A01185 Summary:

BILL NO    A01185 

SAME AS    SAME AS S04952

SPONSOR    Weinstein

COSPNSR    Weprin

MLTSPNSR   

Rpld S11-1.5 (d) & (e), amd S11-A-2.1, EPT L; rpld S2102 sub 7, SCPA

Establishes the formula for determining the interest payable on a delayed
legacy.
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A01185 Actions:

BILL NO    A01185 

01/09/2013 referred to judiciary
04/16/2013 reported 
04/18/2013 advanced to third reading cal.135
06/11/2013 passed assembly
06/11/2013 delivered to senate
06/11/2013 REFERRED TO JUDICIARY
01/08/2014 DIED IN SENATE
01/08/2014 RETURNED TO ASSEMBLY
01/08/2014 ordered to third reading cal.72
01/22/2014 passed assembly
01/22/2014 delivered to senate
01/22/2014 REFERRED TO JUDICIARY
03/20/2014 SUBSTITUTED FOR S4952
03/20/2014 3RD READING CAL.81
03/20/2014 PASSED SENATE
03/20/2014 RETURNED TO ASSEMBLY
10/09/2014 delivered to governor
10/21/2014 signed chap.404
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A01185 Votes:

A01185 06/11/2013 140/1
AbbateYColtonYGarbariYKearnsYMillmanYRiveraERStevensY
AbinantYCookYGibsonYKellnerYMontesaYRobertsYStirpeY
ArroyoYCorwinYGiglioYKimERMorelleYRobinsoYSweeneyY
AubryYCrespoYGjonajYKolbYMosleyYRodriguERTediscoY
BarclayYCrouchYGlickYLalorYMoyaYRosaYTenneyY
BarrettYCurranYGoldfedYLavineYNojayYRosenthYThieleY
BarronYCusickYGoodellYLentolYNolanYRozicYTitoneY
BenedetYCymbrowYGottfriYLiftonYOaksYRussellYTitusY
BlankenYDenDekkYGrafYLopezYO'DonneYRyanYWalterY
BorelliYDinowitYGuntherYLupardoYOrtizYSaladinYWeinsteY
BoylandYDiPietrYHawleyYLupinacYOtisYSantabaYWeisenbY
BraunstYDupreyYHeastieYMageeYPalmesaYScarborYWeprinY
BrennanYEnglebrYHennessYMagnareYPaulinYSchimelYWrightY
BrindisYEspinalYHevesiYMaiselYPeoplesYSchimmiYZebrowsY
BronsonYFahyYHikindYMalliotYPerryYSepulveYMr SpkrY
Brook-KYFarrellYHooperERMarkeyYPretlowYSimanowY
BuchwalYFinchERJacobsYMayerYQuartYSimotasY
ButlerYFitzpatYJaffeeYMcDonalYRaYSkartadY
CahillYFriendYJohnsYMcDonouYRabbittYSkoufisY
CamaraYGabryszYJordanYMcKevitERRaiaYSolagesY
CerettoYGalefYKatzNOMcLaughYRamosYStecY
ClarkYGanttYKavanagYMillerYReilichYSteckY

A01185 01/22/2014 132/0
AbbateYCookYGjonajYLalorYNojayYRosenthYTitoneY
AbinantYCorwinYGlickYLavineYNolanERRozicYTitusY
ArroyoYCrespoYGoldfedYLentolYOaksYRussellERWalterY
AubryYCrouchYGoodellYLiftonYO'DonneYRyanYWeinsteY
BarclayYCurranYGottfriYLopezYOrtizYSaladinYWeisenbY
BarrettYCusickYGrafYLupardoYOtisYSantabaYWeprinY
BenedetYCymbrowYGuntherYLupinacYPalmesaYScarborYWrightY
BlankenYDavilaYHawleyYMageeYPalumboYSchimelYZebrowsY
BorelliYDenDekkYHeastieYMagnareYPaulinYSchimmiYMr SpkrY
BoylandABDinowitYHennessYMalliotERPeoplesYSepulveY
BraunstYDiPietrYHevesiYMarkeyERPerryYSimanowY
BrennanYDupreyYHikindYMayerYPichardYSimotasY
BrindisYEnglebrYHooperERMcDonalYPretlowYSkartadY
BronsonYFahyYJacobsERMcDonouYQuartYSkoufisY
Brook-KYFarrellYJaffeeYMcKevitYRaYSolagesY
BuchwalYFinchYJohnsYMcLaughYRaiaYStecY
ButlerYFitzpatYKatzERMillerYRamosYSteckY
CahillYFriendYKavanagYMillmanYRiveraYStirpeY
CamaraYGalefYKearnsYMontesaYRobertsYSweeneyY
CerettoYGanttYKellnerYMorelleYRobinsoYTediscoY
ClarkYGarbariYKimYMosleyYRodriguYTenneyY
ColtonERGiglioYKolbYMoyaYRosaYThieleY

