Provisions in A Prenuptial Agreement can be a Sufficient Basis to Establish Constructive Trusts on Estate Assets

In re Chantarasmi, 938 N.Y.S.2d 762 (N.Y. Sur. 2012)

In a case before the Surrogate’s Court in Westchester County, New York, relating to a Prenuptial Agreement, the co-administrators of a deceased father’s estate and guardians of property of his minor children sought to impose constructive trusts on a portion of the estate.  The court authorized the guardians to establish trusts for the benefit of the decedent’s children.

In June 2002, the decedent and his wife entered into a prenuptial agreement under which the wife waived her rights to the decedent’s estate in the event that they did not have children.  If the couple were still married and had children at the time of his death, the prenuptial agreement provided that the decedent would leave an amount equivalent to 30-percent of his gross estate to a trust for his wife.  The trustees of this trust would be the wife, the decedent’s father and the decedent’s brother.  The same clause in the prenuptial agreement provided that the decedent would leave an amount equivalent to 70-percent of his gross estate to one or more trusts to be established for the sole benefit of his children, upon the terms specified in the decedent’s will.  The trustees for the children’s trusts would also be the wife, the decedent’s brother and the decedent’s father.   In December 2009, the decedent died in an accident before making his will.  He was survived by his wife, his eight-year-old son and his seven-year-old daughter.

Upon the decedent’s death, the co-administrators distributed 30-percent of the net estate to the marital trust.  However, the absence of a will meant that there were no provisions to establish the trusts for the benefit of the decedent’s children.  Therefore, the co-administrators of the decedent’s estate, who were also the guardians of property of his minor children, petitioned the court to impose a constructive trust on 70-percent of the net estate and authorize them to transfer such funds to the individuals named as trustees in the prenuptial agreement in order.  The co-administrators proposed to establish two irrevocable trusts, one for the son with 35-percent of the net assets and one for the daughter with 35-percent of the net assets.  Under the terms of each proposed trust, the trustees would have full discretion to pay to, or apply for the benefit of, any or all income and/or principal to the beneficiary during the trust period.  Each proposed trust would make payments of principal upon the beneficiary attaining age 25 and age 30.  Each trust would pay the balance of the principal and terminate upon the beneficiary attaining age 35.  The co-administrators also proposed various exculpatory clauses and broad administrative powers clauses.

In New York case law, it is well settled that a contract between spouses that provides for distribution of one’s estate to the other, or to their children, may be enforced against the deceased spouse’s estate.  In re Granwell, 228 N.E.2d 779 (N.Y. 1967); see also, In re Cohen, 629 N.E.2d 1356 (N.Y. 1994).  Because the decedent did not leave a will, he breached the terms of his prenuptial agreement regarding the establishment of trusts for his children.    Therefore, the Surrogate Court held that this breach warranted imposition of a constructive trust, and the guardians of the property of the minor children could enforce the prenuptial agreement in equity by imposing a trust upon 70-percent of the net assets of the decedent’s estate.

Although a constructive trust may be imposed, the Surrogate Court also considered whether it may authorize the guardians to establish the children’s irrevocable trusts under the proposed terms.  The court found the instant case differs from precedents in New York case law because, in the instant case, the agreement clearly stated that the decedent would provide certain terms and conditions of the trust in his will.  Therefore, the Surrogate Court had to construe the missing terms from the intents and purposes expressed by the decedent in the prenuptial agreement.

The prenuptial agreement clearly defined three of the necessary elements of a trust agreement by designating beneficiaries, trustees and trust assets; however, the duration of the trust and the distribution of assets during the trust’s administration were left for the decedent to provide in his will. In absence of the decedent’s will, the Surrogate Court construed the decedent’s intent as desiring the trust to continue for the period necessary to accomplish its purpose.  When the trust arises from another agreement, such as the prenuptial agreement in the instant case, the purpose of that agreement becomes relevant to determining the trust period. In examining the relevant provision of the prenuptial agreement, the Surrogate Court construed the decedent’s intent to be that trusts provide financial support for the children after the decedent’s death and free their mother from administering the children’s assets under a join guardianship with the Clerk of the Court.  Because the decedent sought to hold the assets in trust, the Surrogate Court inferred that the decedent did not want the children to receive their shares of his estate at the age of majority.  Because the obligation to support the children was not specifically limited to age 21, the Surrogate Court inferred that the decedent contemplated that the trustees would administer the trust for a longer period.  The same analysis was applied to ascertain the decedent’s intent with regard to the distribution of trust funds.  Taking these inferences as a whole, the court construed that the decedent’s intent was for each children’s trust to continue for a period necessary to accomplish its purpose by fairly and impartially distributing income and/or principal for the benefit of the children during their minority and to pay principal at fixed ages.  Therefore, the Surrogate Court concurred with the trustees, duration of the trust and distribution of assets proposed by the co-administrators

Although the court granted the imposition of the constructive trusts on 70-percent of net assets for the children’s benefit and concurred with the necessary elements of the trust, the court found that several of the proposed exculpatory clauses and administrative powers were in violation of New York law.  These same clauses would not have been enforceable had the decedent created them under a will.  Therefore, the court ordered the guardians to redraft the proposed trusts in accordance with the fiduciary powers outlined in New York Law,  N.Y. Estates, Powers and Trusts Law § 11-1.1 (MicKinney 2011).

The court granted the guardians’ application to enforce the prenuptial agreement and to authorize the establishment of trusts for the benefit of the decedent’s children. The guardians were ordered to provide copies of the revised proposed trusts within 60 days of the decision.

Should you have any questions relating to wills, trusts, estate planning or other personal asset protection issues, please do not hesitate to contact managing partner, Attorney Joseph Maya, at JMaya@Mayalaw.com or at 203-221-3100.