Opinion
File No. 81053/G/H/I/J
06-07-2021
In the MATTER OF the Judicial Settlement of the First Account and the Second Account of Marvin I. HONIG and Charles E. Gregory, Jr., Trustees, and Thalia Cassuto, as Executor of the Estate of Isadore Cassuto, deceased Trustee, and the Third and Final Account of Marvin I. Honig, Charles E. Gregory, Jr. and David N. Cassuto, Trustees, of the Generation-Skipping Transfer Tax Non-Exempt trust under Section 3.03 of The Irving Kirsch Trust dated February 10, 1990, as amended (Trust No.1) In the Matter of the Judicial Settlement of the First Account and the Second Account of Marvin I. Honig and Charles E. Gregory, Jr., Trustees, and Thalia Cassuto, as Executor of the Estate of Isadore Cassuto, deceased Trustee, and the Third and Final Account of Marvin I. Honig, Charles E. Gregory, Jr. and David N. Cassuto, Trustees, of the Generation-Skipping Transfer Tax Exempt trust under Section 3.03 of The Irving Kirsch Trust dated February 10, 1990, as amended (Trust #2)
Thomas J. Collura, Esq., Christopher Massaroni, Esq., and Michael D. Zahler, Esq., Attorneys for Petitioners, Hodgson Russ LLP, Albany Javier Mendez, Esq. and Claire E. McRae, Esq., Attorneys for Respondent Alex L., Lemery Greisler LLC, Albany
Thomas J. Collura, Esq., Christopher Massaroni, Esq., and Michael D. Zahler, Esq., Attorneys for Petitioners, Hodgson Russ LLP, Albany
Javier Mendez, Esq. and Claire E. McRae, Esq., Attorneys for Respondent Alex L., Lemery Greisler LLC, Albany
Stacy L. Pettit, J. Accounting proceedings were commenced by the trustees (hereinafter petitioners) for the sub-trusts established pursuant to Section 3.03 of the Irving Kirsch Trust dated February 10, 1990, as amended (hereinafter Irving's Trust). Pending before the Court is a motion by petitioners pursuant to CPLR 3211 (a) (1) and 3211 (a) (5) to dismiss objections related to their initial funding of the sub-trusts and their payment of estate taxes as set forth in the first and fifth objections of respondent Alex L. (hereinafter Alex) and the objections at paragraphs 10 (b) and 10 (d) of respondents A. L. and N. L. (hereinafter A.L. and N.L.) (hereafter collectively referred to as respondents). The Court appointed Patricia J. Shevy, Esq. as Guardian ad Litem (hereinafter GAL) to represent A.L. and N.L., minor beneficiaries of discretionary income and principal during the existence of certain sub-trusts of Irving's Trust, and contingent remainder beneficiaries under Irving's Trust. Respondents oppose the motion, and the matter is now submitted for decision.
The Court has amended the GAL appointment of Shevy to include any possible unborn issue of Alex, recognizing that such unborn persons are also interested parties to these accounting proceedings, and accepts the objections and motion papers filed on behalf of A.L. and N.L. by the GAL to include possible unborn issue of Alex. This decision and order will refer to all such issue of Alex as "A.L. and N.L."
Decedent died testate on August 22, 1999 survived by his spouse, Elaine Kirsch, his two adult children, Deborah Kirsch and Andrea Kirsch, and his two grandchildren, Alex L. and Jesse L. Jesse died in 2010 without issue. A.L. and N.L. are Alex's minor children and decedent's great-grandchildren. Irving's Trust was created by decedent as grantor and Marvin I. Honig and Isadore Cassuto as trustees, amended and restated several times, finally by the Sixth Restated Trust Agreement dated July 21, 1999.
Decedent's will dated July 21, 1999 was admitted to probate on November 16, 1999. Letters testamentary were issued to Marvin I. Honig, Isadore Cassuto and Charles E. Gregory, Jr. on November 16,1999.
Pursuant to the terms of the trust, Charles E. Gregory, Jr. was qualified as an additional trustee on August 24, 1999 after decedent's death. On September 1, 2016, Isadore Cassuto resigned as trustee and Irving's Trust provided for the appointment of Mark J. Rosen as the first successor Trustee. Rosen declined his appointment and trustees Honig and Gregory designated David N. Cassuto as an additional trustee.
Irving's Trust contains multiple sub-trusts. Two sub-trusts that are relevant to this motion include the Grandchildren's Trust (Section 3.02) and Elaine's Trust (Section 3.03). The Grandchildren's Trust (Section 3.02) provides that it would be funded with $500,000.00 in "cash, securities or business asset, or a combination thereof" on decedent's death if Elaine survived him. More specifically, the Grandchildren's Trust provides that
"[i]f Grantor's wife survives Grantor, the sum of FIVE HUNDRED THOUSAND DOLLARS ($500,000.00), shall be held by the Trustees in trust for the primary benefit of Grantor's surviving grandchildren. If Grantor's wife does not survive
Grantor, the sum of ONE MILLION DOLLARS ($1,000,000.00) shall be held by the Trustees in trust for the primary benefit of Grantor's surviving grandchildren (the "Grandchildren's Trust") upon the terms hereinafter provided in Article Fourth. [sic] Grantor's Trustees, in their sole discretion, may fund this trust with cash, securities, or business assets, or a combination thereof."
Elaine's Trust (Section 3.03) was to be funded with a fractional interest in decedent's business assets worth $500,000.00. Elaine's Trust provides that
"[i]f Grantor's Wife survives Grantor, the Trustees shall hold a fractional interest in my business assets in the value of FIVE HUNDRED THOUSAND DOLLARS ($500,000.00) in trust for the uses and purposes hereinafter provided. The trustees shall hold, manage, control, invest and reinvest the principal of this trust, shall collect all income thereof, shall pay all proper expenses, charges and taxes connected therewith, and shall distribute the net income to Grantor's wife in at least quarterly installments during her lifetime. Upon the death of Grantor's said wife, the corpus of said trust shall be added to the corpus of the trust created pursuant to Section 3.02 of this Article Third [the Grandchildren's Trust];"
During November 2000, the trustees divided Elaine's Trust into two separate trusts; one with a generation-skipping transfer tax inclusion ratio of one pursuant to Section 2642 (a) of the Internal Revenue Code of 1986 (hereinafter Trust #1), and the other with a generation-skipping transfer tax inclusion ratio of zero (hereinafter Trust #2, and collectively as the Sub-Trusts). The instant accountings are for the Sub-Trusts of Elaine's Trust. Petitioners funded the Sub-Trusts on December 4, 2001 with cash totaling $500,000.00 rather than a fractional interest in decedent's business assets.
Elaine died several years later on December 8, 2013. On her death, Elaine's Trust was to be terminated pursuant to its terms, and the Sub-Trusts’ assets were to be added to the Grandchildren's Trust. The beneficiaries of the Grandchildren's Trust are decedent's sole living grandchild, Alex, and his issue, A.L. and N.L. The Grandchildren's Trust provides for liberal distributions of income or principal to Alex and/or his issue (A.L. and N.L.) at any time during the existence of the Grandchildren's Trust, without regard to equality of distribution, and provides for distributions of the balance of the trust in three payments to Alex at ages 35, 45 and 55, when the trust terminates. In the event of Alex's death before age 55, the balance of the trust would be distributed to Alex's issue, per stirpes, giving A.L. and N.L. contingent remainder interests. Thus, the Grandchildren's trust gives Alex, A.L. and N.L. present, concurrent and non-successive interests in distributions as follows:
The accountings now filed for the Sub-Trusts indicate that, although Elaine died over seven years ago, petitioners have not yet transferred the balance of the Sub-Trusts to the Grandchildren's Trust.
"The Trustees shall distribute such part or all of the trust at any time and from time to time to or for the use of Grantor's said grandchildren and their issue in such amounts and proportions as the Trustees, in their sole and absolute discretion, shall deem advisable for the best interests of Grantor's said beneficiaries, without regard to equality of distribution, and including the permissible exclusion of one or more beneficiaries. The Trustees’ discretion shall be liberally exercised in order to satisfy each beneficiary's reasonable need for funds, including (without limitation) any need for funds arising by reason of illness, accident, or other emergency, educational, professional or business requirements, marriage or other personal circumstances."
On September 9, 2014, after Elaine's death, the trustees made estate tax payments totaling $234,000.00 out of funds from the Sub-Trusts. Thereafter, petitioners did not account voluntarily or transfer the assets of the Sub-Trusts to the Grandchildren's Trust. In August 2018, Alex brought a proceeding to compel petitioners to account, and in November 2018 these accounting proceedings were commenced by petitioners seeking judicial settlement of the accounts of the Sub-Trusts. The accountings cover periods from 2001 to 2018 and show a combined balance on hand in the Sub-Trusts of $135,056.19 as of August 2018. Respondents objected to petitioners’ accounts, and petitioners now move to dismiss the objections related to their initial funding of the Sub-Trusts and their payment of estate taxes from the Sub-Trusts.
