All in the Family: Inherited Real Estate the Subject of Siblings’ Lawsuits

Two kids yelling at each other illustrating article by Richard Klass about a dispute between siblings over real estate profits and limited partnerships.

All in the Family

Inherited Real Estate the Subject of Siblings’ Lawsuits

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Their mother owned several valuable properties. While she was alive, the mother did some estate planning to minimize potential estate taxes. As part of her estate plan, she transferred the properties into limited partnerships, keeping for herself a life estate (the right to retain some ownership until her death).

Every year, she transferred certain percentages of each limited partnership to each of her children, of which there were five — two brothers and three sisters. As part of her estate plan, the mother set up a separate company to manage the limited partnerships’ real estate, appointing herself and one of her sons to be the two managers of the company. She also made a Will which directed that her children equally share in the proceeds of the sale of her real estate interests after her demise.
After her death, the son whom she had appointed manager was now in charge of managing the limited partnerships’ real estate. He found buyers and sold two of the properties held by the limited partnerships. After the sales, the son/manager sent each of his siblings a letter stating how much each property sold for and the amount of the net proceeds from the closings. After meetings and conversations among the siblings about their mother’s estate and the son/manager’s sale of the properties, a couple of the sisters accused the son/manager and his brother of committing fraudulent acts. Specifically, they accused the brothers of selling the properties at below-market prices to entities owned by the brothers, without any prior notice to the sisters, in order to develop the properties.

Refusal to Waive Claims

Faced with the threat of litigation, and on advice of estate counsel, the son/manager sent each of his siblings a letter offering to distribute to each sibling his/her share of the proceeds of the property sales from the limited partnerships provided each sibling signed a Receipt and Release Agreement, which would release the son/manager from any potential claims. The sisters refused to sign the Receipt and Release Agreement, claiming that its terms were unconscionable and oppressive.

Through counsel, the sisters then requested copies of certain documents from their brother’s attorney. The son/manager’s attorney provided documentation of the property sales. Despite providing the requested documents, two of the sisters commenced a lawsuit against the two brothers alleging, among other things, that the brothers failed to provide all documents related to the sales of the properties and, also, that the brothers breached their fiduciary duties.

Commingling of Individual and Derivative Claims

In the first lawsuit, the sisters sued in their own individual capacities and not on behalf of the limited partnerships. In dismissing the case, the judge held that the sisters were required to sue on behalf of the limited partnerships, as their claims were derivative claims. “Derivative claims” are those brought by a member of an entity, on its behalf, against another person.

After the first case was dismissed, one of the sisters brought a new case suing both on her behalf and on behalf of the limited partnerships. The case against the two brothers asked for essentially the same relief as in the first case. The brothers retained Richard A. Klass, Esq., Your Court Street Lawyer, who argued that the new case should be dismissed because the complaint failed to distinguish between the sister’s individual claims and the derivative claims. The reasoning for requesting dismissal was that commingling (or mixing) the claims together would confuse who is entitled to which relief. See, Wallace v. Perret, 28 Misc.3d 1023; Pomerance v. McGrath, 2011 NY Slip Op. 34060(U). New York Partnership Law §121-1002 provides that a limited partner may bring a derivative claim to address harm to the limited partnership.

Dissolution of the Limited Partnerships not Directed

One argument made by the sister was that, as there had been no activity by the limited partnerships since selling the real estate, the limited partnerships should be judicially dissolved (or terminated by the court). She argued that her brother (the son/manager) was holding her money hostage simply for her to release him from any liability.

In response, Your Court Street Lawyer pointed out that the operating agreements for the limited partnerships provide for certain specific events which would trigger their dissolution, mainly (a) an act or omission by a partner under New York’s Partnership law; (b) agreement of all of the partners; or (c) January 1, 2050. Since none of these events occurred as of yet, it was urged by the brothers, there was no cause of action for dissolution. The son/manager argued that it was within his right as the manager/general partner to elect to retain the net proceeds unless and until the release is provided; the limited partnerships’ moneys needed to be preserved to defend the lawsuits filed by the sister.

No Proof Submitted in Opposition to Summary Judgment

In response to the sister’s motion to dissolve the limited partnerships, the brothers brought their own motion seeking summary judgment, in order to dismiss the sister’s case entirely. They submitted affidavits in support of the motion, claiming that their sister had no case against them. The brothers claimed that they were innocent of any wrongdoings.

In opposition to the motion for summary judgment, the sister’s attorney provided his affirmation with nothing more; there was no affidavit from the sister or any documentary evidence in opposition to the motion. The judge pointed out to the sister’s attorney that he could have provided an appraisal of the fair market value of the two properties to show that they were sold below-market. But, she hadn’t. The judge held that failure to provide any meaningful opposition was fatal to her case. The judge dismissed the case.

— Richard A. Klass, Esq.

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Image on page one: Photo credit: © Can Stock Photo / ilona75

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Essential Components of a Last Will and Testament

A Last Will and Testament sets forth the wishes and directions of the “Testator” upon his/her death. It is important that, in considering the various issues of one’s Will, the following items be incorporated:

1. Executor

The first consideration of the person making the Will is who will be selected to carry out his/her wishes upon death. The person selected should be a responsible, trusted friend or relative. The person selected should not be someone who has been convicted of a felony, and preferably an American citizen who is over 18 years old. The Testator should approach the proposed Executor to make sure that he/she would be willing to serve as the same. Alternate Executors should be selected as well, in the event that the selected person does not serve. If the Testator wishes to restrict certain rights of the Executor (e.g. mortgage property or make a loan from the estate), the same should be stated in the Will.

2. Guardians of children

If the Testator has minor children, a serious discussion should be had with the friend or relative to be selected as guardian of the children in the event that neither parent survives. Alternate guardians should be selected as well, in the event that the selected person does not serve.

3. Beneficiaries

The people or entities to whom property will be left by the Testator are called the beneficiaries. The Testator may designate the property to be received by the beneficiaries in terms of specific dollar amounts, percentages of the estate, specific items, or rights to be given.

It is important in estate planning to be cognizant of the fact that certain assets will pass “outside of the estate,” and not be controlled by the dispositions in the Will, but rather by their own terms. Examples of such assets are life insurance policies, annuities, Individual Retirement Accounts, and other types where beneficiaries are designated therein.

— by Richard A. Klass, Esq.

———–
copyr. 2014 Richard A. Klass, Esq.
The firm’s website: www.CourtStreetLaw.com
Richard A. Klass, Esq., maintains a law firm engaged in civil litigation in Brooklyn Heights, New York.
He may be reached at (718) COURT-ST or e-ml to RichKlass@courtstreetlaw.com with any questions.
Prior results do not guarantee a similar outcome.


R. A. Klass
Your Court Street Lawyer

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Probate/Administration: a guide to probate or administration proceedings in New York State.

Upon a person’s death, a proceeding may be brought in the Surrogate’s Court of the county in which the person formerly resided. The proceeding will seek to collect and administer assets of the deceased person, and distribute them to his/her heirs.

There are two basic types of proceedings: Probate and Administration.

Probate: where the deceased executed a “Last Will and Testament,” a proceeding will be filed to “probate” [or “prove”] the Will. The deceased, known as the “testator” will have designated an “executor” [someone selected to carry out the deceased’s wishes], who may or may not receive a commission for such services. The deceased will also have designated beneficiaries to receive portions of his/her estate. The deceased may indicate specific bequests of property (such as “to my brother, I leave my guitar”) or general bequests (such as “to my three siblings, I leave them each one-third of my net estate”).

Administration: where the deceased did not execute a Will, the person is referred to having died “intestate.” Contrary to popular belief, the assets of that person’s estate do not automatically go to the State. Rather, there is a section of law which specifies the manner in which an intestate’s assets are distributed. Depending on who the survivors of the intestate are (such as a spouse, child, parent, or cousin), the law will tell the “administrator” to whom the net assets of the estate must be paid. The “administrator” serves a similar duty to the deceased’s estate as the “executor” mentioned above, and may be appointed by the Surrogate of the county upon proper application.

Collection of assets
After appointment, the executor/administrator will have the duty to locate and collect the various assets of the deceased. An account may be opened in which the assets will be deposited; non-liquid assets, such as cars, houses, stocks, or furniture may be sold at auction or otherwise converted to money. Actions may be brought on behalf of the deceased to collect moneys due to the estate or for wrongful death/personal injury actions.

Tax returns
After all of the assets have been collected, the executor/administrator will determine whether federal and/or state estate tax returns must be filed. Various banks or institutions may require “tax waivers” or “releases of tax lien” from the State in order to release funds to the executor/administrator.

Accounting
The final duty of the fiduciary is to file with the court an “accounting” of what that person did during his term as executor/administrator.

Professional fees
The fiduciary will retain and pay professionals in connection with the estate proceeding, including attorneys, accountants, brokers, auctioneers, and appraisers.

by Richard A. Klass, Esq.

———–
copyr. 2014 Richard A. Klass, Esq.
The firm’s website: www.CourtStreetLaw.com
Richard A. Klass, Esq., maintains a law firm engaged in civil litigation in Brooklyn Heights, New York.
He may be reached at (718) COURT-ST or e-ml to RichKlass@courtstreetlaw.com with any questions.
Prior results do not guarantee a similar outcome.


R. A. Klass
Your Court Street Lawyer

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Abandonment under the Estates Powers and Trusts Law (“EPTL”)

A parent is not supposed to outlive his/her children. This is a tragic truth that can only be enhanced when determining that child’s estate. Due to the statute EPTL 3-1.1, a child under 18 dies intestate, meaning without a will.[1] The laws of intestacy clearly state that in the event the decedent is not married and has no children, his estate shall be inherited by the decedent’s parents. But what happens when one of those parents has not been there for the child? Either due to divorce or other circumstances the child and parent do not have a relationship; is that parent still entitled to collect his distributive share of the child’s estate? The statute is clear. EPTL 4-1.1(a)(1) provides: “No distributive share in the estate of a deceased child shall be allowed to a parent if the parent, while the child is under the age of 21 years has failed or refused to provide for the child or has abandoned such child, whether or not such child dies before having attained the age of 21 years, unless the parental relationship and duties are subsequently resumed and continue until the death of the child.” In interpreting and applying this statute, the courts have been clear in their determination. The disqualification of a parent is premised upon either (1) a failure or refusal to support the child or (2) abandonment of the child.[2] Either of these can be the basis for denying a parent their right a distributive share of the child’s estate, although neither is a necessary element in order to prove the other.[3] A parent’s disqualification is determined by their relationship before the child turns 18, regardless of whether or not the child dies after 18. If the child dies intestate and one parent asserts abandonment by the other parent, an analysis is necessary to determine whether the parent asserting abandonment has sustained her burden.[4] A parent has the duty to support his minor child in accordance with his means.[5] A failure or refusal to support a child financially can prevent that parent from receiving his distributive share. Financial support of a minor child must be shown by monies paid by the non-custodial parent to the parent with custody. Direct payments to the child are not included, nor are payments made to the child by others. Relying on others, including the state in the form of public assistance will result in the parent forfeiting his rights to any distributive share. The statute “imposes an equitable penalty upon parents who fail to fulfill their obligations of support under FCA 413.”[6] It is relatively easy to determine whether a parent takes on the responsibility of financially supporting his child. It is more difficult to determine whether a parent has abandoned his child. What is abandonment? The statute does not provide a definition of abandonment, so a review of the case law is necessary to determine how the term ‘abandonment’ is interpreted. Case law has been clear on what constitutes ‘abandonment.’ Abandonment is a voluntary breach of neglect of the duty to care for and train a child and the duty to supervise and guide his growth and development.”[7] There are limitless interpretations of the relationship between a parent and child and each one is unique. Therefore, how can a court determine that a particular parent has abandoned his child under the statute? There must be an analysis of the facts and circumstances of the parent/child relationship in order to make a determination. A father who paid child support, but made no effort to contact his son for the seven years between his remarriage and the child’s death, despite living nearby was found to have abandoned his son, despite the fact that he paid child support.[8] Similarly, a father who professed his long-distance love for his child but had no more than sporadic, infrequent visits did not reach the threshold of demonstrating his “natural and legal obligations of training, care and guidance owed by a parent to a child.”[9] A claim the child’s custodial parent ‘poisoned’ the child against the non-custodial parent will not be sufficient to overcome the burden of proof.[10] A court’s order limiting a parent’s involvement is also not a valid excuse to avoid a determination of abandonment. Courts have clearly held, “while a court order restricting a parent to visitation may lessen the measure of such parent’s obligation, it does not eliminate it. Rather the inquiry then becomes whether or not the parent has fulfilled this responsibility…”[11] However, a father who was absent for nearly half a child’s life due only to the fact that he did not know of the child’s existence, and subsequently financially supported and attempted to participate was found to have not abandoned the child.[12] A parent who has failed to fulfill his parental duties due to incompetency will not be held as abandoning his child so long as there is no history of non-support.[13] A parent cannot prove his involvement in his child’s life merely by asserting his love for the child or by stating his intent to have a relationship with the child. Actions speak louder than words. It is the actions of the parent accused of abandoning his child that will determine whether or not his parental duties were fulfilled, not his plan or intent or wish to spend time with the child during their life. A parent’s absence in the child’s life, as evidenced by a lack of knowledge regarding the child’s health, education and well-being are strong indicators of abandonment and will support a court’s denial of any distributive share of the child decedent’s estate.
by Elisa S. Rosenthal, Esq.,
Associate
Copyright 2013 Richard A. Klass, Esq.
__________

Footnotes

[1] NY EPTL §3-1.1; N.Y. Prac., Trusts and Estates Practice in New York §7:61 (A person must be 18 in order to execute a will). [2] In the matter of Wright, 20 Misc.3d 648 (2008); In the matter of Pessoni, 11 Misc.3d 245 (2005). [3] Matter of Pridell, 206 Misc. 316 (1954)(Where the father paid child support to decedent’s mother, he admits to having no relationship with the decedent, and was denied participation in decedent’s estate); Matter of Musczak, 196 Misc. 364 (1949). [4] Matter of the Estate of Clark, 119 A.D.2d 947 (1986). [5] Matter of Gonzalez, 196 Misc.2d 984 (2003). [6] Id at 988. [7] Wright at 867; Pessoni at 247; Pridell at 318; N.Y. Prac., Trusts and Estates Practice in New York §7:63 [8] Pridell at 318. [9] Gonzalez at 987. [10] Pessoni at 549. [11] Pridell at 318. [12] The matter of the Estate of Ball, 24 A.D.3d 1062 (2005).

[13] Musczak at 367.

———– copyr. 2013 Richard A. Klass, Esq. The firm’s website: www.CourtStreetLaw.com Richard A. Klass, Esq., maintains a law firm engaged in civil litigation in Brooklyn Heights, New York. He may be reached at (718) COURT-ST or e-ml to RichKlass@courtstreetlaw.com with any questions. Prior results do not guarantee a similar outcome.

An Extra $1,500,000 for the Aged

Bedroom in nursing home. Photo in black and white. An elderly woman in the bed, with a book, smiling. There's a nun in habit at bedside, also smiling, with a radio in front of her. More than fifty years ago, a charitable woman executed her Last Will and Testament, bequeathing all of her assets to two Catholic charities in the event that her siblings did not survive her. The two Catholic charities named in the Will were the Columbus Hospital and St. Joseph Rest Home for the Aged, each to get 50% of her estate. Both of these institutions were founded or operated by Italian American Catholic Orders.
In March 2008, the woman passed away, leaving more than $3,000,000 worth of assets in her estate. Since her siblings predeceased her, the Will left everything to the two Catholic charities.

Demise of Columbus/Cabrini Hospital

Columbus Hospital was founded in 1892 and operated a hospital in Manhattan. It was opened by a mission of the Missionary Sisters of the Sacred Heart of Jesus to address the needs of Italian immigrants. In 1973, Columbus Hospital and Italian Hospital merged to form Cabrini Medical Center. Cabrini Medical Center operated as a hospital on the same site as Columbus Hospital on East 19th Street until it filed for bankruptcy on July 9, 2009. Through the bankruptcy proceedings, Memorial Sloan Kettering Cancer Center purchased the buildings in which Cabrini Medical Center was formerly located.

Charitable mission of St. Joseph Rest Home for the Aged

Similarly to Cabrini, St. Joseph Rest Home for the Aged was founded by Nuns whose lives are committed, without compensation, solely to their charitable and religious convictions. Both charitable organizations — Cabrini and St. Joseph — were founded and operated by Nuns of Italian heritage. The Order of St. Joseph’s was founded in Rome by Italian Nuns and still has a mother house located in the Vatican. St. Joseph’s Rest Home for the Aged, which operates a licensed nursing home facility that accommodates forty women, was founded by the Catholic Sisters of The Order of St. Joseph’s and is located in Paterson, New Jersey.

Accounting proceeding

Because Columbus Hospital had ceased to exist, the executor of the deceased woman’s estate filed a judicial accounting with the Surrogate’s Court, requesting that the Surrogate give the 50% share originally meant for Cabrini Hospital to Memorial Sloan Kettering. The executor indicated that the bequest originally meant for Cabrini should be given to Memorial Sloan Kettering because the deceased had been treated there.
The Chairman of the Board of Directors of St. Joseph contacted Richard A. Klass, Your Court Street Lawyer, about objecting to the bequest to Memorial Sloan Kettering and, instead, requesting that the Surrogate pay the entire net estate to St. Joseph Rest Home for the Aged.

Cy Pres doctrine

There is a centuries’ old doctrine of cy pres (pronounced “sigh – pray”), which is a rule that when literal compliance with a Will or trust is impossible, the intention of a donor or testator should be carried out as nearly as possible. This is especially true when a bequest to a charity has “lapsed” as the result of the charity no longer existing to receive the bequest; then the Surrogate may designate another charity in its place.
In the seminal case of In re Brundrett’s Estate [1940], a percentage of the remainder of the estate was left to St. Mark’s Hospital, but the hospital was bankrupt in 1931 and ceased to operate as a hospital and perform the functions for which it was originally incorporated. The court held that the gift to the hospital was, therefore, ineffectual. The court then applied the doctrine of cy pres and paid over that charity’s portion to the other charitable ‘remaindermen’ named in the Will (the term ‘remaindermen’ refers to others who receive the residuary or balance of an estate).
Following the holding in In re Brundrett’s Estate, the court in In re Shelton’s Estate [1942] was faced with a similar issue as presented here. In that case, the decedent left moneys to a charitable institution located in Italy that was maintained by a New York religious corporation. After the death of the decedent, the New York religious corporation relinquished its maintenance of the Italian institution and discontinued all of its religious and charitable activities. Although its officers continued to function, it was a “charity in name only.” The court held that the discontinuance of the charitable and religious functions precluded authorization of payment of the legacy to the entity. However, the court recognized that the decedent had charitable intentions to provide a gift for religious purposes and invoked the doctrine of cy pres. In granting the legacy originally left to the Italian charity to the other charitable legatee, the court in In re Shelton’s Estate held: “By the application of that doctrine [cy pres] the surrogate holds that the legacy did not lapse and may be paid to The Cathedral Church of St. John the Divine in the City and Diocese of New York, the other charitable legatees named in the will and object of the generous bounty of the testatrix.”
After the objection to the judicial accounting by St. Joseph, with sufficient case law being presented in support of the request to pay the bequest of Cabrini Hospital over to St. Joseph, the executor agreed to pay 100% of the residuary estate to St. Joseph, roughly $3 million in total. The nursing home needs a new roof — now they’ll be able to afford it!
— Richard A. Klass, Esq.
Credits:
Photo of Richard Klass by Robert Matson, copyr. Richard A. Klass, 2011. Newsletter marketing by The Innovation Works, Inc. Image on page one: Salzgitter, Städtisches Altenheim, 1961, Maria retirement home in Tann, in a hospital room with a Dutch nun. Licensed under the Creative Commons Attribution-Share Alike 3.0 Germany license. Attribution: Bundesarchiv, B 145 Bild-F010160-0001 / Steiner, Egon / CC-BY-SA.
———– copyr. 2012 Richard A. Klass, Esq. The firm’s website: www.CourtStreetLaw.com Richard A. Klass, Esq., maintains a law firm engaged in civil litigation at 16 Court Street, 28th Floor, Brooklyn Heights, New York. He may be reached at (718) COURT-ST or e-ml to RichKlass@courtstreetlaw.com with any questions. Prior results do not guarantee a similar outcome.

R. A. Klass Your Court Street Lawyer

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$401,452.59 Surplus Moneys: The Extra Bit Left Over!

