NEW YORK STATE ASSEMBLY MEMORANDUM IN SUPPORT OF LEGISLATION submitted in accordance with Assembly Rule III, Sec 1(f)
BILL NUMBER: A1185
SPONSOR: Weinstein 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 regard-
ing 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 flexi-
ble to be fair over time." Similarly, the legislative history surround-
ing 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 unreason-
able, 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 proceed-
ing 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 prob-
lem, a point addressed by Surrogate Roth in Matter of Schwarz.
The existing statute leaves all parties uncertain as to what is appro-
priate 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 as 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 Surro-
gate'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 judi-
cial authorization.
Thus, the existing law often puts the residuary beneficiary in a quan-
dary 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 institu-
tion, 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 pres-
ence 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 prelimi-
nary 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 situ-
ations, 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 frac-
tion 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 inter-
est - 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 nega-
tive 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 neces-
sary 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.
