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Trusts & Estates:
Rulings Highlight Interplay of Family, Inheritance and Trust Principles
By Terence E. Smolev and Mary E. Mongioi
September 02, 2008

Two decisions by the Court of Appeals this past term bring to the forefront the juxtaposition of long-standing principles of law in two practice areas that many consider unrelated but which both deal with the relationships between parents and children. This overlap creates issues of which both matrimonial and estate attorneys should take note.

Adopted-Out Children

It has long been thought that the rights of adopted-out children regarding their biological parents' estates has been settled, especially since the amendments to Domestic Relations Law §117. The case decided by the Court this term, involving a supposed heir to the Jell-O fortune (In re Accounting by Fleet Bank), combined with a Surrogate's Court decision this year on paternal versus maternal adoptive parents (In re Estate of Johnson), make it clear that what seemed settled is still ambiguous and vague.1

In 1899, Orator Francis Woodward purchased rights to Jell-O from its inventor.2 Orator's daughter, Florence, created irrevocable trusts in 1926 and 1963, for the benefit of her daughter, Barbara Woodward Peel. The trusts provided in part that upon Barbara's death, the trusts would benefit Barbara's living children. The trusts were worth, at Florence's death, between $9.7 million and $12 million.3

Barbara, prior to marrying, had an illegitimate daughter, Elizabeth, adopted by third parties. Barbara subsequently had two daughters during her marriage. In October, 2004, after Barbara's death, Fleet Bank, the trustee, filed an accounting of both trusts. Elizabeth sought to intervene in that proceeding, seeking an equal distribution of the trusts' assets with the two legitimate daughters.

The Surrogate's Court and Appellate Division differed in their opinions based on their interpretations of In re Best,4 which held "a child adopted out of the family by strangers does not presumptively share in a class gift to the biological parent's issue established in the biological grandmother's 1973 testamentary trust."5 The Surrogate's Court relied on Best in denying Elizabeth a share. The Appellate Division reversed, finding the reasoning in Best to be inapplicable because the trusts in question were executed prior to the 1963 and 1966 amendments to the Domestic Relations Law that had been effective in Best.6

In Fleet, the Court of Appeals focused on the ambiguity in the terms of the subject trusts and the lack of evidence of Florence's intent to include or exclude an adopted-out child. The Court examined the Domestic Relations Law and did not find it instructive because when Florence executed her trusts, §117 "[did] not create rights for an adopted-out child to share in a class gift by implication." Nothing existed in pre-1964 legislative history or case law that would indicate "that an adopted-out child would share in a class gift to a biological parent's issue, descendants or children."

The Court relied on policy considerations in reversing the Appellate Division, and discussed "the legislative objective of fully assimilating the adopted child into the adoptive family and, relatedly, the importance of keeping adoption records confidential." The Court discussed the importance of finality, "because there would always lurk the possibility, no matter how remote, that a secret out-of-wedlock child had been adopted-out of the family by a biological parent or ancestor of a class of beneficiaries." The Court was also concerned with procedural administration in the event that adopted-out children gained the right to participate in the class created by a pre-1964 instrument, which would "create two classes of beneficiaries, those receiving a gift in an instrument executed before 1964 and those after."

New York Domestic Relations Law §117(1)(b) applies to intestate descent and distribution, and provides: "The rights of an adopted child to inheritance and succession from and through his birth parents shall terminate upon the making of the order of adoption except as hereafter provided." Section 117(2) deals with testate transactions and states in part that "after the making of an order of adoption, adopted children and their issue thereafter are strangers to any birth relatives for the purpose of the interpretation or construction of a disposition in any instrument[.]" Thus, unless there is a contrary intention expressly stated in the subject instrument, adopted-out children have no rights to the assets of a birth parent.

