EPTL 7-1.13 contains an elaborate set of rules that determine a trustee's ability to divide a trust that vary according to different circumstances. The sum and substance of those rules are that (1) a trustee may divide a trust without court approval and the consent of those interested in the trust if the division is made for certain specified tax purposes (e.g., dividing a trust into two resulting trusts, one of which is exempt from GST tax, and the other of which is fully subject to GST tax),21 (2) a trustee may divide a trust without court approval "for any reason not directly contrary to the primary purpose of the trust,"22 and (3) the court, upon application by the trustee or any person interested in the trust, may order the division of the trust for any reason not contrary to the primary purpose of the trust.23 The current statute also contains detailed provisions regarding administrative aspects of trust division.24 Notable among such administrative rules is the requirement that each trust resulting from a division contain the same terms as the original, undivided trust.25
Some practitioners consider EPTL 7-1.13 to be too rigid because it allows trustees to divide trusts without court approval and beneficiary consent only in very limited, tax-related circumstances, and because it generally requires the resulting divided trusts to contain the same terms. Section 417 of the UTC would liberalize the current rule by allowing a trustee to divide a trust for any reason, including a non-tax reason, provided that the division does not adversely affect any of the beneficiaries or the achievement of the trust's primary purposes.26 Also, the Radigan committee's commentary on §417 explicitly states that the dispositive terms of the divided trusts do not have to be identical. Thus, the divided trusts can be tailored to address the particular needs of different beneficiaries.
Section 417 of the UTC does more than liberalize trust division rules; it also authorizes trustees to combine trusts with different provisions. The Radigan committee's commentary states that, often, "the trusts to be combined will have been created by different members of the same family and will vary on only insignificant details…. Combining trusts may prompt more efficient trust administration and is sometimes an alternative to terminating an uneconomic trust as authorized by Section 414."27
Uneconomic Trusts
UTC §414 states
(a) After notice to the qualified beneficiaries, the trustee of a trust consisting of trust property having a total value less than $100,000 may terminate the trust if the trustee concludes that the value of the trust property is insufficient to justify the cost of administration.
(b) The court may modify or terminate a trust or remove the trustee and appoint a different trustee if it determines that the value of the trust property is insufficient to justify the cost of administration.
(c) Upon termination of a trust under this section, the trustee shall distribute the trust property in a manner consistent with the purposes of the trust.
(d) This section does not apply to an easement for conservation or preservation.
New York currently has a statute, EPTL 7-1.19, that deals with terminating uneconomical trusts. It permits the Surrogate's Court, upon a trustee's or beneficiary's application, to terminate a lifetime or testamentary trust (other than a wholly charitable trust and a supplemental needs trust) when the expense of administering it is uneconomical. The court's authority is predicated on findings that continuation of the trust is economically impracticable, that the trust's terms do not prohibit its early termination, and that such termination would not defeat the trust's specified purpose and would be in the beneficiaries' best interests. If it so finds, the court may direct distribution of the trust assets to and among those beneficiaries who at the time are entitled (or entitled in the discretion of the trustee) to the income and/or principal of the trust and those beneficiaries who would be entitled (or entitled in the discretion of the trustee) to the income and/or principal of the trust if it were to terminate immediately before such order or decree. The distribution of the trust assets are to be made in such manner, proportions, and shares as in the judgment of the court will effectuate the intention of the creator. The court is without power to terminate if doing so would reduce or eliminate a charitable deduction otherwise available to any person under the income tax, gift tax, estate tax or generation-skipping transfer tax regimes.
Some practitioners consider EPTL 7-1.19 fundamentally flawed because it requires a court proceeding. Their reasoning is that trusts with relatively little assets, which presumably are the trusts that need to rely on the statute, are the very trusts that could least afford the expense of a court proceeding.
Proposed UTC §414 addresses this concern by eliminating the requirement for a court proceeding. It does so by instituting a bright line test: if the value of the trust's assets is less than $100,000, the trustee may terminate the trust if he concludes that the costs of administration are uneconomical. The trustee is authorized to distribute the assets of the terminated trust in a manner consistent with the purposes of the trust. In order to safeguard the beneficiaries' interests, the trustee must notify the trust's beneficiaries prior to terminating the trust.
Subscribe to New York Law Journal
