UNITED STATES TAX COURT

T.C. Memo. 1998-323

UNITED STATES TAX COURT

ESTATE OF HONORE V. DE ST. AUBIN, DECEASED, OVIDE E.

DE ST. AUBIN, EXECUTOR, ET AL.,1 Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 39493-87, 32807-88,

32808-88, 32809-88,

32811-88, 32926-88,

32994-88, 32995-88,

1

Filed September 14, 1998.

Cases of the following petitioners are consolidated

herewith: Trust No. 4 Under Article 7th UWO Ovide de St.

Aubin, Jr., FBO Celeste Schettig, Transferee, Corinne Shaw

& Ovide E. de St. Aubin, Trustees, docket No. 32807-88;

Trust No. 1 Under Article 7th UWO Ovide de St. Aubin, Jr.,

FBO Corinne Shaw, Transferee, Corinne Shaw and Ovide E. de

St. Aubin, Trustees, docket No. 32808-88; Celeste Schettig,

Transferee, docket No. 32809-88; Trust No. 2 Under Article

7th UWO Ovide de St. Aubin, Jr., FBO Ovide E. de St. Aubin,

Transferee, Corinne Shaw and Ovide E. de St. Aubin,

Trustees, docket No. 32811-88; Honore V. O'Brien,

Transferee, docket No. 32926-88; Ovide E. de St. Aubin,

Transferee and Fiduciary, docket No. 32994-88; Corinne

Shaw, Transferee and Fiduciary, docket No. 32995-88; and

Trust No. 3 Under Article 7th UWO Ovide De St. Aubin, Jr.,

FBO Honore V. O'Brien, Transferee, Corinne Shaw and Ovide

E. de St. Aubin, Trustees, docket No. 32996-88.

- 2 32996-88.

Joseph M. Persinger, Jonathan G. Blattmachr, and

Jessica A. Feder, for petitioners.

Jill A. Frisch, Howard J. Berman, Steven Winningham,

and Robert B. Marino, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

WHALEN, Judge:

Pursuant to Rule 121, this matter is

before the Court on petitioners' motion for partial summary

judgment and respondent's cross-motion for partial summary

judgment.

The motions raise three issues:

(1) Whether

Honore V. de St. Aubin, as the income beneficiary of both

the marital trust and the residuary trust to be established

under her husband's will, possessed a claim to a portion of

the proceeds from the sale of certain stock holdings of his

estate; (2) whether the marital trust established for the

benefit of Honore V. de St. Aubin is entitled to share in

the appreciation of the undistributed assets of her

husband's estate; and (3) whether Honore V. de St. Aubin

or her estate had a right to compel funding of the marital

trust with interest at the legal rate.

At issue are

purported claims of decedent and her estate against her

husband's estate and against the trusts established under

her husband's will, which was executed in 1966.

If any of

- 3 these purported claims is valid, the value of decedent's

estate will rise and thus also the estate tax liability of

her estate.

To determine the validity of these claims, we

must examine Mr. de St. Aubin's will, his estate, and the

trusts created under the will.

FINDINGS OF FACT

Honore V. de St. Aubin (decedent) died December 27,

1983.

Sixteen years earlier, on November 18, 1967, her

husband, Ovide de St. Aubin, Jr. (Mr. de St. Aubin), died,

survived by decedent and their four adult children, Ovide

E. de St. Aubin (the younger Mr. de St. Aubin), Honore

O'Brien, Corinne Shaw, and Celeste Schettig.

Decedent's husband provided for her in his will.

Under Article Fourth of his will, he devised to Honore his

house and land located in New Rochelle, New York, which had

an estate tax value of $73,500.

Under Article Fifth of his

will, he bequeathed to Honore all of his personal property,

including a yacht and two automobiles.

The personal

property had an aggregate estate tax value of $145,749.

Decedent's husband had also designated her as beneficiary

of insurance policies on his life, with an aggregate value

of more than $175,000.

In addition, decedent owned

insurance on her husband's life, which paid her a death

benefit of more than $100,000.

- 4 Mr. de St. Aubin's will establishes two trusts for the

benefit of decedent.

marital trust.

Article Sixth of the will creates a

The will names decedent as the income

beneficiary of that trust, and it grants her a testamentary

power of appointment over the assets of the marital trust.

Article Sixth directs that the marital trust be funded with

an amount equal to 50 percent of the adjusted gross estate

less the aggregate value of all interests in Mr. de St.

Aubin's property that pass to decedent outright through her

husband's will, or "otherwise than under [his] will, by

operation of law, through life insurance policies, or

otherwise".

With respect to funding, Article Sixth

provides:

My executors, hereinafter named, shall have

the power and sole discretion to satisfy this

bequest wholly or partly in cash or in kind and

to select the assets to be included therein,

provided, however, that all such assets included

shall be valued at the value thereof as finally

determined for Federal estate tax purposes, and

that the total value of such cash and/or property

at the time of distribution to my said trustees

shall be at least equal to the amount of this

bequest.

Article Sixth directs that the entire net income be paid to

decedent at least quarterly.

The will does not authorize

invasion of the principal of the marital trust for

decedent's benefit.

Under Article Sixth, the marital trust

- 5 was to be undiminished by estate taxes, which were to be

paid from the residuary trust established under Article

Seventh.

Article Seventh of Mr. de St. Aubin's will directs

that the remainder of his estate be placed in a residuary

trust with decedent as the income beneficiary.

The will

provides no guidance regarding the frequency of payments of

income.

He granted the trustees discretion to invade the

principal of the residuary trust for decedent's benefit,

up to a total of 50 percent of the value of the corpus.

Decedent held no power of appointment over the residuary

trust.

Rather, Article Seventh provides that upon her

death, the remaining principal would be equally divided and

placed in four separate residuary trusts, with the income

therefrom paid to their four children.

The trust principal

would eventually devolve to the descendants of the

children.

Article Eleventh of Mr. de St. Aubin's will applies

to the sale of property that forms a part of the estate

principal or a part of the corpus of any trust created

under the will.

This article provides as follows:

All profits and losses realized upon the sale of

any real or personal property forming a part of

the principal of my estate or any such trust

shall be added to, or charged against, the

principal thereof. * * *

- 6 -

Article Twelfth of Mr. de St. Aubin's will authorizes

the retention, sale, and investment of property that he

owned at the time of his death.

