In re Heller
6 N.Y.3d 651 (2006)
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Rule of Law:
A trustee's status as a remainder beneficiary does not, in itself, create a per se prohibition against electing to convert a trust to a unitrust under New York's EPTL 11-2.4. Such an election may also be applied retroactively to the effective date of the statute.
Facts:
- In his will, Jacob Heller created a trust for the life of his wife, Bertha Heller, that would pay her the greater of $40,000 or the total trust income annually.
- Jacob Heller named his sons, Herbert and Alan Heller, as successor trustees and also as remainder beneficiaries, each with a 20% share.
- Jacob Heller's daughters, Suzanne Heller and Faith Willinger, were also named as remainder beneficiaries, each with a 30% share.
- After Jacob Heller's death, and upon becoming trustees in 1997, Herbert and Alan administered the trust, which paid Bertha an average annual income of approximately $190,000 from 1997 to 2001.
- In March 2003, the trustees, Herbert and Alan Heller, elected to convert the trust to a unitrust under a new state law.
- The trustees sought to apply the unitrust election retroactively to January 1, 2002, the effective date of the new law.
- As a result of this unitrust election, Bertha Heller's annual income from the trust was reduced to approximately $70,000.
Procedural Posture:
- Sandra Davis, as attorney-in-fact for Bertha Heller, commenced a proceeding in Surrogate's Court seeking to annul the trustees' unitrust election.
- Davis moved for summary judgment to annul the election and prevent its retroactive application.
- The Surrogate's Court (trial court) denied the motion to annul the election itself but granted the motion to void its retroactive application.
- Davis (appellant) appealed the partial denial to the Appellate Division, and trustees Herbert and Alan Heller (cross-appellants) cross-appealed the ruling against retroactivity.
- The Appellate Division, an intermediate appellate court, affirmed the part of the order allowing the election to stand but reversed the part that denied retroactive application.
- The Appellate Division granted Davis leave to appeal to the Court of Appeals, New York's highest court, and certified a question for review.
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Issue:
Does a trustee's status as a remainder beneficiary automatically prohibit them from electing to convert a trust to a unitrust under New York's EPTL 11-2.4, and can such an election be applied retroactively to the statute's effective date?
Opinions:
Majority - Rosenblatt, J.
No, a trustee's status as a remainder beneficiary does not automatically prohibit them from electing unitrust status, and yes, such an election can be applied retroactively. The Legislature's decision to expressly prohibit interested trustees from exercising the power to adjust between principal and income (EPTL 11-2.3), while omitting a similar prohibition from the simultaneously enacted optional unitrust provision (EPTL 11-2.4), indicates a deliberate choice not to create a per se bar. While the common law prohibits self-dealing, that rule is not violated as a matter of law here because the trustees also owe fiduciary duties to the other remainder beneficiaries whose interests align with theirs. However, any unitrust election from which a trustee benefits must be scrutinized by the courts with special care for fairness. Regarding retroactivity, the statutory language explicitly authorizes trustees to specify an effective date and requires them to recompute payments for 'preceding' years, which would be meaningless if retroactive application were barred.
Analysis:
This decision provides significant clarity on New York's then-new Uniform Principal and Income Act, particularly the optional unitrust provision. It establishes that a trustee's conflict of interest as a remainder beneficiary does not create an absolute bar to making a unitrust election, distinguishing it from the stricter rules governing the power to adjust. The ruling affirms the Legislature's intent to give trustees flexibility to invest for total return. However, by mandating that such elections receive 'special care' from the courts, the decision balances this newfound flexibility with the trustee's bedrock common-law duty of loyalty, ensuring that the election is fair and not an abuse of discretion.
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