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New York Law Supporting the Special Power of Appointment Trust (SPA Trust)

National Authorities:

The Restatement (3rd) of Trusts § 56(b)

“[T]he creditors of the donee of a nongeneral power of appointment (one that cannot be exercised for the economic benefit of the power holder), whether or not presently exercisable, cannot reach the property subject to the power for the satisfaction of their claims[.]”

 

New York Statutory Law:

New York Estates, Powers and Trusts Law § 10-7.1

“Property covered by a special power of appointment (or a general power of appointment that is exercisable solely for the support, maintenance, health and education of the donee within the meaning of sections 2041 and 2514 of the Internal Revenue Code) is not subject to the payment of the claims of creditors of the donee, his estate or the expenses of administering his estate.”

 

Caselaw from New York's Court of Appeals, its highest court:

Estate of Reynolds, 87 NY2d 633, 637–38 (1996).

Power of appointment ineffective in stopping elective share, because the settlor, “despite her general relinquishment of title and ownership of the property, was free to designate any person, charity or entity as a beneficiary of the trust except for herself, her spouse or her estate and creditors, she possessed personal power to execute what were essentially testamentary transfers to any number of other specific beneficiaries of her choosing. This was a functional substitute allowing disposal of the entire trust corpus by way of one or a series of specific bequests that constitute a forbidden reserved ‘power to consume, invade or dispose[.]’ ”

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Estate of Vanderbilt, 281 NY 297, 303–04 (1939).

“The property which was included in Mrs. [Cornelius] Vanderbilt's estate [no, not that Cornelius Vanderbilt of railroad fame—his grandson of the same name.  –Ed.] did not at any time belong to her. It did not at her death pass from her to those whom she appointed to take. Her power of appointment was not general. By its exercise she could obtain no benefit for herself, her creditors or her estate.”  [Yes, this means that the SPA trust is the same means used to protect the legendary Vanderbilt’s family’s wealth.]

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Cutting v. Cutting, 86 NY 522 (1881).

“The revisers sought to protect creditors by declaring that an absolute power of disposition should be deemed equivalent to actual ownership ( Id. 328); and by an absolute power of disposition, they meant a power of disposition in the life-time of the donee, or in their own words, a power by which he "may sell when he chooses, and dispose of the proceeds at his pleasure." (Id.) It will be noticed, by him who reads closely the reported cases on this topic, that at the time when the revisers drafted the article "of powers," it had seldom been held that the execution of a general power to dispose by will alone (that is, not in the lifetime of the donee), or to dispose of property entirely that of another than the donee, subjected the estate to the debts of the  creditors of the donee. In Grise v. Goodwin (Freeman's Ch. 264 [in 1703]), it had been adjudged, that as the estate was never in the donee, but settled upon him by his wife's father with a power to dispose, it should not be taken as any part of his assets; and the case was distinguished from Thompson v. Towne (2 Vern. 319), where the property was once that of the donee of the power, which will be found to be so in most of the cases usually cited on this head of the law. . . .

In our judgment it was not in the purpose of the legislature to save from the abolition of powers made by section 73, the rule of English equity, upon which the plaintiff relies to obtain the judgment which he demands. The purpose of the legislature was to prevent those rights from being taken away, by the subjection to the effect of a power, of property to which they might lawfully advance a claim.

It was not the purpose to give to creditors new rights and to subject to these claims property in which they never had an interest, because the lawful owner of it saw fit to leave the future disposition of it to a power of appointment by will. . . .

The article on powers, of the Revised Statutes, will not permit a man to subject his own property to a power so as to screen it from his own creditors (§ 74); nor to place it under a power in trust so that the grantee of the power may hinder those interested in the execution unless such is the expressed will of the grantor (§§ 96, et seq.); nor to provide for the disposition of the entire fee of property in his life-time, and still screen it from the creditors of the latter. (§§ 81, et seq.) Can it be said of any property owned and devised by Mrs. Cutting, that any creditor of her or of Fulton Cutting had a right to or in it during her life-time, which right is not protected by the affirmative provisions of the article on powers, which we have pointed out? Is it irrational; is it contrary to sound principle or public policy; is it inequitable or unjust; is it preferring generosity to right or morals, that she should be permitted by the law to give a power which, while it trenches on no right of any creditor existing when the  power is created, shall not be construed to beget a right in a creditor of the donee by the bare execution of it to take effect after his decease?”