This article provides as

follows:

I authorize and empower my executors and trustees

* * * to sell and convey the whole or any part of

the property, real, personal, or mixed, belonging

to my estate or to any such trust estate, at

public or private sale, on such terms and

conditions as may seem to them expedient, * * *

[to] invest and reinvest any or all such personal

property; * * * to retain as part of my estate or

any trust estate hereby created any real estate,

stocks, bonds, loans or other investments which I

may own at the time of my decease; to invest and

reinvest the funds of my estate or any such trust

estate in such securities or investments,

including common and preferred stocks and bonds,

as they, in their absolute discretion, may deem

advisable * * *

Mr. de St. Aubin's will named decedent and their son as

executors.

At the time of Mr. de St. Aubin's death, his estate

included two parcels of real property located in Hempstead,

New York.

One is known as the Malibu Beach property, which

has an estate tax value of $1,500,580.

The other is known

as the Channel Land, which has an estate tax value of

$1,310,100.

included:

The other principal assets of his estate

52 percent of the outstanding common stock

of Vesta Underwear Co. (Vesta Underwear), a clothing

- 7 manufacturer subsequently renamed Modern Globe, Inc., with

an estate tax value of $371,500; 49 percent of the common

stock of Pohatcong Hosiery Mills, Inc. (Pohatcong Hosiery),

a personal holding company with an estate tax value of

$812,918; 4 percent of the common shares of Vesta Corp.,

a personal holding company, with an estate tax value of

$15,756; and 25 percent of the common stock of Fairlee

Textile Co. (Fairlee), a personal holding company with

an estate tax value of $52,760.

On audit, respondent

determined the Federal estate tax value of Mr. de

St. Aubin's gross estate to be $5,699,575.48 and the

value of the adjusted gross estate to be $3,848,912.65.

Respondent allowed an estate tax marital deduction of

$1,924,456.33.

On May 15, 1968, the town of Hempstead, New York,

condemned the Malibu Beach property.

Mr. de St. Aubin's

estate engaged the town in protracted litigation regarding

the value of the property.

The estate received interim

payments against the condemnation award in 1969 and 1972,

totaling $939,000.

The estate used these interim payments

to pay at least a portion of its expenses.

The town paid

the estate interest of $141,800 on the interim payments in

1973.

In 1985, the parties reached a settlement in which

- 8 the estate accepted an additional $975,000 as full

compensation for the property.

The executors determined that to obtain what they felt

was a reasonable sales price for the Channel Land, the

property had to be filled and zoned for multiple family

dwellings.

In 1972, the estate requested a zoning

variance.

Effective September 1, 1973, pursuant to the

New York Tidal Wetlands Act, N.Y. Envtl. Conserv. Law,

secs. 25.0101 through 25.0601 (McKinney 1997), a portion

of the Channel Land was classified as wetlands, and its

development was prohibited.

At the time of these motions,

in a pending State court action, Mr. de St. Aubin's estate

was seeking compensation from the State of New York for the

loss of the development rights for this property.

By the

time of these motions, his estate had incurred significant

expenses in connection with the litigation involving the

Malibu Beach property and the Channel Land.

On or about March 31, 1969, by operation of a trust

established by Mr. de St. Aubin's father, 48 percent of

the shares of Vesta Corp. passed to Ms. Lorraine O'Hayer,

Mr. de St. Aubin's sister, and 48 percent passed to

decedent. Each woman received 624 shares of Vesta Corp.

The record supplies no indication of the 1969 value of

these shares.

However, based on values used in Mr. de St.

- 9 Aubin's estate tax return, this distribution had a value of

$303 per share for a total of $189,072 per block at the

time of his death in 1967.

Prior to Mr. de St. Aubin's death, there developed

friction between his immediate family and that of his

sister, Ms. O'Hayer.

As a result of this ongoing friction,

decedent's husband had been attempting to attain 100

percent St. Aubin control of Vesta Corp. and Vesta

Underwear.

At the time of his death, litigation was

pending between Mr. de St. Aubin and Ms. O'Hayer regarding

the ownership of the remaining 4 percent of the common

stock of Vesta Corp. and regarding certain actions taken

by Mr. de St. Aubin as trustee of the trust established by

their father.

In 1969, in settlement of this litigation,

Mr. de St. Aubin's family and his estate caused Vesta

Underwear to redeem the 48 percent of its common stock

owned by the O'Hayer family.

After elimination of the

O'Hayer interest, the estate was the sole owner of Vesta

Underwear common stock.

Vesta Underwear also purchased

the 48 percent of Vesta Corp. common stock owned by the

O'Hayers.

Simultaneously with the above redemption and purchase

by Vesta Underwear, Pohatcong Hosiery purchased the O'Hayer

shares of Vesta Corp. preferred stock and Vesta Underwear

- 10 preferred stock.

In addition, Pohatcong Hosiery redeemed

the O'Hayer shares of its own common and preferred stock.

Finally, Fairlee redeemed all stock held by the O'Hayer

family.

As a result of the transactions described above,

the O'Hayer family relinquished its minority interests in

Vesta Underwear, Vesta Corp., Fairlee, and Pohatcong

Hosiery.

The total purchase price for those interests was

approximately $2,200,000.

At the time of the O'Hayer buyouts, the younger

Mr. de St. Aubin was the president and chairman of the

board of Vesta Underwear.

Decedent had also been a member

of the board of directors of Vesta Underwear.

Shortly

after the buyouts of the O'Hayer holdings, Vesta Underwear

changed its name to Modern Globe, Inc.

Vesta Underwear

and Modern Globe are sometimes hereinafter referred

collectively to as "Modern Globe".

In the early 1970's, Pohatcong Hosiery and Vesta Corp.

were involved in corporate restructuring with Pohatcong

Investors, Inc., another personal holding company.

It

appears that the two former corporations were dissolved,

and only Pohatcong Investors survived.

Decedent and her

son were directors of Pohatcong Investors from its

incorporation in February 1971.

Pohatcong Hosiery and

- 11 Pohatcong Investors are sometimes hereinafter collectively

referred to as "Pohatcong Investors".

After the buyout of the O'Hayer family and the

corporate restructurings, the estate of Mr. de St. Aubin

held 100 percent of the common stock of Modern Globe and

approximately 68 percent of the common stock of Pohatcong

Investors.

At the same point, decedent and her children

and grandchildren owned all of the remaining common stock

of Pohatcong Investors.

However, at her death, decedent

owned no common or preferred stock of Pohatcong Investors

or Modern Globe, as a result of gifts made to her children

and grandchildren throughout her life.

