Matter of Hicks

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[*1] Matter of Hicks 2006 NY Slip Op 50118(U) [10 Misc 3d 1078(A)] Decided on February 1, 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 This opinion is uncorrected and will not be published in the printed Official Reports.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 February 1, 2006
Surrogate's Court, Nassau County

In the Matter of the Application for Construction of Language Contained in Trusts Created for the Benefit of Marilyn B. Hicks under Article THIRD of the Last Will and Testament of Alfred H. Hicks, Deceased.



335173



Humes & Wagner (Attorney for Petitioner)

147 Forest Avenue

Locust Valley, NY 11560

John B. Riordan, J.

This is a petition by the decedent's wife as a co-trustee of two testamentary trusts created under the decedent's Will requesting construction of the provisions of Sections A and B of Article THIRD of the Will. Although petitioner's prayer for relief is denominated as a construction of the Will, the application is more properly one for reformation and construction.

The decedent, Alfred H. Hicks, died a resident of Nassau County on October 1, 2004. The decedent was survived by his spouse, Marilyn B. Hicks, and his three children, Karen Hicks Courts, Marianne H. Folk and Stephen B. Hicks. The decedent's Will dated April 30, 2002 was admitted to probate and letters testamentary issued to petitioner on December 22, 2004. Letters of trusteeship issued to petitioner and Stephen B. Hicks as co-trustees of both the marital trust and the credit shelter trust created under the Will.

Section A of Article THIRD of the Will creates a credit shelter trust, the net income of which is to be paid to the decedent's spouse at least quarterly during her lifetime. In addition, the trustees may, in their discretion, pay to the decedent's spouse so much of the principal as they determine for her "health, maintenance or support." Upon the spouse's death, the trust assets are to be distributed to the decedent's then living issue, per stirpes.

Similarly, Section B of Article THIRD creates a martial trust for the benefit of the decedent's spouse. The income from the trust is payable to the decedent's spouse at least quarterly. The trustees have the discretion to pay to the spouse so much of the principal as they determine for her "health, maintenance or support." Upon the death of the decedent's spouse, unless her Will contains a contrary direction, the trustees shall pay the death taxes attributable to the inclusion of the martial trust in the spouse's estate to her executors. After such payment is made, the balance of the trust property is to be paid to the decedent's then living issue, per stirpes.

The decedent died owning shares of Hicks Nurseries, Inc., which is an S-corporation. The petitioner avers that the stock of Hicks Nurseries, Inc. is needed to fund the credit shelter trust and the martial trust. Petitioner is concerned that neither trust meets the requirements of a qualified subchapter S trust under Section 1361 of the Internal Revenue Code (26 USC §1361). Accordingly, absent reformation, if the trusts are funded with the stock of Hicks Nurseries, Inc., the corporation will lose its S-corporation status and the associated tax benefits. Petitioner, therefore, seeks to reform the Will in order that the trusts will meet the requirements of a [*2]qualified subchapter S trust (26 USC §1361). A citation with respect to the application issued to the decedent's three adult children, the presumptive remaindermen of both trusts. The citation was returnable on November 2, 2005, and no one appeared on that date.

Section 1361(a)(1) of the Internal Revenue Code (26 USC §1361[a][1]) defines an S-corporation as a small business corporation for which an election under Section 1362(a) of the Internal Revenue Code is in effect. Section 1361(b)(1) of the Internal Revenue Code (26 USC §1361[b][1]) defines a "small business corporation" as a domestic corporation which is not an ineligible corporation and which does not have (a) more than 100 shareholders; (b) as a shareholder a person (other than an estate, a trust described in Section 1361[c][2] or an organization described in Section 1361 [c][6]) who is not an individual; ( c) a nonresident alien as a shareholder; and (d) more than one class of stock. Under Section 1361(c)(2)(A)(i) of the Internal Revenue Code (26 USC §1361[c][2][A][i]), a trust all of which is treated (under subpart E of part I of subchapter J of Chapter 1) as owned by an individual who is a citizen or resident of the United States may be a shareholder of a small business corporation.

Section 1361(d)(1) of the Internal Revenue Code (26 USC §1361[d][1]) provides that a qualified subchapter S trust whose beneficiary makes an election under Section 1362(d)(2) will be treated as a trust described in Section 1361(c)(2)(A)(i) and the trust's beneficiary will be treated as the owner of the portion of the trust's S corporation stock to which the election under Section 1361(d)(2) (2)) applies. Under Section 1361(d)(2)(A), a beneficiary of a qualified subchapter S trust may elect to have Section 1361(d) apply.

In order to be a qualified subchapter S trust as defined in Section 1361(d) of the Internal Revenue Code (26 USC §1361(d)), a trust must meet the following statutory requirements: (1) the trust must have only one current income beneficiary; (2) if distributions of trust principal are permitted during the lifetime of the income beneficiary, the trust's terms must permit such principal distributions only to such income beneficiary; (3) the income interest of the current income beneficiary must be required to terminate on the earlier of such income beneficiary's death or the termination of the trust; (4) the terms of the trust must provide that, upon termination of the trust during the life of the income beneficiary, all trust assets must be distributed to the income beneficiary; and (5) all trust income must be distributed to one individual who is a citizen or resident of the United States (26 USC §1361[d][3][A] and [B]).

Petitioner contends that it was always the intent of the decedent that both trusts meet the requirements of a qualified subchapter S trust to permit the trusts to be funded with shares of Hicks Nurseries, Inc. and the corporation to maintain its S-corporation status. The petitioner is concerned that the trusts will not qualify since neither Article THIRD Section (A), which creates the credit shelter trust, nor Article THIRD Section (B), which creates the martial trust, specifically provides that (i) the current income beneficiary's income interest shall terminate at the earlier of her death or the termination of the trust and (ii) if the trust terminates during the life of the current income beneficiary, all of the trust assets shall be distributed to her.

Wills or trusts will rarely be reformed to correct mistakes (Matter of Merns, NYLJ, Mar. 16, 2001, at 18; Matter of Snide, 52 NY2d 193 [1981]) unless the reformation effectuates the settlor's or testator's intent to take maximum advantage of the available tax exemptions and deductions (Matter of Merns, NYLJ, Mar. 16, 2001, at 18; Matter of Choate, 141 Misc 2d 489 [1988]). The courts have generally been sympathetic where the reformation is requested to [*3]"satisfy technical tax code requirements and avoid unintended tax consequences" (Matter of Gottfried, NYLJ, Apr. 11, 1997, at 25, col. 6) since it is presumed that a testator intends to take full advantage of all tax exemptions and deductions (Matter of Fischer, NYLJ, June 26, 1996, at 26; Matter of Lepore, 128 Misc 2d 250 [1985]). In particular, courts have allowed reformations to allow a charitable remainder trust to qualify for the charitable deduction (Matter of Bull, NYLJ, Apr. 8, 1998, at 33, col. 4; Matter of Balletta, NYLJ, Feb. 23, 1998, at 33, col. 5; Matter of Kander, 115 Misc 2d 386 [1982]; Matter of Witz, 95 Misc 2d 36 [1978]; Matter of Stalp, 79 Misc 2d 412 [1974]); to allow a trust to qualify for the marital deduction (Matter of Pasquale, NYLJ, Mar. 21, 1997, at 38, col. 5; Matter of Opperman, NYLJ, Oct. 18, 1989, at 26, col. 4; Matter of Martin, 146 Misc 2d 144 [1989]; Matter of Khadad, 135 Misc 2d 67 [1987]; Matter of Lepore, 128 Misc 2d 250 [1985]); to maximize the generation-skipping transfer tax exemption (Matter of Choate, 141 Misc 2d 489 [1988]); to take advantage of the tax-savings aspect of a credit shelter trust (Matter of Quigan, NYLJ, Nov. 17, 1994, at 34); 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). In addition, there is precedent for reformation of a trust to meet the requirements of a qualified subchapter S trust as provided in Section 1361 of the Internal Revenue Code (26 USC §1361) (Matter of Fischer, NYLJ, June 26, 1996, at 26; Matter of Gordon, NYLJ, June 27, 1994, at 32, col. 3; Matter of Pivnick, NYLJ, Aug. 24, 1992, at 25, col. 5; Matter of Mainzer, 151 Misc 2d 203 [1991]; Matter of Romita, 134 Misc 2d 410 [1986]).

Here, if the trusts are not reformed, they will fail to meet the qualified subchapter S trust requirements. Accordingly, once the trusts are funded with the stock of Hicks Nurseries, Inc., the corporation will lose its S-corporation status, resulting in adverse income tax consequences. If the court, however, reforms Sections A and B of Article THIRD of the Will as requested, the trusts would qualify for subchapter S treatment, thereby continuing the income tax treatment enjoyed by the decedent while he owned the stock.

Nevertheless, the relief requested by petitioner goes beyond merely reforming the trusts to avoid adverse tax consequences. Petitioner also asks the court to delete the ascertainable standard language in both Sections A and B of Article THIRD which limits the trustees' principal invasion power to withdrawals for the decedent's spouse's "health, maintenance or support." In support of her request, petitioner claims that it was the decedent's intent that the "non-spousal Trustees of both trusts be given full and sole discretion with respect to the distribution of principal to the beneficiary whose distribution could exceed the limitations of the ascertainable standard which is contained in both trusts."

A testator's intent must be gleaned from a reading of the entire instrument (Matter of Thall, 18 NY2d 186 [1966]; Matter of Fabbri, 2 NY2d 236 [1957]). Here, the ascertainable standard language is set forth in both Section A of Article THIRD (the credit shelter trust) and Section B of Article THIRD (the martial trust). Moreover, Section A specifically provides that no invasions of principal from the Article THIRD (A) trust should be made so long as there is principal in the Article THIRD (B) trust. In addition, absent from the Will is any language indicating that the testator considered his spouse's interest as paramount to the interests of the remaindermen. The most salient evidence of the testator's intent is found in Article SEVENTH of the Will. Article SEVENTH provides that a trustee who is a beneficiary shall not "participate in the exercise of any power to make discretionary distributions to himself or herself." Since [*4]Article SEVENTH prohibits the beneficiary-trustee from participating in the exercise of such discretion in favor of himself or herself, the only conclusion that can be drawn is that the ascertainable standard language in Article THIRD was meant to apply to the non-beneficiary trustee's exercise of discretion to invade principal. Petitioner has failed to offer any proof to support her contention that the decedent did not intend to limit the discretion of the non-spousal trustees.

Petitioner does not contend that the ascertainable standard language must be deleted in order that the trusts will qualify as subchapter S trusts. In fact, the Internal Revenue Service has qualified a trust as a subchapter S trust where the trust includes a principal invasion power which is limited by an ascertainable standard language so long as no person other than the income beneficiary may receive principal distributions (Priv. Ltr. Rul. 199922052; Priv. Ltr. Rul. 200403031; Priv. Ltr. Rul. 9728044; Priv. Ltr. Rul. 9711011). The court also notes that reforming the Will to delete the ascertainable standard language could alter the dispositive provisions of the Will which courts are reluctant to do without any tax savings justification (Matter of Gordon, NYLJ, June 27, 1994, at 32).

Thus, the branch of petitioner's prayer for relief requesting that the language "for my spouse's health, maintenance or support" be deleted under Article THIRD Sections (A) and (B) of the Will is denied. Petitioner's application is granted to the extent that the following language:

"(a) My spouse's income interest in the trust shall terminate at the earlier

of her death or the termination of the trust.

(b) If the trust terminates during the life of my spouse, all trust assets

shall be distributed to my spouse."

shall be added at the end of the last paragraph of Section A of Article THIRD and as a new fourth paragraph to Section B of Article THIRD of the Will.

This constitutes the decision of the court.

Submit decree.

Dated: February 1, 2006

JOHN B. RIORDAN

Judge of the

Surrogate's Court

The appearance of counsel is as follows:



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