849 N.E.2d 262 (Ct. App. N.Y. 2007)
In his will, Jacob Heller created a trust to benefit his wife Bertha Heller during her life, with the residuary estate held in trust.1 He appointed his brother Frank Heller as initial trustee, to be succeeded by his sons Herbert and Alan Heller.2 The remainder beneficiaries were his daughters Suzanne Heller and Faith Willinger, each with a 30% share, and his sons Herbert and Alan Heller, each with a 20% share.3 Bertha was to receive the greater of $40,000 or the total income of the trust annually.4
Jacob Heller died in 1986, survived by his wife Bertha.5 When Frank Heller died in 1997, Herbert and Alan became trustees.6 From 1997 until 2001, Bertha received an average annual income of approximately $190,000 from the trust.7
In September 2001, New York enacted legislation including the optional unitrust provision under EPTL 11-2.4, effective January 1, 2002.8 In March 2003, trustees Herbert and Alan elected to apply the unitrust provision, notifying beneficiaries Bertha, Suzanne, and Faith.9 They sought retroactive application to January 1, 2002, which reduced Bertha's annual income to approximately $70,000.10
Sandra Davis, as attorney-in-fact for Bertha Heller, commenced a proceeding in Surrogate’s Court on August 1, 2003, moving for summary judgment to annul the unitrust election, revoke the trustees' letters, and determine that the election could not be retroactive.11 Surrogate’s Court granted the motion regarding retroactivity but denied annulment of the election.12 Davis appealed, and the trustees cross-appealed.13 The Appellate Division affirmed the denial of annulment and reversed on retroactivity, granting leave and certifying a question to the Court of Appeals.14
Whether a trustee who is also a remainder beneficiary may elect unitrust status under EPTL 11-2.4?15
The Legislature did not prohibit trustees who have a beneficial interest from electing unitrust treatment under EPTL 11-2.4.16 This stands in contrast to the express prohibitions contained in the power-to-adjust provision of EPTL 11-2.3 (b) (5) (C) (vii) and (viii).17 Although the common law imposes an absolute prohibition against self-dealing, the trustees owe fiduciary duties to all beneficiaries.18 Their status as remainder beneficiaries does not by itself invalidate a unitrust election.19
Yes. The trustees Herbert and Alan Heller are remainder beneficiaries holding twenty percent shares each, yet EPTL 11-2.4 contains no absolute bar comparable to the one enacted for the power to adjust.20 The trustees notified income beneficiary Bertha Heller and the other remainder beneficiaries Suzanne Heller and Faith Willinger before making the election in March 2003.21 Because the trustees owe duties to every beneficiary, including those whose interests align with their own, the common-law prohibition on self-dealing does not automatically disqualify the election.22
The Surrogate must still review the fairness of the election by applying the factors listed in EPTL 11-2.4 (e) (5) (A). The trustees' status as remainder beneficiaries does not invalidate the election as a matter of law.23
A trustee who is also a remainder beneficiary may elect unitrust status under EPTL 11-2.4.24
Whether trustees may elect unitrust status retroactively to January 1, 2002?25
EPTL 11-2.4 (d) (1) authorizes a trustee to specify the date on which the interest of a beneficiary begins.26 EPTL 11-2.4 (b) (6) expressly requires recomputation of the unitrust amount for any preceding valuation year unless the election is made expressly prospective.27 This structure permits retroactive application to the statute's effective date of January 1, 2002.28
Yes. The trustees Herbert and Alan Heller elected unitrust status in March 2003 and specified that the election apply retroactively to January 1, 2002.29 EPTL 11-2.4 (d) (1) grants trustees authority to determine the effective date of the election.30 EPTL 11-2.4 (b) (6) further directs trustees to calculate the unitrust amount for preceding years and to adjust distributions accordingly.31 This mechanism would serve no purpose if retroactive application were forbidden.
EPTL 11-2.4 (e) (4) (A) does not override this authority.32 On its most plausible reading the provision itself contemplates retroactivity by using the initial funding date as a default starting point for trusts created on or after January 1, 2002.33
Trustees may elect unitrust status retroactively to January 1, 2002.34