From 1969 through 1988, Pohatcong Investors declared

dividends on its preferred stock every year.

It paid

dividends on its common stock every year except 1970.

Modern Globe declared dividends on its preferred stock

nearly every year between 1968 and 1985.

Modern Globe

paid dividends on its common stock in 4 of the 16 years

between Mr. de St. Aubin's death and decedent's death.

During decedent's lifetime, her husband's estate, the owner

of all the common stock of Modern Globe, received a total

of $178,873 in dividends on that common stock as follows:

6/14/71

10/29/74

10/25/75

$108,420

6,753

31,200

- 12 10/26/77

32,500

178,873

Modern Globe paid no dividends on its common stock for at

least 5 years prior to Mr. de St. Aubin's death and at

least 3 years prior to the execution of his will.

Prior to

Mr. de St. Aubin's death, Modern Globe was experiencing

financial difficulties.

At the time he executed his

will, a bank loan agreement prohibited Modern Globe from

paying dividends without prior written bank consent.

In the late 1970's and early 1980's, Modern Globe's

fortunes greatly improved.

Modern Globe's board of

directors chose to reinvest earnings in the corporation

in order to satisfy existing debt and to avoid incurring

additional debt during an anticipated expansion of the

business.

To those ends, Modern Globe retained earnings

of approximately $12.8 million in 1978, which increased

to approximately $23.5 million in 1984.

During the administration of Mr. de St. Aubin's

estate, after the estate gained control of Modern Globe and

Pohatcong Investors, the two corporations regularly lent

money to the estate, often interest free.

The principal

amount of the loans to the estate was more than $2 million.

In addition, Modern Globe guaranteed lines of credit to the

estate in the amounts of $500,000 in 1974, $1 million in

- 13 1983, and $2 million in 1984.

Modern Globe received no

consideration for the guaranties.

During the administration of Mr. de St. Aubin's

estate, Modern Globe regularly made interest-bearing demand

loans to Pohatcong Investors, including $1 million lent on

an "available as required" basis, beginning in October

1979.

Modern Globe demanded repayment when it required

additional working funds.

The loans were structured to be

profitable for both corporations, bearing a higher interest

rate than Modern Globe could safely earn in the market, but

lower than the market loan rates available to Pohatcong

Investors.

During the period from Mr. de St. Aubin's death in

1967 until sometime in 1983, decedent received the personal

use of a Cadillac or Oldsmobile automobile and a chauffeur

supplied by Modern Globe Sales, Inc., a wholly owned

subsidiary of Modern Globe.

The record does not state

whether decedent received use of the car and driver because

of her status as a director of Modern Globe, as income

beneficiary of one or both of the trusts, or otherwise.

In 1981, decedent suffered an incapacitating stroke.

The

record does not state how the stroke affected decedent's

use of the car and driver.

After the stroke, Chester

Nuttal, controller of Modern Globe, replaced decedent on

- 14 the boards of directors of Modern Globe and Pohatcong

Investors.

However, decedent continued as coexecutor of

her husband's estate until her death.

From 1967 through 1977, decedent received no income or

benefits from Mr. de St. Aubin's estate apart from the use

of the car and driver.

There is no indication that the

estate paid any income to her between 1977 and her date of

death.

However, Modern Globe and Modern Globe Sales, Inc.,

made interest-free loans to decedent.

Decedent generally

repaid these loans monthly or annually.

The executors of Mr. de St. Aubin's estate, decedent

and her son, failed to fully fund the marital trust during

decedent's lifetime.

During her lifetime, the following

distributions were made to the marital and residuary

trusts:

Date of

Distribution

Marital

Trust

Residuary

Trust

10/05/79

--

230 shares

Pohatcong Investors

10/29/79

$70,000

10/01/80

--

115 shares

Pohatcong Investors

10/30/80

23,000

--

10/01/81

--

82 shares

Pohatcong Investors

10/23/81

64,500

--

10/04/82

110 shares

Pohatcong Investors

110 shares

Pohatcong Investors

10/26/82

92,500

--

$100

- 15 10/04/83

--

105 shares

Pohatcong Investors

10/26/83

60,000

--

The executors distributed to the residuary trust

shares of Pohatcong Investors with a basis of $205.75 each.

They distributed to the marital trust shares of Pohatcong

Investors with a basis of $415.43 each.

The records of

Mr. de St. Aubin's estate indicate that the Pohatcong

Investors stock distributed to the marital trust had a

fair market value of $400 per share at the time of its

distribution.

Those records also indicate that the shares

distributed to the residuary trust had fair market values

ranging from $375 to $540 on the dates of their

distribution.

Upon decedent's death, by operation of her will, her

daughter Corinne Shaw replaced her as coexecutor of

Mr. de St. Aubin's estate.

In addition, decedent's will

appointed Ms. Shaw and decedent's son, the younger

Mr. de St. Aubin, as executors of decedent's estate.

In

her will, decedent exercised her general power of

appointment over the marital trust in favor of her four

children in equal shares.

As mentioned above, the marital trust was not fully

funded at the time of decedent's death.

The marital trust

- 16 was further funded in 1984 after Modern Globe guaranteed a

$2 million bank loan for Mr. de St. Aubin's estate.

Mr. de St. Aubin's estate subsequently obtained a loan and

distributed $1,560,932.80 to the marital trust.

Pursuant

to Mr. de St. Aubin's will, upon decedent's death, the

assets of the residuary trust were divided into four

residuary trusts, one for the benefit of each of their

children.

Thereafter, Mr. de St. Aubin's estate

transferred the Modern Globe common stock to the residuary

trusts.

In 1984, sometime after the transfer of the Modern

Globe stock, Modern Globe paid a dividend of $4.16 million

to the residuary trusts, $3,200 per common share.

In

September 1984, the residuary trusts sold the Modern Globe

assets to an unrelated party for $35 million.

In 1985,

Modern Globe paid a dividend of $23,000 per common share

to the residuary trusts, for a total of $29,900,000.

The residuary trusts then repaid the loan obtained by

Mr. de St. Aubin's estate.

At the time of the filing of these motions, the

administration of Mr. de St. Aubin's estate had not been

concluded, and no accounting had been made by his

executors, the trustees of the marital trust, or the

trustees of the residuary trust.

- 17 For each year of the estate's administration,

Mr. de St. Aubin's estate has filed a United States

Fiduciary Income Tax Return, Form 1041.

The Internal

Revenue Service requested that his executors justify the

continued existence of the estate as a taxpayer for the tax

years ending October 31, 1981, and October 31, 1982.

The

executors submitted responses, and the Internal Revenue

Service did not further contest the estate's right to

continued existence as a taxpayer for income tax purposes.

Decedent's executors filed her United States Estate

Tax Return, Form 706, with the Internal Revenue Service on

September 27, 1984.

Thereafter, respondent issued a notice

of deficiency to the executors of decedent's estate

asserting a deficiency in Federal estate tax in the amount

of $20,607,275.29.

Corinne Shaw and Ovide E. de St. Aubin,

acting in their capacity as executors, filed a petition

with this Court to dispute the entire amount of the

deficiency.

Subsequently, respondent determined that, as

fiduciaries, Ovide E. de St. Aubin and Corinne Shaw are

each personally liable for the entire estate tax

deficiency.

Accordingly, respondent issued notices of

deficiency to Ovide E. de St. Aubin and Corinne Shaw for

Federal estate tax due from the estate as fiduciaries

- 18 and as transferees of the assets of decedent's estate.

Respondent also issued notices of deficiency to decedent's

other daughters, Celeste Schettig and Honore O'Brien, as

transferees of assets from the estate of Honore, but

limited their liability to $169,404 each.

In addition,

respondent issued notices of deficiency to the four

residuary trusts established in Mr. de St. Aubin's will

as transferees of assets of the estate of decedent.

The

notices limited the trusts' liability to $8,595,606.80

each.

The issue of transferee liability arose by reason

of the transfer of assets to petitioners that respondent

contends are includable in decedent's gross estate.

The

above-named petitioners filed timely petitions with this

Court.

They dispute the entire amounts of the

deficiencies.

OPINION

Petitioners request the following three holdings in

their motion for partial summary judgment:

1. Neither Honore V. de St. Aubin ("Honore")

nor her Estate had a claim to "delayed income"

under the New York Principal and Income Act

(Estates, Powers and Trust Law ["EPTL"] §11-2.1)

at the date of Honore's death with respect to the

shares of stock in Modern Globe, Inc. held by the

estate of her husband, Ovide de St. Aubin

("Ovide");

- 19 2. Neither Honore nor her Estate had a claim

to have the marital trust created under Article

Sixth of Ovide's will funded with more than the

pecuniary amount allowed as a marital deduction

in the estate tax proceeding in her husband's

estate; and

3. Neither Honore nor the Estate had a claim

under EPTL to compel funding of her pecuniary

trust with interest at the legal rate.

Respondent opposes petitioners' motion.

The Commissioner

has also filed a cross-motion for partial summary judgment,

which addresses the same substantive issue as petitioners'

second request above.

Respondent seeks a ruling that "The

marital trust is entitled to share in a representative

portion of the appreciation of Ovide's estate occurring

during the period of administration".

Rule 121(b) of the Tax Court Rules of Practice and

Procedure provides that a motion for summary judgment shall

be "rendered if the pleadings, answers to interrogatories,

depositions, admissions, and any other acceptable

materials, together with the affidavits, if any, show that

there is no genuine issue as to any material fact and that

a decision may be rendered as a matter of law."

All Rule

references are to the Tax Court Rules of Practice and

Procedure, unless noted otherwise.

The burden of proof on

a motion for partial summary judgment is on the moving

party to show that no genuine issues of material fact

- 20 exist.

Jacklin v. Commissioner, 79 T.C. 340, 344 (1982).

All reasonable inferences must be drawn in favor of the

nonmoving party.

Anderson v. Liberty Lobby, Inc., 477 U.S.

242, 249-250 (1986); Naftel v. Commissioner, 85 T.C. 527,

529 (1985).

Once a motion for summary judgment is properly

supported, the adverse party may not rest on its pleadings.

Rather, the nonmoving party must set forth specific facts

showing that there is a genuine issue for trial.

Rule

121(d); Williams v. Borough of West Chester, 891 F.2d 458

(3d Cir. 1989); Marshall v. Commissioner, 85 T.C. 267, 271

(1985).

However, Rule 121(e) provides an exception to the

above Rule.

Rule 121(e) provides as follows:

(e) When Affidavits Are Unavailable: If

it appears from the affidavits of a party

opposing the motion that such party cannot

for reasons stated present by affidavit facts

essential to justify such party's opposition,

then the Court may deny the motion or may

order a continuance to permit affidavits to be

obtained or other steps to be taken or may make

such other order as is just. If it appears from

the affidavits of a party opposing the motion

that such party's only legally available method

of contravening the facts set forth in the

supporting affidavits of the moving party is

through cross-examination of such affiants or the

testimony of third parties from whom affidavits

cannot be secured, then such a showing may be

deemed sufficient to establish that the facts set

forth in such supporting affidavits are genuinely

disputed.

- 21 -

Respondent argues that, by application of

Rule 121(e), the Court should deny petitioners' motion for

partial summary judgment.

Respondent asserts that the

manner in which Mr. de St. Aubin's estate was administered

is a material fact in dispute.

The Commissioner further

contends that petitioners are in possession and control

of the information regarding this material fact, and that

the Commissioner's only legally available method of

controverting the facts set forth by petitioners is through

the examination of petitioners' affiants or through

examination of hostile witnesses from whom affidavits

cannot be secured.

Therefore, respondent states that,

pursuant to Rule 121(e), petitioners should not be able to

prevent respondent from cross-examining petitioners'

witnesses by filing a motion for partial summary judgment.

Petitioners attached the affidavit of Martin Drazen

to their motion for partial summary judgment.

In addition,

petitioners attached the affidavits of Chester Nuttall,

Ovide E. de St. Aubin, and Corinne Shaw to their

supplemental memorandum of law.

Respondent has not

disputed the material facts that are contained therein.

As will be explored herein, the other facts that respondent

claims are in dispute are immaterial to the resolution of

- 22 of the three questions placed before this Court.

Therefore, based on the information in the record, we are

able to rule on two of the issues before the Court.

note that these are issues of New York State law.

We

Where

a Federal tax result turns on an unsettled matter of State

law, we sit, in effect, as a State court.

Commissioner v.

Estate of Bosch, 387 U.S. 456, 465 (1967).

I.

Claim for Delayed Income Under EPTL Section 11-2.1(k)

Decedent was the income beneficiary of both the

marital trust and the residuary trust established in her

husband's will.

