Sylvie L. F. Richards, Esq., Ph.D.: 2010

Tuesday, December 14, 2010

The Life Estate, Part 2: The Problem of Children as Remaindermen

A life estate is a estate in land with a present life tenant, and a future vested remainderman. Each person has different interests in the land. The person who has a life estate in land is a legal life tenant and has a present interest in the land/property. The life tenant is the measuring life, meaning that once the life tenant dies the property goes to the remainderman, the person named in the life estate agreement. A remainderman has a vested future interest in the property.

Here is a typical scenario. An aging parent wishes to remain in his/her home and to be cared for in the home for as long as possible. To avoid any complications that might arise from ill health or dementia, the parent executes a new deed retaining exclusive use and occupancy of the property with the property passing to a named remainderman (usually a child) when the parent's life estate terminates. The remainderman has a vested future interest in the property that will ripen into full ownership once the life estate expires.

Clearly this scenario works well in a predictable world. But more often than not, your attorney will advise you to protect yourself against the following possible events:

the remainderman precedes you in death;
the remainderman suffers a catastrophic mental or physical illness;
you and the remainderman have a serious falling out;
family circumstances have changed and another child is a better candidate to receive the property.

To mitigate against such eventualities, the original donor/grantor of the life estate (usually the owner of the property at the time of the life estate agreement) may reserve for himself/herself not only a life estate but also a limited power of appointment. The donor/grantor may then exercise the limited power of appointment to change the remainderman provided that s/he has the mental capacity required to transfer the property and that the change in remainderman is done through a properly executed written instrument.

Consider the case of Richard C. Voght and his three children. In December 2006, Richard Voght executed a deed conveying property in Montgomery County to his son Gilbert M. Voght. Richard reserved for himself a life estate as well as a limited power of appointment to be used, if at all, during Richard's lifetime. In order to exercise this power of appointment, Richard had to execute another deed and make specific reference to the 2006 limited power of appointment.

One year later on December 2007, Richard exercised this limited power of appointment to remove Gilbert from the deed and to name his two siblings instead as sole owners of the property. The 2007 deed still reserved to Richard a life estate as well as the same limited power of appointment as in the previous 2006 conveyance.

Richard and his two other children then commenced an action to eject Gilbert from the property Gilbert sought an injunction from the court and a determination that the 2007 deed did not transfer property rights to his siblings. He also asked that the 2007 deed be corrected to reflect the language of the 2006 deed. Richard and his remaining children moved for summary judgment. The New York Supreme Court sided with Gilbert and confirmed his title in the property subject to his father's life estate. In effect, the court determined that Richard had not reserved a limited power of appointment that could, if executed, change the identity of the remainderman. The defendants appealed.

In Voght v. Voght, 64 A.D.3d 984, 882 N.Y.S.2d 551 (N.Y. App. Div. 3d Dep't 2009), the Appellate Court overturned the lower court and found that Richard had indeed reserved a limited power of appointment for himself. Citing EPTL 10-4.1, the court found that a donor can transfer property or reserve to himself/herself the power with a written instrument executed with all due formalities, so long as the transfer is not used as a way of avoiding creditors. What Gilbert had received in the 2006 conveyance was a vested remainder subject to complete defeasance if during Richard's lifetime he decided to use his limited power of appointment. Thus the 2007 deed completely divested Gilbert of the property and gave it to his siblings instead as remaindermen in the life estate -- for the time being at least, until such time as he chose to exercise his limited power of appointment again.

The Voght case is a cautionary tale about the benefits of creating a life estate agreement with a limited power of appointment. Circumstances may change such that there is a need to name a different remainderman. However, it must be kept in mind that a change in remainderman can have a disruptive effect on an estate plan. A life estate is best used as a tool for long-term estate planning where the totality of the circumstances warrant it. Depending upon your goals, an attorney can suggest alternatives, including a trust, that can not only achieve your estate planning objectives but also maintain family harmony.

If you would like to discuss your own personal situation with me, review your current legal life plan, or put together a legal life plan that is tailored for your needs, you can get a free 30-minute consultation simply by filling out this contact form. I will get back to you promptly.

I invite you to join my list of subscribers to this blog by clicking on "Subscribe to" on the left-hand side of the page so that you can receive a notification when the next installment has been published. Thank you.

Sunday, December 5, 2010

The Life Estate, Part 1: Defining the Asset Conveyed

Life estates are sometimes used in estate planning to avoid probate and/or to make certain that the intended person receives the asset. Life estates are sophisticated planning tools and you should seek the advise of an attorney to draft a document that will meet your individual needs. As we will see in future installments of this series, problems can arise from the conveyance of a life estate if not done properly. Estate problems can also be avoided with a carefully crafted life estate.

The life tenant has the present use and enjoyment of the land during his/her lifetime, including derivative income from rents, agricultural, and other uses, while the remainderman waits patiently for his/her future full ownership to mature at the death of the life tenant. However, the life tenant may not engage in waste. Waste is a legal theory that gives rise to a cause of action by the remainderman. There are three types of waste that can give rise to a cause of action by a remainderman.

The first type of waste is called permissive waste. Here the life tenant fails to do something to maintain the property either physically or financially. For example, the life tenant fails to make ordinary repairs, pay maintenance charges, pay taxes, or pay the mortgage or mortgage interest on the property. Permissive waste is like the sin of omission. There is no bad act per se, but the failure to act results in the damage.

If the failure to act causes permissive waste, it it better for a life tenant to improve the property? Not if the improvement changes the character of the property. That is called ameliorative waste. The life tenant may not engage in ameliorative waste even if the improvement increases the value of the land. The remainderman can ask the court for injunctive relief, even if the property is in miserable condition. The exception is when the neighborhood has sufficiently changed from residential to commercial. The life tenant may then change the nature of the land use from residential to commercial without committing ameliorative waste.

Voluntary waste occurs when the life tenant intentionally or negligently causes harm to the property, or depletes its resources. The exception to this rule is when there is a pre-existing use, if for instance part of the property was originally used for lumbering. Where there has been continuing exploitation of a resource already in use, then there is no voluntary waste.

Where a court finds waste, the remainderman may be awarded money damages for the loss, the life tenant may be ordered to restore the property to its original state, or the court may divest the life tenant of the property and vest title immediately in the remainderman.

While a life estate can be a good tool in estate planning, the language of the life estate agreement has to be carefully crafted by an attorney to avoid potential problems. For instance, a life estate is a terminable interest and thus may not qualify for the estate tax marital deduction. Also, a life tenant cannot will ownership in a life estate. Therefore, careful consideration of the totality of the family's circumstances must be taken into account so that there are no unintended consequences. The life tenant may become physically or mentally disabled and inadvertently commit permissive waste as a result. The agreement should include a process for taking care of necessary payments in the event of such incapacity. Finally, the remainderman may die before the life tenant. It is thus very important to draft a life estate agreement that takes this possibility into account.

In subsequent posts in this series, we will look at cases where a life estate is at the center of the estate dispute. If you would like to discuss your own personal situation with me, review your current legal life plan, or put together a legal life plan that is tailored for your needs, you can get a free 30-minute consultation simply by filling out this contact form. I will get back to you promptly.

Wednesday, November 24, 2010

A Thanksgiving Checklist as We Count Our Blessings...

More than any other holiday, Thanksgiving is the time when we gather around the table to celebrate with family and friends. Many of you are traveling to visit your family, and many of you are receiving family and friends for Thanksgiving. Soon there will be the familiar and anticipated aromas coming from the kitchen and we will gather around the table to enjoy a fabulous meal prepared by loving hands and give thanks for all of our blessings.

This is also the time of year that I suggest for an annual review of your legal life plan because the people you love and want to protect are right there with you. So this weekend, as you savor the leftovers, ask yourself the following questions.

Do I need a Will?
If I have a Will, has anything major occured in my life this past year so that I should review it with an attorney?
Do I need to look into setting up a trust?
Have I reviewed all of my beneficiary designations on such things as life insurance policies and retirement plans?
Do I need a living Will?
Do I need a Power of Attorney for financial matters?
Do I need a Power of Attorney for health care?
Do I need a prenuptial agreement?
Do I need a postnuptial agreement?
Do I need a domestic partnership agreement?

From my home to yours, I wish you a very Happy Thanksgiving! May you and your family continue to be blessed.

Tuesday, November 16, 2010

Mental Capacity and Marriage in New York, Part 3: The Secret Marriage

Marriage fraud has always had as a consequence the disruption of family estate planning, or even the potential of an unfair result where the state's intestate laws are applied when the decedent dies without a Will. But if the bride or groom suffers from dementia and their fiance(e) has been in a caregiver position, the resulting marriage could be considered a form of elder abuse because the person suffering from dementia is being exploited for financial reasons.

Consider the case in Matter of Berk, 2010 NY Slip Op 02139 [2d Dept 2010]). Irving Berk was a very successful businessman, having founded the Berk Trade and Business School. In 1982, he executed a Will naming his sons Joel and Harvey as co-executors. Over the next few years, Irving's memory began to fail. His physical health also deteriorated, and he became wheelchair bound. In 1997 his sons decided to hire a live-in caregiver. At the time, Irving Berk was 91 years old. His caregiver, a recent immigrant from China named Hua Wang (also known as Judy Wang), was 40 years old.

Friends of Irving reported that Wang took advantage of Berk's increasing dependency on her, and that she physically and verbally abused him. By 2005 Irving Berk could no longer recognize his sons who by then were contemplating guardianship proceedings. As part of this process, Irving was examined in April 2007 by a physician who diagnosed him as having dementia and stated that Berk did not possess the mental capacity to enter into contracts. His family physician who examined him a short time later found that Irving did not have the mental capacity to handle his social affairs.

Nevertheless, on 17 June 2005 Irving Berk and Judy Wang were married in the civil ceremony in the New York City Clerk's Office. The marriage was kept a secret. Neither Berk nor Wang wore wedding bands thereafter, nor did family and friends ever witness displays of affection between them.

On 16 June 2006, Irving Berk died leaving an estate worth more than $5 million. The day before the funeral, Wang informed his sons of the secret marriage as they drove to the funeral home. When the Will was read, it was discovered that Irving Berk had never changed his Will to make his new wife a beneficiary. The named beneficiaries remained his two sons and four grandchildren. Because Irving had made no provision for his new wife in the Will, Judy was now entitled to ask for the elective share.

On 29 December 2006, after the Will was filed for probate and within the requisite six months after the Will was probated, Judy Wang Berk petitioned the Surrogate's Court in King's County for a determination of her right to take her elective share as Irving's surviving spouse. Under New York law, the surviving spouse is entitled to $50,000 or one-third of the decedent spouse's estate, whichever is greater. The Surrogate found that Judy was married to the decedent at the time of his death and that, as a matter of law, she was entitled to her elective share under EPTL 5-1.1-A [a].

Berk's sons appealed. The Appellate Division, Second Department found that Judy Wang had married Irving Berk in the full knowledge that he lacked the mental capacity to consent to a marriage. Under the principles of equity, the court found that Wang should thus not be unjustly enriched because she took unfair advantage of Berk's mental incapacity at the time of their marriage.

Over 5 million people are affected by Alzheimer's disease and other forms of dementia, and this number is expected to grow. The time is now to protect your assets and your loved ones. You cannot afford to wait for a diagnosis because once you have been diagnosed with dementia, your diminished mental capacity will prevent you from taking the necessary legal steps to protect yourself, your property, and your family.

What can you do to protect yourself? Irving Berk had a Will, after all. A Will is certainly a good first step, but it is not enough. Unless the Will has been carefully drafted by an attorney to make sure that it is in compliance with New York Law and contains the necessary language about the elective share so as to mitigate against unscrupulous persons, then the door is left open for a sham marriage or other forms of unjust enrichment to occur. Do-it-yourself online wills should be used with extreme caution or not at all as a result.

Secondly, you should meet with your attorney at least once a year in the same way that you meet with your doctor for your annual physical exam. Your attorney will ask you questions to determine what has changed in your personal and legal affairs, and may suggest redoing your Will or adding a codicil based upon your responses. Your attorney will also evaluate your mental capacity as you answer the questions. If the attorney determines that there is a doubt about your mental capacity, then your attorney will strongly advise that any codicils or new Will be videotaped during the execution ceremony. This service is worth its weight in gold.

Next, your attorney may suggest that you place you assets into a trust. If you go this route, you may want to execute a pour-over Will, meaning that your assets will go directly into the trust at the time of your death, to be administered according to the terms of the trust. Remember that assets such as bank accounts and property that can be held jointly are vulnerable to sham marriage schemes. You may want to re-title these in the name of the trust. Note that trusts are contracts, and that contracts require the highest level of mental capacity in New York. If you wait too long, you may not have the requisite mental capacity to execute the trust documents.

You will also need full mental capacity to give a durable power of attorney to someone you trust or to your bank so that your affairs can be managed should you lose mental capacity. Your attorney will discuss these options with you in detail so that you comfortable with your choices.

Finally, your attorney will review your planning for medical decision-making including having a living Will and a health care proxy. These are known as advance directives. The case does not disclose whether Irving Berk had these instruments in place. If he did not, Judy Wang Berk as his legal wife would have been the one to make the decisions about his health care, and not his sons.

If you would like to discuss your own personal situation with me, you can get a free 30-minute consultation simply by filling out this contact form. I will get back to you promptly.

I invite you to join my list of subscribers to this blog by clicking on "Subscribe to" on the left-hand side of the page so that you can receive a notification when the next installment has been published. Thank you.

Saturday, October 30, 2010

Mental Capacity and Marriage in New York, Part 2: Surviving the Surviving Spouse

In New York, a person is considered a surviving spouse even if the marriage is subsequently annulled or voided. This is particularly problematic where a sham marriage has occurred, such as when a caregiver marries a person with known dementia. Under the current law in New York, even if the marriage was annulled after the death of the mentally incompetent spouse, the surviving spouse may still claim his/her right of election against the estate. This may have the effect of nullifying the decedent's Will provisions or intestate distributions.

The issue is complicated in New York by the fact that there are several statutes that touch upon the issue of mental capacity and marriage. Together they create a patchwork of referring statutes that nonetheless leave open the possibility that a surviving spouse from a voidable marriage may still take against the estate.

Domestic Relations Law §7 provides that a marriage contracted between two people where one person "is incapable of consenting to a marriage for want of understanding" is deemed "void from the time its nullity is declared by a court of competent jurisdiction." In other words, such a marriage is voidable, that is, it remains valid until such time as a court declares it void. When a court declares such a marriage void, then it has the effect of being void from its beginning. Voidable marriages are distinguished in the law from void marriages, such as incestuous marriages. These are considered void from the start, and require no judicial action to render them void.

The Domestic Relations Law § 140 [c] provides that "[a]n action to annul a marriage on the ground that one of the parties thereto was a mentally ill person may be maintained at any time during the continuance of the mental illness, or, after the death of the mentally ill person in that condition, and during the life of the other party to the marriage, by any relative of the mentally ill person who has an interest to avoid the marriage"

Nevertheless, EPTL 5-1.1-A defines a "surviving spouse" as having a right of election against the deceased spouse's estate "unless it is established satisfactorily to the court having jurisdiction of the action or proceeding that: (1) A final decree or judgment of divorce, of annulment or declaring the nullity of a marriage (. . .) was in effect when the deceased spouse died," or that in the instant case "(2) The marriage was void as incestuous under section five of the domestic relations law, bigamous under section six thereof, or a prohibited remarriage under section eight thereof " (EPTL 5-1.2 [a]). There are no provisions that address what happens to the surviving spouse's right of election if the marriage is annulled by a court due to the diminished capacity of the deceased at the time of the marriage.