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A01185 Memo:

BILL NUMBER:A1185

TITLE OF BILL:  An act to amend the estates, powers and trusts law, in
relation to the payment of interest on delayed legacies; and to repeal
paragraphs (d) and (e) of section 11-1.5 of the estates, powers and
trusts law and subdivision 7 of section 2102 of the surrogate's court
procedure act relating thereto

PURPOSE OF BILL:  The purpose of the bill is to change the law
regarding the payment of interest on a delayed pecuniary legacy. In
addition, this bill proposes to change the interest rate paid on
legacies from the statutory rate of six percent, to an interest rate
based on the Federal Funds Rate. This way, the beneficiary is
compensated according to the time value of money for the delay in
payment of their legacy.

JUSTIFICATION:  EPTL 11-1.5 currently provides that interest is not
payable unless a demand is made upon the fiduciary prior to commencing
a proceeding in Surrogate's Court to compel payment of the legacy. The
current statute fixes interest at 6% starting seven months from the
time that letters testamentary, including preliminary letters
testamentary, are granted and permits the Court to award interest at
the legal or judgment rate set forth in the CPLR if the delay in
paying legacies was unreasonable.

1. 6% Interest Rate Is Unreasonable

Although the testator or settlor of a trust may specify a desired rate
of interest, the statutory default rate merely should reflect the time
value of money where the delay is not unreasonable and the interest is
paid by the estate or trust. Paying interest at too high a rate is
unfair to the residuary beneficiaries whose share of the estate is
diminished. Likewise, paying interest at too low a rate unfairly
enriches the residuary beneficiaries at the expense of the legatee who
is not compensated for the delay in payment.

The current statutory fixed rate of 6% is far too high based on
current market interest rates and imposes a significant economic
burden on the residuary beneficiaries. However, the rate may be deemed
to be too low in a different economic environment. Surrogate Roth
identified this problem in Matter of Schwarz, 161 Misc. 2d 471, 476
(Sur. Ct., N.Y. Cty. 1994) characterizing "any fixed numerical rate as
insufficiently flexible to be fair over time." Similarly, the
legislative history surrounding the increase in the interest rate from
3% to 6% during high-interest rate economic environment identifies the
problem of undue hardship on beneficiaries when the rate is too low or
too high, " The three percent rate is clearly too low for the present
time, when interest rates of nearly ten percent are not uncommon...
The proposed figure of six percent in the case of a reasonable delay
in payment of a legacy is appropriate because that amount is a minimum
reasonable rate of return for estate assets prudently invested... the
proposed changes are intended to encourage prompt payment of outright
pecuniary dispositions and to prevent the imposition of undue hardship
on beneficiaries of such dispositions.' " (Id, at 47576), Yet, the
current rate of 6% just does that: it imposes undue hardship on
residuary beneficiaries because estate investments are not earning
anywhere near 6%.


In situations where the Court finds the fiduciary's conduct
unreasonable, the Surrogate should retain the power to surcharge the
fiduciary (as this bill allows), at an appropriate penalty rate.
Penalty interest should be paid by the errant fiduciary and not the
estate or trust, as there is no justification in these situations to
impose an economic burden on residuary beneficiaries; yet, the current
statute allows for just that.

