Estate, Powers and Trusts, § 7-1.5: When Trust Interest Inalienable; Exception

A trust is an important estate planning document that may be vital to reaching your estate planning and financial goals. A trust has some features that are similar to a will, but also offers unique features that a will does not have such as placing complicated restrictions on how a bequest is to be used by your loved one and in what manner your loved one can receive the asset. For example, a spendthrift trust is a type of trust that places controls on the beneficiary’s ability to access trust assets. Furthermore, through a trustee, you can make sure that the gift you make is properly managed even after you have passed away. When creating a trust, it is important to understand that under New York probate law, the interest of a trust, except for a few exceptions cannot be transferred. Under New York Estate, Powers and Trusts, § 7-1.5 one important exception is that the right of a beneficiary to receive income from his or her trust and use it pay others cannot be transferred or assigned unless trust agreement creates that power. In example of a trust with this type of provision is a spendthrift trust. To learn more about the estate planning process and how to create a trust that will meet your estate planning goals, contact an experienced New York Trust Lawyer.

1. When trust interests not to merge: Estates, Powers and Trust, § 7-1.1
2. Trustee of passive trust not to take: Estates, Powers and Trust, § 7-1.2
3. Purchase-money resulting trust abolished: Estates, Powers and Trust, § 7-1.3
4. Purposes for which trust may be created: Estates, Powers and Trust, § 7-1.4

The decedent in his will left a portion of his estate to his daughter, Marilyn Fenety, to be held in trust. The will allowed the trustees to ".. pay at any time or from time to time such portion of the income or principal for the benefit of Marilyn Fenety as the trustees in their discretion shall deem proper." The will also provide that the trustees pay the entire balance of principal and undistributed income to Marilyn Fenety’s children upon her death. The decedent decided to leave Fenety’s bequest in a trust with the stated restrictions because he believed Fenety would not properly invest and spend the assets. The court denied the petitioner’s request to terminate the trust and pay over its assets to Fenety, noting that “the income interest of a beneficiary of a testamentary trust is inalienable in this state unless the instrument creating the trust provides otherwise,” as indicated in New York Estate, Powers and Trusts, § 7-1.5. Estate of Sanders, Matter of, 158 Misc.2d 606 (N.Y. Sur., 1991)

1. The interest of the beneficiary of any trust may be assigned or otherwise transferred, except that:
   1. The right of a beneficiary of an express trust to receive the income from property and apply it to the use of or pay it to any person may not be transferred by assignment or otherwise unless a power to transfer such right, or any part thereof, is conferred upon such beneficiary by the instrument creating or declaring the trust.
   2. The proceeds of a life insurance policy which, under a trust or other agreement, are upon the death of the insured left with the insurance company may not be (A) transferred, (B) subject to commutation or encumbrance or (C) subject to legal process except in an action for necessaries, if provisions to such effect were incorporated in such trust or other agreement.
2. Notwithstanding subparagraph (a)(1):
   1. The beneficiary of an express trust to receive income from property and apply it to the use of or pay it to any person may, unless otherwise provided in the instrument creating or declaring such trust, transfer any amount in excess of ten thousand dollars of the annual income to which the beneficiary is entitled from such trust to the spouse, issue, ancestors, brothers, sisters, uncles, aunts, nephews or nieces of the beneficiary, or to a trustee, committee, conservator, curator, custodian, guardian of the property of a minor, or the donee of a power during minority for the benefit only of any such person bearing such relationship to the beneficiary, provided that such transfer is evidenced by a written instrument signed and acknowledged by the beneficiary and delivered to the trustee of the trust, together with an affidavit by the beneficiary that such transfer and any like transfer concurrently in effect are for all or part of the excess over ten thousand dollars of the annual income from such trust to which such beneficiary is entitled, and that he has not received and is not to receive any consideration in money or money's worth for the transfer.
   2. Any such transfer shall be effective in any year only as to income from such trust in excess of ten thousand dollars, and for this purpose all previous like transfers applicable to a given year shall be taken into account.  In the event that two or more transfers are made in or for any year in a total amount exceeding the income from such trust properly transferable hereunder, transferees shall be preferred in the order in which the instruments of transfer were delivered to the trustee.
   3. A trustee shall be exonerated and fully discharged for any payment made to a transferee in reliance on the affidavit of a beneficiary described in subparagraph (1).
   4. The provisions of this paragraph do not apply to subparagraph (a)(2): [FN1]
3. A transferee of income may, if he has not received or is not to receive any consideration in money or money's worth therefor, make a further transfer of such income only to one or more of the permissible transferees referred to in subparagraph (b)(1), other than a prior transferor;  provided, however, that upon the death of a transferee any income not so transferred by him shall be an asset of his estate, subject to his testamentary disposition or passing to his distributees under the statutes of descent and distribution.
4. The beneficiary of an express trust to receive the income from property and apply it to the use of or pay it to any person is not precluded by anything contained in this § from transferring or assigning any part or all of such income to or for the benefit of persons whom the beneficiary is legally obligated to support.

A trust is quite complicated to set up. Many trusts require not just knowing your goals, who you want to name as the trustee, and who you want to name as beneficiaries. If your trust is not set up correctly the goals of your trust may not be realized and the financial consequences may be severe. To ensure that your trust, will and other estate planning documents are properly drafted and executed, it is important that you work with an experienced practitioner. The staff at Stephen Bilkis & Associates, PLLC has years of experience working closely with New York clients to develop a variety of types of trusts as well as wills and other estate planning documents. Contact us at 800.696.9529 to schedule a free, no obligation consultation regarding your estate issue. We serve individuals throughout the following locations: