§ 10-6.6 — Exercise of a power of appointment; effect when more extensive

New York § 10-6.6

• Jurisdiction: New York
• Law EPT: Estates, Powers & Trusts
• Part 6: Rules Governing Exercise of a Power of Appointment
• Art. 10: Powers

Text

§ 10-6.6 Exercise of a power of appointment; effect when more extensive\n or less extensive than authorized; trustee's authority to\n invade principal in trust.\n (a) An exercise of a power of appointment is not void because its\nexercise is:\n (1) More extensive than was authorized but is valid to the extent\nauthorized by the instrument creating the power.\n (2) Less extensive than authorized by the instrument creating the\npower, unless the donor has manifested a contrary intention.\n (b) An authorized trustee with unlimited discretion to invade trust\nprincipal may appoint part or all of such principal to a trustee of an\nappointed trust for, and only for the benefit of, one, more than one or\nall of the current beneficiaries of the invaded trust (to the exclusion\nof any one or more of such current beneficiaries). The successor and\nremainder beneficiaries of such appointed trust may be one, more than\none or all of the successor and remainder beneficiaries of such invaded\ntrust (to the exclusion of any one, more than one or all of such\nsuccessor and remainder beneficiaries).\n (1) An authorized trustee exercising the power under this paragraph\nmay grant a discretionary power of appointment as defined in paragraph\n(c) of section 10-3.4 of this article (including a presently exercisable\npower of appointment) in the appointed trust to one or more of the\ncurrent beneficiaries of the invaded trust, provided that the\nbeneficiary granted a power to appoint could receive the principal\noutright under the terms of the invaded trust.\n (2) If the authorized trustee grants a power of appointment under\nsubparagraph (l) of this paragraph, except as otherwise provided in\nsubparagraph (3) of this paragraph, the granted power may only exclude\nas permissible appointees one or more of the beneficiary, the creator,\nor the creator's spouse, or any of the estates, creditors, or creditors\nof the estates of the beneficiary, the creator or the creator's spouse.\n (3) If the authorized trustee exercises the power under this\nparagraph, the appointed trust may grant any power of appointment\nincluded in the invaded trust provided such power has the same class of\npermissible appointees as the power of appointment in the invaded trust\nand is exercisable in the same fashion as the power of appointment in\nthe invaded trust.\n (4) If the beneficiary or beneficiaries of the invaded trust are\ndescribed by a class, the beneficiary or beneficiaries of the appointed\ntrust may include present or future members of such class.\n (c) An authorized trustee with the power to invade trust principal but\nwithout unlimited discretion may appoint part or all of the principal of\nthe trust to a trustee of an appointed trust, provided that the current\nbeneficiaries of the appointed trust shall be the same as the current\nbeneficiaries of the invaded trust and the successor and remainder\nbeneficiaries of the appointed trust shall be the same as the successor\nand remainder beneficiaries of the invaded trust.\n (1) If the authorized trustee exercises the power under this\nparagraph, the appointed trust shall include the same language\nauthorizing the trustee to distribute the income or invade the principal\nof the appointed trust as in the invaded trust.\n (2) If the authorized trustee exercises the power under this paragraph\nto extend the term of the appointed trust beyond the term of the invaded\ntrust, for any period after the invaded trust would have otherwise\nterminated under the provisions of the invaded trust, the appointed\ntrust, in addition to the language required to be included in the\nappointed trust pursuant to subparagraph (1) of this paragraph, may also\ninclude language providing the trustees with unlimited discretion to\ninvade the principal of the appointed trust during such extended term.\n (3) If the beneficiary or beneficiaries of the invaded trust are\ndescribed by a class, the beneficiary or beneficiaries of the appointed\ntrust shall include present or future members of such class.\n (4) If the authorized trustee exercises the power under this paragraph\nand if the invaded trust grants a power of appointment to a beneficiary\nof the trust, the appointed trust shall grant such power of appointment\nin the appointed trust and the class of permissible appointees shall be\nthe same as in the invaded trust.\n (d) An exercise of the power to invade trust principal under\nparagraphs (b) and (c) of this section shall be considered the exercise\nof a special power of appointment as defined in section 10-3.2 of this\narticle.\n (e) The appointed trust to which an authorized trustee appoints the\nassets of the invaded trust may have a term that is longer than the term\nset forth in the invaded trust, including, but not limited to, a term\nmeasured by the lifetime of a current beneficiary.\n (f) If an authorized trustee has unlimited discretion to invade the\nprincipal of a trust and the same trustee or another trustee has the\npower to invade principal under the trust instrument which power is not\nsubject to unlimited discretion, such authorized trustee having\nunlimited discretion may exercise the power of appointment under\nparagraph (b) of this section.\n (g) An authorized trustee may exercise the power to appoint in favor\nof an appointed trust under paragraphs (b) and (c) of this section\nwhether or not there is a current need to invade principal under the\nterms of the invaded trust.\n (h) An authorized trustee exercising the power under this section has\na fiduciary duty to exercise the power in the best interests of one or\nmore proper objects of the exercise of the power and as a prudent person\nwould exercise the power under the prevailing circumstances. The\nauthorized trustee may not exercise the power under this section if\nthere is substantial evidence of a contrary intent of the creator and it\ncannot be established that the creator would be likely to have changed\nsuch intention under the circumstances existing at the time of the\nexercise of the power. The provisions of the invaded trust alone are not\nto be viewed as substantial evidence of a contrary intent of the creator\nunless the invaded trust expressly prohibits the exercise of the power\nin the manner intended by the authorized trustee.\n (i) Unless the authorized trustee provides otherwise:\n (1) The appointment of all of the assets comprising the principal of\nthe invaded trust to an appointed trust shall include subsequently\ndiscovered assets of the invaded trust and undistributed principal of\nthe invaded trust acquired after the appointment to the appointed trust;\nand\n (2) The appointment of part but not all of the assets comprising the\nprincipal of the invaded trust to an appointed trust shall not include\nsubsequently discovered assets belonging to the invaded trust and\nprincipal paid to or acquired by the invaded trust after the appointment\nto the appointed trust; such assets shall remain the assets of the\ninvaded trust.\n (j) The exercise of the power to appoint to an appointed trust under\nparagraph (b) or (c) of this section shall be evidenced by an instrument\nin writing, signed, dated and acknowledged by the authorized trustee.\nThe exercise of the power shall be effective thirty days after the date\nof service of the instrument as specified in subparagraph (2) of this\nparagraph, unless the persons entitled to notice consent in writing to a\nsooner effective date. The exercise of the power is irrevocable on such\neffective date, either thirty days following service of the notice or\nthe effective date as set forth in the written consent.\n (1) An authorized trustee may exercise the power authorized by\nparagraphs (b) and (c) of this section without the consent of the\ncreator, or of the persons interested in the invaded trust, and without\ncourt approval, provided that the authorized trustee may seek court\napproval for the exercise with notice to all persons interested in the\ninvaded trust.\n (2) A copy of the instrument exercising the power and a copy of each\nof the invaded trust and the appointed trust shall be delivered (A) to\nthe creator, if living, of the invaded trust, (B) to any person having\nthe right, pursuant to the terms of the invaded trust, to remove or\nreplace the authorized trustee exercising the power under paragraph (b)\nor (c) of this section, and (C) to any persons interested in the invaded\ntrust and the appointed trust (or, in the case of any persons interested\nin the trust, to any guardian of the property, conservator or personal\nrepresentative of any such person or the parent or person with whom any\nsuch minor person resides), by registered or certified mail, return\nreceipt requested, or by personal delivery or in any other manner\ndirected by the court having jurisdiction over the invaded trust.\n (3) The instrument exercising the power shall state whether the\nappointment is of all the assets comprising the principal of the invaded\ntrust or a part but not all the assets comprising the principal of the\ninvaded trust and if a part, the approximate percentage of the value of\nthe principal of the invaded trust that is the subject of the\nappointment.\n (4) A person interested in the invaded trust may object to the\ntrustee's exercise of the power under this section by serving a written\nnotice of objection upon the trustee prior to the effective date of the\nexercise of the power. The failure to object shall not constitute a\nconsent.\n (5) The receipt of a copy of the instrument exercising the power shall\nnot affect the right of any person interested in the invaded trust to\ncompel the authorized trustee who exercised the power under paragraph\n(b) or (c) of this section to account for such exercise and shall not\nforeclose any such interested person from objecting to an account or\ncompelling a trustee to account. Whether the exercise of a power under\nparagraph (b) or (c) of this section begins the running of the statute\nof limitations on an action to compel a trustee to account shall be\nbased on all the facts and circumstances of the situation.\n (6) A copy of the instrument exercising the power shall be kept with\nthe records of the invaded trust and, within twenty days of the\neffective date, the original shall be filed in the court having\njurisdiction over the invaded trust. Where a trustee of an inter vivos\ntrust exercises the power and the trust has not been the subject of a\nproceeding in the surrogate's court, no filing is required. The\ninstrument shall state that in certain circumstances the appointment\nwill begin the running of the statute of limitations that will preclude\npersons interested in the invaded trust from compelling an accounting by\nthe trustees after the expiration of a given time.\n (7) Prior to the effective date as provided herein, a trustee may\nrevoke the exercise of the power to invade to a new trust. Where a\ntrustee has served notice of the exercise of the power pursuant to\nsubparagraph (2) of this paragraph, the trustee shall serve notice of\nthe revocation of the exercise of the power to persons interested in the\ninvaded trust and the appointed trust by registered or certified mail,\nreturn receipt requested, or by personal delivery or in any other manner\ndirected by the court having jurisdiction over the invaded trust. Where\nthe notice of the exercise of the power was filed with the court, the\ntrustee shall file the notice of revocation of the exercise of the power\nwith such court.\n (k) This section shall not be construed to abridge the right of any\ntrustee to appoint property in further trust that arises under the terms\nof the governing instrument of a trust or under any other provision of\nlaw or under common law, or as directed by any court having jurisdiction\nover the trust.\n (1) Nothing in this section is intended to create or imply a duty to\nexercise a power to invade principal, and no inference of impropriety\nshall be made as a result of an authorized trustee not exercising the\npower conferred under paragraph (b) or (c) of this section.\n (m) A power authorized by paragraph (b) or (c) of this section may be\nexercised, subject to the provisions of paragraph (h) of this section,\nunless expressly prohibited by the terms of the governing instrument,\nbut a general prohibition of the amendment or revocation of the invaded\ntrust or a provision that constitutes a spendthrift clause shall not\npreclude the exercise of a power under paragraph (b) or (c) of this\nsection.\n (n) An authorized trustee may not exercise a power authorized by\nparagraph (b) or (c) of this section to effect any of the following:\n (1) To reduce, limit or modify any beneficiary's current right to a\nmandatory distribution of income or principal, a mandatory annuity or\nunitrust interest, a right to withdraw a percentage of the value of the\ntrust or a right to withdraw a specified dollar amount, provided that\nsuch mandatory right has come into effect with respect to the\nbeneficiary. Notwithstanding the foregoing, but subject to the other\nlimitations in this section, an authorized trustee may exercise a power\nauthorized by paragraph (b) or (c) of this section to appoint to an\nappointed trust that is a supplemental needs trust that conforms to the\nprovisions of section 7-1.12 of this chapter;\n (2) To decrease or indemnify against a trustee's liability or\nexonerate a trustee from liability for failure to exercise reasonable\ncare, diligence and prudence;\n (3) To eliminate a provision granting another person the right to\nremove or replace the authorized trustee exercising the power under\nparagraph (b) or (c) of this section unless a court having jurisdiction\nover the trust specifies otherwise;\n (4) To make a binding and conclusive fixation of the value of any\nasset for purposes of distribution, allocation or otherwise; or\n (5) To jeopardize (A) the deduction or exclusion originally claimed\nwith respect to any contribution to the invaded trust that qualified for\nthe annual exclusion under section 2503(b) of the internal revenue code,\nthe marital deduction under section 2056(a) or 2523(a) of the internal\nrevenue code, or the charitable deduction under section 170(a), 642(c),\n2055(a) or 2522(a) of the internal revenue code, (B) the qualification\nof a transfer as a direct skip under section 2642(c) of the internal\nrevenue code, or (C) any other specific tax benefit for which a\ncontribution originally qualified for income, gift, estate, or\ngeneration-skipping transfer tax purposes under the internal revenue\ncode.\n (o) An authorized trustee shall consider the tax implications of the\nexercise of the power under paragraph (b) or (c) of this section.\n (p) An authorized trustee may not exercise a power described in\nparagraph (b) or (c) of this section in violation of the limitations\nunder sections 9-1.1, 10-8.1 and 10-8.2 of this chapter, and any such\nexercise shall void the entire exercise of such power.