A case recently decided in New York County Surrogate’s Court and subsequently affirmed on appeal, Davidovich vs. Hoppenstein (162 A.D.3d 512, 79 N.Y.S.3d 133 (1st Dep’t 2018)) has wide-ranging consequences for NY-based trusts & estates practitioners, as well as individuals seeking to establish new trusts or decant existing ones.
These consequences are welcome because the ruling clearly establishes that trustees do not always need to comply with the stringent requirements of New York’s trust decanting statute (EPTL §10-6.6) when appointing and/or distributing assets in further trust.
Davidovich vs. Hoppenstein
Davidovich vs. Hoppenstein involves an individual who, in 2004, created an irrevocable trust which owned a $10 million life insurance policy. This trust’s beneficiaries initially included all of his children and its terms authorized its trustees to “pay such sums out of principal of the trust (even to the extent of the whole thereof) to the Settlor’s descendants, living from time to time, in equal or unequal amounts, and to any one or more of them to the exclusion to the others, as the Trustees, in their absolute discretion, shall determine.”
In 2012, after the grantor of the trust had a falling out with one of his children, the disinterested trustee of the trust distributed – or, as it is commonly referred to, decanted – the life insurance policy to a new trust that was substantially similar to the original except it did not include one of the grantor’s children in the class of beneficiaries. After the grantor died in 2015, the disinherited child and her children brought suit in Surrogate’s Court, arguing, among other things, that the distribution was void because the trustee did not comply with all of the requirements of EPTL §10-6.6.
The Surrogate’s Court rejected these arguments, writing that “the procedure for decanting outlined in EPTL §10-6.6 has no bearing on this case” because the distribution was done in accordance with the terms of the trust instrument. The Appellate Division, in a 2018 decision rejecting the daughter’s appeal of the Surrogate’s Court decision, wrote:
“Estates, Powers and Trusts Law § 10-6.6(k) states, ‘This section shall not be construed to abridge the right of any trustee to appoint property in further trust that arises . . . under common law.’ Under the common law, a trustee with an absolute power to invade principal was ‘able to exercise that power by appointing in further trust’ unless the creator of the trust indicated otherwise (citations omitted). The trustees of the Reuben Hoppenstein 2004 Insurance Trust (2004 Trust) had the absolute power to invade principal, as evidenced by Article 2(c) of the 2004 trust instrument. Article 9(f) gave the trustees the power to create further trusts. Thus, the transfer of the life insurance policy at issue from the 2004 Trust to the Hoppenstein 2012 Insurance Trust was valid.”
New Clarity for NY-based Trusts & Estates Practitioners
The Hoppenstein decisions provide much-needed clarity to trusts and estates practitioners who formerly had been proceeding without guidance as to the proper interpretation of EPTL §10-6.6, particularly subparagraphs (j) and (k). These decisions make clear that New York’s trust decanting statute does not override the express terms of a trust and is to be interpreted as a supplement to any authority to distribute principal in a trust agreement or under common law.
While some might be tempted to interpret the Hoppenstein decisions as rendering New York’s decanting statute obsolete, it seems clear that the decanting statute was merely a codification of the common law intended to enhance, rather than limit, the circumstances under which trustees can appoint assets in further trust. To hold otherwise would limit the trustee’s authority in a manner not contemplated by the grantor.
If you have questions or concerns about setting up a new trust or decanting an existing one be sure to seek counsel from our qualified team of trusts & estates advisors who can help you determine your best options and processes.