An unpublished New York County Surrogate’s Court opinion, In re Hoppenstein, held that the distribution of a life insurance policy from one trust to another trust that did not include certain beneficiaries of the original trust was a valid exercise of the trustee’s discretionary power to distribute trust principal under the trust instrument.
The significance of this case is that the court determined that the trust instrument, and hence the settlor’s intent, controlled the decision in this case. First, although New York has a decanting statute, the court held that the decanting could be accomplished under the terms of the trust instrument and did not have to comply with the statute. Second, the court determined that the unexercised Crummey withdrawal rights of the excluded beneficiaries lapsed pursuant to the trust instrument and were not contingent on notifying the beneficiaries of the withdrawal rights. And most importantly, the case confirms that a trustee does have complete discretion over principal distributions when the trust instrument provides absolute discretionary authority to make principal distributions.
The holding is great news for settlors and clients creating trusts in New York (who desire more flexibility than the New York decanting statute) and in states that do not have decanting statues because it confirms that the construction of a trust instrument matters and that trustees can rely on the terms of a trust instrument to properly administer a trust.
Reuben Hoppenstein (Settlor) created an irrevocable trust in 2004 (2004 Trust). The 2004 Trust authorized the trustees “to pay such sums out of principal of the trust (even to the extent of the whole thereof) to the Settlor’s descendants, living from time to time, in equal or unequal amounts, and to any one or more of them to the exclusion of others, as the Trustees, in their absolute discretion, shall determine.” The 2004 Trust gave the beneficiaries Crummey powers “to withdraw from additions to trust principal an amount designed to qualify each addition to trust as a ‘present interest’ eligible for the federal gift tax annual exclusion.” Pursuant to the 2004 Trust, the trustee was required to “notify each of the Settlor’s descendants of their intention to make any distribution… not less than  days before the intended distribution, whereupon each of the Settlor’s descendants shall have the right to withdraw principal.” The trust instrument also provided that any unexercised withdrawal rights lapsed annually.
At some point, the Settlor was unhappy with his daughter, Cheryl Hoppenstein (Cheryl), because he felt that her demands for money were excessive. The Settlor had reserved the right to exclude any beneficiary from the group eligible to exercise his or her Crummey power and exercised that right as to Cheryl (as well as her husband and children) in 2008.
Pursuant to their discretionary power to distribute principal granted in the trust instrument, the trustees distributed a life insurance policy from the 2004 Trust to a new trust (the 2012 Trust) in 2012, on the authority of the independent co-trustee, Nathan Davidovich. The 2012 Trust was similar in all respects to the 2004 Trust, except that it eliminated Cheryl and her descendants as beneficiaries. Davidovich provided notice, as required by the trust instrument, by letter in 2012 to each of the Settlor’s adult descendants in their individual capacities and on behalf of their minor children. The Settlor died in 2015 and the proceeds ($10 million) of the life insurance policy were paid to the 2012 Trust. Thereafter, Cheryl and her children sought to void the trustees’ distribution of the $10 million insurance policy from the 2004 Trust to the 2012 Trust.
The court, granting summary judgment to the trustees, rejected all of Cheryl’s arguments finding that the trust instrument expressly allowed the distribution that was made and that other provisions of the trust that Cheryl pointed to were not relevant limitations. The court also rejected Cheryl’s arguments under state law because they were irrelevant given the trust’s provisions. In particular, the court noted that New York decanting statute states that it should not be interpreted to limit a trustee’s ability to decant when the trust grants such power. The court also held that Cheryl did not have any unexercised withdrawal rights in the 2004 Trust at the time the insurance policy was transferred because they had all expired under the terms of the trust.
As stated above, overall, this case reinforces that the Settlor’s intent is what matters most when looking at the four corners of a well-constructed trust instrument. The trustees were able to decant assets by relying on the powers given to them within the trust instrument. The Settlor, in the trust instrument, reserved the right to exclude beneficiaries from their Crummey powers of withdrawal and determine how the Crummey withdrawal rights would lapse. And finally, the trustee was able to use his discretionary power, under the trust instrument, to distribute trust principal to exclude one or more of the original beneficiaries—Cheryl and her children. This case imparts great significance to the proper construction of an estate plan that uses flexible drafting techniques tailored to the client’s foreseeable and unforeseeable estate planning goals and objectives. Ultimately, the excellent drafting saved the client time and money by not having to engage in extensive litigation regarding whether the transaction was an appropriate decanting under New York law; rather, the court merely stated that the decanting was a valid exercise of authority under the terms of the trust instrument, without any further analysis required.
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