As a result, she was entitled to all of

the income produced by the trust assets during her lifetime.

We note that Mr. de St. Aubin's will provides that,

after payment of specific bequests, all of the net assets

of his estate were eventually to become a part of one of

these trusts.

The trusts were not fully funded during

decedent's lifetime.

After her death, the executors of

her husband's estate funded the marital trust with an

additional $1,560,932.80 in cash.

The executors of Mr. de St. Aubin's will also

transferred the common stock of Modern Globe from his

estate to the residuary trusts that were to be established

under his will for the benefit of each of his children at

decedent's death.

Thereafter, Modern Globe paid a dividend

- 23 to the residuary trusts totaling $4.16 million.

In

September 1984, the residuary trusts sold Modern Globe's

operating assets for $35 million.

Subsequently, the

corporation paid a $29,900,000 dividend to the trusts, and

the trustees of the residuary trusts liquidated Modern

Globe.

Respondent determined that decedent, as the income

beneficiary of both the marital trust and the residuary

trust, possessed a claim for delayed income under N.Y. Est.

Powers & Trusts Law (EPTL) section 11-2.1(k) (McKinney

1967) (sometimes referred to as the delayed income

provision), with respect to a portion of the proceeds

derived from the sale of Modern Globe.

Respondent

determined the value of this claim to be $13,461,477.

Petitioners move for a holding that neither decedent

nor her estate had a claim for delayed income under EPTL

section 11-2.1(k) at the time of her death.

Petitioners

contend that, on the basis of the undisputed facts, this

Court can find that the delayed income provision does not

apply in these cases because Mr. de St. Aubin's will

provides a method for allocating the proceeds from the sale

of property held by his estate and the trusts set up

thereunder.

As a result, petitioners argue, the proceeds

from the sale of Modern Globe must be allocated to

- 24 principal, pursuant to Mr. de St. Aubin's will.

In the

alternative, petitioners argue that if the will does not

control the allocation of the sales proceeds from the

Modern Globe assets, the amended, 1987 version of EPTL

section 11-2.1(k) (the 1987 provision) applies, rather than

the version in effect at the time of decedent's death (the

1965 provision).

However, petitioners argue that the

Modern Globe stock was not underproductive within the

meaning of either version of EPTL section 11-2.1(k), and,

therefore, application of the statute would not affect the

allocation of the proceeds from the sale of the Modern

Globe assets.

As a final alternative, petitioners argue

that the delayed income provision does not apply in any

event because EPTL section 11-2.1(e)(6) (McKinney 1967),

which requires that proceeds from liquidation of stock be

allocated to principal, is applicable and overrides EPTL

section 11-2.1(k).

Respondent argues that summary judgment is not

warranted because there are unresolved, material questions

of fact that will affect the resolution of this issue.

Respondent argues that EPTL section 11-2.1(k) applies

because Mr. de St. Aubin's will and his overall estate plan

indicate no clear and explicit intent to override the

delayed income provision.

Respondent contends that the

- 25 question of Mr. de St. Aubin's intent is a factual question

that will require a hearing to resolve.

Respondent further

asserts that the 1965 provision controls this question,

rather than the 1987 provision.

Respondent contends

that the applicability of the 1965 provision in place

of the 1987 provision depends upon the manner in which

Mr. de St. Aubin's executors carried out their duties,

another subject of a factual dispute.

Respondent asserts

that, under the 1965 provision, the Modern Globe stock was

underproductive property, and, therefore, a portion of the

proceeds from the sale of the Modern Globe assets should be

allocated to decedent as income beneficiary of both trusts.

Respondent further argues that even if the 1987 provision

applies, the "inventory value" of the Modern Globe stock

under that version of EPTL section 11-2.1(k) presents a

material question of fact.

Finally, respondent contends

that EPTL section 11-2.1(e)(6) is compatible with, and does

not override, EPTL section 11-2.1(k).

We find it unnecessary to decide the question of

whether Mr. de St. Aubin intended to override the delayed

income provision because, even if EPTL section 11-2.1(k)

does apply to these cases, it requires no allocation of

profits from the sale of the Modern Globe assets to income.

- 26 Before applying EPTL section 11-2.1(k), we must decide

whether the 1987 provision or the 1965 provision applies.

In passing the 1987 amendments, the New York State

legislature provided the following instruction:

This act shall take effect immediately [July 30,

1987] and shall apply to proceeds received during

any period as to which the fiduciary's account

has not been settled prior to such effective

date, whether the proceeds were received prior to

or after such effective date by any trust * * *

established before, on or after the effective

date hereof. [1987 N.Y. Laws ch. 495, sec. 2.]

As of the date of these motions, Mr. de St. Aubin's

executors' accounts had not been settled.

Therefore, the

1987 provision is controlling, although the amendment to

the statute was made more than 20 years after the execution

of Mr. de St. Aubin's will.

See In re Allister, 545

N.Y.S.2d 483 (Sur. Ct. 1989) (applying EPTL section

11-2.1(k), as amended in 1987, in a proceeding in which

the decedent died in 1969 and her beneficiary died in

1985).

Respondent argues that this Court should supplant the

effective date supplied by the legislature because of the

actions of Mr. de St. Aubin's executors, and, therefore,

the 1965 provision should apply.

In this regard,

respondent has made numerous allegations regarding the

propriety of the actions of the executors.

Respondent

- 27 argues that "the executors of Ovide's Estate have failed

to honor Ovide's intent in administering his estate and

thereby have breached their fiduciary obligations.

Respondent posits that factual issues exist regarding the

executors' intention to deprive Honore of the beneficial

enjoyment required by the statute".

Respondent further

asserts that the executors could have made an interim

accounting of Mr. de St. Aubin's estate but chose not to do

so.

Respondent contends that such an interim accounting

would have exempted the estate from the application of the

amended version of EPTL section 11-2.1(k) but cites no

controlling authority.

In addition, respondent states:

Petitioners appear to take the untenable position

that even if it is determined that those

administering Ovide's Estate breached their duty

to the income beneficiary, and that the Modern

Globe stock should have been converted or made

income producing at an earlier date, there is no

remedy available to the income beneficiary

because the amended statute applies.

We reject respondent's argument.

The legislature

supplied a clear effective date for the amended statute.

Further, respondent concedes that New York does not require

interim accountings.

In addition, respondent has presented

this Court with no precedent from New York or from any

other jurisdiction to support the argument that we may and

should supply an alternative effective date for the State

- 28 statute under any circumstances.

We note that reallocation

of proceeds under EPTL section 11-2.1(k) is triggered by

failure to meet an objective standard of productivity.

The statute does not require or allow different treatment

as a result of the cause a failure to meet that level of

productivity.

Application of the 1987 provision results in no

reallocation of proceeds.

EPTL section 11-2.1(k)(1), as

amended in 1987, provides as follows:

Except as otherwise provided in this

paragraph (k), a portion of the net proceeds of

a sale by a fiduciary * * * of any principal

property of an estate or trust * * * held for

more than a year which has not produced over the

period held an average net income of one percent

per annum of its inventory value (including as

income the value of any beneficial use of the

property by any income beneficiary), shall be

allocated to income as delayed income, as

provided in this paragraph (k). * * *

EPTL section 11-2.1(o)(4) defines "inventory value",

for purposes of section 11-2.1, as "the cost of property

purchased by the trustee and the market value of other

property at the time it was made subject to the trust."

The parties dispute the meaning of the phrase "made subject

to the trust".

Petitioners assert that EPTL section

11-2.1(c)(1) provides that Mr. de St. Aubin's assets were

"made subject to the trust" as of his date of death.

- 29 Respondent contends that, in these cases, "The inventory

value of Modern Globe stock should be determined at the

date the Trusts should have been funded."

Respondent

argues that, because that date is a disputed matter of

fact, petitioners' motion for summary judgment should be

denied.

Respondent also appears to assert that the stock

was not "made subject to the trusts" until the trusts were

actually funded in 1984.

However, respondent concedes

that, if the inventory value is to be determined as of

Mr. de St. Aubin's date of death, petitioner's estate

possessed no right to delayed income from the Modern Globe

stock.

EPTL section 11-2.1(c)(1), which defines the point at

which the right to income arises, states:

"In the case of

an asset which becomes subject to a trust by reason of a

will, it becomes subject to the trust as of the date of the

death of the testator even though there is an intervening

period of administration of the testator's estate."

An

identical proposition has long been reflected in the case

law.

See, e.g., In re Bird's Will, 149 N.E. 827, 828 (N.Y.

1925); In re Stanfield's Estate, 31 N.E. 1013, 1014 (N.Y.

1892); In re Ahren's Estate, 196 N.Y.S. 313, 314 (App. Div.

1922); In re Will of Osterlof, 343 N.Y.S.2d 896, 898 (Sur.

Ct. 1973); In re Myers' Trust, 190 N.Y.S.2d 566, 571 (Sup.

- 30 Ct. 1959).

Clearly, an income beneficiary's right to the

income from assets arises under State law at the testator's

date of death.

Therefore, it is appropriate to gauge the

adequacy of the flow of income from the assets by the value

of the assets at the date of death.

In support of the Government's argument, respondent

cites a single commentator, George C. Barclay, who states

that:

Originally inventory value in the case of

testamentary trusts was equated with the value

used for estate tax purposes. However, this

meant that a trustee to whom the assets were

delivered at a much later date was being charged

with values which might bear no relation to the

values at the time he received the assets. Thus,

inventory value is now defined simply as the cost

of property or its value when made subject to the

trust.

Barclay, "The Principal and Income Act", 33 Brook. L. Rev.

489, 498 (1967).

Mr. Barclay's commentary does

not directly address the issue at hand.

In fact, this

statement seems directed toward protecting fiduciaries who

receive assets after their values have fallen below their

original inventory values.

Further, Mr. Barclay's

statement offers no support to respondent's claim that the

inventory value of the Modern Globe stock should be

determined as of the date when the trusts "should have been

funded".

- 31 Before leaving this issue, we answer respondent's

concern that our application of EPTL section 11-2.1(k)

leaves an aggrieved income beneficiary without recourse

against fiduciaries in breach of their duties.

New York

has long allowed beneficiaries to recover their losses

through actions for removal and surcharge of fiduciaries.

See, e.g., In re Van Bokkelen's Estate, 33 N.E.2d 87, 87

(N.Y. 1941); In re Birnbaum, 555 N.Y.S.2d 982, 991 (App.

Div. 1990); In re Epstein, 557 N.Y.S.2d 907, 910 (App. Div.

1990); In re Lirakis, 491 N.Y.S.2d 36, 36 (App. Div. 1985);

Velez v. Feinstein, 451 N.Y.S.2d 110, 114 (App. Div. 1982).

In accordance with the above, we hold that, under EPTL

section 11-2.1, the inventory value of the stock is to be

determined as of Mr. de St. Aubin's date of death.

Respondent has conceded that, under this interpretation

of the law, decedent had no claim under EPTL section

11-2.1(k).

Therefore, it is unnecessary to examine

petitioners' argument regarding the relationship between

EPTL section 11-2.1(k) and 11-2.1(e)(6).

II.

Claim for a Share of the Appreciation

Both parties move for summary judgment on the question

of whether decedent was entitled to share in the appreciation of the assets held in her husband's estate.

To

analyze this issue effectively, it is necessary to focus on

- 32 the type of bequest, referred to as a "hybrid pecuniary

bequest with a floor", that Mr. de St. Aubin directed to be

used to fund the marital trust.

A hybrid pecuniary bequest

blends the characteristics of a pecuniary bequest and of a

fractional bequest.

Estate of Goutmanovitch, 432 N.Y.S.2d

768, 774 (Sur. Ct. 1980); Covey, The Marital Deduction and

the Use of Formula Provisions, 99-100 (2d ed. 1978).

A

pecuniary bequest is a gift of a sum certain, either stated

explicitly in dollars or stated as a formula that can be

reduced to a dollar value on the date of the testator's

death or on the alternate valuation date (e.g., an amount

equal to 50 percent of the adjusted gross estate value).

Epping's Trust No. 4 v. Bankers Trust Co., 288 N.Y.S.2d

565, 569 (App. Div. 1968), affd. 246 N.E.2d 753 (1969);

Estate of Guterman, 476 N.Y.S.2d 1006, 1008 (Sur. Ct.

1984).

A fractional bequest is a gift of a percentage of

the estate, valued on the date of distribution.

Estate of

Goutmanovitch, supra at 771; In re Goldsmith, 30 N.Y.S.2d

474, 476 (Sur. Ct. 1941).

Thus, until distribution, the

value of a fractional bequest will fluctuate with the value

of the estate, whereas the value of a pecuniary bequest is

fixed as of the testator's date of death or as of the

alternate valuation date.