2. Current Law Is Unclear

The current statutory scheme is not optimal from the viewpoint of the
fiduciary, the legatee and the residuary beneficiary. In fact, the
current statute seems to encourage disputes and unnecessary
litigation.  The courts have added greatly to the uncertainty of how
the statute applies when there is a delay in the payment of a legacy.
Some courts have allowed payment of interest even when a legatee did
not bring a proceeding for payment of interest (Matter of Schwartz,
614 N.Y.S.2d 668 (Sur. Ct., N.Y. Cty. 1994); Matter of
Park-Montgomery, NYLJ, 5/19/1997 (Sur. Ct., Nassau Cty.)). Some courts
require a legatee to make a demand upon fiduciary for the payment of
interest prior to bringing a proceeding for payment of interest
(Matter of Erlich, NYLJ, 7/6/2001 (Sur. Ct., Kings Cty.)), while other
courts say that the demand is not necessary (Matter of Fisher, NYLJ,
1/21/2003 (Sur.  Ct., Westchester Cty.); Matter of Kasenetz, 196 Misc.
2d 318 (Sur.  Ct., Nassau Cty. 2003)). Adding to the uncertainty, some
courts hold that interest may be awarded (Matter of Park-Montgomery,
NYLJ, 5/19/1997 (Sur. Ct., Nassau Cty.)), while other courts deem it
mandatory (Matter of Lancaster, NYLJ, 12/27/1996 (Sur. Ct., Suffolk
Cty.)). The cases also disagree whether the residuary beneficiaries
(Matter of Goodman, NYLJ, 5/19/2000 (Sur. Ct., N.Y. Cty.)) or
fiduciary (Matter of Bozzi, NYLJ, 3/31/1999 (Sur. Ct., Nassau Cty.))
pay the cost of interest to the legatee.

The core issue is not which cases were correctly decided. Rather, the
fact that the existing law is not clear is itself the crux of the
problem, a point addressed by Surrogate Roth in Matter of Schwarz.

The existing statute leaves all parties uncertain as to what is
appropriate regarding payment of interest. For example, fiduciaries
pay interest on a legacy at their peril in the absence of a judicial
proceeding. As a practical matter, only legatees of larger cash
bequests will institute a judicial proceeding to compel payment of
interest. Most fiduciaries wish to satisfy cash legacies as soon a
practicable. When legacies cannot be paid promptly, many fiduciaries
pay interest because they believe it is the proper course,
irrespective of the vagaries of the existing statute. Moreover, since
most estate accountings are settled non-judicially, requiring a
judicial proceeding for the Surrogate's Court to authorize payment of
interest seems wasteful. However, the existing statute seems to
indicate that a residuary beneficiary has a valid claim against the
fiduciary if interest was paid without judicial authorization.

Thus, the existing law often puts the residuary beneficiary in a
quandary in that this beneficiary may feel that payment of interest in
the absence of Court authorization is an impermissible benefit to the
cash legatee. In situations where the residuary beneficiary is an
institution, its governing body may be placed in an awkward position


vis-a-vis its shareholders, members or other constituents. When the
residuary beneficiary is a charitable organization, the Attorney
General's presence as an interested party further complicates matters.

In short, the existing New York law requires each leg of the triangle
- the fiduciary, the legatee, and the residuary beneficiary - to
safeguard his or her interests which may result in expensive legal
proceedings. In the majority of situations where judicial proceedings
do not take place, there is a lack of uniformity of practice and
outcome. This is not desirable and therefore, the statute should be
revised to provide predictability.

3. Accrual of Right to Interest

Unless the governing instrument provides otherwise, interest should be
paid starting seven months from the date of issuance of either
preliminary or permanent letters, or if letters are not required,
seven months from the date of death or other date a beneficiary is
entitled to receive a legacy.  The legatee should not be required to
make a formal demand or institute a judicial proceeding. It is unfair
to require a legatee to institute a judicial proceeding in order to
collect interest on a delayed payment of a legacy. If the law requires
a judicial proceeding, then, as a practical matter, only the legatees
who are the most aggrieved will institute a proceeding and collect
interest.  Most likely, larger sums will be involved. If interest can
only be awarded at the discretion of the Court, then most legatees
will never receive interest because someone must institute a
proceeding in order to get the Court involved. In New York, many
estates - large or small, upstate or downstate - have no Court
involvement following the probate of the will.

