Trust issues and Concerns

Victoria Hasseler*

I. INTRODUCTION

A trust is established. Tracy Brown is both the trustee and the

beneficiary.1 The settlor has empowered the trustee to make

discretionary distributions from the trust to the beneficiary herself

without any limitation, such as an ascertainable standard.2 Much

to the dismay of creditors, this means that Tracy Brown, as the

trustee-beneficiary (hereinafter "T/B"), can access the trust funds at

any time, yet the funds remain protected from her creditors while

held in trust. Could the New York Legislature have intended such a

consequence from the seemingly benign 2003, and subsequent 2004,

amendments to section 10-10.1 of the New York Estates, Powers

and Trusts Law (EPTL)?3

* B.A., State University of New York at Cortland, 2003, summa cum laude; J.D., Albany Law

School, 2006, summa cum laude. I would like to thank Albany Law School Justice David

Josiah Brewer Distinguished Professor of Law Ira Mark Bloom for his advocacy, insight, and

expertise, as well as my family and my fiancé for their support and encouragement.

1 The disposition actually contains a second beneficiary to prevent merger (discussed infra

Part II.A.), but for the purposes of this article the first, present beneficiary will be referred to

simply as "the beneficiary." See N.Y. EST. POWERS & TRUSTS LAW § 7-1.1 (McKinney 2002)

(recognizing a valid trust where the trustee is also a beneficiary provided there is another

"beneficial interest" in the trust); see also In re Estate of Seidman, 395 N.Y.S.2d 674, 675

(App. Div. 1977) (illustrating the possibility of remote beneficiaries when, for example, the

testator enables the life beneficiary to name the remaindermen).

2 Typical ascertainable standard limitations include health, education, maintenance, or

support. I.R.C. § 2041(b)(1)(A) (2000).

3 N.Y. EST. POWERS & TRUSTS LAW § 10-10.1 (McKinney Supp. 2006). Article 10 of the

EPTL is entitled "Powers"; part 10 is entitled "Provisions Affecting Powers Other Than

Powers of Appointment"; section 10-10.1 is entitled "Power to distribute principal or allocate

income; restriction on exercise." N.Y. EST. POWERS & TRUSTS LAW art. 10 at 290–91

(McKinney 2002). Section 10-10.1 of the Estates, Powers and Trusts Law provides:

A power held by a person as trustee of an express trust to make a discretionary

distribution of either principal or income to such person as a beneficiary, or to make

discretionary allocations in such person's favor of receipts or expenses as between

principal and income, cannot be exercised by such person unless (1) such person is the

grantor of the trust and the trust is revocable by such person during such person's

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This protection against creditors occurs because the discretionary

power under section 10-10.1 of the EPTL is not a general power of

appointment—with the accompanying provisions for creditors—

although it is tantamount to such a power. Should the Legislature

act and amend the current law to prevent abuse from occurring?

This paper begins by presenting a brief background of trust law

and creditor law, including the doctrine of merger and the rights of

creditors, in Section II. Section III sets forth the evolution of section

10-10.1 of the EPTL. Section IV addresses the implications of the

2003 and 2004 amendments by first discussing provisions for

creditors and then discussing why the discretionary power is not a

power of appointment based on the definition of a power of

appointment under section 10-3.1 of the EPTL; the legislative

history of article 10 of the EPTL; and the statutory heading of

article 10, part 10 of the EPTL. Section V presents the possible

positions of the Uniform Trust Code and considers why New York

should adopt versions of articles 1 and 5 of the Uniform Trust Code.

Finally, Section VI suggests feasible legislative solutions for New

York's current law.

II. TRUST LAW AND CREDITOR LAW BACKGROUND

A. The Doctrine of Merger

Historically, a sole trustee of a trust was not entitled to be

simultaneously a beneficiary of the trust. Under the doctrine of

merger,4 formerly embodied in sections 7-1.1 and 7-1.2 of the EPTL,5

lifetime, or (2) the power is a power to provide for such person's health, education,

maintenance or support within the meaning of sections 2041 and 2514 of the Internal

Revenue Code, or (3) the trust instrument, by express reference to this section, provides

otherwise. If the power is conferred on two or more trustees, it may be exercised by the

trustee or trustees who are not so disqualified. If there is no trustee qualified to exercise

the power, its exercise devolves on the supreme court or the surrogate's court, except

that if the power is created by will, its exercise devolves on the surrogate's court having

jurisdiction of the estate of the donor of the power.

§ 10-10.1 (codifying Act effective May 18, 2004, ch. 82, § 1) (footnote omitted).

4 For further descriptions of the doctrine, see Margaret Valentine Turano, Practice

Commentaries, in N.Y. EST. POWERS & TRUSTS LAW § 7-1.1; Reed v. Browne, 66 N.E.2d 47, 49

(N.Y. 1946); Weeks v. Frankel, 90 N.E. 969, 971 (N.Y. 1910).

5 Section 7-1.1 of the Estates, Powers and Trusts Law was formerly entitled "When right to

possession creates legal ownership"; in 1997, the Legislature amended the statutory heading

of section 7-1.1 so that it is now entitled "When trust interests not to merge." Act effective

June 25, 1997, ch. 139, § 1, 1997 N.Y. Laws 1885, 1885; N.Y. EST. POWERS & TRUSTS LAW § 7-

1.1. Section 7-1.2 of the Estates, Powers and Trusts Law retained the title "Trustee of passive

trust not to take." N.Y. EST. POWERS & TRUSTS LAW § 7-1.2 (McKinney 2002) (originally

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2006] Trustee-Beneficiaries, Creditors, and NY's EPTL 1171

the trust automatically terminated if the individual named as the

sole trustee was also named as a beneficiary since the trust would

effectively be passive, and the trustee would have no duties to carry

out.6 Title of the same nature and for the same duration as the

intended trust vested in the T/B.7 Provided that the trustee was not

the sole trustee, a trustee could, however, also be a beneficiary. For

example, in Woodward v. James, the Court of Appeals of New York

found that where, by the terms of his will, the decedent intended to

leave his widow a life estate in half the income from his estate but

did not expressly word the devise as a trust, "the law will not imply

a trust where, in the moment of its creation, it will be invalid, and

that, as the same person cannot be both trustee and beneficiary, the

trust to [the widow] must fail."8 This decision led to "the inevitable

result . . . that the equitable is merged in the legal estate, and the

latter alone remains" so that the widow, in regard to her one-half of

the income, "was not trustee, and took what was given to her by a

direct legal right."9

The merger doctrine, however, was not always strictly applied. In

In re Phipps' Will, for example, the beneficiary was a co-trustee but

became the sole trustee when the other trustee died.10 The court

distinguished cases where merger had been applied, reasoning that

in those cases there was not a demonstrated "intention that the

trust continue after the death of the sole beneficiary's cotrustee,"

and instead held that "[t]he doctrine of merger is not to be applied

'with rigidity,' and, where it appears to have been the intention of

the settlor . . . that the trust continue or that a successor trustee be

enacted as Act effective Aug. 2, 1966, ch. 952, 1966 N.Y. Laws 2761, 2806).

6 Margaret Valentine Turano, Practice Commentaries, in N.Y. EST. POWERS & TRUSTS LAW

§ 7-1.1 (McKinney 2002). The original version of section 7-1.1 of the EPTL, enacted in 1966,

provided, "[e]very person who by virtue of any disposition is entitled to the actual possession

of property and the receipt of income therefrom has a legal estate in such property of the

same quality and duration and subject to the same conditions as his beneficial interest." Act

effective Aug. 2, 1966, ch. 952, 1966 N.Y. Laws 2761, 2806. This provision interacted with

section 7-1.2 of the EPTL, enacted simultaneously, which provided:

Every disposition of property shall be made directly to the person in whom the right to

possession and income is intended to be vested and not to another in trust for such

person, and if made to any person in trust for another, no estate, legal or equitable, vests

in the trustee. But neither this section nor 7-1.1 shall apply to trusts arising or resulting

by implication of law.

N.Y. Est. Powers & Trusts Law § 7-1.2 (originally enacted as Act effective Aug. 2, 1966, ch.

952, 1966 N.Y. Laws 2761, 2806).

7 Reed, 66 N.E.2d at 49.

8 Woodward v. James, 22 N.E. 150, 15152 (N.Y. 1889).

9 Id. Mrs. James, however, was able to remain trustee over the other one-half of the

income, which was given to "legal heirs." Id.

10 In re Phipps' Will, 157 N.Y.S.2d 14, 16 (1956).

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appointed, the courts will act to prevent the extinguishment and

termination of the trust."11 A more recent example is In re Estate of

Seidman, in which the testator's wife was named as trustee.12 She

was to receive the income from the trust for her life and was given a

discretionary power to invade the trust principal, in addition to

being given the power to appoint the remainder beneficiaries.13

Although the wife argued that a merger of legal and equitable titles

occurred because she had been given the power to withdraw the

entire trust principal and no specific remainder beneficiaries, the

court rejected this argument and instead held that "a cotrustee

should be appointed."14

In 1997, prompted by the increasing use of trusts to transfer

assets and avoid probate while keeping a life estate,15 the legislature

enacted the current version of section 7-1.1 of the EPTL.16 In effect,

the legislation prevents merger from occurring in situations where

the trustee is also a beneficiary, provided that another individual

also holds a beneficial interest.17 Consequently, the ability of

settlors to designate the same individual as both sole trustee and

one of the trust beneficiaries is codified.18 It should be kept in mind,

however, that where there is no beneficial interest other than that

of the T/B, merger will still occur.

B. The Rights of Creditors

When a debtor owes money, creditors look to any and all property

that the debtor owns or in which such debtor maintains an interest

in order to satisfy the debt. Some property that seemingly appears

beyond the reach of creditors is not, while other property that

creditors want to attach promises to be more elusive.

Section 5201(b) of the New York Civil Practice Law and Rules

11 Id. at 1718 (citation omitted).

12 395 N.Y.S.2d 674, 676 (App. Div. 1977).

13 Id. at 675–76.

14 Id. at 676.

15 Margaret Valentine Turano, Practice Commentaries, in N.Y. EST. POWERS & TRUSTS

LAW § 7-1.1 (McKinney 2002); Memorandum in Support, S. 4223, 220th Leg. Sess. (N.Y.

1997), reprinted in 1997 N.Y. Sess. Laws 2129, 2130 (McKinney).

16 N.Y. EST. POWERS & TRUSTS LAW § 7-1.1 (codifying Act effective June 25, 1997, ch. 139, §

2, 1997 N.Y. Laws 1885, 1885–86).

17 Id. The second beneficial interest, however, can be as uncertain as a contingent future

remainder to avoid merger of the trust. E.g., In re Estate of Wickwire, 705 N.Y.S.2d 102, 104

(App. Div. 2000) (requiring a "beneficial interest in some form" to prevent merger).

18 See HAROLD D. KLIPSTEIN & IRA MARK BLOOM, DRAFTING NEW YORK WILLS § 11.04[7][b]

(3d ed. 2005) (explaining the applicability of the 1997 amendment).

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2006] Trustee-Beneficiaries, Creditors, and NY's EPTL 1173

(CPLR) provides that "[a] money judgment may be enforced against

any property which could be assigned or transferred, whether it

consists of a present or future right or interest and whether or not it

is vested, unless it is exempt from application to the satisfaction of

the judgment."19

However, section 5205(c)(1) makes this provision irrelevant for all

practical purposes by providing that, with few exceptions, property

held in trust for a judgment debtor is exempt from "application to

the satisfaction of a money judgment," so long as the judgment

debtor did not create or fund the trust.20 In effect, the New York

Legislature provided automatic spendthrift provisions for all trusts.

Section 5205(d)(1) of the CPLR exempts ninety percent of the

income, or other payments, from trusts.21 When read in conjunction

with section 5205(c) of the CPLR, which exempts the trust principal,

only ten percent of the trust income and none of the trust principal

is left for creditors of the beneficiary.22 Section 7-1.5 of the Estates,

Powers and Trusts Law places additional limits on the voluntary

alienation of trust interests. Although the premise is that all trust

interests are alienable, the trust instrument must expressly allow

the income beneficiary to alienate this right for the interest to be

transferred.23 Thus, the only way for creditors to effectively reach

the assets that the T/B can access is for the T/B's power to be

interpreted as a power of appointment.

Trust dispositions for the settlor's use are unequivocally "void as

against [any] existing or subsequent creditors" the settlor may

have,24 as are dispositions in which the beneficiary is entitled to the

trust corpus at will.25 The underlying reason for these policies is

19 N.Y. C.P.L.R. 5201(b) (McKinney 1997).

20 Id. 5205(c)(1).

21 The statute provides that "except . . . as a court determines to be unnecessary for the

reasonable requirements of the judgment debtor . . . [,] ninety per cent of the income or other

payments from a trust" are classified as "personal property . . . exempt from . . . the

satisfaction of a money judgment." Id. 5205(d). Thus, if a court determines that the debtor

needs a smaller portion of income or payments than is exempted, the court may reduce the

amount of the exemption.

22 Id. 5205(c)(1), (d); see also David D. Siegel, Practice Commentaries C5205:2 (Income

Exemptions), in N.Y. C.P.L.R. 5205 (McKinney 1997) (further explaining the application of

section 5205 of the CPLR to trusts).

23 N.Y. EST. POWERS & TRUSTS LAW § 7-1.5(a)(1) (McKinney 2002). The income beneficiary

is allowed to transfer income in excess of ten thousand dollars, but the class of eligible

individuals is enumerated by the statute and does not include creditors. Id. § 7-1.5(b)(1).

24 Id. § 7-3.1(a).

25 Ullman v. Cameron, 78 N.E. 1074, 1076 (N.Y. 1906). The beneficiary was entitled to the

trust principal if he demanded it "to engage in some business or enterprise"; considering the

broad and personal nature of the purpose, the court found the trust to be a "pretext" for the

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1174 Albany Law Review [Vol. 69

that it is '"contrary to sound public policy to permit a person to have

the absolute and uncontrolled ownership of property for his own

purposes, and to be able at the same time to keep it from his

creditors.'"26 Thus, in such situations, the creditor can reach the

property that is the subject of the trust disposition.27 Property held

by a trustee for the benefit of others, however, is not subject to the

trustee's creditors.28 This is true even if the trustee is also the

settlor so long as the trustee is not a beneficiary as well.29

The relative standing that the beneficiary's current creditors

enjoy is decidedly murkier. Recall that only assignable or

transferable property is subject to the enforcement of money

judgments.30 Consequently, if the beneficiary lacks the power to

transfer or assign the property, it will be beyond the reach of the

beneficiary's creditors. Although section 5201 of the CPLR

generally authorizes the enforcement of money judgments against

property held in trust,31 Article 10 of the EPTL more specifically

delineates the actual rights of creditors.32

III. THE EVOLUTION OF SECTION 10-10.1 OF THE EPTL

Designed to address tax issues, the precursor to the statute that

evolved into section 10-10.1 of the EPTL was first introduced in

purpose of allowing the testatrix to give property to her husband while keeping it from his

creditors. Id. Such a situation would now be encompassed within the scope of section 10-7.2

of the EPTL, which subjects property covered by a presently exercisable power of appointment

to the payment of claims of the creditors of the holder of the power. N.Y. EST. POWERS &

TRUSTS LAW § 10-7.2 (McKinney 2002), amended by Act of Oct. 4, 2005, ch. 700, § 2, 2005 N.Y.

Sess. Laws 1658, 1658 (McKinney); see infra Part IV.A. (elaborating upon creditors' rights

under part 7 of article 10 of the EPTL).

26 Ullman, 78 N.E. at 1076 (quoting Chancellor Walworth in Hallett v. Thompson, 5 Paige

Ch. 581, 584 (N.Y. Ch. 1836)).

27 Section 5201(c)(2) of the CPLR provides that the proper garnishee for property controlled

or held by a fiduciary such as a trustee is the fiduciary. N.Y. C.P.L.R. 5201(c)(2) (McKinney

1997).

28 See, e.g., Finn v. Brown, 12 N.Y.S.2d 150, 152–53 (App. Div. 1939) (holding that money

and scrip unclaimed by debtholders and held in trust for debtholders may not be attached by

creditors); Wulff v. Roseville Trust Co., 149 N.Y.S. 683, 687 (App. Div. 1914) (holding that

"[p]roperty which a debtor holds in trust for others, even though he has created the trust, is

not subject to an attachment issued against his property"). This is also in accord with section

5201(b) of the CPLR since the interest could not be assigned or transferred for the benefit of

the trustee—the trustee owes a fiduciary duty to the beneficiaries of the trust. N.Y. C.P.L.R.

5201(b).

29 Wulff, 149 N.Y.S. at 687.

30 N.Y. C.P.L.R. 5201(b).

31 Recall that section 5205 of the CPLR exempts only certain personal property from

application to the satisfaction of a money judgment. N.Y. C.P.L.R. 5205(a) (McKinney 1997).

32 See infra Part IV.A.

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2006] Trustee-Beneficiaries, Creditors, and NY's EPTL 1175

1945.33 A revised version was introduced in 1966.34 For the next

thirty years the statute remained unchanged in the following form:

A power conferred upon a person in his capacity as trustee of

an express trust to make discretionary distribution of either

principal or income to himself or to make discretionary

allocations in his own favor of receipts or expenses as

between principal and income, cannot be exercised by him. If

the power is conferred on two or more trustees, it may be

executed by the trustees who are not so disqualified. If there

is no trustee qualified to execute the power, its execution

devolves on the supreme court, except that if the power is

created by will, its execution devolves on the surrogate's

court having jurisdiction of the estate of the donor of the

power.35

The next amendment came in 1997 when the Legislature added

the introductory phrase "[e]xcept in the case of a trust which is

revocable by such person during lifetime" and provided the

surrogate's court as an alternate court, along with the supreme

court, qualified to exercise the devolving power.36 Gender neutral

language was also added.37

At the recommendation of the Chief Administrative Judge, based

on a recommendation by the Surrogate's Court Advisory Committee,

the Legislature amended section 10-10.1 of the EPTL again in

2003.38 The New York State Assembly Bill Summary explains that

the amendment allows the trustee to "make distributions to himself

or herself in certain instances: 1) where such trustee is the grantor

of the trust; 2) the power is a power to provide for such person's

health, education, maintenance or support; or 3) the trust

33 Margaret Valentine Turano, Practice Commentaries, in N.Y. EST. POWERS & TRUSTS

LAW § 10-10.1 (McKinney 2002); Act effective Apr. 18, 1945, ch. 843, § 1, 1945 N.Y. Laws

1867, 1867–68. The statute was enacted to prevent gift and estate tax consequences adverse

to the holder of the power. Margaret Valentine Turano, Practice Commentaries, § 10-10.1; see

also Ira Mark Bloom, How Federal Transfer Taxes Affect the Development of Property Law, 48

CLEV. ST. L. REV. 661, 671 (2000) (explaining that section 10-10.1 of the EPTL is an

"unfortunate property law[]" enacted to prevent adverse tax consequences).

34 Act effective Aug. 2, 1966, ch. 952, § 10-10.1, 1966 N.Y. Laws 2761, 2926. A technical

amendment the following year added a comma following the phrase "on two or more trustees."

Act effective Apr. 27, 1967, ch. 686, § 102, 1967 N.Y. Laws 1711, 1739.

35 Id.

36 Act effective June 25, 1997, ch. 139, § 6, 1997 N.Y. Laws 1885, 1887.

37 Id.

38 Memorandum in Support, A. 8090, 226th Leg. Sess. (N.Y. 2003), reprinted in 2003 N.Y.

Sess. Laws 2062, 2063 (McKinney); Act effective Sept. 30, 2003, ch. 633, § 1, 2003 N.Y. Laws

3303, 3303.

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1176 Albany Law Review [Vol. 69

instrument, by express reference, provides otherwise."39

The New York State Assembly Memorandum in Support further

rationalized: "The primary purpose of [section] 10-10.1 [of the

EPTL] is to prevent a grantor from inadvertently causing the

inclusion of the property subject to the power in the gross estate of

the trustee for estate tax purposes under the general power of

appointment provisions of section 2041 of the Internal Revenue

Code."40

The Assembly additionally reasoned that "the present provisions

of [section] 10-10.1 [of the EPTL] are unnecessarily restrictive of

trust grantors."41 As an example of this unnecessary restriction, the

Memorandum cited In re Estate of Seidman,42 explaining that the

court held that "a trustee may not, under 10.10-1, exercise a

discretionary power to invade corpus for his 'maintenance and

support' even though possession of such a power would not require

inclusion of the property under § 2041 [of the Internal Revenue

Code]."43 The Memorandum also rationalized that other states,

including California, Florida, and Wisconsin, with statutes similar

to section 10-10.1 of the EPTL, opted for an approach similar to that

which was being proposed and concluded by summarizing that

"[t]he instant measure would . . . retain the protection of the statute

for an unwary grantor, while at the same time properly

implementing the intentions of an informed grantor." 44

The proposed revision indeed passed and, effective September 30,

2003, section 10-10.1 of the EPTL was rewritten to read:

A power held by a person as trustee of an express trust to

make a discretionary distribution of either principal or

income to such person as a beneficiary, or to make

39 N.Y. LEGISLATIVE DIGEST, 209th Reg. Sess., A.B. 8090 (2003) (bill summary).

40 Memorandum in Support, A. 8090, 226th Leg. Sess. (N.Y. 2003), reprinted in 2003 N.Y.

Sess. Laws 2062, 2063 (McKinney).

41 Id.

42 395 N.Y.S.2d 674 (App. Div. 1977).

43 Memorandum in Support, A. 8090, 226th Leg. Sess. (N.Y. 2003), reprinted in 2003 N.Y.

Sess. Laws 2062, 2063 (McKinney) (citations omitted) (citing Seidman, 395 N.Y.S.2d at 677).

Section 2041(a)(1) of the Internal Revenue Code provides that the value of a decedent's gross

estate includes property over which the decedent had a general power of appointment but

then sets forth an exception so that a power limited by an ascertainable standard is not

included as a power of appointment. I.R.C. § 2041(a), (b)(1)(A) (2000). However, the Internal

Revenue Code also provides that for income tax purposes a power is taxable to the holder of

the power if the "power [is] exercisable solely by [the holder] to vest the corpus or the income

therefrom in himself." Id. § 678(a)(1) (2000); see id. § 671(2000).

44 Memorandum in Support, A. 8090, 226th Leg. Sess. (N.Y. 2003), reprinted in 2003 N.Y.

Sess. Laws 2062, 2063 (McKinney).

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2006] Trustee-Beneficiaries, Creditors, and NY's EPTL 1177

discretionary allocations in such person's favor of receipts or

expenses as between principal and income, cannot be

exercised by such person unless (1) such person is the

grantor of the trust and the trust is revocable by such person

during such person's lifetime, or (2) the power is a power to

provide for such person's health, education, maintenance or

support within the meaning of sections 2041 and 2514 of the

Internal Revenue Code, or (3) the trust instrument, by

express reference to this section, provides otherwise. If the

power is conferred on two or more trustees, it may be

exercised by the trustee or trustees who are not so

disqualified. If there is no trustee qualified to exercise the

power, its exercise devolves on the supreme court or the

surrogate's court, except that if the power is created by will,

its exercise devolves on the surrogate's court having

jurisdiction of the estate of the donor of the power.45

The third alternative is of the most immediate concern.46 It also

should be noted that in 2004 the section was amended by the

deletion of the words "or any other ascertainable standard" in the

second alternative, following the Internal Revenue Code reference.47

The purpose of the 2004 amendment, however, was to avoid a

possible federal tax conflict that would be detrimental to the estate

of a donee or trustee; it was not meant to diminish the newly

expanded power of a trustee to make discretionary distributions.48

IV. THE IMPLICATIONS OF THE 2003 AND 2004 AMENDMENTS

The implications of the 2003 re-writing are speculative at best. It

must be presumed that impairing creditors' rights was not a

foreseeable consequence of the amendment; otherwise there would

45 N.Y. Est. Powers & Trusts Law § 10-10.1 (McKinney Supp. 2006) (codifying Act effective

Sept. 30, 2003, ch. 633, § 1, 2003 N.Y. Laws 3303, 3303). The quoted text incorporates the

technical amendment of 2004 New York Laws, chapter 82 by deleting the phrase "or any

other ascertainable standard." Act effective May 18, 2004, ch. 82, § 1, 2004 N.Y. Laws 2515,

2515.

46 Prior to the 2003 amendment, the prohibition on the trustee's exercise of discretionary

power was a rule that could not be overridden and which, in some situations, served to

frustrate the intention of the settlor. Bloom, supra note 33, at 671. Thus, although

unintended consequences have followed, enabling a settlor to waive the default rule was a

long-needed change to an "unfortunate property law[]." Id.

47 Act effective May 18, 2004, ch. 82, § 1, 2004 N.Y. Laws 2515, 2515. The amendment was

effective immediately. Id. § 2, 2004 N.Y. Laws at 2515.

48 Memorandum in Support, S. 6308, 227th Leg. Sess. (N.Y. 2004), reprinted in 2004 N.Y.

Sess. Laws 1614, 1614 (McKinney); see also KLIPSTEIN & BLOOM, supra note 18, § 11.04[6][c].

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1178 Albany Law Review [Vol. 69

have undoubtedly been widespread and publicized lobbying efforts

by creditors' rights groups. However, as it stands—intended or

not—creditors remain unable to reach property that is in trust for

Tracy Brown, the T/B, despite Tracy Brown's ability to invade the

principal of the trust in her sole discretion. This is largely because

the newly-given power to Tracy Brown is not actually a power of

appointment, based on definitions of powers of appointment,

legislative history, and the statutory heading, and thus is not

covered by provisions under article 10 which would allow creditors

to reach the trust.

A. Provisions for Creditors

Part 7 of Article 10 of the EPTL is dedicated solely to the rights of

creditors.49 Creditors' rights are clearly laid out. If the beneficiary

has a lifetime special power of appointment, the trust property is

not subject to claims of the beneficiary's creditors.50 Even if the

power of appointment is general, so long as it remains subject to a

condition precedent or subsequent, the creditors may still not reach

the trust property.51 If the power is general but not presently

exercisable, the trust property also remains beyond the reach of

creditors until the power becomes presently exercisable.52

Furthermore, 2005 amendments enacted for clarification of

creditors' rights subsequent to the 2003 amendment to section 10-

10.1 of the EPTL delineate that a general power of appointment

"exercisable solely for the support, maintenance, health and

education of the donee" is excluded from the reach of the donee's

creditors.53

49 Article 10, part 7 of the Estates, Powers and Trusts Law is entitled "Rights of Creditors

in Appointive Property." N.Y. EST. POWERS & TRUSTS LAW art. 10 at 290 (McKinney 2002).

50 Id. § 10-7.1, amended by Act effective Oct. 4, 2005, ch. 700, § 2, 2005 N.Y. Sess. Laws

1658, 1658 (McKinney). This is because under section 10-3.2(b) of the EPTL, a general power

of appointment is defined as a power "exercisable wholly in favor of the donee, his estate, his

creditors or the creditors of his estate," and fittingly, section 10-3.2(c) of the EPTL specifies

that all powers of appointment that are not general are special. Id. § 10-3.2(b)–(c).

Consequently, a lifetime special power is one that cannot be exercised in favor of the donee or

his creditors.

51 Id. § 10-7.2, amended by Act effective Oct. 4, 2005, ch. 700, § 2, 2005 N.Y. Sess. Laws

1658, 1658 (McKinney); id. § 10-7.3.

52 Id. § 10-7.4(a)(2). The property can be reached by creditors, however, if the presently

non-exercisable power of appointment was created by the donee himself. Id. § 10-7.4(a)(1).

53 Act effective Oct. 4, 2005, ch. 700, §§ 1, 2, 2005 N.Y. Sess. Laws 1658, 1658 (McKinney)

(amending N.Y. EST. POWERS & TRUSTS LAW §§ 10-7.1, 10-7.2). The ascertainable standard

exception was added to legislatively overrule the outcome of In re Flood, which exemplified

the rule that although an "ascertainable standard" may prevent a power from being a general

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2006] Trustee-Beneficiaries, Creditors, and NY's EPTL 1179

Creditors, however, should not be dismayed at these provisions.

Creditors' saving grace lies in section 10-7.2 of the EPTL, which

provides that if the donee's general power of appointment is

presently exercisable and not subject to an ascertainable standard,

then the trust property is subject to the claims of the donee's

creditors.54 This provision also applies to powers that have become

presently exercisable though they once were not.55 Whether the

donee or some other party created the power and whether the donee

has purportedly exercised the power are both immaterial.56 The

theory underlying this immateriality is that the donee could

exercise the power in his own favor if he so chose, and thus he

effectively owns the property outright.57 This rationale is also

expressed in the Practice Commentary to part 1 of article 10.58 Part

1 of article 10 is entitled "Common Law of Powers Established with

Exceptions."59 The commentary explains:

In enacting the provisions of Article 10, the legislature

had several objectives, among them (i) to eliminate the

complex and confusing definitions in the prior statutes and

substitute the 'simple terminology of the common law' . . .;

(ii) 'to clarify the rights of creditors of the donee of the power

power of appointment in regards to taxation, the power may still be a general power in

determining the rights of creditors. In re Flood, N.Y.L.J., Mar. 11, 1998, at 32, aff'd on reh'g,

N.Y.L.J., May 13, 1998, at 32, aff'd, 691 N.Y.S.2d 354, 355 (App. Div. 1999); KLIPSTEIN &

BLOOM, supra note 18, § 13.03[2]. The legislature found a "'bright-line' statutory rule"

preferable to relying on drafting techniques to avoid the result of In re Flood; thus, a general

power of appointment subject to an ascertainable standard is now definitively beyond the

reach of creditors. Introducer's Memorandum in Support, S. 4342, 228th Leg. Sess. (N.Y.

2005).

54 N.Y. EST. POWERS & TRUSTS LAW § 10-7.2, amended by Act effective Oct. 4, 2005, ch.

700, § 2, 2005 N.Y. Sess. Laws 1658, 1658 (McKinney).

55 Id.

56 Id.

57 Margaret Valentine Turano, Practice Commentaries 2002, in N.Y. EST. POWERS &

TRUSTS LAW § 10-7.2 (McKinney 2002); Margaret Valentine Turano, Supplementary Practice

Commentaries 2003, in N.Y. EST. POWERS & TRUSTS LAW § 10-7.2 (McKinney Supp. 2006).

The text of section 10-7.2 of the EPTL in full provides:

Property covered by a general power of appointment (other than one exercisable solely

for the support, maintenance, health and education of the donee within the meaning of

sections 2041 and 2514 of the Internal Revenue Code) which is presently exercisable, or

of a postponed power which has become exercisable, is subject to the payment of the

claims of creditors of the donee, his estate and the expenses of administering his estate.

It is immaterial whether the power was created in the donee by himself or by some other

person, or whether the donee has or has not purported to exercise the power.

Id. § 10-7.2, amended by Act effective Oct. 4, 2005, ch. 700, § 2, 2005 N.Y. Sess. Laws 1658,

1658 (McKinney).

58 Margaret Valentine Turano, Practice Commentaries, in N.Y. EST. POWERS & TRUSTS

LAW art. 10, pt. 1, at 291–92 (McKinney 2002).

59 N.Y. EST. POWERS & TRUSTS LAW art. 10 at 291.

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of appointment . . . by generally enabling creditors to

reach . . . whatever assets the debtor can dispose of as he

chooses' . . .; and [sic] (iii) to eliminate the possibility of

thwarting creditors by an attempt to make the donee's

interest spendthrift . . .; and (iv) to address the interplay

between releasing a power and contracting to exercise it.60

The provisions of article 10, which relate to creditors' rights, are

not dealt with exclusively by part 7. If the settlor reserves an

unqualified power to revoke the trust, then the settlor, in effect,

never gives up absolute ownership of the property, thus allowing the

property to remain subject to creditors of the settlor.61

Interestingly, none of the aforementioned provisions have been

amended since their enactment.62

If creditors are left looking to section 10-7.2 of the EPTL for

authorization to reach property which is subject to some sort of

power held by the donee, then it should be clear that much turns on

whether the power recently granted to beneficiaries by the

legislature is a general power of appointment or some other class of

power.63

B. The Discretionary Power Is Not a Power of Appointment

The definition of power of appointment and the legislative history

and statutory outlay of article 10 of the EPTL all counsel against

classifying the power authorized by section 10-10.1 of the EPTL as a

general power of appointment such that creditors of the beneficiary

would consequently be able to reach the property.

1. The Definition of Power of Appointment Under Section 10-3.1 of

the EPTL

At the outset, section 10-3.1 of the EPTL clearly defines a power

of appointment as "an authority created or reserved by a person

60 Id. (citing THIRD REPORT OF THE TEMP. STATE COMM'N ON THE MODERNIZATION,

REVISION & SIMPLIFICATION OF THE LAW OF ESTATES, N.Y. Leg. Doc. No. 19, at 611 (March 31,

1964) [hereinafter COMM'N ON ESTATES]). At the time of the Commission, the powers of

article 10 were contained in article 5 of the Real Property Law; the Commission recommended

an extensive revision which led to the formation of article 10 as it is today. COMM'N ON

ESTATES, supra, at 610–11.

61 N.Y. EST. POWERS & TRUSTS LAW § 10-10.6 (McKinney 2002).

62 Compare N.Y. EST. POWERS & TRUSTS LAW § 10-10.6, with Act effective Aug. 2, 1966, ch.

952, § 10-10.6, 1966 N.Y. Laws 2031, 2135.

63 N.Y. EST. POWERS & TRUSTS LAW. § 10-7.2, amended by Act effective Oct. 4, 2005, ch.

700, § 2, 2005 N.Y. Sess. Laws 1658, 1658 (McKinney).

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having property subject to his disposition, enabling the donee to

designate, within such limits as may be prescribed by the donor, the

appointees of the property or the shares or the manner in which

such property shall be received."64 The section goes on to explain

that powers that are not powers of appointment include, though are

not limited to, "a power to revoke a disposition previously made, a

power during minority to manage property vested in an infant, a

power to disburse the principal of a trust, a power to sell in a

mortgage and a power in a life tenant to make leases."65 Since the

power at issue relates to the distribution of trust principal, it is

clearly encompassed by the latter section, powers which are not

powers of appointment.66

2. The Legislative History of Article 10 of the EPTL

The second reason for not considering the distributive power as a

power of appointment is found in the legislative history of article 10

of the EPTL. The legislative history from the Commission on

Estates provides that the statute "establishes the common law but

for the convenience of the profession it spells out major aspects of

the thus adopted common law."67 Consequently, "'[t]he definition of

a power of appointment is borrowed from Restatement of Property §

318(1).'"68 A power of appointment under section 318(1) of the

Restatement (First) of Property is in essence defined the same as a

power of appointment under section 10-3.1(a) of the EPTL.69

Section 318(2) of the Restatement (First) of Property, in a manner

similar to section 10-3.1(b) of the EPTL, sets out powers not

included under the term "power of appointment."70 The list

enumerates "a power of sale, a power of attorney, a power of

64 Id. § 10-3.1(a).

65 Id. § 10-3.1(b) (emphasis added).

66 Recall that section 10-10.1 of the EPTL specifically reads: "[a] power held by a person as

trustee of an express trust to make a discretionary distribution of either principal or income

to such person as a beneficiary." Id. § 10-10.1.

67 COMM'N ON ESTATES, supra note 60, at 611.

68 Memorandum from Professor Ira Mark Bloom, Justice David Josiah Brewer

Distinguished Professor of Law, Albany Law Sch., to Professor Kenneth F. Joyce,

Distinguished Teaching Professor, Univ. of Buffalo Law Sch., at 2 (Mar. 8, 2004) (quoting

COMM'N ON ESTATES, supra note 60, at 615) (on file with author).

69 RESTATEMENT (FIRST) OF PROP. § 318(1) (1940). The actual text defines a power of

appointment as "a power created or reserved by a person (the donor) having property subject

to his disposition enabling the donee of the power to designate, within such limits as the

donor may prescribe, the transferees of the property or the shares in which it shall be

received." Id.

70 Id. § 318(2).

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revocation, a power to cause a gift of income to be augmented out of

principal, a power to designate charities, a charitable trust, a

discretionary trust, or an honorary trust."71 The Restatement

further notes that "power" means power of appointment unless

indicated otherwise by the context within which it is used.72

Comment j, "Powers to augment income out of principal," further

clarifies that such a power is not to be construed as a power of

appointment, explaining:

When the income of a trust is given to one or more persons

it is frequently provided that the income may be augmented

by payments of principal. Sometimes the power to augment

is given to the trustee, sometimes to the recipient of income

himself. Sometimes the power is unlimited; sometimes a

restriction is imposed, as, for instance, that the income shall

be augmented only to the extent deemed necessary "for the

comfort and support" of the recipient. Such powers are

incidental to the interest of the income recipient and do not

give rise to the characteristic problems of this Chapter. They

are commonly known as powers of dissipation or powers of

augmentation, not as powers of appointment. For these

reasons they are not treated as powers of appointment in

this Restatement.73

In the scenario of Tracy Brown, the power is given to the income

recipient and is unlimited; thus, it is clearly encompassed in the

scope of comment j.

The distinction between powers of appointment and other powers,

such as the power to augment income out of principal, and powers

incidental to discretionary trusts, as laid out in section 318 of the

Restatement (First) of Property, is also observable in the definitions

provided under section 10-3.1 of the EPTL.74

71 Id. (emphasis added).

72 Id. § 318(3).

73 Id. § 318 cmt. j. Comment l, entitled "Discretionary trusts," also lends support to the

proposition that discretionary powers of augmentation are not powers of appointment:

It is common for a settlor to create a trust to last during the lives of a group, for instance,

his children, and to declare that the trustee or some other person shall have discretion as

to how much income of the trust shall be used for the group, or which members of the

group shall receive income, or what proportion of the income shall be allocated to each

member, or any combination of these. This type of provision is usually described as a

discretionary trust. It is analytically close to a power to appoint the principal at the end

of the trust but, conformably to common usage, it is not included within the term power

of appointment as here defined.

Id. cmt. l.

74 N.Y. EST. POWERS & TRUSTS LAW § 10-3.1 (McKinney 2002).

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2006] Trustee-Beneficiaries, Creditors, and NY's EPTL 1183

3. The Statutory Heading of Part 10, Article 10 of the EPTL

Lastly, the statutory headings of the EPTL are themselves

instructive. Part 10, entitled "Provisions Affecting Powers Other

than Powers of Appointment,"75 unambiguously indicates that it

does not encompass powers of appointment. Six parts of article 10,

preceding part 10, all concern powers of appointment.76 If section

10-10.1 had been meant to be construed as a power of appointment,

the legislature surely would have added another section title to the

ranks of the sixteen titles in article 10 which already explicitly

include "power of appointment" in their heading.77 At the very least,

the legislature would have generally included section 10-10.1 in one

of the six parts that would leave no doubt as to its intention.

In light of the aforementioned reasons—definition, legislative

history, and statutory structure—it seems clear that the power

under section 10-10.1 of the EPTL to grant Tracy Brown the power

to distribute both income and principal to herself was not intended

to result in a power of appointment and therefore should not be

construed as such. Consequently, section 10-7.2's grant allowing

creditors to reach property subject to a power of appointment that

can be presently exercised does not apply, and creditors are indeed

unable to reach such property.

Two obvious consequences stemming from the current state of the

law in New York come to mind. First, until the legislature sorts the

situation out, there exists the real potential for litigation in which

creditors argue that they can reach Tracy Brown's property and in

which the debtor T/B argues that the property is beyond the reach

of creditors. Further, the debtor T/B will likely argue that the

courts should be constrained to rule in favor of the donees since

there is no authorization for creditors to reach the property.

Second, once this outcome is realized, people will find that it is in

the best interest of their donees to give property in trust instead of

outright. Since the T/B will be given sole discretion as to whether to

distribute both income and principal, the donee will be able to

75 Id. pt. 10 at 410.

76 "Part 4. Creation of a Power of Appointment"; "Part 5. Extent of Donee's Authority to

Appoint or Contract to Appoint an Estate in Appointive Property"; "Part 6. Rules Governing

Exercise of a Power of Appointment"; "Part 7. Rights of Creditors in Appointive Property";

"Part 8. Rule Against Perpetuities and Accumulations as Affected by Powers of Appointment";

"Part 9. Revocation and Release of a Power of Appointment." Id. art. 10 at 290–91.

77 The sixteen sections whose titles include "power of appointment" are located in part 3

(Varieties of Powers) through part 9, inclusive. Id.

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1184 Albany Law Review [Vol. 69

access the full amount of the gift; yet without statutory

authorization, the money will remain safe from the donee's

creditors.78

V. THE UNIFORM TRUST CODE

A. T/B's Power Under the Uniform Trust Code

The Uniform Trust Code (UTC), originally completed in 2000 and

subsequently adopted in fifteen states, was enacted "[t]o provide a

comprehensive model for codifying the law on trusts."79 The stated

purpose includes "enabl[ing] states which enact it to specify their

rules on trusts with precision and . . . provid[ing] individuals with a

readily available source for determining their state's law on

trusts."80 The UTC primarily provides default rules that can be

overridden by the terms of the trust81 and is topically divided into

eleven articles.82 The present focus will be on Article 1, "General

Provisions and Definitions," and Article 5, "Creditor's Claims;

Spendthrift and Discretionary Trusts."83 Based on the interaction of

these articles, a T/B's power of withdrawal is either a general power

of appointment or a fiduciary power under common law;

consequently, the trust corpus is subject to the claims of the T/B's

creditors.

A power of withdrawal is defined as "a presently exercisable

general power of appointment other than a power: (A) exercisable by

78 There may also be potential tax consequences, but they are beyond the scope of this

comment. See Bloom, supra note 68, at 5; Debra D. Devaughn et al., When to Choose a

Corporate Fiduciary, 172 N.J.L.J. 657 (2003).

79 Uniform Law Commissioners: The National Conference of Commissioners on Uniform

State Laws, A Few Facts About The . . . Uniform Trust Code,

http://www.nccusl.org/update/uniformact_factsheets/uniformacts-fs-utc2000.asp (last visited

Apr. 23, 2006).

80 Id. The states that have adopted the Uniform Trust Code are Arkansas, the District of

Columbia, Kansas, Maine, Missouri, Nebraska, New Hampshire, New Mexico, North

Carolina, Oregon, South Carolina, Tennessee, Utah, Virginia, and Wyoming. Id.

Additionally, UTC bills are expected to be introduced in Alabama, Colorado, Connecticut,

Florida, Massachusetts, Oklahoma, and South Dakota in 2006. UTC Legislative Update 2005,

UTC NOTES (Nat'l Conference of Comm'rs on Unif. State Laws), Oct. 2005, at 1, available at

http://www.nccusl.org/nccusl/newsletters/UTCNotes/UTCNotes_Oct05_print.pdf.

Pennsylvania and Ohio have versions of the UTC pending. S.B. 660, 2005 Gen. Assem. (Pa.

2005); H.B. 416, 126th Gen. Assem. (Oh. 2005).

81 UNIF. TRUST CODE prefatory note, default rule (amended 2005), 7C U.L.A. 178 (Supp.

2005); id. art. 1, general cmt., 7C U.L.A. 190 (2005).

82 Id. prefatory note, overview of uniform trust code, 7C U.L.A. 180–81.

83 Id. arts. 1, 5, 7C U.L.A. 190, 250.

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2006] Trustee-Beneficiaries, Creditors, and NY's EPTL 1185

a trustee and limited by an ascertainable standard; or (B)

exercisable by another person only upon consent of the trustee or a

person holding an adverse interest."84 Added in 2004 were both the

first exception, in which the power is limited by an ascertainable

standard,85 and a provision in section 504 providing:

If the trustee's or cotrustee's discretion to make

distributions for the trustee's or cotrustee's own benefit is

limited by an ascertainable standard, a creditor may not

reach or compel distribution of the beneficial interest except

to the extent the interest would be subject to the creditor's

claim were the beneficiary not acting as trustee or

cotrustee.86

The comment to 504 explains that both of these amendments

were made "to preclude a claim that the power of a trusteebeneficiary

to make discretionary distributions for the trusteebeneficiary's

own benefit results in an enforceable claim of the

trustee-beneficiary's creditors to reach the trustee-beneficiary's

interest" despite the T/B's discretion being restrained by an

ascertainable standard.87 This concern arose in light of the

potential applicability and interpretation of Trusts section 60,

comment g, of the Restatement (Third)88 which allows creditors to

reach "the maximum amount the trustee-beneficiary can properly

take" when the T/B has discretionary power that is limited by an

ascertainable standard.89 The Restatement may come into play

when considering the UTC because section 106 of the UTC provides

for the UTC to be supplemented by the common law and principles

of equity.90

84 Id. § 103(11), 7C U.L.A. 192.

85 Id. § 103 cmt., 7C U.L.A. 193.

86 Id. § 504(e), 7C U.L.A. 256.

87 Id. § 504 cmt., 2004 amend., 7C U.L.A. 257.

88 Section 60 of the Restatement (Third) of Trusts provides that:

[I]f the terms of a trust provide for a beneficiary to receive distributions in the trustee's

discretion, a transferee or creditor of the beneficiary is entitled to receive or attach any

distributions the trustee makes or is required to make in the exercise of that

discretion . . . . The amounts a creditor can reach may be . . . increased where the

beneficiary . . . holds the discretionary power to determine his or her own distributions.

Id. Comment g specifically addresses the situation where the T/B holds a discretionary

power, including a power subject to an ascertainable standard. Id. § 60 cmt. g.

89 Id.; see Alan Newman, The Rights of Creditors of Beneficiaries Under the Uniform Trust

Code: An Examination of the Compromise, 69 TENN. L. REV. 771, 805 (2002) (concluding that

"it appears that the rule of the Restatement (Third) of Trusts allowing the creditors of a

trustee-beneficiary to reach the maximum amount he or she can properly take from the trust

also should be the result under the U.T.C.").

90 UNIF. TRUST CODE § 106 (amended 2005), 7C U.L.A. 204 (Supp. 2005). The comment to

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1186 Albany Law Review [Vol. 69

The usual definition of an ascertainable standard, "a standard

relating to an individual's health, education, support, or

maintenance within the meaning of Section 2041(b)(1)(A) or

2514(c)(1) of the Internal Revenue Code of 1986" is set forth in

section 103(2) of the UTC.91 Notably absent from section 103, the

definitional section, is the definition of a power of appointment.

However, the comment to section 103 cites section 11.1 of the

Restatement (Second) of Property: Donative Transfers, and explains

that "[a] power of appointment is authority to designate the

recipients of beneficial interests in property," a power which can be

classified as general or nongeneral and presently exercisable or not

presently exercisable.92 Ultimately, as in New York, the issue of

whether a T/B's power to make discretionary distributions to herself

is a presently exercisable general power of appointment is raised.

1. T/B's Power as a Power of Withdrawal

If a T/B's power is deemed a presently exercisable power of

appointment, then the power falls within the classification "power of

withdrawal." Keeping in accord with the intuitive outcome,

"[d]uring the lifetime of the settlor, the property of a revocable trust

is subject to the claims of the settlor's creditors" under the UTC

regardless of a spendthrift provision.93 Furthermore, section

505(b)(1) provides that "during the period the power may be

exercised, the holder of a power of withdrawal is treated in the same

manner as the settlor of a revocable trust to the extent of the

property subject to the power."94 This means that the trust property

is subject to the claims of creditors of the T/B, the power holder, just

as if the T/B owned the trust property outright.95 The comment to

section 505 further clarifies that "a creditor or assignee of the power

this section elaborates that in determining the common law and principles of equity, "a court

should look first to prior case law in the state and then to more general sources, such as the

Restatement of Trusts, Restatement (Third) of Property: Wills and Other Donative Transfers,

and the Restatement of Restitution." Id. cmt., 7C U.L.A. 204.

91 Id. § 103(2), 7C U.L.A. 191. This section was added by the 2004 amendments as a result

of the term "ascertainable standard" being added to sections 103(11) and 504. Id. cmt., 7C

U.L.A. 193.

92 Id.

93 Id. § 505(a)(1), 7C U.L.A. 258.

94 Id. § 505(b)(1), 7C U.L.A. 258. The Restatement (Third) of Trusts asserts an analogous

proposition: "the treatment of the assets subject to a presently exercisable general power is

like the treatment of revocable trust assets." RESTATEMENT (THIRD) OF TRUSTS § 56 cmt. b

(2003).

95 UNIF. TRUST CODE § 505 cmt. (amended 2005), 7C U.L.A. 258–59 (Supp. 2005).

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2006] Trustee-Beneficiaries, Creditors, and NY's EPTL 1187

holder generally may reach the power holder's entire beneficial

interest in the trust, whether or not distribution is subject to the

trustee's discretion."96 Perhaps in an attempt to lessen the political

debate that accompanies a state's consideration of whether to adopt

the UTC, "the UTC doesn't take a position"97 on the question of

"whether a trustee's power to distribute trust property to himself or

herself, not subject to an ascertainable standard, is a power of

withdrawal."98

Although there is some thought that the T/B's power should not

be deemed a power of appointment under the UTC, this is not the

most logical conclusion. First, if this were the case, then there

would have been no need to provide an express exception for a

power of appointment subject to an ascertainable standard in

defining a power of withdrawal; instead of the exception, an

outright statement that a T/B's fiduciary power is not a power of

appointment could have been made.99 Additionally, although the

comment to section 504(e) provides that "[t]he Code does not

specifically address the extent to which a creditor of a

trustee/beneficiary may reach a beneficial interest of a

beneficiary/trustee [sic] that is not limited by an ascertainable

standard,"100 the use of the word "specifically" does not foreclose the

assertion that the UTC does address this issue implicitly through

96 Id. The definition of power of withdrawal, however, excludes those discretionary powers

which are limited by an ascertainable standard so that section 505(b)(1) and consequently

section 505(a)(2) would not be applicable in that situation. See supra notes 84–85 and

accompanying text.

97 E-mail from David English, Reporter, Uniform Trust Code, to Ira Mark Bloom, Justice

David Josiah Brewer Distinguished Professor of Law, Albany Law Sch. (Mar. 9, 2005) (on file

with author).

98 E-mail from Ira Mark Bloom, Justice David Josiah Brewer Distinguished Professor of

Law, Albany Law Sch., to David English, Reporter, Uniform Trust Code (Mar. 6, 2005) (on file

with author). The entire response provided to the question of classification states:

The answer to [the] question is that the UTC doesn't take a position on [the] question,

leaving the issue to other law such as the Restatement. The purpose of the amendments

103(11) and 504(e) was to combat the major political problems created by Restatement

(Third) of Trusts, comment g. The result is that creditors cannot reach the trustee

beneficiary's interest if limited by an ascertainable standard whether it is classified as a

power of withdrawal or not and whether the creditor tries to reach the interest under

either Section 504 or Section 505.

English, supra note 97.

99 UNIF. TRUST CODE § 103(11) (amended 2005), 7C U.L.A. 192 (2005); see Alan Newman,

Spendthrift and Discretionary Trusts: Alive and Well Under the Uniform Trust Code, 40

REAL PROP. PROB. & TR. J. 567, 593–94 (2005); E-mail from Lawrence Waggoner, Lewis M.

Simes Professor of Law, Univ. of Mich. Law Sch., Reporter, Restatement (Third) of Property

(Wills and Other Donative Transfers), to Ira Mark Bloom, Justice David Josiah Brewer

Distinguished Professor of Law, Albany Law Sch. (Feb. 14, 2005) (on file with author).

100 UNIF. TRUST CODE § 504(e) cmt., 2004 amend., 7C U.L.A. 257 (emphasis added).

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1188 Albany Law Review [Vol. 69

sections 103(11) and 505(b).101 Indeed, if the UTC did not implicitly

address the issue, then the use of the term "specifically" would be

superfluous.

Another argument that counsels against concluding that the UTC

is silent on whether the T/B's power is a power of appointment

under the UTC is that if such were the case, then section 106, which

provides for the applicability of the common law of the state,102

would come into play and it would consequently be possible to reach

opposite conclusions on whether the T/B's creditors could reach the

trust property in two different states, both of which had

implemented the UTC.103 This is completely contrary to the stated

purpose of the UTC to provide "precise, comprehensive, and easily

accessible guidance on trust law questions" and to "provide a

uniform rule" "[o]n issues on which States diverge or on which the

law is unclear or unknown."104 Thus, a T/B's power should be

considered a power of appointment under the UTC.

Presuming Tracy Brown's power is a power of appointment under

the UTC such that it would be considered a power of withdrawal,

section 505(b) would then come into play.

2. T/B's Power Under Common Law Per Section 106 of the UTC

If it is determined that the UTC does not satisfactorily address

the issue, then section 106 directs for the UTC to be supplemented

by "more general sources, such as the Restatement of Trusts, [and

the] Restatement (Third) of Property: Wills and Other Donative

Transfers."105 The recently drafted section 17.1, comment g of the

Restatement of Property (Wills and Other Donative Transfers)

defines a fiduciary distributive power to include "a trustee's power

101 E-mail from Lawrence Waggoner, Lewis M. Simes Professor of Law, Univ. of Mich. Law

Sch., to Ira Mark Bloom, Justice David Josiah Brewer Distinguished Professor of Law, Albany

Law Sch. (Feb. 17, 2005) (on file with author); see also Newman, supra note 99, at 594

(concluding that a T/B with a power to distribute to him or herself that is not subject to an

ascertainable standard will be treated as the settler of a revocable trust and as having a

power of withdrawal).

102 UNIF. TRUST CODE § 106 (amended 2005), 7C U.L.A. 204 (Supp. 2005). Section 106

provides that "[t]he common law of trusts and principles of equity supplement this [Code],

except to the extent modified by this [Code] or another statute of this State." Id.

103 E-mail from Ira Mark Bloom, Justice David Josiah Brewer Distinguished Professor of

Law, Albany Law Sch., to David English, Reporter, Uniform Trust Code (Feb. 14, 2005) (on

file with author); E-mail from Ira Mark Bloom, Justice David Josiah Brewer Distinguished

Professor of Law, Albany Law Sch., to Alan Newman, Associate Professor of Law, Univ. of

Akron Sch. of Law (Mar. 11, 2005) (on file with author).

104 UNIF. TRUST CODE prefatory note (amended 2005), 7C U.L.A. 178 (2005).

105 Id. § 106 cmt., 7C U.LA. 204.

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2006] Trustee-Beneficiaries, Creditors, and NY's EPTL 1189

to distribute principal to or for the benefit of an income beneficiary,

or for some other person, or to pay income or principal to a

designated beneficiary" and provides outright that "[a]s used in this

Restatement and in the Restatement Third of Trusts, a fiduciary

distributive power is not a power of appointment."106 However, a

fiduciary power not subject to an ascertainable standard is still

subject to creditors. Additionally, section 60, comment g of the

Restatement (Third) of Trusts furthers the analogous treatment of

fiduciary powers and powers of appointment, despite these powers

being distinct, by bluntly providing:

Sometimes a beneficiary is trustee of the discretionary

trust, with authority to determine his or her own benefits.

In such a case, a rule similar to that of Comment f applies,

with creditors able to reach from time to time the maximum

amount the trustee-beneficiary can properly take . . . . The

beneficiary's rights and authority represent a limited form of

ownership equivalence analogous to certain general powers

under the rule of § 56, Comment b.107

Therefore, guidance from the common law as derived from the

Restatements clearly dictates that a T/B's property can be reached

by creditors.

If Tracy Brown's power is deemed a power of withdrawal then it is

"specifically" addressed by the UTC; if not, section 106 of the UTC

directs the application of the common law, including section 60 of

the Restatement (Third) of Trusts. In either scenario, the same

outcome occurs—Tracy Brown's creditors would be able to reach the

property of the trust to the same extent they would be able to reach

it if she had instead created a revocable trust herself.

106 RESTATEMENT (THIRD) OF PROP.: WILLS & OTHER DONATIVE TRANSFERS § 17.1 cmt. g

(Tentative Draft No. 5, 2006).

107 RESTATEMENT (THIRD) OF TRUSTS § 60 cmt. g (2003). Comment f applies where the

trustee has discretion to pay income or principal to the settler: "creditors of the settlor can

reach the maximum amount the trustee, in the proper exercise of fiduciary discretion, could

pay to or apply for the benefit of the settlor." Id. cmt. f. Section 56, comment b sets forth the

rule that:

Trust property subject to a presently exercisable general power of appointment (a power

by which the property may be appointed to the donee, including one in the form of a

power of withdrawal), because of the power's equivalence to ownership, is treated as

property of the donee of the power. It can therefore be subject to the satisfaction of the

claims of the donee's creditors.

Id. § 56, cmt. b.

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1190 Albany Law Review [Vol. 69

B. New York Considerations Regarding the Uniform Trust Code

There is a recent trend toward states adopting the UTC. It has

already been adopted in nearly one third of the states, and at least

seven more states are expected to introduce bills for its adoption in

2006.108 In keeping with the times, it is extremely likely that New

York will also undertake consideration of whether the UTC should

be adopted and, if so, what alterations, if any, should be made.

Presuming New York does decide to adopt the UTC, the

provisions discussed in section V.A., infra, should be included in the

adoption. However, due to the UTC's enigmatic nature as applied to

a T/B's power, the definition of a power of withdrawal, section

103(11), should be classified. This could be done most simply by

redefining a power of withdrawal as "a power to distribute to

oneself" without first defining such a power as a power of

appointment.

Adopting a version of the UTC would represent a change from the

current law in New York since under the UTC creditors arguably

can reach property subject to Tracy Brown's power while currently

they cannot. Consequently, a policy debate between doing the "right

thing," making the choice which is preferable based on a sense of

fairness, and allowing trusts to be created which are not favorable

to creditors and therefore would promote trust business in New

York will ensue. Since New York is not among the ranks of the

states who have repealed the law against perpetuities109 or who

have allowed for asset protection trusts which bar creditors from

reaching property in trust,110 these states will remain more

preferential choices for settlors of trusts.111 Because a refusal to

adopt the standard UTC provisions would not boost New York to the

top of trust settlors' "A List," New York should not make an

imprudent decision and choose against the more ethically

108 Arkansas, the District of Columbia, Kansas, Maine, Missouri, Nebraska, New

Hampshire, New Mexico, North Carolina, Oregon, South Carolina, Tennessee, Utah, Virginia,

and Wyoming have adopted the UTC; UTC introductions are pending in Pennsylvania and

Ohio, and introductions are expected in Alabama, Colorado, Connecticut, Florida,

Massachusetts, Oklahoma, and South Dakota in 2006. UTC Legislative Update 2005, supra

note 80, at 1; S.B. 660, 2005 Gen. Assem. (Pa. 2005); H.B. 416, 126th Gen. Assem. (Oh. 2005).

Additionally, UTC studies are underway in states including Georgia, Michigan, New Jersey,

North Dakota, Vermont, and Wisconsin. UTC Legislative Update 2005, supra note 80, at 1.

109 Bloom, supra note 33, at 673 & n.82.

110 Id. at 672 & n.74.

111 For criticism of states enacting "unfortunate property laws" to attract the business of

non-residents, see id. at 671–76 (characterizing Alaska as "[w]inning property law's race to

the bottom" through measures such as repealing the rule against perpetuities).

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2006] Trustee-Beneficiaries, Creditors, and NY's EPTL 1191

upstanding choice based on an expected increase in trust business

that will doubtfully be as generous as projected by its proponents.

Instead, New York should join those states that have adopted or are

considering adopting the UTC and should adopt the UTC provisions

relating to creditors' rights as set forth by the drafters of the UTC.

VI. POSSIBLE LEGISLATIVE SOLUTIONS FOR NEW YORK'S CURRENT

LAW

Recall the hypothetical situation presented at the outset: a trust

is established. The trustee, Tracy Brown, is also the beneficiary.

The settlor has empowered the trustee to make discretionary

distributions from the trust to herself, without any limitation, such

as an ascertainable standard relating to health, education,

maintenance, or support. Much to the dismay of creditors, this

means that Tracy Brown can access the trust funds at any time, yet

the funds remain protected from her creditors while in trust.112 In

other words, a settlor is enabled to pass assets through the use of a

trust to a beneficiary and at the same time keep the assets out of

the reach of creditors. There are a number of legislative solutions

that could be enacted to remedy this presumably unintended result

until such time as the UTC is adopted. These potential solutions

include re-defining powers of appointment and modifying the trust

exemption in section 5205(c) of the CPLR.

A. Re-Definition of Powers of Appointment

New York's statute defining powers of appointment, section 10-3.1

of the EPTL, could be re-written to recognize the power of a T/B to

distribute income or principal from a trust to herself as a power of

appointment.113 If this were done, then section 10-7.2 of the EPTL,

which makes property subject to a presently exercisable general

power of appointment also subject to the claims of the donee's

creditors, would be applicable and creditors would clearly be able to

reach the trust property. This would be reminiscent of section

505(b) of the UTC, which applies the same rules to a T/B with a

112 Once the funds are distributed from the trust to the beneficiary, "a game of hide-andseek"

often ensues between creditors who are searching for the money and the beneficiary

who is trying to keep the money hidden. Adam J. Hirsch, Spendthrift Trusts and Public

Policy: Economic and Cognitive Perspectives, 73 WASH. U. L.Q. 1, 2–3 (1995), quoted in ROGER

W. ANDERSON & IRA MARK BLOOM, FUNDAMENTALS OF TRUSTS AND ESTATES § 8.03 (2d ed.

2005).

113 See supra Part IV.B.1.

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1192 Albany Law Review [Vol. 69

power of withdrawal as apply to the settlor of a trust114 and may be

similar to provisions in states including Arizona, California,

Michigan, Texas, and Wisconsin.115

Alternatively, a sentence could be added to the end of section 10-

10.1 of the EPTL providing that if the T/B would be deemed to have

a power of appointment under section 2514(c) of the I.R.C., then

section 10-7.2 of the EPTL will be applicable. Section 2514(c) of the

I.R.C., which defines powers of appointment for gift taxes on

transfers, states that "the term 'general power of appointment'

means a power which is exercisable in favor of the individual

possessing the power (hereafter in this subsection referred to as the

'possessor'), his estate, his creditors, or the creditors of his estate"

but further provides that "[a] power to consume, invade, or

appropriate property for the benefit of the possessor which is

limited by an ascertainable standard relating to the health,

education, support, or maintenance of the possessor shall not be

deemed a general power of appointment."116 Since the power given

to the T/B, the "possessor," is not subject to any ascertainable

standard, the power would be considered a power of appointment

under section 2514(c) of the I.R.C. An approach similar to this

proposal has already been adopted in relation to spousal right of

election, which refers to section 2041 of the I.R.C. in defining

presently exercisable general powers of appointment held by the

decedent.117 This proposition eliminates the need to redefine powers

of appointment under New York law. Instead, the Internal Revenue

Code definition of power of appointment is referenced in this single,

isolated situation to determine if the power at issue is indeed a

power of appointment. If it is considered a power of appointment,

then New York's law regarding the rights of creditors in conjunction

with general powers of appointment are applicable.

B. Modification of Section 5205 of the CPLR Trust Exemption

A second solution category would be to make section 5205(c) of the

CPLR, which exempts trusts from "application to the satisfaction

114 UNIF. TRUST CODE § 505(b) (amended 2005), 7C U.L.A. 258 (2005).

115 David English, Reporters Report: The UTC and Crummey Powers, UTC NOTES (Nat'l

Conference of Comm'rs on Unif. State Laws), Winter 2004, at 7, 8, available at

http://www.nccusl.org/update/newsletters/ utcnotes/utcnotes_dec04_print.pdf. Section 505(b)

has been retained without substantive change by all ten states that have enacted the UTC.

Id.

116 I.R.C. § 2514(c) (2000).

117 N.Y. EST. POWERS & TRUSTS LAW § 5-1.1-A(b)(1)(H) (McKinney 1999).

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2006] Trustee-Beneficiaries, Creditors, and NY's EPTL 1193

of . . . money judgment[s]," inapplicable to trusts where there is a

beneficiary trustee who has unlimited discretionary power pursuant

to section 10-10.1 of the EPTL.118 If this were done, then the trust

assets over which a T/B has absolute discretionary power would

once again be fair game for creditors, just as they would be if a T/B

held a power of appointment and section 10-7.3 of the EPTL was

applicable.

This modification could be implemented in a number of different

ways. A sixth sub-section could be added to the presently existing

five sub-sections of section 5205(c) of the CPLR, which would

provide for the inapplicability of section (c) where the T/B has the

power to make distributions to herself not subject to an

ascertainable standard. Alternatively, a similar provision providing

for the inapplicability of section 5205(c) of the CPLR could be added

to section 10-10.1 of the EPTL. Yet another possible, though less

desirable, approach would be to leave the trust principal as exempt

but to make the ninety percent income exemption in section 5205(d)

of the CPLR inapplicable to such trusts, either through an addition

to section 5205(d) or through an addition to section 10-10.1 of the

EPTL. In 2003 alone, the legislature made twenty amendments to

the CPLR—this certainly seems to indicate a willingness to consider

change.119

VII. CONCLUSION

The legislature has enabled a T/B—given discretionary power not

subject to an ascertainable standard pursuant to section 10-10.1 of

the EPTL—to have access to trust funds as desired, yet the trust

funds remain just beyond the reach of creditors since under New

York law the T/B's power is not a power of appointment. This

situation would be remedied by adopting a slightly amended version

of the UTC and the accompanying standard provisions relating to

the rights of creditors. Possible legislative solutions until then

include re-defining powers of appointment and modifying section

5205 of the CPLR. Creditors' rights groups, however, will certainly

expand upon these remedies once the situation comes to light.

Regardless of the solution pursued, it is clear that the problem

118 N.Y. C.P.L.R. 5205(c) (McKinney 1997).

119 2003 N.Y. Sess. Laws tbl. 1, at T1-4 (McKinney). In the past three legislative sessions,

there have been a total of forty-four amendments to the CPLR—fifteen made in 2002, twenty

made in 2003, and nine made in 2004. Id.; 2002 N.Y. Sess. Laws tbl. 1, at T1-5 (McKinney);

2004 N.Y. Sess. Laws tbl. 1, at T1-5 (McKinney).

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1194 Albany Law Review [Vol. 69

needs to be addressed before the situation is exploited by

conscientious settlors to the disadvantage of rightful creditors.