N.Y. Estates, Powers & Trusts Law § 10-6.6: Exercise of a power of appointment; effect when more extensive

§ 10-6.6 Exercise of a power of appointment; effect when more extensive

or less extensive than authorized; trustee's authority to

invade principal in trust.

(a) An exercise of a power of appointment is not void because its

exercise is:

(1) More extensive than was authorized but is valid to the extent

authorized by the instrument creating the power.

(2) Less extensive than authorized by the instrument creating the

power, unless the donor has manifested a contrary intention.

(b) An authorized trustee with unlimited discretion to invade trust

principal may appoint part or all of such principal to a trustee of an

appointed trust for, and only for the benefit of, one, more than one or

all of the current beneficiaries of the invaded trust (to the exclusion

of any one or more of such current beneficiaries). The successor and

remainder beneficiaries of such appointed trust may be one, more than

one or all of the successor and remainder beneficiaries of such invaded

trust (to the exclusion of any one, more than one or all of such

successor and remainder beneficiaries).

(1) An authorized trustee exercising the power under this paragraph

may grant a discretionary power of appointment as defined in paragraph

(c) of section 10-3.4 of this article (including a presently exercisable

power of appointment) in the appointed trust to one or more of the

current beneficiaries of the invaded trust, provided that the

beneficiary granted a power to appoint could receive the principal

outright under the terms of the invaded trust.

(2) If the authorized trustee grants a power of appointment under

subparagraph (l) of this paragraph, except as otherwise provided in

subparagraph (3) of this paragraph, the granted power may only exclude

as permissible appointees one or more of the beneficiary, the creator,

or the creator's spouse, or any of the estates, creditors, or creditors

of the estates of the beneficiary, the creator or the creator's spouse.

(3) If the authorized trustee exercises the power under this

paragraph, the appointed trust may grant any power of appointment

included in the invaded trust provided such power has the same class of

permissible appointees as the power of appointment in the invaded trust

and is exercisable in the same fashion as the power of appointment in

the invaded trust.

(4) If the beneficiary or beneficiaries of the invaded trust are

described by a class, the beneficiary or beneficiaries of the appointed

trust may include present or future members of such class.

(c) An authorized trustee with the power to invade trust principal but

without unlimited discretion may appoint part or all of the principal of

the trust to a trustee of an appointed trust, provided that the current

beneficiaries of the appointed trust shall be the same as the current

beneficiaries of the invaded trust and the successor and remainder

beneficiaries of the appointed trust shall be the same as the successor

and remainder beneficiaries of the invaded trust.

(1) If the authorized trustee exercises the power under this

paragraph, the appointed trust shall include the same language

authorizing the trustee to distribute the income or invade the principal

of the appointed trust as in the invaded trust.

(2) If the authorized trustee exercises the power under this paragraph

to extend the term of the appointed trust beyond the term of the invaded

trust, for any period after the invaded trust would have otherwise

terminated under the provisions of the invaded trust, the appointed

trust, in addition to the language required to be included in the

appointed trust pursuant to subparagraph (1) of this paragraph, may also

include language providing the trustees with unlimited discretion to

invade the principal of the appointed trust during such extended term.

(3) If the beneficiary or beneficiaries of the invaded trust are

described by a class, the beneficiary or beneficiaries of the appointed

trust shall include present or future members of such class.

(4) If the authorized trustee exercises the power under this paragraph

and if the invaded trust grants a power of appointment to a beneficiary

of the trust, the appointed trust shall grant such power of appointment

in the appointed trust and the class of permissible appointees shall be

the same as in the invaded trust.

(d) An exercise of the power to invade trust principal under

paragraphs (b) and (c) of this section shall be considered the exercise

of a special power of appointment as defined in section 10-3.2 of this

article.

(e) The appointed trust to which an authorized trustee appoints the

assets of the invaded trust may have a term that is longer than the term

set forth in the invaded trust, including, but not limited to, a term

measured by the lifetime of a current beneficiary.

(f) If an authorized trustee has unlimited discretion to invade the

principal of a trust and the same trustee or another trustee has the

power to invade principal under the trust instrument which power is not

subject to unlimited discretion, such authorized trustee having

unlimited discretion may exercise the power of appointment under

paragraph (b) of this section.

(g) An authorized trustee may exercise the power to appoint in favor

of an appointed trust under paragraphs (b) and (c) of this section

whether or not there is a current need to invade principal under the

terms of the invaded trust.

(h) An authorized trustee exercising the power under this section has

a fiduciary duty to exercise the power in the best interests of one or

more proper objects of the exercise of the power and as a prudent person

would exercise the power under the prevailing circumstances. The

authorized trustee may not exercise the power under this section if

there is substantial evidence of a contrary intent of the creator and it

cannot be established that the creator would be likely to have changed

such intention under the circumstances existing at the time of the

exercise of the power. The provisions of the invaded trust alone are not

to be viewed as substantial evidence of a contrary intent of the creator

unless the invaded trust expressly prohibits the exercise of the power

in the manner intended by the authorized trustee.

(i) Unless the authorized trustee provides otherwise:

(1) The appointment of all of the assets comprising the principal of

the invaded trust to an appointed trust shall include subsequently

discovered assets of the invaded trust and undistributed principal of

the invaded trust acquired after the appointment to the appointed trust;

and

(2) The appointment of part but not all of the assets comprising the

principal of the invaded trust to an appointed trust shall not include

subsequently discovered assets belonging to the invaded trust and

principal paid to or acquired by the invaded trust after the appointment

to the appointed trust; such assets shall remain the assets of the

invaded trust.

(j) The exercise of the power to appoint to an appointed trust under

paragraph (b) or (c) of this section shall be evidenced by an instrument

in writing, signed, dated and acknowledged by the authorized trustee.

The exercise of the power shall be effective thirty days after the date

of service of the instrument as specified in subparagraph (2) of this

paragraph, unless the persons entitled to notice consent in writing to a

sooner effective date. The exercise of the power is irrevocable on such

effective date, either thirty days following service of the notice or

the effective date as set forth in the written consent.

(1) An authorized trustee may exercise the power authorized by

paragraphs (b) and (c) of this section without the consent of the

creator, or of the persons interested in the invaded trust, and without

court approval, provided that the authorized trustee may seek court

approval for the exercise with notice to all persons interested in the

invaded trust.

(2) A copy of the instrument exercising the power and a copy of each

of the invaded trust and the appointed trust shall be delivered (A) to

the creator, if living, of the invaded trust, (B) to any person having

the right, pursuant to the terms of the invaded trust, to remove or

replace the authorized trustee exercising the power under paragraph (b)

or (c) of this section, and (C) to any persons interested in the invaded

trust and the appointed trust (or, in the case of any persons interested

in the trust, to any guardian of the property, conservator or personal

representative of any such person or the parent or person with whom any

such minor person resides), by registered or certified mail, return

receipt requested, or by personal delivery or in any other manner

directed by the court having jurisdiction over the invaded trust.

(3) The instrument exercising the power shall state whether the

appointment is of all the assets comprising the principal of the invaded

trust or a part but not all the assets comprising the principal of the

invaded trust and if a part, the approximate percentage of the value of

the principal of the invaded trust that is the subject of the

appointment.

(4) A person interested in the invaded trust may object to the

trustee's exercise of the power under this section by serving a written

notice of objection upon the trustee prior to the effective date of the

exercise of the power. The failure to object shall not constitute a

consent.

(5) The receipt of a copy of the instrument exercising the power shall

not affect the right of any person interested in the invaded trust to

compel the authorized trustee who exercised the power under paragraph

(b) or (c) of this section to account for such exercise and shall not

foreclose any such interested person from objecting to an account or

compelling a trustee to account. Whether the exercise of a power under

paragraph (b) or (c) of this section begins the running of the statute

of limitations on an action to compel a trustee to account shall be

based on all the facts and circumstances of the situation.