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Caselaw from other New York courts:

Hirsch et al. v. Bucki, 162 AD 659, 669 (1st Dep’t 1914) (cited approvingly at In re Will of King, 22 NY2d 456, 462 (1968) and In re Fowles’ Will, 222 NY 222, 230 (1918)).

“The plaintiff is a creditor of the testator, by judgment got against him in his lifetime. It is that judgment debt that it is sought to have charged. The plaintiff relies, therefor, upon a rule of equity, which he claims to be, that where a person has a general power of appointment by will over property, and has exercised the power, the property thus appointed forms a part of his assets, and is subject to the claims of creditors; and that, too, in preference to those of a legatee or of the gratuitous appointee. The text books state the rule to be, as it is claimed by the plaintiff; . . . and the decisions cited in them, amply uphold the statement they make. . . . We have come to a conclusion, based upon the Revised Statutes, that the English rule has been abrogated by our Legislature, and that the plaintiff cannot maintain his position."” (quoting Cutting v. Cutting, supra.)

And about Cutting’s treatment since: “The appellant suggests in her brief that if the facts of Cutting v. Cutting were now to come before the Court of Appeals that tribunal would take a different position, citing Farmers' Loan & Trust Co. v. Kip (192 N. Y. 266). But Judge Werner in that case quoted Judge Finch in Crooke v. County of Kings (97 N. Y. 421), who said: "In Cutting v. Cutting (86 N. Y. 536) the meaning and construction of the absolute power of disposition specified in sections 81 to 85, inclusive, of the statute relating to powers, was settled with a care and precision which leaves us at liberty to take and depend upon the result without repetition of the analysis which led to it."”

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In re Trusts Created by Chappell, 883 NYS2d 857, 861 (Sur.Ct. NY County, 2009).

“The respondents son and daughter of Mary Chappell Wheat rely on an 1881 Court of Appeals decision, Cutting v Cutting (86 NY 522 [1881]), for the proposition that the law in effect when the trusts were created abrogated the common-law rule of subjecting property covered by a general power of appointment to the claims of creditors. Cutting limited the rights of a donee's creditors where the property in question was covered by a general testamentary power of appointment coupled with a legal life estate. Cutting is distinguishable because the life tenant did not have a lifetime power to appoint, as did Mrs. Wheat. Further,  the legislature rejected the rule in Cutting with the enactment of the Real Property Law, which was expressly made applicable to all powers of appointment whether created before or after its effective date (L 1964,  ch 864, § 167). Accordingly, the court finds that the appointive property is subject to the claims of the creditors of Mary Chappell Wheat.” 

And further: “The Cutting decision was criticized by the Temporary State Commission on the Modernization, Revision and Simplification of the Law of Estates in its Third Report (1964), saying the decision "unfortunately" had "scuttled the statutory scheme" and that the new statute would "free our statutory law from the frustrations read into it by Cutting v. Cutting" (1964 NY Legis Doc No. 19, Comment, at 477).”  (Id. at n. 7.)

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In re Catapano’s Estate, 847 NYS2d 895 (Sur.Ct. Nassau County 2007).

“A power of appointment is general to the extent that it is exercisable wholly in favor of the donee, his estate, his creditors or the creditors of his estate (EPTL 10-3.2[b]). The ability to appoint to any one of the four listed appointees will make the power general (2-13 Klipstein, Drafting New York Wills § 13.02). A power of appointment may be exercised during lifetime or by will, or only after the expiration of a stated time or after the occurrence or non-occurrence of a specific event (EPTL 10-3.3). The effect of conferring a general power of appointment upon the donee is to give him a power of disposition as broad as though he was disposing of his own property (Matter of Ramdin, 11 AD3d 698, 783 N.Y.S.2d 643 [2d Dept 2004]).

