What is a trust? Why make a trust? Are trusts only for rich people? If…
Seymour and his wife just couldn’t make their marriage work. So in 1957 they entered into a separation agreement.
The separation agreement required Seymour in any will he made to treat the estranged couple’s three children equally with any child of Seymour’s born after the agreement.
Seymour subsequently divorced his first wife and remarried. He and his second wife had a daughter.
Thirty years later, on July 16, 1987, Seymour executed a will and a lifetime trust. Under the will, each of Seymour’s four children received a $10,000 bequest and his second wife received the balance of the estate. She was also named executor of his will.
Eventually, Seymour died. But he died without any assets to pay the bequests under the will. Instead, during his life, Seymour dishonored the separation agreement and transferred one million dollars in assets to his lifetime trust.
The lifetime trust provided for the creation of a special subtrust, called a credit shelter trust, upon Seymour’s death. According to the terms of the credit shelter trust, which was designed to avoid estate taxes, the trustee was to provide income to Seymour’s second wife until she died. Whatever assets remained in the credit shelter trust after the death of his second wife went to his daughter from the second marriage. The balance of the trust assets, those assets that weren’t in the credit shelter trust, went to his second wife.
In the trust instrument, Seymour, the clever man that he was, mentioned his obligation under the separation agreement to treat his children equally and declared to have satisfied that promise by his will.
But Seymour’s daughter from his first marriage wasn’t buying it. Sure, Seymour technically fulfilled the obligations under his will in writing, but certainly not in spirit.
The daughter from the second marriage brought a proceeding in New York Surrogate’s Court objecting to the estate plan. She maintained that her dad breached the separation agreement by providing for only his fourth child under the lifetime trust and not making equal provisions for his other children. She sought an amount equal to the present value of her half-sister’s interest in the credit shelter trust. The executer counter-argued that Seymour was permitted to favor his fourth child under the trust because the separation agreement did not explicitly prohibit it.
The Judge didn’t buy Seymour’s scheme either, and found that Seymour breached the separation agreement by leaving a disproportionate share of his estate to his fourth child under the trust.
These are the facts in Estate of Seymour Offerman, a Surrogate’s Court of New York County case that exemplifies issues that can arise where a party to a marital agreement dies in violation of its terms.
The Court in Estate of Seymour Offerman reasoned that the lifetime trust was “merely a will substitute” and that “the separation agreement created an enforceable obligation by decedent to treat his children equally under any will or codicil.” The Court held that because Seymour had three children from the first marriage, the objectant daughter was entitled to a one-fourth remainder interest in the property of the credit shelter trust.
Legal agreements between spouses, such as separation agreements and prenuptial agreements, often require the parties to provide for each other, or their children, at death. New York courts enforce such provisions and treat these agreements between spouses as they would any other contract or agreement.
But when one spouse doesn’t live up to their end of the bargain, like Seymour, how do the deceased spouse’s heirs recover their share of the estate? Like the daughter of the first marriage in Estate of Seymour Offerman the appropriate forum is often Surrogate’s Court, and the appropriate time is usually after death.
In Matter of Shvachko, a Surrogate’s Court of New York County case, a widow brought claims against her deceased husband’s estate under the theory of a fraudulent transfer of assets.
Prior to marriage, the widow and her husband entered into a binding prenuptial agreement, which provided that the “survivor”, meaning the spouse who outlived the other, “shall be entitled to one-half of the marital [real] property acquired by the parties or either of them during their marriage”.
The widow alleged that, days before her husband’s death, he entered into a promissory note/gift transaction with his son from a prior marriage which fundamentally stripped the widow of her rights to one-half of the marital property. The widow reasoned that if the note were to be paid by the estate, the marital property would need to be sold in order to pay the note.
In its analysis, the Court opined that, after a review of the case law dealing with lifetime transfers or transactions inconsistent with a party’s contractual obligations, the general rule was that individuals, including testators (the person who makes the will), ordinarily possess unfettered authority to dispose of all their property during their lifetimes as they see fit. The Court reasoned that courts have been reluctant to imply into promises to make bequests or not to revoke or change testamentary dispositions a further promise not to make transfers of property during life “unless there is an express provision in the agreement or instrument prohibiting such transfers or there is a substantial basis within the four comers of the instrument for making such an inference.”
However, the Court ruled that there are exceptions, and that “a prohibition against lifetime transfers of property made in bad faith or with the intent to defeat the purpose of an agreement to make a testamentary disposition is always inferred” and that any gift made with actual intent to defraud would be void.