As Presiding Judge Prudenti noted in Campbell v Thomas (2010 NY Slip Op 02082 [2d Dept 2010], "New York, however, does not yet have a statute specifically addressing a situation in which a person takes unfair advantage of an individual who clearly lacks the capacity to enter into a marriage by secretly marrying him or her for the purpose of obtaining a portion of his or her estate at the expense of his or her intended heirs. When a marriage to which one of the parties is incapable of consenting due to mental incapacity is not annulled until after the death of the nonconsenting party, a strict reading of the existing statutes requires that the other party be treated as a surviving spouse and afforded a right of election against the decedent's estate, without regard to whether the marital relationship itself came about through an exercise of overreaching or undue influence by the surviving party. On this appeal, we have occasion to consider whether the surviving party may nonetheless be denied the right of election, based on the equitable principle that a court will not permit a party to profit from his or her own wrongdoing."

In Campbell v Thomas, New York's Second Department addressed the issue of mental capacity with respect to sham marriages. In February 2001 Nancy Thomas left for a well-deserved one-week vacation, leaving the care of her 72 year-old Alzheimer-suffering father Howard in the care of Nidia Colon whom Nancy hired. Unbeknowst to Nancy, Nidia married Howard during Nancy's vacation. She then had valuable assets transferred into her name, specifically putting her name as joint owner of Howard's $150,000 bank account, and naming herself as sole beneficiary of Howard's New York City Teachers' Retirement System account then valued at $147,000.

Howard Thomas died in August 2001. In November 2001 Nancy and her brothers Christopher and Keith commenced an action in Supreme Court asking that the court declare Nidia's marriage to Howard as null and void, as well as the subsequent transfer of assets. In their pleadings, they alleged undue influence, conversion, and fraud and moved for summary judgment. On October 1, 2004 the Supreme Court denied the plaintiffs' motion for summary judgement. The Thomas children appealed.

The Appellate Court for the Second Department heard the appeal and found that the Thomas children had succeeded in demonstrating that Howard "lacked the capacity to understand his actions before his marriage, and that his mental state only diminished thereafter" (Campbell v Thomas, 36 AD3d 576, 576 [2007]). The court reversed the Supreme Court and granted the plaintiffs' motion for summary judgment. Further, the court sent back the matter to the Supreme Court "for the entry of a judgment declaring null and void (1) the marriage between the defendant Nidia Colon Thomas and the decedent Howard Nolan Thomas, (2) a change in beneficiary in Howard Nolan Thomas' Teacher's Retirement System of the City of New York account, and (3) a change in the ownership of Howard Nolan Thomas' Citibank accounts" (id.). The Supreme Court so ordered on June 21, 2007. Nidia Colon Thomas appealed.

In her appeal, Nidia alleged that, under the applicable statutes, even if the marriage had been annulled, she was still considered the surviving spouse. As such, she was entitled to the spousal elective share of Howard's estate. Since the marriage to Howard had been annulled almost six years after his death, the strict application of the statutes in question would have resulted in Nidia having a claim to the greater of $50,000 or one-third of the net estate.

However, the court demurred from such a strict application of the statutes on the principles of equity and public policy, so that "(n)either in criminal nor in civil cases will the law allow a person to take advantage of his own wrong" (Diaz v United States, 223 US 442, 458 [1912], quoting Falk v United States, 15 App DC 446, 460 [1899]). Due to her overreaching and undue influence in marrying Howard, the court denied Nidia the benefit of her marriage to Howard. Through her conduct, the court found that she had forfeited any benefit that stemmed from her marriage so that she would not be unjustly enriched.

In my next installment, I will examine another case where the mental capacity of one spouse was the determining factor. I invite you to join my list of subscribers to this blog by clicking on "Subscribe to" on the left-hand side of the page so that you can receive a notification when the next installment has been published. Thank you.

Wednesday, October 20, 2010

Mental Capacity and Marriage in New York, Part 1: Background to the Issue

In New York, a person is presumed to have the mental capacity to marry. But the standard that defines the mental capacity to marry is very low. The mental capacity required to marry is lower than testamentary capacity, or the capacity to make a Will. In turn, testamentary capacity is lower than the mental capacity required to execute a contract. To put this into perspective, New York requires greater mental capacity to sign an apartment lease than it does to marry someone.

The U.S. Constitution also protects an individual's right to marry. The U.S. Supreme Court has affirmed that the right to marry is a fundamental right. In Loving v. Virginia, 388 U.S. 1, 12 (1967), the Court held that the Due Process Clause includes a constitutional right to marry because "freedom to marry has long been recognized as one of the vital personal rights essential to the pursuit of happiness by free men." In addition, the Full Faith and Credit Clause in Article IV requires states to credit the "public Acts, Records, and judicial Proceedings" of sister states, including marriage.

A marriage in New York results in two separate outcomes: the marriage itself, and the property consequences that flow from the marriage.   As we will see in this series, there is a loophole in the law that has permitted some unscrupulous individuals to take advantage of elderly individuals with diminished capacity. That is because, while the marriage itself may be annulled or broken, the property consequences of marriage are not necessary severed as a consequence. As we will see in this series, that can result in unintended estate consequences for heirs and distributees, particularly in the area of so-called "deathbed" marriages.

Arguably, the property rights that flow from marriage are much greater than they are for signing an apartment lease even though the mental capacity required to enter into a marriage is significantly lower. Federal property rights that flow from marriage include such things as Social Security survivor benefits for a spouse, and spousal survivorship rights for qualified retirement plans under the Employee Retirement Income Security Act (ERISA) that can only be waived in writing.

Among the New York State property rights for spouses is the right to title property in a tenancy by the entirety. Neither spouse can sell or diminish the 100% share that each owns without the consent of the other. Should a creditor obtain a lien on one spouse’s interest in the property, the lien will only survive if the debtor spouse is the surviving spouse. Otherwise, the lien is extinguished with the death of the debtor spouse. Moreover, the property cannot be reached in a bankruptcy proceeding.   New York also has an elective share statute, meaning that a surviving spouse can elect to one-third of the decedent spouse's estate against the decedent's Will if there is surviving issue, or one-half of the property if there is no issue. Even if there is no Will, New York's intestacy statutes provide that a surviving spouse will receive at least one-third of the decedent's property.

In New York, a marriage can be void from the start (ab initio) due to such reasons as bigamy or an incestuous marriage. In such a case, the marriage is a legal nullity: it never existed from the start. The spouse, the State, or an interested third party can attack the marriage directly or collaterally in court on the ground that it is void. The attack can even take place after the death of one or both spouses. Note that diminished mental capacity is not a ground for voiding a marriage in New York.

A voidable marriage is valid for any civil purpose unless it it attacked by one of the spouses in an action for annulment. The grounds for deeming a marriage as voidable include fraud, duress, temporary or permanent mental incompetence, undue influence, and sham. As concerns mental incompetence in the case of a voidable marriage, Domestic Relations Law § 140 [c] provides that "[a]n action to annul a marriage on the ground that one of the parties thereto was a mentally ill person may be maintained at any time during the continuance of the mental illness, or, after the death of the mentally ill person in that condition, and during the life of the other party to the marriage, by any relative of the mentally ill person who has an interest to avoid the marriage."

