BILL NUMBER:S7630

TITLE OF BILL:
An act
to amend the estates, powers and trusts law, in relation to the exercise
of a power of appointment and an authorized trustee's authority to
invade a trust; and to amend chapter 451 of the laws of 2011, amending
the estates, powers and trusts law relating to the exercise of a power
of appointment and an authorized trustee's authority to invade trust
principal, in relation to the effectiveness thereof

This is one in a series of measures being introduced at the request
of the Chief Administrative Judge upon the recommendation of her
Surrogate's Court Advisory Committee. This measure would make
technical corrections and clarifying amendments to chapter 451 of the
Laws of 2011, which substantially altered New York's so-called
"decanting statute" - EPTL 10-6.6, enacted in 1992. Section 10-6.6(b)
codifies decisional law that permitted a trustee who has authority to
invade the trust principal to exercise that power by creating new
trusts. This effectively allows the rewriting of an irrevocable trust
by permitting trust assets to be "appointed" or "decanted" to another
trust. Chapter 451 enacted provisions to make the statute more
flexible and more explicit with respect to the procedure required to
effect a decanting.

(1) Exclusion of Successor or Remainder Beneficiaries
              

L. 2011, c. 451 enacted a new paragraph (b) to EPTL 10-6.6, to provide
as follows:

"(b) An authorized trustee with unlimited discretion to invade trust
principal may appoint part or all of such principal to a trustee of
an appointed trust for, and only for the
benefit of, one, more than one or all of the current beneficiaries
of the invaded trust (to the exclusion of any one or more of such
current beneficiaries.  The successor and remainder beneficiaries
of such appointed trust shall be one, more than one or all of the
successor and remainder beneficiaries of such invaded trust (to
the exclusion of any one or more of such successor and remainder
beneficiaries)." (emphasis added.)

In light of the language of the second sentence of paragraph (b), the
question has arisen whether the interests of all the successor or
remainder beneficiaries of the original ("invaded") trust may be
excluded in the new ("appointed") trust.

Although it can be argued that the phrase "to the exclusion of anyone
or more literally can be read to encompass "to the exclusion of
all", more importantly, permitting the exclusion of all of such
successor or remainder beneficiaries appears more in keeping with the
probable intent of the original grantor. A grantor who intentionally

provides a trustee with the unlimited discretion to distribute the
entire trust property outright to one or more "current beneficiaries"
has thereby rendered the interests of the "successor or remainder
beneficiaries" inherently susceptible to exclusion. In addition, it
is highly improbable that a grantor would intend that a trustee have
the power to exclude all but one of any number of successor or
remainder beneficiaries (as is clearly allowed under the present
statutory language), but not have the power to exclude all such
beneficiaries.

It is therefore proposed that paragraph (b) of EPTL 10-6.6 be amended
to read as follows:

(b) An authorized trustee with unlimited discretion to invade trust
principal may appoint part or all of such principal to a trustee of
an appointed trust for, and only for the benefit of, one, more than
one or all of the current beneficiaries of the invaded trust (to the
exclusion of anyone or more of such current beneficiaries). The
successor and remainder beneficiaries of such appointed trust (shall)
may be one, more than one or all of the successor and remainder
beneficiaries of such invaded trust (to the exclusion of any one
(or) more than one or all of such successor and remainder
beneficiaries)."

(2) Requirement of Majority or Unanimity in the Decanting Decision

Although the new statute is silent on the matter, the Legislative
Memorandum to the statute recites that the decision to decant
requires only a "majority" of trustees ("Unless expressly limited by
the terms of the invaded trust, a majority of the trustees....
may pay part or all of the principal of the invaded trust to an
appointed trust." P.6 of Legislative Memo).

On the other hand EPTL 10-6.7 provides that, unless the instrument
provides otherwise, unanimity is required for the exercise of a
"power of appointment" 'held by "two or more" persons. EPTL 10-6.7
would literally apply to the decanting power because such power is
specifically denominated as a "power of appointment" under 106.6(d)
("An exercise of the power to invade trust principal under paragraphs
(b) and (0) of this section shall be considered the exercise of a
special power of appointment as defined in section 10-3.2 of this
article").

However, under 10-6.6(h) a trustee has a "fiduciary duty to exercise
the power in the best interests of the objects of the power" and it
would therefore appear that the default rule should be the rule
contained in EPTL 10-10.7, which applies to powers held jointly by
fiduciaries, and which allows a majority decision to govern where
there are "three or more fiduciaries", unless the instrument provides
otherwise.