The Court in Matter of Shvachko cited Dickinson v. Seaman, a 1908 Court of Appeals case, New York’s highest Court, which noted:
Any gift made with actual intent to defraud would be void, but none made without such intent, unless so out of proportion to the rest of his estate as to attack the integrity of the contract, when it would be fraudulent as matter of law. The gift might be so large that, independent of intent or motive, fraud upon the contract would be imputed, or arise constructively by operation of law. Reasonable gifts were impliedly authorized. Unreasonable gifts were not, even if made without actual intent to defraud. In the absence of intentional fraud, the question is one of degree and depends upon the proportion that the value of the gift bears to the amount of the donor’s estate.
So far, good news for heirs with a right to inherit from an estate pursuant to the terms of a binding marital agreement. But not all litigants in such cases have enjoyed the same result.
In Blackmon v. Estate of Battcock, for example, Elizabeth Battcock agreed in 1971 as part of a settlement of her deceased husband’s estate not to change a will she had executed in 1969. Her daughter and grandchildren claimed that she breached the settlement agreement by subsequently creating Totten trust accounts for beneficiaries not named in that will. A Totten trust, simply put, is a bank account where a named beneficiary receives the funds in the account automatically upon the death of the depositor. It is similar to an account made payable on death.
The Court of Appeals of New York held that “the agreement, which did not expressly prohibit the creation of Totten trusts, does not impliedly create such a restriction on the decedent’s actions during her lifetime.”
The Court of Appeals reasoned:
We disagree that the promise must be implied into decedent’s 1971 agreement not to change her will (citation omitted). To do so constitutes a significant judicial alteration and addition to the settlement agreement of the parties. The agreement itself is silent as to Totten trusts or any other testamentary-like forms of disposition of property. Only the change of the will is forbidden.
The Court continued: “In the absence of an express provision in the agreement or factors far more substantial within the four corners of the settlement agreement itself from which a judicial inference could comfortably and properly be drawn, courts should not innovate for parties after the fact.”
Further, the Court reasoned that since a contract to establish a trust must be in writing, a promise to refrain from creating trust accounts must also be in writing, and that the promise not to create Totten trusts, assuming it could be implied, did not satisfy the writing requirement.
So far, the cases discussed deal with litigation after the death of the person who made the promise. So what can be done if there is a breach of the agreement during life? Can there be a breach of the agreement during life? There are only limited circumstances where such a claim may arise prior to death.
First, there is the theory of anticipatory breach of contract. If “a party has indicated an unequivocal intent to forego performance of his obligations under a contract” then there may be a cause of action for anticipatory breach of contract by the aggrieved party, wrote the Court in Rachmani Corp. v. 9 East 96th Street Apartment Corp. “However, it is clear that there must be a definite and final communication of the intention to forego performance before the anticipated breach may be the subject of legal action (citations omitted). Mere expression of difficulty in tendering the required performance, for example, is not tantamount to a renunciation of the contract (supra).”
There are cases, however, that hold legal redress won’t be available until after the breaching parties death, under the theory that the breach cannot occur until death.
In Augustine v. Szwed, for example, the wife and husband married in 1939 and separated in 1968. At the time of their separation, they signed a separation agreement which provided that the husband agreed to maintain in full force and affect insurance policies on his life which named his wife as the beneficiary and that “there shall be no change in the beneficiary”. The separation agreement provided a list of 10 life insurance policies.
Shortly after executing the agreement, the husband moved in with his sister and named her beneficiary on five of the 10 listed policies. The husband died on April 3, 1975 and the sister received the proceeds. The wife demanded that the insurance monies be turned over to her. When the sister refused, the wife sued the sister. The sister argued, in essence, that the wife took too long to sue and should have done so years prior when the husband actually changed the beneficiaries during his life.
One of New York State’s four intermediate appellate courts, the Appellate Division, Fourth Department, held that the husband “may have breached the separation agreement” in 1968 when he changed the beneficiaries, “but there were no insurance proceeds then and no property rightfully belonging” to the wife “was adversely possessed by anyone until after his death.” It was the date that the husband died when the wife’s rights as beneficiary of the policies “vested” and when the property was held adversely by the sister, the Court ruled.
If you have questions about your rights in a marital agreement, I encourage you to get in touch. I can be reached at (646) 820-4011 and firstname.lastname@example.org.