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May 1993

Changes to the estates powers and trusts law. (Estates & Trusts)

by Edelstein, Martin A.

    Abstract- Significant changes were made to the Estates, Powers and Trusts Law (EPTL) of New York. Among the new provisions is the introduction of the concept of 'by representation' which supplants the per stirpes approach to distribution. Under EPTL Sec. 12.16, the 'by representation' distribution requires both surviving and predeceased issue of the closest generation to the decedent to each receive a share. These changes have been effective since Sep 1, 1992. The most significant change to the law, however, is the prohibition of using a trust to satisfy the right of election. This provision is contained under EPTL Sec. 5-1.1A and is applicable to decedents who pass away after Aug 31 1994 and are survived by a spouse. Nevertheless, spouses of decedents who pass away after Aug 31 1992 and before Sep 1 1994 can still use the trust to satisfy the right of election although their right of withdrawal is increased.

The most sweeping change has eliminated the use of a trust to satisfy the right of election. Due to the huge impact this will have on many estate plans, this provision will not be effective until September 1, 1994, leaving a two year period to review prior estate plans, wills, and trust documents.

Intestacy and Will Provisions

"By Representation" Distribution. EPTL Sec. 12.16 provides for a new method of distribution known as "by representation," which applies to distributions made to persons who take as issue of a predeceased ancestor. The rule provides that the surviving as well as the predeceased issue of the closest generation to the decedent each take a share. The share(s) of the predeceased issue is divided equally among all the surviving issue of the predeceased issue.

Example: Decedent A had three children, X, Y, and Z. X and Y predeceased A. X was survived by X-1. Y was survived by Y-1, Y-2, and Y-3. If A's estate is distributed by representation, then Z will receive 1/3 of the estate. The other 2/3 of the estate will be divided equally among the four survivors of X and Y. Thus, all four survivors will receive 2/3 x 1/4 of the estate or 1/6 each. By contrast, per stirpes distribution would result in X-1 receiving a 1/3 share and Y's children each receiving a 1/9 share (1/3 divided among three children).

New "Per Stirpes" Definitions. EPTL Sec. 1-2.14 has been revised to reflect the situation where the decedent is not survived by children. The statute provides that the estate is divided equally among surviving issue of the next immediate generation of issue and the deceased issue in the same generation who left surviving issue. The share of each deceased issue is distributed to his survivors similarly.

Example: Decedent A had a son X who predeceased him. X was survived by his children D and E and the issue of deceased child F (F-1 and F-2). D and E each take 1/3 of A's estate and F-1 and F-2 each take 1/6.

Distribution to Issue. EPTL Sec. 2-1.2 now provides that for wills executed on or after September 1, 1992, dispositions to "issue" will be deemed to be made by representation unless the testator explicitly provides otherwise.

Lapse. EPTL Sec. 3-3.3 has added another paragraph which provides that for wills executed on or after September 1, 1992, dispositions to brothers and sisters or issue of the testator who have predeceased the testator vest in the surviving issue of the deceased sibling or child by representation. For pre-September 1, 1992 instruments, vesting in the surviving issue remains per stirpes.

Intestate Distribution. EPTL Sec. 4-1.1 has been revised to effect several changes as follows:

* Intestate distribution is computed after deducting debts, administration expenses, and reasonable funeral expenses. Previously, estate taxes were deducted in addition to these items. The intestate distributees will however be responsible for their apportioned share of taxes.

* When a decedent is survived by a spouse and a child or children, the spouse receives $50,000 plus one-half of the residue and the child or children receive the remainder. If a child has predeceased the decedent, distribution to the issue is by representation. Previously, the $50,000 amount was $4,000 and there was a distinction between families with one child and those with more than one child.

* When a decedent is survived by a spouse and parents, all the property is distributed to the spouse. Previously, the parents and spouse shared in the intestate distribution.

Exemption for Benefit of Family. The items which vested automatically in the surviving spouse or children under EPTL 5-3.1 have been revised to include items not previously contemplated (e.g., computers, video tapes, and software) and to raise the dollar amount of certain exempt property to reflect more reasonable approximations of fair market value.

Right of Election by Surviving Spouse

The bill has added EPTL Sec. 5-1.1A which is applicable to decedents dying after August 31, 1992, survived by a spouse. Among the more salient parts of the statute are:

1) The surviving spouse's right of election is equal to the greater of $50,000 or one-third of the net estate.

2) The right of election to which a spouse is entitled is reduced by the capital value of any interest passing to the spouse by intestacy, will, or testamentary substitute. For this purpose, the capital value of a terminable interest is not considered.

3) For decedents dying after August 31, 1994, the right of election cannot be satisfied utilizing a trust where the spouse has an income interest (e.g., a QTIP trust). For decedents dying after August 31, 1992, and before September 1, 1994, a trust can still be utilized to satisfy the right of election but the surviving spouse's right of withdrawal is increased from $10,000 to $50,000.

4) The definition of testamentary substitute has been modified from the EPTL Sec. 5-1.1 ("the old law") definition. Among the changes are:

a) Totten trust accounts and joint bank accounts with rights of survivorship, and joint tenancies with rights of survivorship are testamentary substitutes whether created before or after the decedent's marriage. EPTL Sec. 5-1.1 provides that only interests created after marriage are testamentary substitutes.

b) Gifts made within one year of death are testamentary substitutes except if they were less than the annual exclusion, educational or medical expenses under IRC Sec. 2503(e), or not taxable due to gift splitting.

c) A revocable trust is a testamentary substitute whether created before or after marriage. EPTL Sec. 5-1.1 refers only to revocable trusts created after marriage. An irrevocable trust is a testamentary substitute only if created after marriage.

d) Pension, profit-sharing, and other qualified plan interests transactions occurring prior to September 1, 1992, are not testamentary substitutes. Those transactions occurring on or after September 1, 1992, are considered testamentary substitutes. EPTL 5-1.1 specifically excluded qualified plan interests from the definition of testamentary substitutes.

e) U.S. savings bonds and other U.S. obligations held jointly with rights of survivorship or as tenants by the entirety are testamentary substitutes. To the extent the bonds or obligations are payable upon the decedent's death to someone other then the decedent or his or her estate, they are treated as testamentary substitutes. EPTL Sec. 5-1.1 specifically excluded U.S. savings bonds from the ambit of testamentary substitutes.

5) The time period for exercising the right of election is within six months from the date of issuance of letters testamentary or of administration but in no event later than two years after the date of the decedent's death. The old law did not have a time limit contingent upon the decedent's date of death.

6) A waiver of a spouse's survivor benefit in a qualified plan will constitute a waiver against using the qualified plan as a testamentary substitute.

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