Academic journal article Albany Law Review

Trustee-Beneficiaries, Creditors, and New York's EPTL: The Surprises That Result and How the UTC Solves Them

Academic journal article Albany Law Review

Trustee-Beneficiaries, Creditors, and New York's EPTL: The Surprises That Result and How the UTC Solves Them

Article excerpt


A trust is established. Tracy Brown is both the trustee and the beneficiary. (1) The settlor has empowered the trustee to make discretionary distributions from the trust to the beneficiary herself without any limitation, such as an ascertainable standard. (2) Much to the dismay of creditors, this means that Tracy Brown, as the trustee-beneficiary (hereinafter "T/B"), can access the trust funds at any time, yet the funds remain protected from her creditors while held in trust. Could the New York Legislature have intended such a consequence from the seemingly benign 2003, and subsequent 2004, amendments to section 10-10.1 of the New York Estates, Powers and Trusts Law (EPTL)? (3)

This protection against creditors occurs because the discretionary power under section 10-10.1 of the EPTL is not a general power of appointment--with the accompanying provisions for creditors--although it is tantamount to such a power. Should the Legislature act and amend the current law to prevent abuse from occurring?

This paper begins by presenting a brief background of trust law and creditor law, including the doctrine of merger and the rights of creditors, in Section II. Section III sets forth the evolution of section 10-10.1 of the EPTL. Section IV addresses the implications of the 2003 and 2004 amendments by first discussing provisions for creditors and then discussing why the discretionary power is not a power of appointment based on the definition of a power of appointment under section 10-3.1 of the EPTL; the legislative history of article 10 of the EPTL; and the statutory heading of article 10, part 10 of the EPTL. Section V presents the possible positions of the Uniform Trust Code and considers why New York should adopt versions of articles 1 and 5 of the Uniform Trust Code. Finally, Section VI suggests feasible legislative solutions for New York's current law.


A. The Doctrine of Merger

Historically, a sole trustee of a trust was not entitled to be simultaneously a beneficiary of the trust. Under the doctrine of merger, (4) formerly embodied in sections 7-1.1 and 7-1.2 of the EPTL, (5) the trust automatically terminated if the individual named as the sole trustee was also named as a beneficiary since the trust would effectively be passive, and the trustee would have no duties to carry out. (6) Title of the same nature and for the same duration as the intended trust vested in the T/B. (7) Provided that the trustee was not the sole trustee, a trustee could, however, also be a beneficiary. For example, in Woodward v. James, the Court of Appeals of New York found that where, by the terms of his will, the decedent intended to leave his widow a life estate in half the income from his estate but did not expressly word the devise as a trust, "the law will got imply a trust where, in the moment of its creation, it will be invalid, and that, as the same person cannot be both trustee and beneficiary, the trust to [the widow] must fail." (8) This decision led to "the inevitable result ... that the equitable is merged in the legal estate, and the latter alone remains" so that the widow, in regard to her one-half of the income, "was not trustee, and took what was given to her by a direct legal right." (9)

The merger doctrine, however, was not always strictly applied. In In re Phipps' Will, for example, the beneficiary was a co-trustee but became the sole trustee when the other trustee died. (10) The court distinguished cases where merger had been applied, reasoning that in those cases there was not a demonstrated "intention that the trust continue after the death of the sole beneficiary's cotrustee," and instead held that "[t]he doctrine of merger is not to be applied 'with rigidity,' and, where it appears to have been the intention of the settlor ... that the trust continue or that a successor trustee be appointed, the courts will act to prevent the extinguishment and termination of the trust. …

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