Even if a third party should succeed in proving that there was sufficient evidence of diminished capacity before the marriage took place (for instance, with documented medical evidence showing dementia), the surviving spouse of an annulled marriage may still take against the Will under the right of election or under intestacy. The property stakes are high when one enters into a marriage. They are even higher for the children of aging parents with diminished capacity who find themselves (and their property) prey to unscrupulous persons who will marry them (sometimes in secret) in order to obtain the federal and state property benefits that flow from marriage.

In this series, we will look at how New York courts have dealt with the issue of mental capacity and marriage, especially in cases where the results have been egregious.   I invite you to join my list of subscribers to this blog by clicking on "Subscribe to" on the left-hand side of the page so that you can receive a notification when the next installment has been published. Thank you.

Tuesday, September 28, 2010

Defining Parentage in the Age of Surrogacy, Part 4: Intentional Fathers

Even though New York State amply defines and provides for the legal rights of fathers, the statutes do so within the framework of a traditional heterosexual couple. Beyond the biological ability to father a child, paternity rights provide a father with the legal context to make important decisions regarding his child's life such as the child’s medical care, religious upbringing, and education. As a legal parent, the father also obtains the right to continued parentage in the event the other legal parent becomes incapacitated; and the right of standing to contend for custody, visitation, and/or child support in the event of a breakup. The latter rights are especially critical where the bonds of filiation have been established.

The case of In the Matter of the Adoption of an Infant Whose First Name is Nicholas illustrates some of the key issues surrounding paternity rights in the age of surrogacy. Gary, Nicholas' biological father, legally married Anthony in Canada in 2004, several years prior to Nicholas' birth. Though New York does not allow gay marriages to be performed within its jurisdiction, New York does recognize gay marriages legally performed in other jurisdictions. In New York, the presumptive parentage rights of “husbands” with respects to the children born to their “wives” flow to same-sex couples as well. As discussed in my prior blog post with respect to In the Matter of Sebastian, because parentage rights for same-sex couples are not portable, second-parent adoption is the only way to insure these. But unlike Sebastian's parents Mona and Ingrid, Anthony faced several major obstacles on his road to becoming Nicholas' other father.

The first obstacle to fatherhood was the matter of finding a gestational surrogate in a state that permits it. Surrogacy contracts are void in New York as against public policy. Desirous of starting a family, Anthony's spouse Gary donated the sperm for an in vitro egg implantation in a surrogate domiciled in North Carolina. Under the terms of her surrogacy contract, the gestational mother surrendered all parental rights to the child. Both Gary and Anthony were present at Nicholas' birth and thereafter co-parented him. But only Gary's name was on the birth certificate. But unlike In the Matter of Sebastian, Anthony's name could not be entered on the birth certificate. The child was not born in New York, and North Carolina does not recognize gay marriages performed legally in another jurisdiction.

It is clear from these facts that both Gary and Anthony intended that Nicholas be brought into the world. While there is no binding case precedent in New York, there is persuasive authority in a leading case on intentional parentage from California. In Johnson v. Calvert 851 P.2d 776 (Cal. 1993)., the California Supreme Court extended the definition of parentage found in the California Civil Code, sections 7000-7021. This portion of the California Code was adopted largely from the Uniform Parentage Act introduced into the U.S. Senate in 1975. In California, parentage is based on the existence of a parent-child relationship rather than on the marital status of the parents.

Johnson v. Calvert dealt directly with the parentage rights of a gestational surrogate mother (Anna Johnson) versus the rights of the couple who has intended that the child be conceived (Mark and Crispina Calvert). In declaring Crispina the child's natural mother, the court defined what it means to be an intentional parent. "We conclude that although the Act recognizes both genetic consanguinity and giving birth as means of establishing a mother and child relationship, when the two means do not coincide in one woman, she who intended to procreate the child--that is, she who intended to bring about the birth of a child that she intended to raise as her own--is the natural mother under California law." Johnson v. Calvert, at 790. The Surrogate's Court in Matter of Nicholas referenced Matter of Sebastian, which in turn referenced Johnson v. Calvert in affirming that both Gary and Anthony had intended Nicholas' birth.

Gary and Anthony were petitioning the Surrogate's Court for the right to have Anthony's second-adoption proceedings filmed and distributed by CNN as part of Gay Pride Week. One issue that flowed from this request pertains to New York's sealed adoption records statute. Sealed adoption records remain the law in New York as codified in Domestic Relations Law (DRL) § 114.. The court in Matter of Linda F. M., 52 NY2d 236, 239 (1981), explained that the sealed records law “shields the child from possibly disturbing facts surrounding his or her birth and parentage,” a clear reference to the stigma of illegitimacy; “permits the adoptive parents to develop a close relationship with the child free from interference or distraction,” thereby giving the adoptive parent(s) the exclusive right as to whether to reveal the conditions of the child’s birth; and “provides the natural parents with an anonymity that they may consider vital,” protecting the identity of the birth mother.

In Matter of Nicholas, the court looked at the three interests served by the statute as explained in Matter of Doe, NYLJ, April 4, 2007, at 31, col 3 [Sur Ct, NY County]: to protect the identity of the birth parents; to protect the privacy of adoptive parents and their newly formed family; and to protect the child from knowledge of his/her illegitimacy.

As to protecting the identity of the birth parents, the request was made by the birth father and the surrogacy contract protects the anonymity of the birth mother. As to the privacy interest protected, it is owned by the adoptive parents. In this case, it is the adoptive parents who intend to publicize the legal formalization of their family. As to the third prong of the rationale, the Guardian ad litem appointed by the court noted that the very fact that Nicholas would have two intentional fathers as parents meant that the circumstances of his birth could not be kept secretive. Therefore, the Surrogate's Court held that the adoption sealing statute was no bar to the filming of the Anthony's second-parent adoption by CNN.

I invite you to join my list of subscribers to this blog by clicking on "Subscribe to" on the left-hand side of the page so that you can receive a notification when the next installment has been published. Thank you.

Saturday, September 18, 2010

Defining Parentage in the Age of Surrogacy, Part 3: Mother at Law

On Christmas Eve in 2004, Mona and Ingrid were legally married in the Netherlands, the first country to allow same-sex marriages. Ingrid is a Dutch citizen and a practicing attorney in New York. Her spouse Mona is employed at the United Nations and is of Somali/Yemeni descent. Desirous of starting a family but eager to preserve their ethnic and racial diversity, the women used assisted reproductive technology to achieve their mutual goals.

As is the common practice with egg donors, Mona signed a surrender giving up her parental rights. At the same time, she executed a side agreement with Ingrid. Mona's ova were fertilized in vitro by an anonymous sperm donor of Dutch and Italian ancestry to match Ingrid's background. After a successful implantation, Mona became the genetic mother and Ingrid became the gestational mother of boy they named Sebastian. But even though she was legally married to Sebastian's mother, Mona initiated an adoption proceeding in order to become the legal parent of her own child.

In a prior series on adoption, I have already examined the history and the New York statutes that create a new legal relationship between the child and the adoptive parents. In this case, however, Mona was seeking to create a legal relation with her own child and the child of her spouse. Mona was asking the Surrogate Court to become a mother at law. But why?

The case of Matter of Sebastian, 25 Misc 3d 567 [Sur Ct, NY County 2009], raises two key issues about the nature of modern parentage. The first issue has to do with the portability of parentage rights: are you a parent to your child everywhere you go? New York recognizes valid same-sex marriages performed elsewhere (Martinez v. County of Monroe, 50 AD3d 189 [4th Dept 2008]), and thus Mona and Ingrid enjoyed parentage rights in New York that flow from their legal marriage. In New York, the presumptive parentage rights of "husbands" with respects to the children born to their "wives" flow to same-sex couples as well, making Mona's adoption of Sebastian unnecessary in New York.