The payment of interest on a delayed payment of legacy should apply to
all estates, including illiquid estates. An executor has a duty to
make the estate assets productive, and the prior underproductive
property rule has been replaced by the flexible power to adjust. In
certain situations, the residuary estate may be illiquid causing
difficulty in paying debts, taxes, administration expenses and
legacies. Many of these cases are the result of faulty estate planning
or poor drafting, and interest on delayed payment of a legacy is not
the focal issue. The cash shortfall for payment of the legacy itself
is the central issue here, and not payment of interest on that legacy
- which is only a small fraction of the legacy.  Furthermore,
requiring a judicial proceeding in this situation seems
counterproductive, as the legal fees incurred will exacerbate the
liquidity problem.

In other situations, there may be a probate contest or other
litigation preventing a bequest from promptly being paid. Unless the
testator provides otherwise, interest should run with the legacy, even
in cases where the legatee filed objections to the will, thereby
causing the delay. In the absence of language in the will akin to an
in terrorem clause, there is no reason why such a legatee should not
receive interest - which is nothing more than compensation for the
time value of money. It is not a windfall as the residuary estate is
earning income on its assets, or should be. If a proceeding is pending
in Surrogate's Court, be it a will contest or a judicial accounting,


the Court always has discretion to disallow interest or surcharge a
fiduciary.

The bill does not intend to change existing law with respect to the
right of election by a surviving spouse (In re Kasenetz, 196 Misc.2d
318 (Sur. Ct. Nassau Cty. 2003)) and does not affect the Court's right
to surcharge the fiduciary in abusive cases, thereby preserving useful
judicial oversight. However, the right to surcharge is not a part of
this bill since additional specific statutory language is not required
for a surcharge action.

4. Applicable Interest Rate

The interest rate on delayed legacies should not be permanently fixed
by statute, but should fluctuate depending on current economic
conditions. This is critical to the fairness of this proposed
statutory reform. There is no one correct interest rate to use as a
reference. Therefore, this proposal requires the interest rate be set
(or reset) on the first business day of each calendar year and fixed
for that calendar year at the Federal funds rate less 1%, but in no
event less than 1/2 of 1%.

As of January 27, 2011 the Federal funds rate (.25%) less 1% was a
negative number, so the bill would fix the interest rate at 1/2 of 1%.
Three month risk-free treasury bills yielded .14%, and money market
funds yielded a negligible amount. By having the rate reset once each
year, fiduciaries can easily comply with the statute and do the
necessary computation. It should not be necessary to engage an
accountant or other professional to compute the interest. Moreover,
the legatee will receive a competitive interest rate based on current
economic conditions in light with what the estate should be earning.
There will be no need for the Surrogate's Court to compute or verify
interest, absent formal objections to the computation within an
accounting or other proceeding.

Example:  The testator died on April 15, 2009. His will provides for a
$100,000 cash legacy to A. The executor was appointed on June 16, 2009
and 7 months from the issuance of letters is on January 16, 2010. The
legacy was paid on March 14, 2012, with income calculated pursuant to
the proposed statutory scheme. The target Federal funds rate on the
first business day of each applicable year was as follows:

o January 4, 2010 - .25% (thus .5% rate applies);
o January 3, 2011 - .25% (thus .5% rate applies); and
o January 3, 2012 - .25% (thus .5% rate applies).

The executor would compute the income due A as follows:

As to 2010: $100,000 x .005 / (349/365) = $478
As to 2011: $100,000 x .005 / 365 = $500
As to 2012: $100,000 x .005 / (74/366) = $101

Thus, A would be entitled to a payment of $101,079.

5. Deductibility of Interest for Estate Income Tax Purposes


Under  current income tax law, the legatee must report the interest as
interest income on Schedule B (Form 1099INT issued by the estate), but
the estate cannot deduct the interest as an expense due to limitations
on deductions for personal interest. Therefore, the current  New  York
statutory  scheme  is not tax efficient. In order to be tax efficient,
the  interest  paid  on  delayed  payment  of  a  legacy   should   be
characterized  under the New York Principal and Income Act (EPTL 11-A)
as  accounting  income,  so  that  its  payment  will  carry  out  the
distributable  net income ("DNI") in the same manner that the share of
income due a pecuniary legacy in trust carries out DNI.