\n (q)(1) Unless a court otherwise directs, an authorized trustee may not\nexercise a power authorized by paragraph (b) or (c) of this section to\nchange the provisions regarding the determination of the compensation of\nany trustee; the commissions or other compensation payable to the\ntrustees of the invaded trust may continue to be paid to the trustees of\nthe appointed trust during the term of the appointed trust and shall be\ndetermined in the same manner as in the invaded trust.\n (2) No trustee shall receive any paying commission or other\ncompensation for appointing of property from the invaded trust to an\nappointed trust pursuant to paragraph (b) or (c) of this section.\n (r) Unless the invaded trust expressly provides otherwise, this\nsection applies to:\n (1) Any trust governed by the laws of this state, including a trust\nwhose governing law has been changed to the laws of this state; and\n (2) Any trust that has a trustee who is an individual domiciled in\nthis state or a trustee which is an entity having an office in this\nstate, provided that a majority of the trustees select this state as the\nlocation for the primary administration of the trust by an instrument in\nwriting, signed and acknowledged by a majority of the trustees. The\ninstrument exercising this selection shall be kept with the records of\nthe invaded trust.\n (s) For purposes of this section:\n (1) The term "appointed trust" means an irrevocable trust which\nreceives principal from an invaded trust under paragraph (b) or (c) of\nthis section including a new trust created by the creator of the invaded\ntrust or by the trustees, in that capacity, of the invaded trust. For\npurposes of creating the new trust, the requirement of section 7-1.17 of\nthis chapter that the instrument be executed and acknowledged by the\nperson establishing such trust shall be deemed satisfied by the\nexecution and acknowledgment of the trustee of the appointed trust.\n (2) The term "authorized trustee" means, as to an invaded trust, any\ntrustee or trustees with authority to pay trust principal to or for one\nor more current beneficiaries other than (i) the creator, or (ii) a\nbeneficiary to whom income or principal must be paid currently or in the\nfuture, or who is or will become eligible to receive a distribution of\nincome or principal in the discretion of the trustee (other than by the\nexercise of a power of appointment held in a non-fiduciary capacity).\n (3) References to sections of the "internal revenue code" refer to the\nUnited States internal revenue code of 1986, as amended from time to\ntime, or to corresponding provisions of subsequent internal revenue\nlaws, and also refer to corresponding provisions of state law.\n (4) The term "current beneficiary or beneficiaries" means the person\nor persons (or as to a class, any person or persons who are or will\nbecome members of such class) to whom the trustees may distribute\nprincipal at the time of the exercise of the power, provided however\nthat the interest of a beneficiary to whom income, but not principal,\nmay be distributed in the discretion of the trustee of the invaded trust\nmay be continued in the appointed trust.\n (5) The term "invade" shall mean the power to pay directly to the\nbeneficiary of a trust or make application for the benefit of the\nbeneficiary.\n (6) The term "invaded trust" means any existing irrevocable inter\nvivos or testamentary trust whose principal is appointed under paragraph\n(b) or (c) of this section.\n (7) The term "person or persons interested in the invaded trust" shall\nmean any person or persons upon whom service of process would be\nrequired in a proceeding for the judicial settlement of the account of\nthe trustee, taking into account section three hundred fifteen of the\nsurrogate's court procedure act.\n (8) The term "principal" shall include the income of the trust at the\ntime of the exercise of the power that is not currently required to be\ndistributed, including accrued and accumulated income.\n (9) The term "unlimited discretion" means the unlimited right to\ndistribute principal that is not modified in any manner. A power to pay\nprincipal that includes words such as best interests, welfare, comfort,\nor happiness shall not be considered a limitation or modification of the\nright to distribute principal.\n (10) The creator shall not be considered to be a beneficiary of an\ninvaded or appointed trust by reason of the trustee's authority to pay\ntrust principal to the creator pursuant to section 7-1.11 of this\nchapter or by reason of the trustee's authority under the trust\ninstrument or any other provision of law to pay or reimburse the creator\nfor any tax on trust income or trust principal that is payable by the\ncreator under the law imposing such tax or to pay any such tax directly\nto the taxing authorities.\n (t) Cross-reference. For the exercise of the power under paragraph (b)\nor (c) of this section where there are multiple trustees, see sections\n10-6.7 and 10-10.7 of this article.\n