" ‘On a motion to dismiss pursuant to CPLR 3211, the pleading is to be afforded a liberal construction’ " ( Myers v. Schneiderman , 30 N.Y.3d 1, 11, 62 N.Y.S.3d 838, 85 N.E.3d 57 [2017], quoting Leon v. Martinez , 84 N.Y.2d 83, 87-88, 614 N.Y.S.2d 972, 638 N.E.2d 511 [1994] ; see Doe v. Bloomberg, L.P. , 36 N.Y.3d 450, 454, 143 N.Y.S.3d 286, 167 N.E.3d 454 [2021] ). The court must " ‘accept the facts as alleged in the [answer or objections] as true, accord [respondents] the benefit of every possible favorable inference, and determine only whether the facts as alleged fit within any cognizable legal theory’ " (id., quoting Leon v. Martinez , 84 N.Y.2d at 87-88, 614 N.Y.S.2d 972, 638 N.E.2d 511 ; see Doe v. Bloomberg, L.P. , 36 N.Y.3d at 454, 143 N.Y.S.3d 286, 167 N.E.3d 454, quoting Aristy-Farer v. State of New York , 29 N.Y.3d 501, 509, 58 N.Y.S.3d 877, 81 N.E.3d 360 [2017] ). "Dismissal is warranted [on a motion to dismiss pursuant to CPLR 3211 (a) (1) ] only if the documentary evidence ‘establishes a defense to the asserted claims as a matter of law’ " ( Kolchins v. Evolution Mkts., Inc. , 31 N.Y.3d 100, 106, 73 N.Y.S.3d 519, 96 N.E.3d 784 [2018], quoting Leon v. Martinez , 84 N.Y.2d at 88, 614 N.Y.S.2d 972, 638 N.E.2d 511 ).
Objections by Alex, and by A.L. and N.L., to the Funding of the Sub-Trusts
Petitioners first seek to dismiss respondents’ objections that the trustees breached Section 3.03 of Irving's Trust when they chose to fund the Sub-Trusts with cash instead of a fractional interest of decedent's business assets as required by the terms of the trust. Petitioners argue that the funding objections are barred by the doctrine of res judicata and that Alex released any claims against them for actions they took as trustees prior to December 31, 2003. As to the funding objection of A.L. and N.L., petitioners claim A.L. and N.L. were virtually represented by Alex, and they are, therefore, also barred by the doctrine of res judicata.
Objections by Alex to the Funding of the Sub-Trusts
Petitioners offer in support of their motion a copy of Schedule E to the Supplemental Account for Irving's Trust dated May 28, 2004 and claim that the accounting provided Alex with full disclosure that cash distributions of $500,000.00 were made to fund the Sub-Trusts. Petitioners also offer a copy of an Agreement of Compromise (hereinafter Agreement) dated November 10, 2004 between the trustees and Elaine, Alex and others, that they claim approved the Supplemental Account for Irving's Trust, including the disclosure of the $500,000.00 cash distribution to the Sub-Trusts. Petitioners further assert that the Agreement released and discharged them for actions they took as trustees prior to December 31, 2003 including the funding of the Sub-Trusts with cash instead of a fractional interest of decedent's business assets. Finally, petitioners offer a copy of the Court's decree dated March 3, 2005 (hereinafter Decree) approving the Agreement and settling the trustees’ first intermediate account for Irving's Trust for the period ending December 31, 2003. Alex contends that the Agreement did not excuse the trustees from their nondiscretionary duty to fund the Sub-Trusts with a fractional interest of decedent's business assets; that he did not have a fair opportunity to object to the cash disbursements at the prior accounting proceeding because Schedule E did not provide him with adequate notice that cash was being disbursed in lieu of an interest in decedent's business assets. He further argues that the Court's decree did not discharge the trustees from their responsibility to fund the Sub-Trusts with an interest in decedent's business assets because the distribution of cash in lieu of business assets was not disclosed in the accounting that was the subject of the decree; and that although the Agreement's release limited the liability of petitioners for the period ending December 31, 2003, it did not bar all claims, known or unknown, concerning administration of Irving's Trust.
There can be no dispute, based upon the plain language of Elaine's Trust, that the trustees were mandated to "hold a fractional interest in [decedent's] business assets in the value of ... ($500,000.00) in trust" from which the net income was to be distributed to Elaine and, upon her death, "the corpus of said trust" was to be added to "the corpus of the [Grandchildren's] trust." The parties do not dispute that the trustees, instead, funded the Sub-Trusts with cash. Nor do the parties dispute that Alex did not raise the propriety of the trustees’ decision to fund the Sub-Trusts with cash in the prior accounting proceeding for Irving's Trust. Alex was 18 years of age when he signed the Agreement, and it is understandable that he overlooked the importance of the disclosure, on the one-page Schedule E of the voluminous accounting, that the Sub-Trusts were funded with cash. The question before the Court, however, is whether petitioners’ documentary proof offered in support of the instant motion establishes as a matter of law that Alex, having failed to raise the issue in the prior accounting proceeding, is now barred from objecting to the funding of the Sub-Trusts with cash. The Court is constrained to find, based on the documentary evidence offered by petitioners in support of their motion, that Alex's current objection to the funding of the Sub-Trusts with cash was "discernible from the documents filed in the[ ] prior proceedings" and therefore could have been raised by Alex at that time ( Matter of Hunter , 4 N.Y.3d 260, 270, 794 N.Y.S.2d 286, 827 N.E.2d 269 [2005] ). Schedule E to the Supplemental Account dated May 28, 2004 contains the following entries: Schedule E
Statement of Distributions of Principal
| Pursuant to "3.03" of the Trust, the following distributions were made to: | Distribution Value | |
| Spouse's GST Exempt Trust | ||
| 12/04/2001 Cash | $85,289.00 | |
| Total | $85,289.00 | |
| Spouse's GST Non-Exempt Trust | ||
| 12/04/2001 Cash | $414,711.00 | |
| Total | $414,711.00 | |
| Total Schedule E | $500,000.00 |
It is apparent from the face of Schedule E that disbursement to the Sub-Trusts was made in the form of cash. The trustees’ decision to disburse cash rather than an interest in decedent's business assets was detectible by Alex during the prior proceeding because the distributions described in Schedule E clearly pertain to Elaine's Trust where it states that the distributions were made "[p]ursuant to ‘3.03’ of the Trust."
Furthermore, the Agreement between Alex and trustees Honig and Gregory, among others, contains the parties’ approval of the First Intermediate and Supplemental Accounts, and the agreement to discharge the trustees from all liability for the period ending December 31, 2003. The Agreement also shows that Alex was represented by attorney Paul C. Montgomery during the prior proceeding. Thereafter, the Court approved the parties’ settlement in its Decree.
Former trustee Isadore Cassuto, succeeded by David N. Cassuto, was also a signatory to the Agreement, as well as other trust beneficiaries.
Thus, the Court is unable to conclude that Alex did not have a fair opportunity to object to the funding at the prior proceeding. The parties having entered into an agreement settling the trustees’ accounts, and the Court having issued a binding decree, Alex is therefore precluded from litigating his objection to the funding of the Sub-Trusts with cash (see Matter of Winston , 39 A.D.3d 765, 767, 833 N.Y.S.2d 657 [2d Dept. 2007], lv denied 9 N.Y.3d 806, 842 N.Y.S.2d 782, 874 N.E.2d 749 [2007] ).
Following a review of the documentary proof offered in support of the instant motion, and "accept[ing] the facts as alleged in [Alex's objection] as true [and] accord[ing] [Alex] the benefit of every possible favorable inference," ( Myers v. Schneiderman , 30 N.Y.3d at 11, 62 N.Y.S.3d 838, 85 N.E.3d 57 quoting Leon v. Martinez , 84 N.Y.2d at 87-88, 614 N.Y.S.2d 972, 638 N.E.2d 511 ), the Court concludes that petitioners have met their burden to establish that the objection by Alex to the trustees’ funding of the Sub-Trusts fails to set forth a viable claim against them. The documentary evidence they offer "conclusively refutes," ( Kolchins v. Evolution Mkts., Inc. , 31 N.Y.3d at 106, 73 N.Y.S.3d 519, 96 N.E.3d 784 ), the factual allegations made against them in the objections.
"Under the doctrine of res judicata, a party may not litigate a claim where a judgment on the merits exists from a prior action between the same parties involving the same subject matter" ( Matter of Hunter , 4 N.Y.3d at 269, 794 N.Y.S.2d 286, 827 N.E.2d 269 ). "The rule applies not only to claims actually litigated but also to claims that could have been raised in the prior litigation" ( id. ). "[A] party who has been given a full and fair opportunity to litigate a claim should not be allowed to do so again" ( id. ). "As a general rule, an accounting decree is conclusive and binding with respect to all issues raised and as against all persons over whom Surrogate's Court obtained jurisdiction" ( id. at 270, 794 N.Y.S.2d 286, 827 N.E.2d 269 ). Moreover, "[i]n accord with res judicata, an accounting decree is ... conclusive as to issues that were decided as well as those that could have been raised in the accounting" ( id. ).
The Court is also not persuaded by Alex's argument that the trustees had a non-discretionary duty to fund the Sub-Trusts with a fractional interest in decedent's business assets that could not be waived during the prior proceeding. EPTL 7-2.4 provides that "[i]f the trust is expressed in the instrument creating the estate of the trustee, every sale, conveyance or other act of the trustee in contravention of the trust, except as authorized by this article and by any other provision of law, is void." Nonetheless, "[a] trustee may bind the trust to an otherwise invalid act or agreement which is outside the scope of the trustee's power when the beneficiary or beneficiaries consent or ratify the trustee's ultra vires act or agreement" ( Mooney v. Madden , 193 A.D.2d 933, 933-934, 597 N.Y.S.2d 775 [3d Dept. 1993], lv dismissed 82 N.Y.2d 889, 610 N.Y.S.2d 153, 632 N.E.2d 463 [1993] ; see also Hempstead Realty, LLC v. Sturrup , 55 Misc. 3d 1219[A], *7, 2017 WL 2215747 [2017] ). "This beneficiary consent may be express or implied from the acceptance of the trustee's act or agreement and may be given either after or before the trustee's act, as when the beneficiary or beneficiaries direct the trustee to take the challenged act or enter into the agreement" ( id. at 934, 597 N.Y.S.2d 775 ). Here, Alex approved the First Intermediate and Supplemental Accounts of Irving's Trust, which disclosed funding the Sub-Trusts with cash, and Alex has presumptively accepted the terms of the Agreement for approximately 14 years. Accordingly, the Court is again constrained to find that Alex ratified the trustees’ otherwise void act in funding the Sub-Trusts with cash rather than a fractional interest in decedent's business assets.
Objection by A.L. and N.L. to Funding of the Sub-Trusts
In support of their motion to dismiss the objection by A.L. and N.L. to their funding of the Sub-Trusts, petitioners rely primarily on SCPA 315 (8) to support their argument that A.L. and N.L. were virtually represented by their father when he signed the Agreement. The statutory provision applies to "nonjudicial settlements of accounts of fiduciaries" and provides that "[u]nless the instrument expressly provides otherwise, an instrument settling an account, executed by all the persons upon whom service of process would be required in a proceeding for the judicial settlement of the account, shall be binding and conclusive on all persons upon whom service of process would not be required to the same extent as that instrument binds the persons who executed it."
GAL Shevy asserts on behalf of A.L. and N.L. that they are not bound by the Agreement signed by Alex or the decree in the prior accounting proceeding. She argues that they were necessary parties to the judicial accounting proceeding in which the settlement occurred, and that jurisdiction was not obtained, either by service and appointment of a guardian ad litem or by Alex's alleged virtual representation of them. She further argues that virtual representation would not have been adequate in any event, because their economic interests are not sufficiently aligned with their father.
A Surrogate's Court decree is binding only as to those parties over which the court has obtained jurisdiction, and when the court fails to obtain jurisdiction over an interested party, the party "is not bound by the decree and can re-litigate the issue in a court with personal jurisdiction" (Turano & Radigan, New York Estate Administration, 2020 ed., § 1.08 [c]). A.L. and N.L. were grandchildren's issue who were not yet born when the prior accounting proceeding for Irving's Trust for the period ending December 31, 2003 was settled by decree. The accounting petition, settlement agreement, decree and other documents in that proceeding make no mention of the grandchildren's issue as necessary parties to the accounting, although the grandchildren's issue have the present right during the trust's existence to distributions of income and principal, and they are also contingent remaindermen. SCPA 2210 (9) provides that "[i]n the case of a trustee [on an accounting proceeding], process shall issue to all persons who are entitled absolutely or contingently by the terms of the ... lifetime trust instrument ... to share in the estate." It is clear from a review of the proceeding that no process was served, nor was any guardian ad litem appointed, on behalf of unborn issue of grandchildren. Therefore, jurisdiction was lacking over A.L. and N.L. unless jurisdiction was obtained over them by virtually representation by their father.
SCPA 315 (2) (a) (iii) provides that it shall not be necessary to serve process on any "unborn or unascertained persons ... [unless] ... it appears that there is no person in being or ascertained, having the same interest, [then] the court shall appoint a guardian ad litem to represent or protect the persons who eventually may become entitled to the interest." If virtual representation is to occur in a proceeding, it must be determined as a threshold issue at the outset of the proceeding, or jurisdiction is not obtained by that method (see SCPA 315 [7] ). "In any proceeding where the petitioner wants to use virtual representation for some parties, the petition must give information justifying it." (Turano & Radigan, New York Estate Administration, 2020 ed., § 2.11 [g]; see SCPA 315 [7] ). SCPA 315 (7) requires, among other things, that the petition set forth certain information with respect to persons interested in the estate that petitioner claims do not need to be served pursuant to SCPA 315. In accordance with SCPA 315 (7) and 304 (f), the petition must identify the parties to be virtually represented as necessary parties, their interests, and their legal disabilities. The petition must also "state whether the fiduciary or any other person has discretion to affect the present or future beneficial enjoyment of the estate and, if so, set forth the discretion possessed and, if exercised, the manner in which it has been exercised" ( SCPA 315 [7] ). Finally, the statute requires that the basis of the court's finding with respect to whether virtual representation is adequate or not is to then be set forth in its order (see SCPA 315 [7] ). None of the required information was provided in the accounting petition in the prior proceeding, as the issue of grandchildren were not even mentioned as parties. There was no consideration, conclusion or order made by the Court in the prior accounting proceeding as to whether virtual representation should be applied to the grandchildren's unborn issue, or instead, whether the court should have appointed a guardian ad litem on their behalf.
Oddly, the petition does mention the Irving and Elaine Kirsch Foundation and the Attorney General on its behalf as contingent remainderman of the trusts, but the foundation would only be a remainderman if there were no issue of grandchildren, or issue of Irving Kirsch living when the trusts terminate. The petition fails to mention any of these parties at all or acknowledge the present interest in sprinkle trust provisions given directly to issue of grandchildren.
See Matter of Appleby , 14 Misc. 3d 1208(A), 2006 N.Y. Slip Op. 52448(U), *2, 2006 WL 3758608 (Sur. Ct., Nassau County 2006), where the court considered virtual representation, and although it acknowledged that the interests of the proposed representors of the representees were similar, it held that virtual representation was not available because the court was "not satisfied that the minor contingent remaindermen [would] be adequately represented by the proposed representors".
The Court concludes that, following a review of the documentary proof, and "accept[ing] the facts as alleged in [A.L. and N.L.’s objections] as true [and] accord[ing] [respondents] the benefit of every possible favorable inference," ( Myers v. Schneiderman , 30 N.Y.3d at 11, 62 N.Y.S.3d 838, 85 N.E.3d 57 ), petitioners have not met their burden to establish that A.L. and N.L. were virtually represented by Alex in the prior accounting proceeding. Where a party seeks that the court permit virtual representation in an accounting proceeding, certain affidavits must be submitted by both the petitioner and the representor, in addition to the information which must be contained in the petition pursuant to SCPA 315 (7) (see 22 NYCRR 207.18 [a]). The affidavit of the petitioner or the petitioner's attorney must include "the name, address and the interest in the estate of the representor; the name, address and the interest in the estate of the representees; and the statutory basis for the use of virtual representation" ( 22 NYCRR 207.18 [a] [1]). The affidavit of the representor must state "that the representor has fully reviewed the proceedings; the steps taken by the representor to adequately represent the interest of the representees in order to make a considered judgment whether to appear, default, acquiesce or contest the proceedings; and that the representor has no conflict of interest in adequately representing the representees" ( 22 NYCRR 207.18 [a] [2]).
No such affidavits were filed with the Court in the prior accounting proceeding, and there is no indication in any documentation, then or now, that Alex undertook to represent his unborn children's interests. " ‘The court must be concerned with whether or not the representees are being actively represented and not with whether or not they could be represented’ " ( Matter of Wells , 37 Misc. 3d 1208[A], 2012 N.Y. Slip Op. 51933[U], *3, 2012 WL 4854700 [Sur. Ct., Chautauqua County 2012], quoting Matter of Sanders , 123 Misc. 2d 424, 429, 474 N.Y.S.2d 215 ([Sur. Ct., Nassau County 1984]) ). In the absence of compliance with SCPA 315 and Uniform Rule 207.18 in the prior accounting proceeding, the Court made no determination that jurisdiction was obtained over A.L. and N.L. by any means, and they are not bound by the prior accounting decree or the agreement entered by Alex (see id. [the failure to file the affidavits required by Surrogate's Court Rule 207.18 alone precludes a party from employing virtual representation under SCPA § 315 (5) ]).
Even if virtual representation had been considered and granted by the Court in the prior proceeding, it is questionable whether Alex and his issue share the same economic interests in the trust which would have allowed for virtual representation. While Alex's interest as a remainderman of the trust may be representative of A.L. and N.L.’s interests as contingent remaindermen, the trust's liberal allowance for principal and income distributions to Alex, A.L. and N.L. during the Grandchildren's Trust's existence give A.L. and N.L. a much larger interest in those concurrent, and likely unequal, distributions, while Alex has a greater interest in retaining his remainder. Minor beneficiaries of a sprinkling trust presumably have college, marriage and business interests ahead of them, while their adult parent may not. Had there been a request in the current accounting proceeding for Alex to virtually represent A.L. and N.L. and any possible unborn children, this Court would have denied the request and appointed a guardian ad litem to represent them, even if some of their economic interests are similar (see Matter of Appleby , 14 Misc.3d 1208[A] at *2 ). The Court is also not convinced that SCPA 315 (8) is applicable to this case. That provision applies in "nonjudicial settlements" and is only "binding and conclusive" on persons upon whom service of process would not be required. The Agreement signed by Alex was made in the context of an existing judicial accounting proceeding and approved by the Court. In addition, there was no determination that Alex's unborn issue were persons upon whom service would not be required. Finally, Alex signed the Agreement allegedly unaware that he was agreeing to the funding of the trust at issue here with cash rather than a share of decedent's business interests, which was clearly against his own interest. Even if the Agreement had been an informal settlement outside court, like the waiver signed by the father in Wells , "[h]ow could it be found that the minors were being adequately represented by their father when their father was consenting to a disposition against his own economic interests; since that would mean the disposition is [also] against the economic interests of the minors" ( Matter of Wells , 37 Misc 3d 1208[A] at *4 ).
Objection to Payment of Estate Taxes
Petitioners next seek to dismiss objections by respondents that upon Elaine's death the trustees improperly paid estate taxes out of funds from the Sub-Trusts contrary to Section 8.01 of Irving's Trust. That section provides that
"[t]he Trustees are directed to pay from the Residuary Property, all funeral and estate administration expenses, all debts and liabilities of the Grantor, and all estate, inheritance, succession, transfer and other death taxes (including all interests thereon or additions thereto) which shall be based upon or payable in respect to the Grantor's estate, including properties and interests (whether or not passing under this Sixth Restated Trust Agreement) which must be included in the Grantor's estate for the purpose of each said tax."
Respondents contend the taxes should have been paid from the Residuary Property Trust (a sub-trust under Section 5.01 of Irving's Trust), which provided: "[i]f the Grantor's wife shall survive him, the Residuary Property [defined under Irving's Trust at Section 3.05 as the balance of the property of Irving's Trust] shall be held, in trust, as the principal of a separate trust for the benefit of the Grantor's wife."
Petitioners argue in support of their motion that the payment of estate taxes upon Elaine's death out of funds from the Sub-Trusts was proper and that the foregoing tax apportionment provision from Irving's Trust was not applicable to estate taxes attributable to Elaine's estate. More specifically, petitioners contend that the taxes paid were related to Elaine's estate, not to decedent's estate, and that they were properly paid out of funds from the Sub-Trusts because the Sub-Trusts became part of Elaine's gross estate pursuant to §§ 2044 and 2207 (A) of the Internal Revenue Code (IRC) when the trustees made qualified terminable interest property (QTIP) elections in order to qualify the Sub-Trusts for the federal and New York State estate tax marital deduction from decedent's gross estate. Petitioners assert that Elaine's estate was therefore entitled to recover from the Sub-Trusts the estate tax attributable to those trusts.
Petitioners rely upon IRC §§ 2044 and 2207 (A), and EPTL 2-1.8, in support of their argument. Section 2044 provides, in relevant part, that "[t]he value of the gross estate shall include the value of any property to which this section applies in which the decedent had a qualifying income interest for life" including property where "a deduction was allowed with respect to the transfer of such property to the decedent ... under section 2056 by reason of," among other things, a QTIP election. IRC § 2207 (A) in turn provides, in relevant part,
"(a) Recovery with respect to estate tax.—
(1) In general.--If any part of the gross estate consists of property the value of which is includible in the gross estate by reason of section 2044 (relating to certain property for which marital deduction was previously allowed), the decedent's estate shall be entitled to recover from the person receiving the property the amount by which—
(A) the total tax under this chapter which has been paid, exceeds
(B) the total tax under this chapter which would have been payable if the value of such property had not been included in the gross estate.
(2) Decedent may otherwise direct.--Paragraph (1) shall not apply with respect to any property to the extent that the decedent in his will (or a revocable trust) specifically indicates an intent to
waive any right of recovery under this subchapter with respect to such property."
And New York State law provides, in relevant part, that
"[i]f any part of the gross tax estate consists of property the value of which is includible in the gross tax estate by reason of § 2044 of the Internal Revenue Code of 1986 as from time to time amended, the decedent's estate shall be entitled to recover from the person receiving the property the amount by which the total tax under article twenty-six of the tax law which has been paid exceeds the total tax under such article which would have been payable if the value of such property had not been included in the gross tax estate ... [but that] this subparagraph shall not apply if the decedent specifically directs otherwise by will" ( EPTL 2-1.8 [d-1] [1] [a] ).
In opposition to the motion, respondents rely upon the waiver provisions of IRC § 2207 (A) and EPTL 2-1.8 (d-1) (1) (a) to argue that Elaine directed in her will and trust that taxes imposed on any life interest created by Irving's Trust for her benefit be paid from the "principal of the Irving Kirsch Trust or trusts" since the estate tax payable on her death was a deferral of estate tax on Irving's estate and not Elaine's estate tax. Their contention is that Elaine's direction would relate back to the direction in Irving's Trust stating that his estate taxes should be paid from the "Residuary Property."
Petitioners offer in support of their motion copies of Elaine's will and amended and restated revocable trust. Elaine directed in her will "that all Estate transfer, inheritance and similar taxes payable with respect to any property included in [her] taxable Estate and the assessment of such taxes shall be paid pursuant to the terms of the AMENDED AND RESTATED ELAINE KIRSCH REVOCABLE TRUST dated December 15, 2010, as it may be amended from time to time." Elaine's amended and restated revocable trust provides that "[a]ll such taxes imposed under chapter 13 of the Internal Revenue Code or a corresponding provision of law ... imposed on any life interests created for the benefit of the Grantor's spouse that qualified for the federal estate tax marital deduction under section 2056 (b) (7) of the Internal Revenue Code by reason of an election made by the Grantor's spouse's Executors, shall be paid from the principal of such trust, or trusts, as applicable, holding such assets , in the manner provided by law" (emphasis added).
Missing from Elaine's will and trust is a waiver of the right to recover from respondents the tax obligation attributable to the Sub-Trusts for which a marital deduction840 was previously taken by decedent. Rather, Elaine's trust expressly provides for the payment of her estate taxes attributable to any life interests created for her benefit by decedent with QTIP elections from the very trusts that harbor those life interests which, here, are the Sub-Trusts. Thus, the Court is not persuaded by respondents’ interpretation of Elaine's will that it "commanded payment" of the subject taxes "from principal of the Irving Kirsch Trust or trusts." Absent a waiver, the trustees’ act in recovering the subject tax obligation from respondents by paying the taxes from the Sub-Trusts, the very "property for which marital deduction was previously allowed," was appropriate ( IRC § 2207 [A] [a] [1]).
Nor is the Court persuaded by respondents’ reliance upon Section 8.01 of Irving's Trust, (supra), to argue that payment of Elaine's estate taxes for the Sub-Trusts should have been taken from decedent's residuary property. That section directs the payment of taxes from decedent's residuary property for "properties and interests ... which must be included in [decedent's] estate." The Sub-Trusts here were excluded from decedent's estate and passed to Elaine upon decedent's QTIP elections (see IRC § 2056 [b] [7]). It was for Elaine's estate tax that the includable QTIP trusts paid their share of the tax due on Elaine's death.
IRC § 2056 (b) (7) (A) (1) provides that QTIPs "shall be treated as passing to the surviving spouse" when determining the value of decedent's taxable estate.
Conclusion
Petitioners’ motion is therefore granted in part and denied in part. Accordingly, the first and fifth objections by respondent Alex L. and the objection at paragraph 10 (d), to the extent it concerns payment of estate taxes after Elaine's death from the Sub-Trusts, by respondents A.L. and N.L. are dismissed. The objection at paragraph 10 (b) by respondents A.L. and N.L. is not dismissed. This constitutes the decision and order of the Court.