However, the Surrogate Court in Matter of Sebastian recognized that any parentage rights of a validly married resident same-sex couple may not be portable in states that explicitly prohibit same-sex co-parents from petitioning to adopt their partner's child, or the child of their relationship. The issue of the portability of parentage rights for married same-sex couples is paramount because, unlike the parentage rights for traditional married couples, married same-sex couples do not enjoy presumptive parentage rights in states that do not recognize same-sex marriage. Thus Mona would not be considered Sebastian's mother in these states, even though she is his genetic mother.

The only way that the Surrogate Court could guarantee the portability of Mona's parentage rights was to grant this genetic mother the right to adopt her own child, even though adoption is not used to affirm existing parental relationships. Here, the court was asked to use adoption to bind the genetic mother to her own child to assure the portability of her parentage rights because she was not Sebastian's gestational mother. Since states, even those who do not recognize same-sex marriage, must give Full Faith and Credit to judicial decrees from sister states, including adoption, Mona was thereby granted full portability to her parentage rights. Thus it was that Mona became a mother at law.

The court pointed out that amending Sebastian's birth certificate to include Mona as a parent would not have been sufficient to assert the portability of her parentage rights because a birth certificate is only prima facie evidence of parentage. A birth certificate is a public record. Under the Full Faith and Credit clause, a sister state can accord to that record no greater validity than the home state (30 Am Jur 2d, section 678).

The second issue addressed by the Surrogate Court in Matter of Sebastian goes to the equal protection of the laws: are New York's family law statutes as written gender-based and thus unconstitutional because they deny women of any sexual orientation the equal protection of the laws? To be fair, these laws precede the civil rights and women's movements, to say nothing of recent civil rights advances by the GLBT community. But as written, New York's statutory scheme privileges the paternity rights of biological and "putative" fathers and provides a way for fathers to assert their parental rights. The statutory scheme does not provide women the same equal legal opportunity to assert their maternity rights. And because the New York statutory scheme for parentage is gender-based, the Surrogate Court raised the constitutional issue of equal protection in its opinion .

Under constitutional analysis, gender-based classifications are subject to heightened scrutiny, meaning that the government must show that a statute is related to an important government objective. Traditionally, this objective has been to make sure that the child does not become a ward of the state, and thus a financial burden. The laws were written at a time when men provided most of the financial support for households. But with more and more women in the workforce and women financially able to provide for their children, these statutes now create legal inequities where in the past they created financial protection for women and their children.

The Surrogate Court found the New York statutes to be under inclusive, and chose to construe the statutes to avoid the constitutional infirmity, finding that the legislature would have chosen to extend parentage rights to genetic mothers and to provide the equal protection of the laws to genetic mothers like Mona. The court provided to Mona the only remedy that would ensure full parentage rights and the portability of those rights anywhere in the world. The court granted her petition to adopt her genetic child and the gestational child of her legal spouse.

In the next part of this series, I will examine the role of second-parent adoptions in creating modern families. I invite you to join my list of subscribers to this blog by clicking on "Subscribe to" on the left-hand side of the page so that you can receive a notification when the next installment has been published. Thank you.

Friday, September 10, 2010

Defining Parentage in the Age of Surrogacy, Part 2: Who is a "mother"?

In the early 1980s, the Infertility Center of New York placed some ads in area newspapers seeking women who would be willing to carry a child for an infertile couple. One young woman, Mary Beth Whitehead of Bricktown, New Jersey, saw the ad in the Asbury Park Press and answered it. The Infertility Center matched Whitehead with William and Elizabeth Stern of Tenafly, New Jersey. On February 6, 1985 Whitehead and the Sterns executed a surrogacy contract wherein Whitehead, in exchange for $10,000, agreed to be artificially inseminated with William Stern's sperm, to carry the resulting child to term, and then to give up all legal rights to the child at birth. At the time, Whitehead was married to Richard Whitehead.

Under this surrogacy arrangement, Whitehead became the genetic surrogate mother to Stern's child through artificial insemination with Stern's sperm. Had Whitehead not contributed an ovum, as in the case of in vitro fertilization using an anonymous egg donor, she would have been a gestational surrogate mother. In this case, both genetic parents were known. Elizabeth Stern did not contribute an ovum because she suffered from multiple sclerosis, the reason for which the Sterns had sought a surrogate in the first place.

At common law, the mother is defined as she who bears the child. Because maternity rights are presumed, laws protecting maternity rights arising out of surrogacy are often absent. Parentage of a child is defined by the birth of the child to a mother and the mother's marriage to the child's father. Where the mother is not married to the father, she retains full custody rights to the child. A surrogacy contract involving a genetic mother seeks to alter the common law understanding of "mother" by termination of parental rights between the birth mother and her child without the intervention of a court. In New York, grounds for the termination of parental rights are governed by statute and found in Soc. Serv. Law, §§ 384-b, 358-a(3)(b). The parent must be adjudicated as "unfit" before parental rights can be terminated.

On March 27, 1986 Whitehead gave birth to a daughter whom she named Sara Elizabeth Whitehead. She and her husband Richard gave every indication that the child was theirs, and the child's birth certificate indicated that Richard Whitehead was the father. At common law, the mother's husband is the presumptive father. As per the terms of her surrogacy contract, she gave up custody of the child to the Sterns at their home on March 30th. But less than a day later, Whitehead had second thoughts. She became emotionally distraught and asked the Sterns to return the child to her for a week, whereupon she would return the child. The Sterns complied, concerned over Whitehead's extreme distress. Instead of keeping her word, Whitehead and her husband fled with the baby to her parents' home in Florida. The details of the Sterns' legal attempts to reclaim custody of the baby are found in In re Baby M, 537 A.2d 1227 (1998).

The New Jersey Supreme Court found that surrogacy contracts offend public policy and are contrary to New Jersey statutes. The court found the surrogacy contract invalid and unenforceable for two reasons. First, termination of parental rights may not be done by contract. The legal standard for determining whether parental rights can be terminated is the best interest of the child and not a contractual clause. Second, an irrevocable agreement on the part of a birth mother to give up a child for adoption prior to the child's birth amounts to coercion to contract, making the agreement unenforceable. The court pointed to additional conflicts with adoption laws: prohibitions on the exchange of money for the right to adopt, with the exception of fees paid to non-profit approved adoption agencies; and laws that make the birth mother's consent to put her child up for adoption a revocable act.

Furthermore, New Jersey's Parentage Act codifies the long-standing common law understanding of parentage. The New Jersey Parentage Act provides that, where a married woman is artificially inseminated by a sperm donor and with her husband's consent, the law creates a parent-child relationship between the husband and the child, and not between the sperm donor and the child (N.J.S.A 9:17-44). The New Jersey Supreme Court found that Whitehead's parental rights had not been terminated as a result of the surrogacy contract. The court granted custody to William Stern but visitation rights to Whitehead.

As a result of the Baby M case, New York passed a law prohibiting surrogacy agreements as contrary to public policy (D.L.R. § 122). Surrogacy contracts fracture the unified concept of motherhood by separating out the functions of the genetic mother, the gestational mother, and the custodial mother. There are fines and criminal penalties in New York for commercial surrogacy. Non-commercial surrogacy contracts are de facto unenforceable. But this law did little to settle the issue of who is a "mother." The issue is particularly thorny in cases where a resulting birth is produced by assisted reproductive technology (ART).

Unlike surrogacy, artificial insemination is not against public policy in New York. Artificial insemination maintains the unified concept of motherhood. Women who donate eggs anonymously are generally required by fertility doctors to sign a surrender, thereby waiving all parental rights and responsibilities. New York goes further and denies any egg donor (the genetic mother) standing to initiate an action for custody. Anonymous sperm donors generally sign contracts with a sperm bank and not with a mother, and so the donor's anonymity and waiver of parental rights are generally upheld. However, in New York a contract waiving parental rights and responsibilities between a known sperm donor and a mother is generally unenforceable. The court will use the "best interest of the child" standard to determine the parental rights and obligations of the sperm donor.