- 33 Under a hybrid pecuniary bequest, as under a pure

pecuniary bequest, the dollar value of the bequest is set

as of the testator's date of death or the alternative

valuation date.

If the executor distributes cash in

satisfaction of the bequest, the beneficiary receives the

equivalent of a pure pecuniary bequest.

However, if the

executor distributes other property, the beneficiary will

participate in the appreciation or depreciation of that

property.

Estate of Goutmanovitch, supra at 774; Covey,

The Marital Deduction and the Use of Formula Provisions,

supra at 99-100.

Hybrid pecuniary bequests are used to ensure that the

testator's estate recognizes no income tax gain or loss if

appreciated or depreciated property is distributed.

This

result obtains because the basis of the assets distributed

equals the value of the obligation satisfied.

See Estate

of Goutmanovitch, supra at 773; Covey, The Marital

Deduction and the Use of Formula Provisions, supra at 99100.

Two methods of funding a hybrid pecuniary bequest are

significant in these cases:

The aggregate approach and

the fairly representative approach.

Under the aggregate

approach, the assets distributed must have an aggregate

fair market value at the time of distribution greater than

- 34 or equal to the amount of the bequest.

Use of the

aggregate approach results in a "hybrid pecuniary bequest

with a floor".

Under the fairly representative approach,

the assets distributed in satisfaction of the bequest must

be fairly representative of appreciation or depreciation in

the value of all property available for distribution.

Therefore, use of the fairly representative approach

effectively transforms a hybrid pecuniary bequest into a

fractional bequest.

See Estate of Goutmanovitch, supra

at 773; Covey, Marital Deductions and Credit Shelter

Dispositions and the Use of Formula Provisions, 90 (1984).

Article Sixth of Mr. de St. Aubin's will establishes

decedent's marital trust.

The trust was to be funded with

an amount equal to 50 percent of the adjusted gross estate,

minus the value of other property passing to Honore under

the will or by operation of law.

Article Sixth provides

for the selection and valuation of the assets used to fund

the marital trust as follows:

My executors * * * shall have the power and

sole discretion to satisfy this bequest wholly

or partly in cash or in kind and to select the

assets to be included therein, provided, however,

that all such assets included shall be valued at

the value thereof as finally determined for

Federal estate tax purposes, and that the total

value of such cash and/or property at the time

of distribution to my said trustees shall be at

least equal to the amount of this bequest.

- 35 Because the bequest is for a sum certain, it constitutes

a pecuniary bequest.

Because the will gave the executors

discretion to satisfy the bequest in cash or in kind and

directed that the aggregate approach be used, it is a

hybrid pecuniary bequest with a floor.

The dispute

concerns whether other terms of the will, general State

fiduciary rules, or the behavior of the executors compels

use of the fairly representative approach, contrary to

Mr. de St. Aubin's explicit instructions.

Petitioners argue that EPTL section 2-1.9 prohibited

the executors from distributing appreciated assets to the

marital trust.

They contend that general State fiduciary

rules do not overrule that specific provision.

Petitioners

further contend that the type of bequest that Mr. de St.

Aubin used to fund the marital trust clearly indicates that

he intended petitioner to have no claim to any appreciation

on the undistributed assets of the estate.

They argue that

nothing in his overall estate plan, as determined by a

reading of his entire will, dictates a different result.

Lastly, they assert that the behavior of the executors has

no effect on the legally required method of funding the

marital trust.

Respondent argues that petitioners are not entitled to

summary judgment on this issue.

First, respondent asserts

- 36 that EPTL section 2-1.9 does not apply in this situation,

and, therefore, under New York case law, the marital

bequest must be funded under the fairly representative

approach.

Respondent also asserts that Mr. de St. Aubin's

executors mishandled his estate and, thus, any discretion

that Mr. de St. Aubin granted to his executors was

"nullified by the executors' failure to expeditiously and

properly administer the estate".

The propriety of the

executors' actions is a disputed matter of fact.

Respondent next argues that respondent is entitled to

summary judgment on this issue.

Respondent asserts that

Mr. de St. Aubin's will reflects an overriding intent to

provide for decedent.

Thus, respondent asserts that she

was entitled to share in the appreciation of the estate

assets.

Respondent next argues that the executors' duty

of impartiality dictates that decedent be entitled to share

in the appreciation of the estate.

Finally, respondent

contends that, because the actions of the executors

violated "the spirit of the marital deduction", decedent's

estate is entitled to share in the appreciation of the

estate assets.

To better understand the arguments of the parties,

it is necessary to review the evolution of New York State

- 37 law regarding the attribution of appreciation among

competing bequests.

a.

Evolution of New York Law and the Application of EPTL

Section 2-1.9

In re Bush's Will, 156 N.Y.S.2d 897 (App. Div. 1956),

affd. 145 N.E.2d 872 (N.Y. 1957), established the rule in

New York that executors have a duty of impartiality in

distributing appreciated assets in satisfaction of

competing bequests.

In that case, the decedent bequeathed

one half of her adjusted gross estate to her husband and

the residuary of the estate in trust for the benefit of her

son.

The subject will granted the surviving spouse, who

was also executor, authority to use his discretion in

making distributions in kind to satisfy the bequests.

at 900.

Id.

However, the court decided that the surviving

spouse, as executor, had a duty to select impartially the

assets to be distributed to each beneficiary.

The court

stated:

The husband of the testatrix is

not only a beneficiary under the will

but is also executor thereof, and, as

such, is acting in a fiduciary capacity

as to everyone but himself. His

interest as beneficiary must not be

allowed to conflict with his duty as

executor. He may not, in distributing

stocks and bonds to himself in

satisfaction of his legacy or share,

make selections which are favorable to

himself and deliver to the trustee

- 38 securities which have not enhanced in

value in the same proportion as

those he receives. * * * The executor

must make distribution equitably and

fairly as between himself and the

trustee of the trust for the son. [Id.

at 900.]

In re Bush's Will spawned a line of cases in which

the New York State courts effectively converted hybrid

pecuniary bequests into fractional bequests by requiring

use of the fairly representative approach.

See In re

McDonnell's Will, 263 N.Y.S.2d 653, 656 (Sur. Ct. 1965);

In re Leonard's Will, 257 N.Y.S.2d 409, 411 (Sur. Ct.

1965); In re Inman's Estate, 196 N.Y.S.2d 369, 371 (Sur.

Ct. 1959).

