Once reserved exclusively for the extremely rich, trusts have now become an integral part of estate planning. Many utilize trusts not only as a mechanism to reduce an estate's tax exposure, but as a means to distribute property outside of the probate process. (Before property may be distributed pursuant a will, a court having appropriate jurisdiction over these types of matters--a Surrogate's Court, here in New York--will oversee and monitor the process.) Many seek to avoid probate because it has been known to be a time-consuming and costly process, particularly when disgruntled family members (or other parties) file objections with the court seeking a (greater) share of the deceased person's assets.
Trusts are also utilized when the intended beneficiary is incapable of managing his/her affairs due to age, physical or mental challenge, or other incapacity, which requires that some other person or party control the assets and distribute payments to the beneficiary pursuant to the terms and conditions delineated in the trust documents. (For example, a trust may provide that the income only be used for the beneficiary's health, education, support and maintenance for a specific time period, and that upon the occurrence of a triggering event, such as the beneficiary's reaching a certain age, all or part of any remaining income and principal would then be distributed pursuant to the trust's terms.)
A recent case decided by the New York State Court of Appeals demonstrates that trusts are not free from controversy nor exempt from protracted litigation. In the Matter of The Chase Manhattan Bank, the Court was asked to decide whether the distribution of trust-related assets complied with the creator's (or settlor's) intent. On the one hand, the deceased's survivors staked claim to the trust's remaining $526,533. On the other, two institutions asserted entitlement to the proceeds.
The Surrogate's Court and the Appellate Division found in favor of the surviving family members. On appeal, the Court of Appeals reversed, finding in favor of St. John Fisher College and The Lutheran Church of the Incarnate Word. In its decision, the state's highest court carefully scrutinized the language of the trust and examined the following provision:
[T]he [Trust] shall continue for the benefit of [Kathleen Pioch], and the Trustee shall apply the income and so much of the principal as in its discretion it shall deem necessary, for the support, maintenance and general welfare of [Kathleen], during her life. The Trustee shall pay, so far as possible, all specific bills for [Kathleen's] living expenses, thus making certain that her rent, her utilities, her food, clothing and medical expenses are paid by the Trustee directly. [Kathleen] shall not be given any large sums of money, but only a small allowance by the Trustee every week to meet her personal needs.Since the trust restricted Kathleen Pioch's payments and use of the trust funds, the Court concluded that the institutions were the intended beneficiaries of any sums remaining upon Ms. Pioch's death. As the Court observed:
By limiting the disbursement of income to Kathleen to a sum sufficient to cover her needs, [her father] anticipated that the Bank might pay out less than all the income for his daughter's benefit and therefore authorized the Bank to accumulate any income not expended...Generally, where a trust requires the trustee to apply only so much of the income as is necessary for the beneficiary's needs, any unexpended income accumulated by the trustee passes to the remainder beneficiaries....
Such a result is appropriate in this case where [her father] specified that Kathleen receive only income sufficient to satisfy her needs and granted her neither the power to control nor the power to alienate the trust's funds. Under these circumstances, it would be incongruous to hold that Kathleen's estate could dispose of $526,533 upon her death when she had not been allocated such funds during her life and the settlor explicitly directed in the [trust] that she not be given any substantial sums of money. We therefore conclude that the Bank should have distributed the disputed amount to objectants, not to Kathleen's estate.
For a copy of the Court of Appeals's decision. please click on the link: Matter of Chase Manhattan Bank
[Note: St. John Fisher was a vocal opponent of King Henry VIII's plan to divorce Queen Catherine of Aragon, a separation precipitated by her inability to produce a male heir to the throne. When Henry's request for an annulment of the marriage was refused by Pope Clement VII, that denial triggered a schism with the Roman Catholic Church and start of the English Reformation. Fisher was eventually beheaded for refusing to acknowledge Henry as leader of the Church of England.]