The will of Andrew Catapano gives Josephine Catapano the power to appoint the trust property to her estate during her lifetime. It is clear from the language of the will that the testator intended to give Josephine the broadest possible power. Article THIRD B provides that Josephine may revoke any appointment made by her. From a reading of the will in its entirety and in view of all the facts and circumstances, it is evident that the testator intended to give  Josephine a valid general power of appointment, endowing her with the authority to dispose of the trust property, in all respects, as if it were her own.”

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In re Mozer’s Estate, 839 NYS2d 434 (Sur.Ct. Nassau County 2007).

“Robert maintains that since the transfer was revocable by virtue of the limited power of appointment, the transfer does not constitute a valid gift. The court disagrees. As this court noted in Matter of Bassin (NYLJ, May 2, 2002, at 27, col 1 [Sur Ct, Nassau County]), a life estate and power of appointment are commonly used Medicaid planning devices to avoid gift taxes by making an incomplete gift but still maintaining Medicaid eligibility. In Matter of Bassin, (NYLJ, May 2, 2002, at 27, col 1 [Sur Ct, Nassau County]), this court held that the transfer by deed of a remainder interest in real property subject to divestment under a limited power of appointment could constitute a valid gift so long as the donor had the requisite donative intent and capacity to make a gift. Similarly, this court has held that a valid remainder may be created subject to being divested by a reserved power of appointment (Matter of Levitt, NYLJ, Mar. 13, 1998, at 32, col 4 [Sur Ct, Nassau County]).”

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In re Levitt, 812 NYS2d 805 (Sur.Ct. Nassau County 2005).

“In addition to spelling out in detail her deep concern for her husband's welfare, she gave him a special power of appointment to appoint the remainders to anyone other than "my said husband, his creditors, his estate or creditors of his estate."

It is apparent from the will that the decedent's intention was clearly to give her husband as much beneficial interest as possible without causing the trusts to be included in his gross estate for estate tax purposes upon his death. By giving the power to make distributions of income or principal to a disinterested trustee the decedent avoided giving her husband the power to consume or invade the trusts which would have required their inclusion in his gross estate for estate tax purposes (Internal Revenue Code [26 USC] § 2041). Indeed, she was careful to give him only a special power of appointment as distinguished from general power of appointment which is defined as "power that is exercisable in favor of the decedent, his estate, his creditors or the creditors of his estate" (Internal Revenue Code [26 USC] § 2041 [b] [1]) which would also have required the inclusion of the trusts in his estate for estate tax purposes.”

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Estate of Albasi, 765 NYS2d 213, 215 (Sur.Ct. Bronx County, 2003).

“Inasmuch as the decedent granted to himself as the donee of the power the right to exercise it in favor of his estate, the power of appointment is classified as a general power of appointment under EPTL 10-3.2 (b). Consequently, regardless of whether the general power of appointment created by the decedent in favor of himself is classified as presently exercisable under EPTL 10-3.3 (b), or as postponed under EPTL 10-3.3 (d), the property covered by the power of appointment  "is subject to the payment of the claims of creditors of the donee, his estate and the expenses of administering his estate" pursuant to either EPTL 10-7.2 or 10-7.4 (a) (1). It would fly in the face of clear legislative intent to construe Social Services Law § 369 as barring a recovery by DSS on the ground that the appointed property should not be deemed part of the decedent's estate in view of the legislative mandates that DSS is a preferred creditor (Social Services Law § 104 [1]) and that the appointed property is subject to the payment of the claims of the donee's creditors and the obligations of the donee's estate (EPTL 10-7.2, 10-7.4 [a] [1]).”

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Matter of Dornbush, 627 NYS2d 232, 233 (Sur.Ct. NY County, 1995).

“The two trusts were created at different times by Murray Riese for the life income benefit of his son, Dennis. Under the agreement dated December 30, 1986 (Trust No. 1), the trustee has absolute discretion to invade principal for Dennis' benefit. Unless earlier terminated by the trustee's exercise of such discretion, the trust terminates upon the first to die of the grantor and Dennis. If the grantor dies first, the balance of principal is payable to Dennis, outright. If Dennis dies first, he is granted a special testamentary power of appointment. In the default of his exercise of the power, principal is payable to his then-living issue, or in default of such issue, to his distributees (other than the grantor).
Under the agreement dated May 17, 1993 (Trust No. 2), the trustees also have absolute discretion to invade principal for Dennis' benefit. At Dennis' death, the trust terminates in favor of his then-living issue.

Under EPTL 10-6.6 (b) (2), a trustee with absolute discretion to invade principal for the income beneficiary's benefit is authorized to apply to the court for permission to exercise such discretion in favor of a trustee of another trust for that beneficiary, rather than distributing the assets to the beneficiary directly, provided, however, that: "(A) the exercise of such discretion does not reduce any fixed income interest of any income beneficiary of the trust, (B) the exercise of such discretion is in favor of the beneficiaries of the trust, and (C) does not violate the limitations of [EPTL] 11-1.7."

Although the statute was intended to assist trustees in taking maximum advantage of generation-skipping transfer (GST) tax exemptions, it clearly can be used for other purposes (see, Matter of Kaskel, 163 Misc 2d 203, where certain distressed real estate investments were transferred from spendthrift trusts to new nonspendthrift trusts, in an attempt to limit the liabilities of the trusts and the parties).”

 
Estate of Simon, 348 NYS2d 462, 467 (Sur.Ct. Nassau County 1973).

“There can be no doubt that the will of Dave Simon granted to his widow Renee a general, testamentary, discretionary power of appointment as now defined in EPTL 10-3.2 to 10-3.4 (formerly Real Property Law, §§ 133 to 135). The only limitation upon Renee's authority as donee was that the power be exercised by her last will and testament, and the donor's will expressly stated in article fourth that such power otherwise was "without limitation." By statute ( EPTL 10-7.4) the property covered by this power of appointment is not subject to the payment of the claims of any creditors of the donee, of her estate, or the expenses of administering her estate. Professor I. Leo Glasser in his Practice Commentary to EPTL 10-7.4 (17B McKinney's Cons. Laws of N. Y., 1973-74 Supp., p. 139) points out that "The last phrase, 'except in the case of a testamentary general power' was designed to assure that under no circumstances was a testamentary power to be deemed a postponed power which has become exercisable upon the donee's death. Thus, as was previously indicated, if A disposes of a life interest in property to B with a testamentary general power in B to appoint the remainder, the power is not a postponed power which becomes exercisable on the death of B and the creditors of B can never reach the appointive property."”

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Matter of Bankers Trust Company, 252 NYS2d 894, 897 (Sup.Ct. NY County 1964).

“In 1951 the tax statute dealing with powers of appointment was attempted to be simplified. The present statute divides powers for purposes of taxation to those created prior to October 21, 1942 and subsequent thereto. With respect to those created after October 21, 1942 a general power of appointment (defined as one "exercisable in favor of the decedent, his estate, his creditors or the creditors of his estate") is includible in the value of the gross taxable estate of donee if he had such general power at time of his death, regardless of whether he exercised it or not; while a nongeneral (commonly referred to as special) power of appointment (as here explicity provided by the settlor) is not includible in donee's gross taxable estate (with one possible exception applicable apparently only to the State of Delaware under its distinctive rule relating to perpetuities -- see 5A Jessup-Redfield, Surrogates Law and Practice, pp. 1017-1018). Thus, this trust fund could not be included in Julia's gross estate for tax purposes and could not be made subject to tax in her estate because settlor had made it a nongeneral power not exercisable in favor of her estate, her creditors or the creditors of her estate, and this regardless of what Julia might do at any time or declare in any instrument.”

 
Estate of Eginton, 193 NYS2d 828, 831 (Sur.Ct. NY County 1959).

 “It has been uniformly held that "a general power of appointment does not permit the property of the donor to be employed for the payment of the donee's creditors in the absence of a testamentary direction that the appointed property be so used." (Matter of Dodge, 11 Misc 2d 307, 310-311; Hirsch v. Bucki, 162 App. Div. 659; Cutting v. Cutting, 86 N. Y. 522.)”

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Related topics:
    SPA Trust