At issue in this proceeding is the right of the trustees of the estate of the donor of a power of appointment to commissions for paying out the appointive property to trustees appointed under the will of the donee of such power.
Testator Mr. S died in 1952. His will admitted to probate in this Court created out of his residuary estate a marital deduction trust for his wife Mrs. S–one coupled with a general testamentary power of appointment. For later discussion, it is observed that under such a power Mrs. S could appoint to her estate or to her creditors or to creditors of her estate or to any other person she may wish. Under the express terms of the will she could also appoint outright or in further trust.
Mrs. S died on June 11, 1969, a resident of Connecticut. Her will has been admitted to probate in the Connecticut courts. By her will she expressly exercised her power of appointment. She first directed her own trustees to pay out of the appointive property all estate taxes on both the appointive property and her own estate assets. She then directed her Own trustees to divide the remaining principal of the appointive property into four shares, each such share to be held in further trust for her four grandchildren with remainder over to her great grandchildren. There are ten such great grandchildren remaindermen represented in this proceeding by a guardian ad litem. Mrs. S appointed as her own trustees the same persons who were already acting as trustees under Mr. S’s will.
For later discussion it is also mentioned that the trustees under Mrs. S’s will originally obtained letters of trusteeship on each of the four trusts from the Connecticut court. Advised by their attorneys that Mrs. S’s will did not ‘merge’ or ‘blend’ the appointive property with her own estate, her trustees applied for and were issued letters out of this Court. As noted, both sets of trustees are the same persons. As trustees appointed in 1952 under Mr. S’s will they were required to account in this Court. In such account, they were required to turn over the principal of the widow’s trust to themselves as trustees appointed in 1971 to administer in this Court, not the Connecticut court, the four grandchildren’s trusts.
The donor’s 1952 trustees have accounted in this Court to themselves as the donee’s 1972 trustees. They have obeyed the directions of the donee Mrs. S by paying the estate taxes out of the appointive property and have transferred the remainder to themselves as 1972 trustees for the purpose of setting up under the jurisdiction of this Court the four grandchildren trusts.
The guardian ad litem has raised objections to the account in one respect–the request of the 1952 trustees to be allowed commissions under SCPA 2308 (governing commissions of trustees under wills of persons dying on or before August 31, 1956) for ‘paying out’ the principal of the widow’s trust to themselves as the 1972 trustees under her will. The guardian ad litem in his memorandum of law relies on the doctrine of ‘relation back’ as applicable to further trusts created by the donee of a power of appointment.
The ‘Relation Back’ Doctrine The ‘relation back’ theory that the appointive property passes to the appointees from the donor of the power rather than from the donee, has a modicum of reality only insofar as a ‘special’ power is concerned. It is then the donor who designates ‘within such limits as he may prescribe’ the appointees of his property. Particularly when the special power is non-exclusive the donee may be said to act as agent for the donor.
However when the power is a general power, the ‘relation back’ doctrine is unsound. The owner of a general power possesses the equivalence of ownership. He can appoint to his estate his creditors or anyone else he may wish. He may appoint outright or in further trust. As a practical matter when a donee exercises a general power he is not acting as an agent of the donor; in truth and in fact the appointive property passes to the appointee from the donee and not from the donor of the power.
As discussed, under the ‘relation back’ doctrine the trusts created by the donee are required to be administered in the donor’s estate. As the cases establish it is not unusual to have the donee’s own assets administered in the courts of one state and the primary trust administered in the courts of another. However, corollary to the ‘relation back’ doctrine are the doctrines of ‘merger’ and ‘blending.’ Here too the distinction between a general and special power exists. The donee of a general power may ‘merge’ the assets of the primary trust into his own estate by appointing to his executor. Or he may ‘blend’ such assets into his residuary disposition and therein appoint the combined assets outright or in further trust. Except in the rare circumstance that the donor’s will so permits, the donee of a special power has no authority to ‘merge’ or ‘blend’ the appointive property with his own and so avoid administration in separate courts or different states.
Commissions The doctrine of ‘relation back’ has been eroding in the commission area as well as the merger area.
The earlier cases under the ‘relation back’ doctrine had held that commissions would not be allowed to the donor’s trustees for ‘paying out’ to the donee’s trustees the appointive property. This was on the theory that the primary trust was a continuing trust for the life of more than one income beneficiary–the donee tacking on as agent of the donor the secondary income beneficiary by the exercise of the power and appointing in further trust. Decisions hold that when a testator creates a Single trust with successive income beneficiaries, commissions are not payable at the death of the primary beneficiary. It was argued in the earlier decisions that on the same principle, commissions could not be paid to the donor’s trustees for ‘paying out’ to the donee’s trustees.
Two later decisions in the First Department establish that the ‘relation back’ doctrine as applied to commissions has been eroded and indeed ‘extinguished.’ These are Matter of Moulton, 1 A.D.2d 771, 148 N.Y.S.2d 128 (1956) and Matter of Davis, 26 A.D.2d 782, 273 N.Y.S.2d 1014 (1967).
Both Moulton and Davis were brief memoranda decisions. However, the records on appeal establish that extensive briefs citing the cases heretofore mentioned (and others) were presented by the protagonists.
In Moulton the donor mother gave the donee daughter a general power which the latter exercised by appointing in further trust. The same corporate trustee had been appointed in both estates. The decision of the Surrogate based on rigid adherence to the ‘relation back’ doctrine was reversed and ‘paying out’ commissions under SCPA 2308 allowed to the corporate trustee upon the authority of Culver the Court stating–
‘The clear import of the majority opinion in that case (Culver) is that where a life income beneficiary of a trust creates a new trust under a power of appointment contained in the primary trust, particularly where the donee, although given the right to dispose of the principal absolutely, instead creates a new trust–a trustee, even though designated in both trusts, is not limited to one commission. The view of the majority in the Culver case was that in those circumstances ‘there are two settlors, two instruments of trust, two actually different trusts and two sets of trustees’.
In Matter of Davis, 26 A.D.2d 782, 273 N.Y.S.2d 1014 (1967), the donor father had given to a donee son, a special power to be exercised exclusively in favor of the son’s issue. The son, in his will admitted to probate in Florida appointed in further trust to his children. The donee son had designated a Florida corporate trustee. The Court found such trustee ineligible and permitted the son to designate the same corporate trustee accounting in the donor’s estate. Despite Moulton, supra, and its holding that Culver, supra was determinative of the issue, the Surrogate followed Moyse (188 Misc. 1030, 65 N.Y.S.2d 291 (1945)) which purported to distinguish Culver and denied commissions on the ‘relation back’ theory. The Appellate Division reversed in a memorandum opinion citing Culver and Moulton.
A decision denying commissions to the donor’s trustees is unjust and often absurd.
If a donee having either a general or special power appoints outright, the donor’s trustees must be paid ‘paying out’ commissions. Because a donee, having the power to appoint outright, elects instead to appoint in further trust is hardly a just reason for denying commissions. This incongruous result is due to the courts’ reliance on the ‘relation back’ doctrine. The instant estate is illustrative. The donor’s trustees have served for 20 years in the primary trust and may reasonably be expected to serve at least another 40 years (if they survive) before the termination of the four grandchildren secondary trusts. This is invariably so because the very purpose of the power of appointment is to permit extension of the duration of a trust for two or more generations of beneficiaries. Without doubt this was a prime consideration in the high court decisions heretofore cited which have eroded and indeed extinguished the ‘relation back’ doctrine insofar as it has been applicable to commissions. It is reasonable to conclude that the donor’s trustees are invariably entitled to ‘paying out’ commissions whenever a donee has exercised a power (whether general or special) to appoint in further trust.
It is absurd to hold that ‘paying out’ commissions should be made to turn on whether the donee names the same trustees or different trustees. For even under the ‘relation back’ single continuing trust theory, when the donee designates different trustees, the trustees of the primary trust must be allowed ‘compensation’ equivalent to commissions as ‘removed’ or ‘resigned’ (like deceased) trustees for turning over the appointive property to the donees ‘successor’ trustees which is what they would become.
As a practical matter, the pre-1956 decisions based on the ‘relation back’ single continuing trust theory had some basis in equity. Prior to 1956 the basic compensation of the trustees was measured by principal received and principal paid out. The annual income and principal commissions were minimal. A holding that the primary and secondary trusts were two separate trusts would have entitled the primary trustees to ‘paying out’ commissions and the secondary trustees to ‘receiving’ commissions. Today, post-1956 trustees are not entitled to receiving commissions. Their basic compensation is measured by annual commissions on principal and a minimal ‘paying out’ commission. This consideration of ‘double’ commissions which probably motivated the earlier decisions is no longer applicable.
The holding of this Court is that there are here, as in Culver, supra ‘two settlors, two instruments of trust, two actually different trusts and two sets of trustees.’ The donee’s trusts are post-1956 trusts and the commissions of its trustees will be governed by SCPA 2309. The commissions of the accounting trustees and the compensation of the deceased trustee are allowed in the amounts requested which include ‘paying out’ commissions.
Whenever you encounter the same difficulty in the application of commissions for estate trustees, you may call the Stephen Bilkis & Associates for guidance.