The Johnson Court highlights how §117(1)(e) of the Domestic Relations Law permits inheritance by adopted-out children if "(1) the decedent is the adoptive child's birth grandparent or is a descendent of such grandparent and (2) an adoptive parent (i) is married to the child's birth parent, (ii) is the child's birth grandparent, or (iii) is descended from such grandparent[.]"7

In Johnson, the decedent was the biological mother of the adopted-out child. The petitioner was another daughter of the decedent who was not adopted-out. The respondent, the adopted-out child, was adopted by a paternal aunt, not a maternal ancestor. The petitioner argued that, because there was no maternal relationship between the aunt and the decedent, the respondent was not permitted to inherit from her birth mother. Instead, the court held that "the language, legislative history, and policies underlying DRL §117(1)(e)" permitted the adopted-out daughter to inherit from her birth mother's estate.

While the Fleet and the Johnson cases further define the rights of adopted-out children, questions arise about what estate planning attorneys should consider. With many marriages ending in divorce and subsequent remarriages resulting in families having children from different marital partners, care should be taken in preparing wills and trusts regarding descendants, children and issue, and how those terms are defined in the documents.

Generally, estate planning attorneys use the terms descendants, issue and children without investigating whether or not a client had out-of-wedlock children or adopted-out children. While it may be a sensitive and difficult subject to broach, the draftsman should consider a more specific designation of who should be inheriting from the testator or testatrix.

It now appears with the Fleet and the Johnson cases that all the possible vagaries of Domestic Relations Law §117 and potential claims by adopted-out children have been settled. It is hard to believe at this time that another issue regarding adopted-out children and inheritance from biological parents could arise that has not now been dealt with in the Fleet and Johnson decisions when read in conjunction with Domestic Relations Law §117.

Parent and Fiduciary

The Court of Appeals recently examined the dual role of a parent with existing child support obligations (including payment of educational and medical expenses), who also acts as a fiduciary of a trust that permits invasion of principal for the same purposes.

In examining whether the Surrogate's Court can approve the use of trust funds by the fiduciary in lieu of his personal legal obligation to pay the expenses, the Court of Appeals answered with a resounding "maybe" and remanded the case for further hearing. The outcome of that hearing, to examine the intent of the fiduciary at the time of invasion of the trust, impacts both the manner in which the matrimonial bar formulates separation agreements and stipulations of settlement, and how the attorney/draftsman of testamentary and other trusts which permit invasion for health and educational expenses, practices his or her craft.

In In the Matter of the Estate of Burton Wallens,8 Charles Wallens, co-trustee of a testamentary trust established by his father, Burton Wallens, for the benefit of Charles' daughter Maggie, filed a judicial accounting with Surrogate's Court upon his daughter's petition demanding same.

After the execution of Burton Wallens' will creating the testamentary trust, Maggie's parents divorced. Maggie's father agreed, pursuant to a separation agreement, incorporated but not merged into the Judgment of Divorce, to pay child support, including educational expenses and any and all uninsured medical expenses for his daughter.

Upon Burton Wallens' death, the trust, which permitted the trustees to distribute monies "as the Trustee shall deem advisable for her proper support, education, maintenance and general welfare," was funded. Thereafter, the father who became the custodial parent post-divorce, petitioned for a reduction of his child support obligations, including his obligation to pay the cost of Maggie's college education. This petition was granted, and the Supreme Court directed that "the trust established by the [testator] for the benefit of the child shall be used to pay for normal and customary college costs and expenses."

The fiduciaries however, invaded trust principal to pay for both secondary school and college expenses as well as certain unreimbursed medical expenses. After Maggie demanded an accounting of trust assets by the co-fiduciaries, she filed objections, specifically to the payment of all educational and health expenses from trust assets, which, she asserted, were the personal legal obligation of her father. The Surrogate's Court allowed the college expenses, but held that "all pre-college education expenses which [were] set forth in [the] accounting . . . must be disallowed as unlawful expenditures from the trust, and [the fiduciary/Maggie's father was] required to repay the same, together with interest thereon . . . "9

The Appellate Division held that the Surrogate properly granted the motion "insofar as it dismissed the objections to use of trust funds for college education[,]" but erred in finding that the other expenses should not have been paid from the trust. The Fourth Department stated "such expenditures were in keeping with the testator's intent," highlighting the fact that "the testator was aware of [Maggie's parents'] divorce but nevertheless did not change the terms of his will during the two years between [the] divorce and the testator's death."