Because New York legitimacy laws only apply to married couples, courts have approved instances where an anonymous sperm donor can successfully waive his parental rights if the the woman is unmarried. The mother then gains sole custody of her child and has no standing to claim child support.

Where a mother is married, there is the legal presumption in New York that a child conceived with the husband's consent through artificial insemination is the legitimate, natural child of the couple. The sperm donor has no rights to the child. The mother who has been artificially inseminated is considered to be both the genetic and the gestational mother.

There have been exceptions to the rule that in New York a mother is both the genetic mother and the gestational mother. In Perry-Rogers v. Fasano, 715 N.Y.S.2d 19 (App. Div. 2000), a New York court awarded custody of one Black fraternal twin whose white mother was mistakenly implanted with an embryo created with the sperm and ovum of another couple, the Rogers. In a truly Solomon-like fashion, the court decided that Donna Fasano was the gestational mother of both twins, but the genetic mother of only one twin. The court acknowledged the legal challenge brought about by ARTs to the concept of “mother”: “It was only with the recent advent of in vitro fertilization technology that it became possible to divide between two women the functions that traditionally defined a mother, at least prenatally. With this technology, a troublesome legal dilemma has arisen: When one woman’s fertilized eggs are implanted in another, which woman is the child’s “natural” mother? (Perry-Rogers v. Fasano, at 24)”

The court presciently predicted that further challenges to the legal concept of “mother” as being both genetic and gestational in New York would be forthcoming. ” (W)e [do not] necessarily accept the broad premise that in any situation where a parent, possessed of that status by virtue of having borne and given birth to the child, acknowledges another couple’s entitlement to the status of parent by virtue of their having provided the genetic materials that created the child, the birth parent automatically gives up all parental rights (Id., at 25).

We will look at this precise question in the next part of this series: who is the "mother" when a woman donates her ova (genetic mother) for in vitro fertilization by an anonymous sperm donor with the intent of having her spouse, another woman, carry the child (gestational mother)? I invite you to join my list of subscribers to this blog by clicking on "Subscribe to" on the left-hand side of the page so that you can receive a notification when the next installment has been published. Thank you.

Tuesday, August 31, 2010

Defining Parentage in the Age of Surrogacy, Part 1: Who is a Parent?

On the surface, the question of who is a parent may seem simplistic or even obvious. But from a legal perspective, the issue of parentage has become a challenging one in the age of assisted reproductive technologies (ART) that include in vitro fertilization, surrogacy, genetic vs. gestational motherhood, etc. In this series, I will explore the question of parentage by looking at both the New York State statutes that govern parentage as well as some recent cases that are defining the legal framework for this issue.

At common law, the issue of parentage was simple. The mother was she who bore and delivered the child. Parentage was defined by birth to a mother and her marriage to the child's father. Any legal impediment to marriage failed to confer this presumptive paternity. Once the child was born, the child's property rights flowed through the husband of the child's mother. At law, the husband was considered the presumptive father of his wife's children. This remains the state of the law today (Michael H. v Gerald D., 491 US 110 (1989)), and is codified in New York in Family Court Act (FCA).

At common law, any legal questions regarding parentage or lineage involved issues of paternity exclusively. This remains largely the case today, and the statutory scheme in the New York Code reflects this gendered language and thinking about parentage. And while the rights of a mother to her child may be presumptive in this statutory scheme, they become at issue in cases where advanced reproductive technologies are used in procreation. As we shall discover in this series, defining parentage is becoming a complicated matter.

Because legal rights historically have been conferred on children through their fathers, mothers of children born out of wedlock traditionally have sought legal protection for their children through paternity proceedings. This is still the case in New York today as codified in FCA § 513. The Family Court has the exclusive original jurisdiction for all paternity proceedings in New York.

Of the many benefits that flow to children from having two recognized legal parents, one very tangible right is that of collecting social security benefits from both parents. For the purposes of eligibility, the Social Security Act defines "child" according to the inheritance laws of each state (42 USC § 416 [h] [2]) . Inheritance laws differ in each state, and in New York are governed by the Estates, Powers & Trusts Law (EPTL). Please refer to my prior post on this issue.

Because it is in the best interest of the child that the child have the benefit of two parents, New York law provides for a simplified way for an unwed father to acknowledge paternity. Paternity may be acknowledged prior to the birth of the child through a procedure established in Public Health Law § 4135-B (1)(a): "Immediately preceding or following the in-hospital birth of a child to an unmarried woman, the person in charge of such hospital or his or her designated representative shall provide to the child's mother and putative father, if such father is readily identifiable and available, the documents and written instructions necessary for such mother and putative father to complete an acknowledgment of paternity witnessed by two persons not related to the signatory. Such acknowledgment, if signed by both parties, at any time following the birth of a child, shall be filed with the registrar at the same time at which the certificate of live birth is filed, if possible, or anytime thereafter."

Paternity may also be established after birth "by a written statement, witnessed by two people not related to the signator or as provided for in section four thousand one hundred thirty-five-b of the public health law. Prior to the execution of such acknowledgment by the child's mother and the respondent, they shall be advised, orally, which may be through the use of audio or video equipment, and in writing, of the consequences of making such an acknowledgment. Upon the signing of an acknowledgment of paternity pursuant to this section, the social services official or his or her representative shall file the original acknowledgment with the registrar (Social Services Law § 111-k (a))." Among the consequences of acknowledging paternity is that the birth mother may file for child support from the father in Family Court.

After the acknowledgment is filed with the registrar, a new birth certificate will be issued that reflects the names of the birth mother and the "putative" father (Public Health Law § 4138 (1)(e)). The father remains "putative" even after acknowledgment of the child because the presumption of paternity is conferred only upon a man married to the birth mother.

Parentage of a child can also be conferred through adoption. Adoption is a creature of statutory law because it runs counter to the common law principles of parentage. Through adoption, courts create new legal relationships between the parent(s) and the child. Please refer to my prior series on Adoption and Inheritance in New York for more detailed information.

In the next installment of this series, I will examine how reproductive technologies are challenging our established notions of who is the child's mother. I invite you to join my list of subscribers to this blog by clicking on "Subscribe to" on the left-hand side of the page so that you can receive a notification when the next installment has been published. Thank you.

Thursday, August 5, 2010

The Carvel Soft-Serve Empire: Avoiding an Estate Meltdown

When I was growing up, one of my favorite treats was a Carvel chocolate-dipped vanilla soft-serve cone. And no birthday party was complete without a Carvel ice cream cake. Tom Carvel was able to parlay my sweet tooth and millions of others into an empire at one time valued at $250 million. When he died in 1990, he left behind his wife, the former Agnes Stewart, who had once loaned her future husband $15 to begin his ice cream business. It proved to be a spectacular investment.

Tom Carvel owed his spectacular good fortune to a flat tire. When Carvel began his business in Hartsdale, New York in 1929, he used a truck to bring his homemade confection to his clients. One day, a tire blew in the proximity of a pottery store parking lot. With his ice cream quickly melting, Carvel decided to start selling right from his parked truck. Thus began the idea for soft serve ice cream, which Carvel refined over time. He then worked out a deal with the pottery store so that he could sell his ice cream in the parking lot by running an electrical wire to keep his confection refrigerated. His sales took off.

