Testamentary substitutes are factored into the calculation of a surviving spouse’s elective share under New York law. In Matter of Lipton, the New York County Surrogate’s Court considered a surviving spouse’s claim that she was entitled to a payment of almost $1.9 million as the balance of her elective share because of certain payments made from trusts in which her deceased husband had interests.
The Facts of Matter of Lipton
Decedent, David, died leaving a probate estate of about $8.5 million. Decedent was survived by his spouse, Audrey, and by three children with his first wife, Hortense – Arthur, Robert, and Heidi. Arthur was the executor of Decedent’s will and a co-trustee with Robert of trusts under Hortense’s will (the “Trusts”).
Decedent was the Trusts’ lifetime income beneficiary and their discretionary principal beneficiary. Discretionary distributions could be made as “necessary or advisable” for David’s “maintenance, health, care or support.”
Within 10 months of David’s death, he instructed Robert as trustee via letter to cease any and all distributions to him under the Trusts and to use his discretion “for other distributions as you deem appropriate.”
About three weeks after Decedent’s instruction, the trustees (Arthur and Robert) drew a series of checks from the Trusts’ accounts, payable to the separate order of the three children (Arthur, Robert, and Heidi) in various amounts. The trustees also forgave Arthur’s personal indebtedness to the trusts for $1 million. The checks and the loan forgiveness totaled $4,674,784 (the “Payments”).
Audrey the surviving spouse argued that the Payments constituted transfers of property subject to her right of election under EPTL 5-1.1-A, New York’s elective share statute, thereby enlarging her elective share by the $1.89 million claimed.
New York EPTL 5-1.1-A
New York’s EPTL 5-1.1-A provides a right of election for a New York surviving spouse to take a share of his or her deceased spouse’s estate, regardless of the terms of the will. We have written about New York elective share issues here.
The pertinent portions of EPTL 5-1.1-A for this case are:
“(a) Where a decedent … is survived by a spouse, a personal right of election is given to the surviving spouse to take a share of the decedent’s estate, subject to the following:
(1) For the purpose of this section, the decedent’s estate includes the capital value, as of the decedent’s death, of any property described in subparagraph (b)(l).
(3) The term “testamentary provision”, as used in this paragraph, includes … any transaction described as a testamentary substitute in subparagraph (b)(l).
(b) Inter vivos dispositions treated as testamentary substitutes for the purpose of election by surviving spouse.
(1) … [t]he transactions affected by and property interests of the decedent described in clauses (A) through (H) … shall be included in the net estate subject to the … elective right …
(B) The aggregate transfers of property … within one year of the death of the decedent, to the extent that the decedent did not receive adequate and full consideration in money or money’s worth for such transfers …. ”
What Is The Purpose of New York’s Elective-Share Statute?
In considering the parties’ positions, the court acknowledged it had to do so in light of the purposes of the elective-share statute: “to prevent one spouse from entirely disinheriting the other.”
New York’s elective share statute assures a surviving spouse a one-third share of the property owned by the deceased spouse at death, net of administration and other expenses.
The statute also allows “testamentary substitutes” to factor in the calculation of a New York surviving spouse’s elective share
What Is A Testamentary Substitute Within The Meaning Of New York’s Elective-Share Statute?
A “testamentary substitute” within the meaning of New York’s elective-share statute includes:
- gifts causa mortis
- gifts made within one year prior to the decedent’s death
- Totten trust accounts
- joint bank accounts
- property held jointly or payable to another on death
- assets transferred by the decedent in which decedent retained the right to income for life
- retirement accounts
- assets in which decedent held a general power of appointment
- pay-on-death or transfer-on-death accounts or securities
The New York Surrogate’s Court again looked to the purpose of creating this category of transfers, stating:
In creating that category of transfers, the statute has a purpose that is very clear: to prevent one spouse from using lifetime transfers of his property as a device to subvert the elective-share protections that public policy intends for the other spouse. The premise of the testamentary substitute provisions is that an owner’s lifetime transfer of his property-which removes that property from his probate estate and thus diminishes the surviving spouse’s elective share – is insidious where the transferor retains some interest in the property until the end, or near-end, of his lifetime. Put simply, the objective of the testamentary-substitute provisions is to prevent one spouse from having his cake (continuing to enjoy his property) and eating it too at the other spouse’s expense (by placing his property, at his death, beyond the other spouse’s reach).
The value of testamentary substitutes is added to the base upon which a New York surviving spouse’s elective share is calculated.
Are A Decedent’s Lifetime Interests In A Trust A “Testamentary Substitute” For New York Elective Share Purposes?
Trust interests that decedent is entitled to, and relinquishes, within the one year period prior to death can constitute a testamentary substitute for purposes of the New York elective share statute.
Entitlement To Income
Here, Decedent had a lifetime entitlement to income from the Trusts, and a possibility of receiving principal. In Decedent’s letter to his trustee son, decedent relinquished his right to further Trust income for life.
The relinquishment of Trust income constituted a testamentary substitute within New York EPTL 5-1.1-A because it diverted from Decedent’s probate estate the value of future Trust income, and such diversion occurred within one year of Decedent’s death. As noted by the court, “this testamentary substitute makes only a very modest difference to the size of Audrey’s elective share, given the actuarial value of future income for the balance of a 95-year-old’s life.”
Mere Expectancy of Principal
The discretionary principal distributions from the Trust were no more than a mere expectancy, thus, decedent was never in a position to relinquish or otherwise transfer such principal:
That principal was derived from property that had been Hortense’s, and at no point thereafter had it become decedent’s. Thus, decedent was never in a position to relinquish or otherwise transfer such principal. Even if, arguendo, he had purported to make such a transfer, his eventual probate estate would have been unaffected, since his mere expectancy as to a discretionary invasion of principal did not amount to an asset that would have otherwise been part of his probate estate. Having had no effect on the size of decedent’s ultimate probate estate, decedent’s loss of such expectancy also had no effect on the size of Audrey’s elective share. Audrey therefore cannot rationally ask that this major part of the Payments be factored into the calculation of her elective share as purported testamentary substitutes.
After dismissing the remainder of Audrey’s arguments, the court summarized:
[U]nder EPTL 5-1.1-A, testamentary substitutes extend the elective share’s reach to property that had belonged to the deceased spouse and therefore would have been in his probate estate if he had not made a lifetime transfer of it. In this case, Trust principal had never belonged to decedent, and his probate estate therefore would not have included it even if the Trusts had remained intact. Accordingly, Audrey has no basis for complaint that the millions of dollars of Trust principal that decedent never owned are beyond the reach of her elective share.
Audrey was granted summary judgment to the extent that the actuarial value of the future income is a testamentary substitute within the meaning of New York’s elective share statute. The claim to the inclusion of the remaining amounts of the Payments was denied.