Upon remittal for a hearing on the use of trust funds for secondary school and health care expenses, the Surrogate's Court ordered the $100,553.36 previously repaid to the trust by the father/trustee be returned to him. Maggie then appealed both the Surrogate's Court decision and the prior decision of the Fourth Department to the Court of Appeals.

The obligations of the father as a fiduciary/trustee of the testamentary trust, who invaded trust principal to pay personal child support expenses, brings competing provisions of the Domestic Relations Law and the Estates, Powers and Trusts Law before the Court. The remittal to Surrogate's Court leaves the conflict unresolved at this time.

Estate practitioners, intimate with the standards of fiduciary responsibility imposed upon trustees, would likely argue that the father breached his duty of care when he expended trust funds for the support of his daughter, given his legal obligation to support her out of his own separate assets. They would point to the long-established rule of law that a "fiduciary owes a duty of undivided and undiluted loyalty to those whose interest the fiduciary is to protect."10 This "sensitive and 'inflexible' rule of fidelity [bars] not only blatant self-dealing, but also [requires] avoidance of situations in which a fiduciary's personal interest possibly conflicts with the interest of those owed a fiduciary duty."

The informed practitioner would also certainly be aware that "a trustee is under a duty to the beneficiary to administer the trust solely in the interest of the beneficiary"11 and that "the trustee . . . cannot compete with the beneficiaries for the benefits of the trust corpus."12 Certain in the knowledge that these principles are routinely upheld by the Court, practitioners would expect the Court to rule that this fiduciary/father clearly breached his duty of loyalty by using trust funds for his daughter's support while he had the ability and obligation to support the beneficiary with his own assets.

Yet, the Court relied upon equally well-established principles which dictate that the intent of the testator to provide trust assets for the beneficiary's educational, general welfare and medical expenses, control in determining whether a trustee's distribution of trust assets was proper. The Court of Appeals found that although the objected to educational and medical expenses "fall within the class of expenditures authorized by the trust, since the terms of the trust explicitly permit trust funds to be used for Maggie's 'support, education, maintenance and general welfare,'" the "trustee is still required to act reasonably and in good faith in attempting to carry out the terms of the trust."13 Thus, the matter was remitted "for a hearing to determine whether the expenditures were authorized in good faith and in furtherance of the beneficiary's interests."

As practitioners, where does this leave us? How are we to prepare matrimonial settlement agreements so that parents cannot avoid child support obligations and benefit from trusts established by others that provide for those same obligations to be met? How are we to draft trust instruments so that parents, in their role as fiduciaries of trusts established for the benefit of their children, cannot exhaust trust principal to pay for educational and other expenses which they have the personal legal obligation to pay? The simple answer seems to be not to appoint a parent as fiduciary of a child's trust, but that is not always practical and may be cost-prohibitive. For an estate practitioner, the key may be to discuss with the testator the nature of the trust and advise of the possible use of trust principal to supplement or pay for expenses that are viewed as the personal legal obligations of a parent.

It would certainly behoove members of the matrimonial bar to be aware of any trusts that may exist for the benefit of the minor children of a marriage. Once informed, one may proceed to artfully draft agreements such that a monied parent may not avoid legal obligations through the exercise of discretion as a fiduciary to invade trust principal to pay for those same obligations. The Wallens Court warns that if a parent is able to characterize an invasion as an act "in good faith and in furtherance of the interests of a beneficiary" the parent can perhaps avoid his or her child support obligation. Thus, the only individual who may benefit from the trust is the fiduciary/parent, a result that may not have been the intent of the testator or grantor in establishing the trust.

Terence E. Smolev is partner in charge of the tax, trusts and estates department of Forchelli, Curto, Crowe, Deegan, Schwartz, Mineo & Cohn, in Mineola. Mary E. Mongioi is counsel to the firm. Danielle Gatto, a law clerk at the firm and a third-year student at Hofstra Law School, assisted in the preparation of this article.

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