In 1936 Carvel purchased the pottery store and formed the Carvel Brand Corporation. Carvel realized that there was money to be made from real estate as well. Having established a successful business model, Carvel proceeded to map out a plan to franchise his business. As part of his franchising model, Carvel purchased the properties upon which his franchisee's store would be located, leasing back the space to the franchisee as part of the license agreement. Thus the expansion of the Carvel brand also meant the expansion of the Carvel real estate holdings.

A known control freak, Carvel fought for years with the Federal Trade Commission against antitrust charges. He required his franchisees to attend a three-month intensive training program, and the purchase of all supplies were to come directly from the Carvel Brand Corporation. While this mentality may have served him well in business, the Will that he executed reflected his need to control from the grave. The Will became the fodder for controversy and chaos.

His estate planning needs were relatively simple. He and Agnes had no children, and his intent was to provide for Agnes during her lifetime and after her death the estate would go to charity. There were several simple ways to accomplish this. One way would have been to purchase a non-probate asset, such as an annuity, with Agnes as the beneficiary. She could then have received structured payments immediately after his death.

By naming a disinterested executor (he would instead name seven interested executors), such as a bank or law firm, Carvel could have assured the continuity needed to administer his large postmortem estate without controversy. And while there are fees associated with this option, it may be a wiser course of action than the litigation costs associated with squabbling executors and beneficiaries.

His Will would still have provided for the statutory spousal elective share. Under New York Estates, Powers and Trusts Law (EPTL) § 5-1.1, a surviving spouse has the option of taking the the greater of $50,000 -or- 1/3 of the net estate.

The rest of the estate could have been given to charity through an irrevocable charitable remainder trust. §664 of the Internal Revenue Code of 1986 as amended provides for either the payment of a fixed amount through a charitable remainder annuity trust (§664(d)(1)(D)), or a percentage of trust principal through a charitable remainder unitrust (§664(d)(2)(D)). Carvel would have received two immediate benefits. He could have claimed a charitable income tax deduction. And given his sizable real estate portfolio, the estate would not have had to pay immediate capital gains taxes as the trust disposed of the trust property in its portfolio.

What Tom Carvel left behind instead when he died of a heart attack in 1990 was a chaotic estate. Nine years later, the estate was still in litigation. A lawsuit filed by his niece Pamela Carvel against the Thomas and Agnes Carvel Foundation in 1999 before the Second Circuit Court of Appeals (188 F.3d 83 (2nd Cir. 1999)) revealed that Tom and Agnes had executed "mirror wills," or two separate but identical Wills, each naming the Foundation as the beneficiary of their entire residuary estate. At the same time, they executed a reciprocal agreement agreeing to refrain from changing their Wills or making certain transfers.

In addition to the Foundation, Carvel had created at least five other entities: a Florida trust for his wife, a charitable remainder unitrust, two real estate holding companies, and the estate created by the mirror Will containing the statutory spousal election share and bequests to 83 different beneficiaries.

A year before his death, Tom Carvel sold his 700 stores to Middle East investors for a reported $80 million. In the years following his death, a good portion of that sum was spent on litigation over the estate. His widow Agnes, one of seven named original executors of his estate, stepped down as executor and Foundation board member and fled to London in the wake of a call for a capacity hearing. She died in London in 1998, having herself litigated against the estate to received the $600,000 quarterly payments stipulated in her husband's Will. A well thought-out estate plan could have avoided this strife and achieved Tom Carvel's postmortem goals.

Saturday, July 24, 2010

The Gottlieb Estate: When Dying without an Estate Plan Impacts Real Estate

New Yorkers are fond of telling real estate stories. It's our urban past time. But when they include a cast of characters seemingly ripped from the pages of a Dickens novel and some properties made extremely valuable as a result of gentrification, the mix is irresistible. Add an estate controversy, and the story becomes even more compelling.

Labeled a "tightwad" by the New York Times, William Gottlieb learned about real estate from Harry Helmsley when he worked for him as a leasing representative. Gottlieb observed how Helmsley made money by buying buildings and then cutting their operating costs. When New York began experiencing tough economic times in the 1960, Gottlieb went on a buying spree, purchasing foreclosed properties in what would become some of New York's trendiest neighborhoods. Though he suffered from poor eyesight, William Gottlieb was blessed with great real estate foresight.

In 1972, Gottlieb had executed a Will leaving his entire estate to his sister Mollie, who had done clerical work in his office for years. Together with their brother Arnold, she was named co-administrator of William's estate. Mollie had two children: Neil Bender and Cheryl Dier. Dier had one son, Michael Corbett, from a previous marriage. Michael Corbett had been raised by his grandparents.

In 1985 Mollie executed a Will that left everything to her husband and her son Neil, and expressly disinherited her daughter Cheryl. After falling and breaking her hip in 2007, Mollie appointed her son Neil as administrator of the Gottlieb estate. She passed away a week later.

Thereupon Dier and Corbett filed suit against Neil Bender in Surrogate's Court claiming Neil's incompetence as executor, citing over 500 violations against Gottlieb properties as evidence. Corbett launched a website to attract attention to the neglect of Gottlieb properties. Corbett also alleged undue influence by Neil over his grandmother and claimed that his grandmother had promised his 25% of the estate. The Surrogate's Court held that Bender's actions did not rise to the level that would merit disqualification as executor, and that Corbett had no standing to dispute the Will. Dier and Corbett appealed.

In May 2010, the Appellate Court upheld the Surrogate's Court, finding Neil Bender to be fit to serve as executor. The ruling paved the way for a potential redevelopment of the properties. Only time will tell the fate of these Manhattan properties and their tenants.

Tuesday, July 20, 2010

Can't Touch This: In Terrorem Clauses in Wills

Family squabbles over the estate of a decedent are the stuff of tragedy and of farce. For this reason, testators often include in terrorem clauses that penalize with forfeiture of their testamentary gift any beneficiary of the Will who unsuccessfully contests its provisions in any court. In terrorem clauses are also designed to safeguard carefully crafted estate plans from disruption.

New York law, however, provides for some limits on in terrorem clauses in order to prevent fraud, undue influence, or gross injustice. These safe harbor provisions are found in Surrogate's Court Procedure Act (SCPA) § 1404 and Estates, Powers and Trusts Law (EPTL) § 3-3.5. The purpose of these safe harbor provisions is to allow a beneficiary to inquire into the circumstances surrounding the drafting of a Will without risking forfeiture of the bequest. Because courts must strictly construe in terrorem clauses, such safe harbor challenges are the only means a beneficiary has of evaluating the risk of contesting the Will.

EPTL § 3-3.5 provides for "[t]he preliminary examination, under SCPA 1404, of a proponent's witnesses, the person who prepared the will, the nominated executors and the proponents in a probate proceeding" (EPTL 3-3.5 [b] [3] [D]). SCPA 1404 [4] states that these persons "may be examined as to all relevant matters which may be the basis of objections to the probate of the propounded instrument." Did the Legislature intend that the safe harbor provisions apply only to those persons expressly mentioned in the companion statutes, or did the Legislature merely provide examples of the types of persons who could be examined and not an exhaustive list?

The New York Court of Appeals addressed the issue of safe harbor provisions as they relate to in terrorem clauses in Matter of Singer, 2009 NY Slip Op 09265 [13 NY3d 447]. On 15 April 2003 Rabbi Joseph Singer executed a Will leaving his Brooklyn home, much of his personal property, and $200,000 to his daughter Vivian who had given up her life to take care of her father's needs. To his son Alexander he left half of the remaining estate (to be shared with Vivian who was also her father's executor), less the outright gifts of $15,000 to each of Alexander's two sons.