LEGISLATIVE HISTORY:  2012: A.10047-A/S.7228-A - PA/S. Rules

FISCAL IMPLICATIONS FOR STATE AND LOCAL GOVERNMENTS:  None.

EFFECTIVE DATE:  This act shall take effect sixty  days  after  having
become  a  law  and  shall  apply only to the estates of decedents who
shall have died on or after such effective date.
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A01185 Text:

                           S T A T E   O F   N E W   Y O R K
       ________________________________________________________________________

                                         1185

                              2013-2014 Regular Sessions

                                 I N  A S S E M B L Y

                                      (PREFILED)

                                    January 9, 2013
                                      ___________

       Introduced  by  M.  of  A.  WEINSTEIN  --  read once and referred to the
         Committee on Judiciary

       AN ACT to amend the estates, powers and trusts law, in relation  to  the
         payment  of interest on delayed legacies; and to repeal paragraphs (d)
         and (e) of section 11-1.5 of the estates, powers and  trusts  law  and
         subdivision  7  of section 2102 of the surrogate's court procedure act
         relating thereto

         THE PEOPLE OF THE STATE OF NEW YORK, REPRESENTED IN SENATE AND  ASSEM-
       BLY, DO ENACT AS FOLLOWS:

    1    Section  1.  Paragraphs  (d) and (e) of section 11-1.5 of the estates,
    2  powers and trusts law are REPEALED.
    3    S 2. Paragraph 3 of section 11-A-2.1 of the estates, powers and trusts
    4  law, as added by chapter 243 of the laws of 2001, is amended to read  as
    5  follows:
    6    (3)  [A]  UNLESS OTHERWISE PROVIDED BY THE TERMS OF THE WILL OR TRUST,
    7  COMMENCING (A) SEVEN MONTHS FROM EITHER THE DATE OF DEATH OR OTHER  DATE
    8  A  BENEFICIARY  IS TO RECEIVE A PECUNIARY AMOUNT OUTRIGHT IF LETTERS ARE
    9  NOT REQUIRED, OR (B) SEVEN  MONTHS  FROM  THE  TIME  LETTERS,  INCLUDING
   10  PRELIMINARY OR TEMPORARY LETTERS, ARE GRANTED IF LETTERS ARE REQUIRED, A
   11  fiduciary  shall distribute INCOME to a beneficiary who receives a pecu-
   12  niary amount outright [the interest or any other amount provided by  the
   13  will, the terms of the trust, or applicable law], from net income deter-
   14  mined  under  paragraph  (2)  or  from  principal to the extent that net
   15  income is insufficient[. If a beneficiary  is  to  receive  a  pecuniary
   16  amount outright from a trust after an income interest ends and no inter-
   17  est  or other amount is provided for by the terms of the trust or appli-
   18  cable law, the fiduciary shall distribute the interest or  other  amount
   19  to  which  the beneficiary would be entitled under applicable law if the
   20  pecuniary amount were required to be paid under a will],  OF  AN  AMOUNT
   21  EQUAL  TO  THE  PECUNIARY  AMOUNT  MULTIPLIED BY AN INCOME FACTOR, WHICH

        EXPLANATION--Matter in ITALICS (underscored) is new; matter in brackets
                             [ ] is old law to be omitted.
                                                                  LBD03692-01-3
       A. 1185                             2

    1  SHALL BE SET (OR RESET) ON THE FIRST BUSINESS DAY OF EACH CALENDAR  YEAR
    2  AND  FIXED  FOR  THAT  CALENDAR YEAR AT THE TARGET FEDERAL FUNDS RATE AS
    3  ANNOUNCED BY THE FEDERAL RESERVE BOARD  (OR  IN  THE  EVENT  THE  TARGET
    4  FEDERAL FUNDS RATE IS A RANGE OF RATES, THE HIGH OF THAT RANGE) LESS ONE
    5  PERCENT, BUT IN NO EVENT LESS THAN ONE-HALF OF ONE PERCENT.
    6    S 3.  Subdivision 7 of section 2102 of the surrogate's court procedure
    7  act is REPEALED.
    8    S  4.  This  act  shall take effect on the sixtieth day after it shall
    9  have become a law and shall apply to the estates of decedents who  shall
   10  have died on or after such date.
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