Matter of Shapiro

[*1] Matter of Shapiro 2006 NY Slip Op 50044(U) [10 Misc 3d 1071(A)] Decided on January 13, 2006 Surrogate's Court, Nassau County Riordan, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on January 13, 2006
Surrogate's Court, Nassau County

In the Matter of the Petition of Barry R. Shapiro and Norman Leben, as Co-Trustees of "The Tina Sohn Irrevocable Trust," created under that certain Trust Agreement dated May 4, 1999



340327



Meyer, Suozzi, English & Klein, P.C. (attorneys for Petitioners, Barry R. Shapiro & Norman Leben, Co-Trustees)

1505 Kellum Place

Mineola, New York 11501-0803

John B. Riordan, J.

This is a petition by the co-trustees of an inter vivos trust dated May 4, 1999 requesting reformation of one of the trust provisions.

The trust is an irrevocable life insurance trust which is the owner and beneficiary of three separate life insurance policies on the life of the settlor, Tina Sohn, in the total face amount of $10,000,000.00. The co-trustees of the trust are Barry R. Shapiro and Norman Leben.

Petitioners seek reformation of the first sentence of Paragraph A of Article XV of the trust agreement which provides, in its entirety, as follows: "In the event that a Trustee shall cease to act for any reason during the lifetime of the Settlor, the Settlor shall appoint, by an instrument in writing, a successor Trustee, other than herself, to fill such vacancy."

Petitioners are concerned that the assets of the trust will be included in the settlor's gross estate for federal and state estate tax purposes since the trust agreement does not expressly prohibit the settlor in the event of a trustee vacancy from appointing as a successor trustee a person who is related or subordinate to her within the meaning of Section 672 of the Internal Revenue Code (26 USC §672). Petitioners aver that the trust assets may be included if the settlor's power to appoint a related or subordinate person as a successor trustee is deemed by the Internal Revenue Service to constitute a retained power under: (i) Section 2036(a)(i) of the Internal Revenue Code (26 USC §2036) (the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom); (ii) Section 2038 of the Internal Revenue Code (26 USC §2038) (the power, alone or by the decedent in conjunction with any other person, to alter, amend, revoke, or terminate a trust); (iii) Section 2041 of the Internal Revenue Code (26 USC §2401) (general power of appointment); or (iv) Section 2042 of the Internal Revenue Code (26 USC §2042) ("incidents of ownership" in the life insurance policies held by the trust).

Moreover, petitioners contend that the reformation is consistent with the settlor's objective in having independent persons serve as trustees. The settlor has submitted an affidavit in which she avers that it was her express intent and objective in creating the trust to ensure that the assets would be excluded from her gross estate for estate tax purposes. Petitioners maintain that the language prohibiting the settlor from appointing a successor trustee who is related or subordinate to her within the meaning of Section 672(c) of the Internal Revenue Code (26 USC §672) was inadvertently omitted by the attorney-draftsperson. Accordingly, petitioners request that the language of Paragraph A of Article XV be reformed as follows: [*2] "In the event that a Trustee shall cease to act for any reason during the lifetime of the Settlor, the Settlor shall appoint, by an instrument in writing, a successor Trustee, other than herself or any person who is related or subordinate to her within the meaning of §672(c) of the Internal Revenue Code of 1986, or any successor thereto, to fill such vacancy."

The dispositive provisions of the trust agreement provide that during the lifetime of the settlor, the trustees shall pay or apply all of the net income of the trust to or for the benefit of the settlor's issue in equal shares, per stirpes. The trustees also have the discretion to pay or apply principal to or for the benefit of any one or more of the settlor's issue. Upon the settlor's death, the trust assets are to be distributed to the settlor's then living children, in equal shares, or all to the survivor of them if only one of them is living, except that if a deceased child of the settlor leaves issue who are then living, such deceased child's share shall be distributed to such child's then living issue, subject to a continuing trust for any beneficiary under the age of 50.

The settlor currently has two adult children and one minor grandchild. The settlor's two adult children have consented to the relief requested. Petitioners contend that the interest of the settlor's minor grandchild may be virtually represented by the settlor's children. Thus, there is a threshold issue of jurisdiction to be addressed arising from petitioners' request that this court dispense with service of process on otherwise interested parties by virtue of SCPA 315.