Painting by August Macke in blocks of bold color showing a lone woman in foreground with two couples in background. Also shown are some trees and an area of blue, perhaps a pond.
In the typical mortgage foreclosure proceeding, the mortgage lender (or “mortgagee”) brings an action against the homeowner to foreclose on its mortgage against the real estate, generally because the homeowner (or “mortgagor”) failed to make payments on the loan. The mortgage is the legal document recorded by the mortgagee against the mortgagor property to provide the collateral for the making of the loan. In case of default in payment, the mortgagee has the right to sell the collateral to satisfy the remaining balance due on the loan (most foreclosure proceedings are judicial sales, where a court has authorized the sale, as opposed to ‘non-judicial’ sales in limited circumstances). Sometimes, in a foreclosure action, the plaintiff is not the holder of a mortgage but rather has another type of lien against the real estate, such as a tax lien for unpaid real estate taxes, mechanic’s lien (for building supplies or labor performed), or judgment lien. Once the mortgagee or lienor has obtained a Judgment of Foreclosure and Sale, it can then sell the real estate. The mortgage foreclosure proceeding culminates with the public auction of the mortgagor’s real estate to the highest bidder. At that point, the property is sold to the bidder, who pays the sale price to a court-appointed referee.

Definition of Surplus Moneys:

If the amount paid by the successful bidder at the auction sale exceeds the amount due to the mortgagee according to the Judgment of Foreclosure and Sale, then there is created a special fund of the left-over purchase price called the “Surplus Moneys.” For example, if the mortgagee is due $200,000 and the property sold for $300,000, the remaining sale price of $100,000 is the surplus. According to Article 13 of New York’s Real Property Actions and Proceedings Law (RPAPL), there is a procedure for the former homeowner (and other junior lienors, such as second mortgagees, judgment creditors or other lienholders) to petition the court for the release of the surplus moneys.

Fighting over $401,452.59 Surplus Moneys:

In 2005, the owner of a building in Brooklyn failed to pay his property taxes. A foreclosure proceeding was brought based on the tax lien, and the building was sold at auction. The referee paid off the tax lien and then deposited the remaining surplus moneys of $401,452.59 into court. The building owner died, leaving his second wife and children as his survivors. He had been married previously and, as part of his and his first wife’s divorce case, had agreed to pay her half of the value of the building. The first wife and one of the owner’s children retained Richard A. Klass, Your Court Street Lawyer, to pursue the payment of their respective shares of the surplus moneys. The various heirs to the estate of the owner, along with the first wife, filed motions in court to have a “surplus moneys referee” appointed to determine who would be entitled to what portion of the surplus moneys. The second wife alleged that the first wife was not entitled to any portion of the surplus moneys, claiming that she was previously paid by the decedent for her portion – but she could not find proof of the alleged payment. A hearing was held before the surplus moneys referee, who determined that the first wife should receive her half-share of the moneys of over $200,000, along with accrued interest. The balance of the surplus moneys were to be distributed according to New York’s Estates, Powers and Trusts Law (EPTL) Section 4-1.1, which comes into play when someone dies without a Will. (This is the reason that making a Last Will and Testament is very important!) According to the EPTL, the balance of the surplus moneys were to be distributed as follows: (a) the first $50,000 plus half of the remaining balance paid to the second wife; and (b) the other half of the remaining balance paid to the surviving children, evenly divided among them. After the completion of the hearing, the referee rendered a report, setting forth the manner of distribution. Then, an Order confirming the report and directing the distribution was signed by the Judge. At the conclusion, each of the clients received her fair share of the surplus moneys in full with interest.
Richard A. Klass, Esq.
———– copyr. 2011 Richard A. Klass, Esq. The firm’s website: www.CourtStreetLaw.com Richard A. Klass, Esq., maintains a law firm engaged in civil litigation at 16 Court Street, 28th Floor, Brooklyn Heights, New York. He may be reached at (718) COURT-ST or e-ml to RichKlass@courtstreetlaw.com with any questions. Prior results do not guarantee a similar outcome.

R. A. Klass Your Court Street Lawyer

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“Busting” the Trust!

Painting by August Macke in blocks of bold color showing man and woman and small child, with trees around them and blue sky in background.
A Trust was created by a woman in her Last Will and Testament (testamentary trust), leaving her children and their issue (children) as the sole beneficiaries of the trust. The Children’s Trust was formed as a “mixed” discretionary trust; meaning that the trustees maintain the discretion to pay moneys to the beneficiaries of the trust but the trust itself is a spendthrift trust, whereby the beneficiaries cannot invade the trust or, in other words, take out money themselves. A “discretionary” trust is typically set up to give the trustees the authority to pay money (either principal or interest) as they see fit, considering the lifestyle and resources of the beneficiary. A “spendthrift” trust prohibits the beneficiary, creditors of the beneficiary, or any other person from taking money out of the trust.

The “deadbeat” parent

A couple was married and had two children. The husband was one of the children of the woman who set up the trust. They got divorced and the two children lived with the wife. As part of the Judgment of Divorce, the husband was ordered to pay child support and yeshiva tuition for the couple’s daughter. The husband failed to pay the court-ordered amounts. The judge granted money judgments against the husband to pay child support arrears, tuition and legal fees. Enforcement of the money judgments proved fruitless. The wife brought proceedings to punish the husband for contempt of court. The judge found that the husband was guilty of contempt of court and even granted an Order of Contempt, allowing for the husband’s arrest for not paying child support. The husband and his assets could not be located – the typical case of a “deadbeat parent.” Unfortunately, the wife was, perhaps, more down and out than most people. She was ill and unable to work; not eligible for social security disability income; and living off of her adult son’s meager income and public assistance through food stamps. Her daughter was going to be expelled from school for nonpayment of three years’ worth of tuition. That’s when the wife’s divorce lawyer referred her to Richard A. Klass, Your Court Street Lawyer, for help.

Looking at invading the Children’s Trust

Generally, a trust can be made invincible – no one can gain access to the moneys or property contained in it, not even the beneficiary. The “settlor” (the one who sets up the trust and funds it) appoints a trustee who will carry out her wishes and follows the directions contained in the trust document. In this particular trust, the beneficiaries were listed as “the Child and the Child’s issue.” Clearly, the Children’s Trust envisioned the trustees giving money not only to the “deadbeat parent” but also to his children, including the daughter who was about to be kicked out of school. An Order to Show Cause was brought in New York State Supreme Court to (a) have the trustees pay the child support arrears and yeshiva tuition owed by the husband; (b) restrain the trustees from paying any money out of the trust to the “deadbeat” parent; and (c) sequester, or set aside, enough money from the trust to pay future child support until the daughter’s age of majority.

The guiding light of Judge Nathan Sobel

The issue of “busting” a trust set up by a grandparent for the benefit of a grandchild was brought up in a case over 40 years ago, in a case of first impression, before the beneficent Surrogate of Kings County, Judge Nathan Sobel. In Matter of Chusid, Judge Sobel first stated the general proposition that a testator may dispose of his own property as he pleases. Among other things, a testator may create a trust for the benefit of an infant or improvident person, so that the beneficiary does not squander the money. However, Surrogate Sobel stated the oft-cited principle which applied to this situation (and, unfortunately, to so many others): “No man should be permitted to live at the same time in luxury and in debt.” While recognizing that the general purpose of a discretionary trust is to protect the trustee from unreasonable demands of a beneficiary or from creditors’ claims, it does not insulate or protect the trustee from responsibility to and reasonable directions from a court. Further, as stated in the Chusid opinion, this “is particularly true where the income beneficiaries are dependent children who will either starve or become public charges if the trustees refuse to exercise discretion in their favor.” Judge Sobel then held that the trustee’s discretion yields to and is subordinate to the equity powers of the court to direct payment for the support of minor dependent children. After argument of the Order to Show Cause, with the opposition of the trustees of the Children’s Trust, the judge made the determination that the wife was entitled to “bust” the trust open to have the trustees pay the child support arrears and yeshiva tuition owed by the husband from the principal and interest of the trust. The judge ordered the trustees of the Children’s Trust to pay the following amounts: (a) 82,350 for yeshiva tuition; (b) 43,329 for child support arrears; and (c) $3,960 for school transportation expenses; he also ordered the trustees to sequester $53,891 for future child support payments.
Richard A. Klass, Esq.
Art credits: Leute am blauen See, by August Macke (1887-1914). ———– copyr. 2011 Richard A. Klass, Esq. The firm’s website: www.CourtStreetLaw.com Richard A. Klass, Esq., maintains a law firm engaged in civil litigation at 16 Court Street, 28th Floor, Brooklyn Heights, New York. He may be reached at (718) COURT-ST or e-ml to RichKlass@courtstreetlaw.com with any questions. Prior results do not guarantee a similar outcome.

R. A. Klass Your Court Street Lawyer

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