Matter of Miller

[*1] Matter of Miller 2015 NY Slip Op 51928(U) Decided on December 16, 2015 Surrogate's Court, Broome County Guy, 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 This opinion is uncorrected and will not be published in the printed Official Reports.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 December 16, 2015
Surrogate's Court, Broome County

In the Matter of Earl F. Miller, Deceased.



71-182



For Petitioner M & T Bank:

Karen J. McMullen, Esq. and Sabrina Moldt, Esq. of Levene Gouldin & Thompson, LLP

For Eric T. Schneiderman, New York State Attorney General by Mary A. Walsh, Esq., Assistant Attorney General
David H. Guy, J.

Petitioner, M & T Bank, NA, is the trustee of the trust created under Article SIXTEENTH of the Last Will & Testament of Earl F. Miller, dated May 31, 1967 (Miller Trust). Letters of Trusteeship were issued to the Endicott Trust Company on May 3, 1971. Endicott Trust Company served as trustee until July of 1992, when they were acquired by Petitioner. Petitioner has served, and continues to serve, as sole trustee the Miller Trust since that time.

The Miller Trust is a perpetual charitable trust for the benefit of Apalachin United Methodist Church. Petitioner requests that this Court order, retroactively as of January 1, 2015, that the provisions of the New York State Estate Powers and Trusts Law (EPTL) §11-2.4 apply to the trust, for the purpose of determining the annual distribution to which the beneficiary church is entitled: a unitrust amount equal to 4% of the net fair market value of the trust's assets, as set forth in EPTL §11-2.4.

Petitioner also seeks an order of this Court directing payment of reasonable trustee's commissions pursuant to Surrogate Court Procedure Act (SCPA) §2312, in accordance with Petitioner's published fee schedule, discounted by 50% due to the charitable nature of this trust. Currently, Petitioner receives a 6% commission on income received by the trust, the statutory minimum under SCPA §2309(5). SCPA §2312(4)(a).

The beneficiary church, through the Chairman of its Board of Trustees, filed an affidavit in support of both aspects of the petition. The New York State Attorney General is also a necessary party to this proceeding. The Attorney General, by Mary A. Walsh, Esq., Assistant Attorney General, filed two letter briefs in response to the petition. The Attorney General makes no objection to the request to convert the trust to a unitrust, nor to the requested change in trustee compensation.

New York's statutory structure has changed significantly since this trust was created in 1971. With respect to compensation, the fixed statutory payment arrangement of SCPA §2309(5) was supplanted by SCPA §2312, allowing a corporate trustee to receive "reasonable compensation, not to be less than that provided by SCPA §2309(5)", in 1993. The Prudent Investor Act, EPTL §11-2.3, was enacted in New York in 1994. The power to adjust and optional unitrust provisions were added in 2001. EPTL §11-2.3(b)(5); EPTL §11-2.4. These changes, and [*2]periodic amendments to them since their respective enactments, are designed to provide fiduciaries and beneficiaries with the benefits of modern portfolio theory using the total return concept of investment, blurring and complicating the traditional definitions and significance of principal and income. New York Estate Administration, Turano & Radigan, 2015 Edition, §§14.05; 14.06; New York EPTL - SCPA Advisory Committee, 5th Report : Proposed Changes to the Definition of Trust Accounting Income, to Redefine Appropriate Benefit Currently Distributable (May 11, 1999, supplemented May 26, 2000).

APPLICATION OF EPTL §11

2.4

The optional unitrust provisions of EPTL §11-2.4 are applicable to trusts in existence before its effective date of January 1, 2002. Specific provision was made in the statute for trustees to elect or request its applicability to a pre-existing trust. The trustee of such a trust may "opt in" to the unitrust provisions with consent of the beneficiaries [EPTL §11-2.4)(e)(1)(B)(i)], or, as in this case, petition the Court on notice to interested parties for application of the provisions. EPTL §11-2.4(e)(2)(B). The "opt in" provisions of EPTL §11-2.4(e) have been ratified with respect to a fully charitable trust [Matter of Millbrook Free Library Trust, 12 Misc 3d 1167 (A), (Dutchess County Surrogate's Court, 2006)] and there is no basis in statute or case law to deny a charitable trustee the ability to petition to for such relief under EPTL §11-2.4(e)(2)(B).

In determining whether a trust should be converted to a unitrust, the Court must consider all factors relevant to the trust, including:

(i) the nature, purpose and expected duration of the trust;

(ii) the intent of the creator of the trust;

(iii) the identity and circumstances of the beneficiaries;

(iv) the needs for liquidity, regularity of payment, and preservation and appreciation of capital;

(v) the assets held in the trust; ...EPTL §11-2.4(e)(5)(A).

The petition, as well as the beneficiary's supporting affidavit, sets forth a cogent analysis of the relevant factors. There is no Will provision prohibiting the conversion. Conversion of this trust to a unitrust would provide the beneficiary with enhanced cash flow at a time of increasing need and the ability to plan and budget more effectively; ensure continued liquidity for the beneficiary; and allow the trustee to take the full advantage of currently available investment strategies with a long term perspective. No evidence is presented which rebuts the presumption favoring a unitrust. EPTL §11-2.4(e)(5)(B); Matter of Ives, 192 Misc 2d 479 (Broome County Surrogate's Court, 2002); Matter of Moore, 41 Misc 3d 687 (Nassau County Surrogate's Court, 2013).

Having considered the facts presented relative to the factors, the statutory presumption in favor of the unitrust and the lack of opposition to the petition, it is clear the petition should be granted. M & T Bank, NA, as trustee, is hereby ordered to treat the trust under Article SIXTEENTH of the Last Will & Testament of Earl F. Miller as a unitrust pursuant to EPTL

§11-2.4.

The petition also requests that the unitrust designation be retroactive to January 1, 2015, the first day of the trust's current fiscal and tax year. EPTL§11-2.4(e)(4)(a)(iii) provides the change shall apply "as of the date specified by the Court in its decision" converting the trust. The [*3]requested date, and the most logical date, is January 1 of the current year. That avoids any risk of having to recalculate payouts or income taxes which have already been filed by both the trust and the beneficiary, or having two (2) partial years with different methodologies. In re Will of Kruszewski, 116 AD3d 1288 (Third Dept., 2014); Matter of Ives, supra. Accordingly, it is held that the trustee shall treat the Miller Trust as a unitrust effective January 1, 2015.

An additional issue, not raised in the petition but which needs to addressed, is the application of the three year smoothing rule in EPTL§11-2.4(B). While this trust has been in existence for may years, the unitrust provisions are only made applicable as of January 1, 2015. If the smoothing rule were implemented immediately, the valuations for January 1, 2014 and January 1, 2013 would be utilized to compute the unitrust for 2015, despite the fact that the unitrust rules were not in place for the two earlier years. Consistent with the ruling of this Court in Matter of Ives, supra, the Court finds it most appropriate to treat 2015 as the first year of the trust for purposes of computing the unitrust payment, pursuant to EPTL§11-2.4(B).

DETERMINATION OF REASONABLE COMPENSATION FOR TRUSTEE

New York has a long history of limiting a trustee of solely charitable trusts, such as the Miller Trust, to commissions from income only. SCPA 2309(5), added by the laws of 1956 and derived from earlier provisions in the Surrogate's Court Act, provides that the trustee of a solely charitable trust "shall be entitled to and may retain commissions from income in amount annually equal to six per cent (6 %) of income collected in each year". That statute goes on to say that such a trustee "shall not be entitled to any commission from principal". When the legislature introduced the concept of reasonable compensation for corporate trustees with the passage of SCPA §2312 in 1993, a charitable corporate trustee's commissions were still limited to income, not principal. SCPA §2312(3). A "floor" for reasonable compensation was established as the compensation computed pursuant to §2309. SCPA §2312(4)(a)[FN1] .

Amendment of SCPA §2312(5) in 2001 provides that commissions on a trust governed by the unitrust provisions of EPTL §11-2.4, are payable from principal of the trust, after allowance for the annual unitrust payment. This statutory change is consistent with the total return investment concept of §11-2.4, that accounting income is not a factor in computing current trust distributions.

The Court having determined the unitrust provisions of 11-2.4 should be applied to the Miller Trust, we are left with an anomalous situation of the trustee being directed to invest pursuant to the unitrust concept, specifically to avoid having to focus on current income for distribution, while at the same time apparently being limited in its commission to the income generated. This puts the trustee's interest in conflict with the purpose of the unitrust statute, presumptively the most appropriate standard of investment, and with the interest of the beneficiary.[FN2]

Courts have disallowed a corporate trustee's use of its published fee schedule to set commissions on solely charitable trusts. Matter of Millbrook Free Library Trust, supra. However, this matter is distinguishable from Millbrook in many respects. First, the will in Millbrook fixed trustee's compensation, so reference to the statute was found to be inappropriate. Here, the will contains no provisions for trustee compensation.

Additionally, in Millbrook, the issue of trustee compensation arose in the context of an accounting, after many years of commission retention by the trustee. The New York State Attorney General, an interested party because of the charitable nature of the trust, was not made aware of the commission payments until after the fact. Objections to the commissions came from both the charitable beneficiary and the Attorney General. Here, the petitioner has not only received the informed consent of the beneficiary to its request, it has sought the Attorney General's prior review and input. After reviewing the petition, the Attorney General has not objected to the trustee's request regarding compensation, recognizing that the determination of reasonable compensation lies with the Court, pursuant to SCPA §2312 (2).

After reviewing the petition, including the projections of future distribution and trustee compensation, as supported by the beneficiary, and noting in particular that utilizing the trustee's discounted fee schedule based on principal appropriately aligns the trustee's and the beneficiary's interests going forward, the Court finds that in this case, the trustee's published fee schedule, discounted by 50%, is an appropriate measure of reasonable compensation to the trustee during the time that EPTL §11-2.4 applies to this trust.

With the application of the unitrust provisions to this trust, traditional definitions of principal and income become irrelevant to this trust. The Court's decision means that EPTL Article 11-A no longer applies to this trust. EPTL §11-2.4(e)(2)(B). Annual distributions to the beneficiary have no direct relation to either principal or income. At the same time, the trustee will continue to track income for purposes of reporting to the beneficiary (and the Attorney General and Court, upon accounting) the composition of its total return, as between ordinary income and capital gain/appreciation. Given the statutory limitation of SCPA §2312(5), that commissions on a solely charitable trust may only be retained from income, the Court finds that accounting income will serve as a limitation on annual compensation payable to the trustee. M & T Bank, NA, as trustee, is hereby authorized to retain commissions on the trust under Article SIXTEENTH of the Last Will & Testament of Earl F. Miller at the rates set forth in its published fee schedule, discounted by 50%; provided, however, that in no event shall commissions received in any calendar year exceed trust accounting income for that year.

This Decision constitutes the Order of the Court.

Dated:December 16, 2015

_________________________________________

Hon. David H. Guy

Surrogate Footnotes

Footnote 1:A solely charitable trust is specifically excluded from the provisions of SCPA §2312(4)(B), which establishes a minimum corporate trustee commission rate of $12.35 per $1,000 of principal value.

Footnote 2:In a non-unitrust charitable trust, where income only is distributed, limiting the trustee to commissions on income, places the trustee's and beneficiary's interests in sync: maximization of income. As noted above, such an investment strategy is inconsistent with modern portfolio theory, as reflected in the unitrust concept of EPTL §11-2.4.