The criteria employed by the courts in applying virtual representation are: 1) similarity of economic interest between representor and representee; 2) the absence of a conflict of interest; and 3) the adequacy of representation (Matter of Dickey, 195 Misc 2d 729 [2003]; Matter of Putignano, 82 Misc 2d 389 [1975]; Matter of Holland, 84 Misc 2d 922 [1974]). The representation of class interests (SCPA 315 [2] [ii]) and contingent interests (SCPA 315 [3]) are typical examples of the utility of virtual representation, and the court is satisfied that the requirements of the statute are met by the facts presented. Therefore, the court approves the use of virtual representation in the manner requested. All of the adult interested parties have consented to the relief requested.

Concerning petitioners' request for reformation of the trust, the court notes that courts will rarely reform wills or trusts to correct mistakes (Matter of Snide, 52 NY2d 193 [1981]; Matter of Merns, NYLJ, Mar. 16, 2001, at 18) unless the reformation effectuates the settlor's or testator's intent to take maximum advantage of the available tax exemptions and deductions (Matter of Choate, 141 Misc 2d 489 [1988]; Matter of Merns, NYLJ, Mar. 16, 2001, at 18). The courts have generally been sympathetic where the reformation is requested to cure various tax defects (Matter of Gottfried, NYLJ, Apr. 11, 1997, at 25, col. 6). In particular, courts have allowed reformations to allow a charitable remainder trust to qualify for the charitable deduction (Matter of Stalp, 79 Misc 2d 412 [1974]; Matter of Witz, 95 Misc 2d 36 [1978]; Matter of Kander, 115 Misc 2d 386 [1982]; Matter of Balleta, NYLJ, Feb. 23, 1998, at 33, col. 5; Matter of Bull, NYLJ, Apr. 8, 1998, at 33, col. 4); to allow a trust to qualify for the marital deduction (Matter of Martin, 146 Misc 2d 144 [1989]; Matter of Khadad, 135 Misc 2d 67 [1987]; Matter of Lepore, 128 Misc 2d 250 [1985]; Matter of Pasquale, NYLJ, Mar. 21, 1997, at 38, col. 5; Matter of Opperman, NYLJ, Oct. 18, 1989, at 26, col. 4); to maximize the generation-skipping transfer tax exemption (Matter of Choate, 141 Misc 2d 489 [1988]); to maximize the credit shelter trust (Matter of [*3]Quigan, NYLJ, Nov. 17, 1994, at 34); to cure the trust so it will qualify as a subchapter S shareholder (Matter of Mainzer, 151 Misc 2d 203 [1991]); and to limit a power in a trust instrument in order to avoid inclusion for estate tax purposes (Matter of Gottfried, NYLJ, Apr. 11, 1997, at 25, col. 6).

Moreover, in the case of an inter vivos trust, reformations to reflect the settlor's intent are allowed upon "clear proof" of mistake (Matter of Gottfried, NYLJ, Apr. 11, 1997, at 25, col. 6). Here, the petitioners contend that the language prohibiting the settlor from appointing a trustee who is related or subordinate to her within the meaning of Section 672(c) of the Internal Revenue Code (26 USC §672) was omitted by the attorney-draftsperson. In addition, the settlor has stated that it was her intention to have the assets excluded from her estate as shown by the language in Article II of the trust agreement which provides that the trust is irrevocable and she shall not have any power to alter, amend, revise, modify, revoke or terminate any provision of the agreement and by her appointment of independent trustees at the outset. Thus, it appears that the intent of the settlor in creating the life insurance trust was to allow the proceeds of insurance to escape estate taxation. Petitioners concede that the law is unsettled on the question of whether the settlor's power to appoint a related or subordinate person as a successor trustee in the event of a vacancy would cause the trust to be included in her gross estate. In view of the sizeable nature of the trust assets and the settlor's express purpose in creating the trust, the trustees, exercising caution and prudence, have asked for the trust to be reformed. The court is satisfied that the reformation is consistent with the settlor's intent. Accordingly, Paragraph A of Article XV of the trust is reformed as follows: "In the event that a Trustee shall cease to act for any reason during the

lifetime of the Settlor, the Settlor shall appoint, by an instrument in writing,

a successor Trustee, other than herself or any person who is related or

subordinate to her within the meaning of §672(c) of the Internal Revenue

Code of 1986, or any successor thereto, to fill such vacancy."

This constitutes the decision of the court.

Submit order.

Dated: January 13, 2006

JOHN B. RIORDAN

Judge of the

Surrogate's Court

The appearance of counsel is as follows: