invaded trust was created, it was discovered that the beneficiary had special needs which made him eligible for Medicaid and supplemental Security Income (SSI) benefits. To ensure that the beneficiary’s rights in the trust which were to vest on his 21st birthday did not render him ineligible for the continued receipt of his government benefits, six days before the beneficiary’s 21st birthday, the trustees executed an instrument appointing all of the assets of the invaded trust to a newly created third-party SNT for the beneficiary (the “appointed trust”).
The Attorney General of the State of New York, on behalf of the State Department of Health (the department responsible for providing SSI and Medicaid benefits), objected to the decanting, arguing that it was ineffective because (1) the trustees were not “authorized trustees” within the meaning of EPTL 10.6-6(s)(2); and (2) the beneficiary’s rights in the invaded trust had vested before the decanting became effective and, consequently, the appointed trust was a first-party SNT and must contain a payback provision.3
The court appointed a guardian ad litem (GAL), whose report supported the decanting. The court agreed. It addressed two issues:
- Definition of “authorized trustee.” The statute defines an authorized trustee of the invaded trust as “any trustee or trustees with the authority to pay trust principal to one or more current beneficiaries other than: (i) the creator, or (ii) a beneficiary to whom income or principal must be paid currently or in the future or who is or will become eligible to receive a distribution of income or principal in the discretion of the trustee (other than by the exercise of a power of appointment held in a non-fiduciary capacity).”4 The court held that it is not the beneficiary who is under scrutiny, but rather it is the trustee who cannot be the creator or a beneficiary to whom income or principal must be paid currently or in the future, or who is or will become eligible to receive a distribution from the trust in the trustee’s discretion. To hold otherwise, the court said, would mean that no trustee could ever be an “authorized trustee” under the statute.
- Effective date of exercise. The court also rejected the AG’s argument that the beneficiary’s rights vested in the trust before the decanting became effective. The statute provides that the trustees’ exercise of appointment becomes effective 30 days after the instrument appointing the trust assets is served on the interested parties, unless those persons sooner consent in writing.5 On May 1, 2012, the trustees executed an instrument evidencing the decanting and delivered it to the beneficiary’s father. The trust provided that a parent or guardian of a disabled beneficiary could receive notice and have authority to act on such beneficiary’s behalf. On May 2, the beneficiary’s father executed an instrument consenting to the appointment of trust assets, to be effective immediately. Five days later, on May 7, the beneficiary turned age 21. The AG argued That the beneficiary’s rights vested on his birthday, which occurred sooner than 30 days after the trustees executed the instrument, but the court disagreed. In light of the trust’s explicit authority permitting a parent or guardian to act on behalf a disabled beneficiary, the consent given by the beneficiary’s father was proper, and the trustees’ exercise of appointment was deemed to be effective on May 2, before the beneficiary’s rights in the invaded trust had vested. Thus, the beneficiary remained eligible for government benefits, and the court held that the appointed trust was a valid first-party SNT which was not required to contain a payback provision.
C. Conclusion
Matter of Kroll is important both because it is the first published decision in which a court has analyzed the recent amendments to EPTL 10-6.6, and also because it offers practical guidance to attorneys and trustees.
First, this case marks the first instance where a court has analyzed and interpreted the language of the revised decanting statute. Although its clarification of the term “authorized trustee” likely is not groundbreaking, it is nevertheless an example of the judiciary’s role in creating the meaning of the words written by the legislature.
Second, the decanting in Matter of Kroll was, in essence, “saved” because the trust contained a provision allowing the parent of a disabled beneficiary to act on his behalf. When the trust was drafted, the beneficiary was not disabled. This is often the case, regardless of how healthy a beneficiary may appear at the moment the trust is created: developmental disabilities often are not present at birth, and accidents can render persons of all ages disabled. Thus, to provide for the utmost flexibility, practitioners should always include in their instruments a provision like the one in Kroll which allows another person to act upon behalf of a disabled beneficiary.
Finally, the trustees could have avoided the timing issue entirely if they had executed the instrument appointing the assets from the invaded trust to the SNT earlier so that the appointment would have been effective under the statute’s 30-day time frame regardless of the father’s consent. Thus, Matter of Kroll serves as a reminder for trustees to become, and stay, acquainted with the beneficiaries and their lives as they pertain to the trust, as well as a reminder to trustees and attorneys that they should not wait until the last minute before implementing important changes.
Endnotes
- Matter of Kroll, 41 Misc.3d 954, 971 N.Y.S.2d 863 (Sur. Ct, Nassau Co. 2013).
- EPTL 10-6.6(j)(1) states that the trustees may, but need not, obtain court approval to exercise their powers to decant under the statute.
- A “payback provision” would require that, upon the beneficiary’s death, the trustee of the SNT must reimburse SSI and Medicaid for the medical benefits it provided to the beneficiary during his lifetime prior to making any other distributions from the trust. See Social Services Law §§ 366(2)(b)(2)(ii) & (iii).
- EPTL 10-6.6(s)(2).
- EPTL 10-6.6(j).
As published in NYSBA Elder and Special Needs Law Journal | Fall 2014 | Vol. 24 | No. 4