(6) A copy of the instrument exercising the power shall be kept with

the records of the invaded trust and, within twenty days of the

effective date, the original shall be filed in the court having

jurisdiction over the invaded trust. Where a trustee of an inter vivos

trust exercises the power and the trust has not been the subject of a

proceeding in the surrogate's court, no filing is required. The

instrument shall state that in certain circumstances the appointment

will begin the running of the statute of limitations that will preclude

persons interested in the invaded trust from compelling an accounting by

the trustees after the expiration of a given time.

(7) Prior to the effective date as provided herein, a trustee may

revoke the exercise of the power to invade to a new trust. Where a

trustee has served notice of the exercise of the power pursuant to

subparagraph (2) of this paragraph, the trustee shall serve notice of

the revocation of the exercise of the power to persons interested in the

invaded trust and the appointed trust by registered or certified mail,

return receipt requested, or by personal delivery or in any other manner

directed by the court having jurisdiction over the invaded trust. Where

the notice of the exercise of the power was filed with the court, the

trustee shall file the notice of revocation of the exercise of the power

with such court.

(k) This section shall not be construed to abridge the right of any

trustee to appoint property in further trust that arises under the terms

of the governing instrument of a trust or under any other provision of

law or under common law, or as directed by any court having jurisdiction

over the trust.

(1) Nothing in this section is intended to create or imply a duty to

exercise a power to invade principal, and no inference of impropriety

shall be made as a result of an authorized trustee not exercising the

power conferred under paragraph (b) or (c) of this section.

(m) A power authorized by paragraph (b) or (c) of this section may be

exercised, subject to the provisions of paragraph (h) of this section,

unless expressly prohibited by the terms of the governing instrument,

but a general prohibition of the amendment or revocation of the invaded

trust or a provision that constitutes a spendthrift clause shall not

preclude the exercise of a power under paragraph (b) or (c) of this

section.

(n) An authorized trustee may not exercise a power authorized by

paragraph (b) or (c) of this section to effect any of the following:

(1) To reduce, limit or modify any beneficiary's current right to a

mandatory distribution of income or principal, a mandatory annuity or

unitrust interest, a right to withdraw a percentage of the value of the

trust or a right to withdraw a specified dollar amount, provided that

such mandatory right has come into effect with respect to the

beneficiary. Notwithstanding the foregoing, but subject to the other

limitations in this section, an authorized trustee may exercise a power

authorized by paragraph (b) or (c) of this section to appoint to an

appointed trust that is a supplemental needs trust that conforms to the

provisions of section 7-1.12 of this chapter;

(2) To decrease or indemnify against a trustee's liability or

exonerate a trustee from liability for failure to exercise reasonable

care, diligence and prudence;

(3) To eliminate a provision granting another person the right to

remove or replace the authorized trustee exercising the power under

paragraph (b) or (c) of this section unless a court having jurisdiction

over the trust specifies otherwise;

(4) To make a binding and conclusive fixation of the value of any

asset for purposes of distribution, allocation or otherwise; or

(5) To jeopardize (A) the deduction or exclusion originally claimed

with respect to any contribution to the invaded trust that qualified for

the annual exclusion under section 2503(b) of the internal revenue code,

the marital deduction under section 2056(a) or 2523(a) of the internal

revenue code, or the charitable deduction under section 170(a), 642(c),

2055(a) or 2522(a) of the internal revenue code, (B) the qualification

of a transfer as a direct skip under section 2642(c) of the internal

revenue code, or (C) any other specific tax benefit for which a

contribution originally qualified for income, gift, estate, or

generation-skipping transfer tax purposes under the internal revenue

code.

(o) An authorized trustee shall consider the tax implications of the

exercise of the power under paragraph (b) or (c) of this section.

(p) An authorized trustee may not exercise a power described in

paragraph (b) or (c) of this section in violation of the limitations

under sections 9-1.1, 10-8.1 and 10-8.2 of this chapter, and any such

exercise shall void the entire exercise of such power.