The Will contained an in terrorem clause addressed specifically at Alexander. "I specifically direct that my son, Alexander I. Singer, not contest, object to or oppose this Will or The Joseph Singer Revocable Trust Agreement, or any part of my estate plan or any gifts made by me, and I specifically direct that my son not take my daughter, Vivian S. Singer, to a Bet Din (religious court) or to any other court for any reason whatsoever; and I specifically direct that if my son takes any such action or brings on any such proceeding, neither my son nor any of his issue shall receive any share of my estate, whether passing under this Will, under The Joseph Singer Revocable Trust Agreement or otherwise."

On 5 March 2004 Rabbi Singer died and Vivian submitted the Will for probate shortly thereafter. Alexander then served a notice of discovery seeking, among other things, to depose Joseph Katz, Rabbi Singer's previous attorney who had drafted seven Wills for the Rabbi but not the one in question. Mr. Katz was subsequently deposed by Alexander's attorney. Thereupon, it was revealed that Rabbi Singer had inserted an in terrorem clause in a prior 2002 Will drafted by Katz. Alexander did not challenge the Will.

Was the deposition of Mr. Katz sufficient clause to trigger the in terrorem clause? After all, Katz did not belong the the class of persons expressly mentioned in the safe harbor statutes. The safe harbor provisions do not include a former attorney. Or was the testator's intent, that Alexander not challenge the Will in any way, satisfied because Alexander never challenged the Will?

The Court of Appeals balanced the testator's intent with the public policy concern that Wills be valid and authentic before being admitted to probate. The court reasoned that only by examining Katz could Alexander properly conclude that he lacked a basis for a successful Wills contest. "A broader construction of these clauses as manifesting testator's intent to preclude the examination of this witness would essentially cut off all other persons from being asked for information, no matter the potential value or relevance of that information—even as to the medical or psychological condition of the testator at the time the will was executed. Interpreting these clauses narrowly will allow surrogates to address on a case-by-case basis whether the conduct undertaken is in keeping with the testator's intent."

With Matter of Singer, the Court of Appeals set a standard for the case-by-case construction of in terrorem clauses: whether the conduct undertaken is in keeping with the testator's intent. Had the court ruled in Vivian's favor, then Alexander and his sons would have been stripped of their bequests. Clearly, that was not Rabbi Singer's intent with the in terrorem clause. He merely wished to protect Vivian's bulk share from a challenge. He did not wish to disinherit his son or his grandsons.

Matter of Singer is an object lesson about the use (and possible misuse) of in terrorem clauses. As Judge Graffeo noted in his concurrence, "in terrorem clauses are not favored since they may result in a total forfeiture of a bequest and—because of this serious consequence—they must be strictly construed to conform to the testator's expressed intent." An in terrorem clause must be drafted very carefully to reflect the testator's intent. Your attorney can advise you as to whether an in terrorem clause is the best strategy based upon your unique circumstances.

I invite you to join my list of subscribers to this blog by clicking on "Subscribe to" on the left-hand side of the page so that you can receive a notification when the next installment has been published. Thank you.

Sunday, July 18, 2010

The Federal Estate Tax: A Brief History

In many ways, the United States inherited the model for the federal estate tax from the British. In feudal England, the monarch owned all of the real property and granted use of real estate to his nobles during their lifetime (life estate). When the nobleman died, his heir could continue to use the land upon payment of an estate tax to the sovereign. These death taxes provided needed income to the Crown to pay for war debts. In default of heirs, the estate reverted to the Crown (escheat). The statute Quia Emptores passed in 1290 finally granted the right to of an individual to hold an estate in land in fee simple (freehold) and to sell it (alienation), but it left the matter of the estate tax in the hands of the Crown.

The original Thirteen Colonies were the result of real estate grants and licences from the British Crown founded on the principles of Quia Emptores. Whether New York still retained vestiges of Quia Emptores in its real estate law was the subject of debate in the 19th century. The court in De Peyster v. Michael, 6 NY 467 (1852), held that Quia Emptores had never been in effect in the colonies, meaning that land was not freely alienable in New York. Seven years later, in Van Rensselaer v. Hays, 19 NY 68 (1859), the court in that case held that Quia Emptores had always been in effect in New York. The question was settled in New York State Constitution Article 1 §12 which states "all lands within this state are declared allodial, so that, subject only to liability to escheat, the entire and absolute property is vested in the owners, according to the nature of their respective estates." In a prior post, I have addressed the issue of the possibility of an estate escheating to the State when an individual dies without a Will (intestate).

In 1765 the British Crown had imposed the Stamp Act specifically on the American colonies, the purpose of which was to help defray the military expenses, mainly troop salaries, for the recently-fought Seven Year's War with France. Among the provisions of the Stamp Act was a requirement that legal documents, such as Wills, be produced on special stamped paper produced in London and containing a revenue stamp. Thus any colonist wishing to make a Will had to pay a tax. Colonial discontent with taxes such as these would lead to the Revolutionary War.

Ironically the new government did not abandon this practice of enacting a tax on Wills to raise money to pay for military debts. In an article published in the Journal of Business & Economics Research, Eddie Metrejean and Cheryl Metrejean demonstrate an historical pattern whereby federal inheritance taxes began to be enacted to pay for wartime expenses. Just a few years after the Revolution, the new Congress passed the Stamp Act of 1797 establishing a tax on Wills related to the transfer of property after death, once again to pay for a war in 1794 (albeit undeclared) with France. But the law was quickly abolished before it could take effect.

The issue of an inheritance tax would not arise again until the Civil War. A wartime inheritance tax was passed as part of the Revenue Act of 1862 affecting only the northern states, whose purpose was to raise over $1 million from estates valued at over $1000. After the war, the inheritance tax was abolished by the Revenue Act of 1870. Another short-lived inheritance tax was passed in 1898 to raise revenue for the Spanish-American War. It was repealed in 1902.

Congress passed its first permanent estate tax with the Revenue Act of 1916, three years after the passage of the 16th Amendment and the institution of the federal income tax. The constitutionality of new federal estate tax was challenged in New York Trust Co. v. Eisner, 256 U.S. 345 (1921), and in an opinion delivered by Oliver Wendell Holmes the Supreme Court held that the new law posed no "unconstitutional interference with the rights of the states to regulate descent and distribution" (256 U.S. 345, 348 (1921).

In order to close the loophole in the tax that allowed people to escape the inheritance tax by giving away their property, Congress passed a gift tax in 1932 that was declared constitutional by the Supreme Court in Heiner v. Donnan, 285 U.S. 312 (1932). In 1948, the marital deduction became law, allowing property to pass to one's spouse without paying any estate tax.

The most significant changes to the federal estate tax occurred with the Tax Reform Act of 1976. The Act enacted the following changes:

a single unified rate structure for transfers of property at death;
a single unified rate structure for lifetime property transfers;
a unified exemption from taxes for certain transfers made either during one's lifetime or at death;
a generation-skipping tax, taxing the transfer at the unified rate of the "skipped" generation if the beneficiary was two or more generations younger than the donor.

There have been other significant additions to the law. In 1980, the "stepped-up" basis restored to the pre-1976 provisions, giving the beneficiaries a significant break in the amount of capital gains they would pay on transferred property that they later sold.

In 1981, the martial deduction became unlimited, but with a catch. With proper estate planning, the surviving spouse can escape paying any estate tax. Without estate planning, the surviving spouse is left with a much larger estate on which the estate tax will be imposed.

In 2001 President Bush signed into law the Economic Growth and Tax Relief Reconciliation Act of 2001. The law repealed the federal estate, gift, and generation-skipping taxes after 2009, meaning that anyone dying during 2010 is able to pass on his or her estate free of any federal estate, gift, or generation-skipping taxes. However, state inheritance taxes may still be in effect. But the 2001 law contained an expiration date: all of the provisions of the 2001 law are set to expire on December 31, 2010. Should Congress not act, then the pre-2001 estate tax will automatically reappear in 2011.

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Sylvie L. F. Richards, Esq., Ph.D.