It is therefore proposed that EPTL 10-6.6(d) be amended to read as
follows:

(d) An exercise of the power to invade trust principal under paragraphs
(b) and (c) of this section shall be considered the exercise of a
special power of appointment as defined in section 10-3.2 of this
article provided. however. that such exercise shall be governed by
the provisions of section 10-10.7 of this article.

(3) Obsolete Reference to EPTL 7-1.17

L. 2011, c. 451 enacted a new paragraph (s)(1) to EPTL 10-6.6, to
provide as follows:

"(s)(1) The term "appointed trust" means an irrevocable trust which
receives principal from an invaded trust under paragraph (b) or (c)
of this section including a new trust created by the creator of the
invaded trust or by the trustees, in that capacity, of the invaded
trust. For purposes of creating the new trust, the requirement of
section 7-1.17 of this chapter that the instrument be signed by the
creator shall be deemed satisfied by the signature of the trustee of
the appointed trust." (emphasis added.)

A technical correction is needed to the second sentence of paragraph
(s)(1) because, pursuant to a 2010 amendment to 7-1.17(a), the
requirement that "the instrument be signed by the creator" has been
changed, and 7-1.17(a) now provides as follows:

"Every lifetime trust shall be in writing and shall be executed and
acknowledged by the person establishing such trust and, unless such
person is the sole trustee, by at
least one trustee thereof; in the manner required by the laws of this
state for the recording of a Conveyance of real property or, in lieu
thereof; executed in the presence of two witnesses who shall affix
their signatures to the trust instrument." (emphasis added)

It is therefore proposed that paragraph (s)(1) be amended to provide
as follows:

(s)(1) The term "appointed trust" means an irrevocable trust which
receives principal from an invaded trust under paragraph (b) or (c)
of this section including a new trust created by the creator of the
invaded trust or by the trustees, in that capacity, of the invaded
trust. For purposes of creating the new trust, the requirement of
section 7-1.17 of this chapter that the instrument be (signed by the
creator) executed and acknowledged by the person establishing such
trust shall be deemed satisfied by the (signature) execution and
acknowledgement of the trustee of the appointed trust.

(4) Discretionary Income Beneficiaries

L. 2011, c. 451 enacted a new paragraph (b) to EPTL 10-6.6, to provide
as follows:

(b) An authorized trustee with unlimited discretion to invade trust
principal may appoint part or all of such principal to a trustee of an
appointed trust for, and only for the benefit of one, more than one or
all of the current beneficiaries of the invaded trust (to the exclusion
of any one or more of such current beneficiaries).  The successor
and remainder beneficiaries of such appointed trust shall be one,
one or all of the successor and remainder beneficiaries of such invaded
trust (to the exclusion of any one or more of such successor and
remainder beneficiaries)." (emphasis added.)

Because paragraph (s)(4) of the new 10-6.6 defines a "current
beneficiary" as someone "to whom the trustees may distribute
principal at the time of the exercise of the power", (emphasis
added) the question has arisen whether the interest of a
discretionary
beneficiary to whom income, but not principal, may be paid under the
original ("invaded") trust, can be continued in the new
(appointed") trust.

Although such continuation may seem literally prohibited under the
first sentence of paragraph(b), there appears to be no reason why a
grantor would want to prohibit a trustee from continuing such an
interest in the new trust.

It is therefore proposed that paragraph(s)(4) of 10-6.6 be amended
to read as follows:

(4) The term "current beneficiary or beneficiaries" means the person
or persons (or as to a class, any person or persons who are or will
become members of such class) to whom the trustees may distribute
principal at the time of the exercise of the power, provided however
that the interest of a beneficiary to whom income, but not principal may
be distributed in the discretion of the trustee of the invaded trust
may be continued in the appointed trust.

(5) The Effective Date Provisions

The effective date provisions of L.2011, c. 451 are as follows:

"This act shall take effect immediately and shall apply to trusts
whether created prior to or after such effective date. "(emphasis
added.)

The effective date of the new statute was August 17, 2011 and the
question has arisen whether the statute applies to a trust created on
that date. To clarify this issue it is proposed that there be a
chapter amendment to L. 2011, c. 451 enacting the following effective
date provisions:

This act shall take effect immediately and shall apply to trusts
whether created prior to, on or after such effective date.

LEGISLATIVE HISTORY:
None. New proposal.