(q)(1) Unless a court otherwise directs, an authorized trustee may not

exercise a power authorized by paragraph (b) or (c) of this section to

change the provisions regarding the determination of the compensation of

any trustee; the commissions or other compensation payable to the

trustees of the invaded trust may continue to be paid to the trustees of

the appointed trust during the term of the appointed trust and shall be

determined in the same manner as in the invaded trust.

(2) No trustee shall receive any paying commission or other

compensation for appointing of property from the invaded trust to an

appointed trust pursuant to paragraph (b) or (c) of this section.

(r) Unless the invaded trust expressly provides otherwise, this

section applies to:

(1) Any trust governed by the laws of this state, including a trust

whose governing law has been changed to the laws of this state; and

(2) Any trust that has a trustee who is an individual domiciled in

this state or a trustee which is an entity having an office in this

state, provided that a majority of the trustees select this state as the

location for the primary administration of the trust by an instrument in

writing, signed and acknowledged by a majority of the trustees. The

instrument exercising this selection shall be kept with the records of

the invaded trust.

(s) For purposes of this section:

(1) The term "appointed trust" means an irrevocable trust which

receives principal from an invaded trust under paragraph (b) or (c) of

this section including a new trust created by the creator of the invaded

trust or by the trustees, in that capacity, of the invaded trust. For

purposes of creating the new trust, the requirement of section 7-1.17 of

this chapter that the instrument be executed and acknowledged by the

person establishing such trust shall be deemed satisfied by the

execution and acknowledgment of the trustee of the appointed trust.

(2) The term "authorized trustee" means, as to an invaded trust, any

trustee or trustees with authority to pay trust principal to or for one

or more current beneficiaries other than (i) the creator, or (ii) a

beneficiary to whom income or principal must be paid currently or in the

future, or who is or will become eligible to receive a distribution of

income or principal in the discretion of the trustee (other than by the

exercise of a power of appointment held in a non-fiduciary capacity).

(3) References to sections of the "internal revenue code" refer to the

United States internal revenue code of 1986, as amended from time to

time, or to corresponding provisions of subsequent internal revenue

laws, and also refer to corresponding provisions of state law.

(4) The term "current beneficiary or beneficiaries" means the person

or persons (or as to a class, any person or persons who are or will

become members of such class) to whom the trustees may distribute

principal at the time of the exercise of the power, provided however

that the interest of a beneficiary to whom income, but not principal,

may be distributed in the discretion of the trustee of the invaded trust

may be continued in the appointed trust.

(5) The term "invade" shall mean the power to pay directly to the

beneficiary of a trust or make application for the benefit of the

beneficiary.

(6) The term "invaded trust" means any existing irrevocable inter

vivos or testamentary trust whose principal is appointed under paragraph

(b) or (c) of this section.

(7) The term "person or persons interested in the invaded trust" shall

mean any person or persons upon whom service of process would be

required in a proceeding for the judicial settlement of the account of

the trustee, taking into account section three hundred fifteen of the

surrogate's court procedure act.

(8) The term "principal" shall include the income of the trust at the

time of the exercise of the power that is not currently required to be

distributed, including accrued and accumulated income.

(9) The term "unlimited discretion" means the unlimited right to

distribute principal that is not modified in any manner. A power to pay

principal that includes words such as best interests, welfare, comfort,

or happiness shall not be considered a limitation or modification of the

right to distribute principal.

(10) The creator shall not be considered to be a beneficiary of an

invaded or appointed trust by reason of the trustee's authority to pay

trust principal to the creator pursuant to section 7-1.11 of this

chapter or by reason of the trustee's authority under the trust

instrument or any other provision of law to pay or reimburse the creator

for any tax on trust income or trust principal that is payable by the

creator under the law imposing such tax or to pay any such tax directly

to the taxing authorities.

(t) Cross-reference. For the exercise of the power under paragraph (b)

or (c) of this section where there are multiple trustees, see sections

10-6.7 and 10-10.7 of this article.