However, in 1965, the line of cases propagated by

In re Bush's Will was vitiated by the enactment of

Personal Property Law 17-f, currently EPTL section 2-1.9

(hereinafter collectively referred to as EPTL section

2-1.9).

In EPTL section 2-1.9(b)(2), New York adopted the

aggregate approach of funding hybrid pecuniary bequests and

implicitly disfavored the fairly representative approach

directed by In re Bush's Will.

EPTL section 2-1.9(b)(2)

provides:

(b) Unless the instrument expressly provides

otherwise:

*

*

*

*

*

*

*

- 39 (2) Where a will or trust agreement

authorizes the fiduciary to satisfy wholly or

partly in kind a pecuniary disposition or

transfer in trust of a pecuniary amount and the

instrument requires the fiduciary to value the

assets selected by the fiduciary for such

distribution as of a date other than the dates

of their distribution, the assets selected by the

fiduciary for that purpose, together with any

cash distributed, shall have an aggregate value

on the dates of their distribution amounting to

no less than, and to the extent practicable no

more than, the amount of such testamentary

disposition or transfer in trust as stated in,

or determined by the formula stated in, the

instrument. [Emphasis added.]

The major impetus for the enactment of EPTL section

2-1.9 was the need to protect unwary New York residents

from Rev. Proc. 64-19, 1964-1 C.B. (Part 1) 682, which

threatened to deny the marital deduction to certain

estates unless the will in question or State law placed a

floor on the value of the assets distributed to the spouse.

However, EPTL section 2-1.9 also added a ceiling ("to

the extent practicable") on the value of the assets

distributed, a feature not required by Rev. Proc. 64-19.

Implicit in this ceiling is a rejection of the fairly

representative approach of In re Bush's Will.

The legislative history of EPTL section 2-1.9 supports

this interpretation.

Shortly before the enactment of EPTL

section 2-1.9, New York set up a commission to analyze its

existing estate law and to suggest amendments.

Writing as

- 40 follows, the commission explicitly recommended rejection of

the fairly representative approach and recommended adoption

of the aggregate approach.

The representative rule, it is submitted,

runs counter to the testator's intention * * *

Under this rule, the executor, in his effort to

avoid liquidation of assets, would be required

to give the spouse a proportionate share of

the entire appreciation, if any, in the estate.

This, certainly, was not the testator's purpose

when he selected a pecuniary form for the

bequest. Had it been so, the fractional

formulation would have been the appropriate

means to insure that result.

*

*

*

*

*

*

*

It is recommended that legislation be

enacted providing in substance that, in the

absence of a contrary provision in the will,

where a pecuniary bequest is made for the

benefit of the testator's surviving spouse which

qualifies for the estate tax marital deduction,

and the executor is given discretionary power to

distribute assets in kind at their estate tax

values, then if such power is exercised the

executor must distribute to the spouse assets

having an aggregate value on the date of

distribution not less than the amount of such

pecuniary bequest allowed as a marital deduction.

It shall further be the fiduciary's duty, under

such circumstances, to endeavor, within reason,

not to distribute assets to the spouse worth

substantially more than that amount at date of

distribution. [Fourth Report of the Temporary

State Commission on the Modernization, Revision

and Simplification of the Law of Estates to the

Governor and the Legislature (Fourth Report of

the Temporary State Commission), N.Y. Legislative

Document 1965, No. 19, Report No. 5.4.2A, pp.

326-327; emphasis added.]

- 41 Neither respondent nor this Court has located any

case law arising after the effective date of EPTL section

2-1.9 that follows the In re Bush's Will precedent of

requiring the transformation of an aggregate method of

funding into a fairly representative approach.

See In

re McDonnell's Will, supra at 657 (declining to consider

the retroactive implications of EPTL section 2-1.9).

In fact, the case law in this area following the

enactment of EPTL section 2-1.9 clearly rejects the In

re Bush's Will precedent.

Estate of Goutmanovitch, 432

N.Y.S.2d 768 (Sur. Ct. 1980) is the case most factually

similar to the current cases.

In Estate of Goutmanovitch,

the widow of the testator was to receive a hybrid pecuniary

bequest with a floor in an amount equal to one half of the

adjusted gross estate reduced by the aggregate value of any

property passing to her outside of the will.

The court

rejected the assertion that the widow had a claim to a

share of the appreciation of the assets of the estate.

court reasoned that EPTL section 2-1.9 "adopted the

aggregate approach, rather than the Bush rule".

774.

Id. at

The court further explained that:

Under the aggregate approach the fiduciary is

clearly relieved of the duty of impartiality with

regard to the distribution of appreciation and is

authorized, certainly in the case of a simple

provision for payment at estate tax values, to

The

- 42 pay a pecuniary marital legacy in cash. [Estate

of Goutmanovitch, supra at 774; emphasis added.]

In Estate of Lasser, N.Y.L.J., Nov. 20, 1987, p.15

(Sur. Ct.), again under circumstances similar to these

cases, the court stated:

perhaps the most important reason why the * * *

[In re Bush's Will line of cases] cannot be

considered as controlling authority here, is

the fact that the enactment of EPTL 2-1.9 * * *

represents a legislated rejection of the holdings

of those cases. * * *

*

*

*

*

*

*

*

It cannot be denied that the Legislature

was fully aware of * * * [In re Bush's Will and

its progeny] and determined that they should be

legislatively overruled. * * * Moreover, in

adopting the "aggregate" as opposed to

"representative" approach, the Legislature

obviously determined that the public policy of

this state did not support the conversion of

every pecuniary disposition into a fractional

one. [Id.]

See also Estate of Guterman, 476 N.Y.S.2d 1006, 1008 (Sur.

Ct. 1984) (allowing, but not requiring, distribution of

appreciation in case of a hybrid pecuniary bequest); Covey,

The Marital Deduction and the Use of Formula Provisions,

105-106.

In some cases, the State surrogate's court has

questioned or rejected the idea that EPTL section

- 43 2-1.9(b)(2) imposes a ceiling as well as a floor on a

hybrid pecuniary bequest.

E.g., Estate of Guterman, supra;

Estate of Goutmanovitch, supra.

But see Estate of Lasser,

supra (honoring the ceiling supplied by EPTL section

2-1.9(k)(2)).

However, the question of whether the

executors are authorized to distribute appreciated assets

is not before this Court.

Rather, the issue at hand is

whether the executors are required to distribute such

assets.

After considering the language of EPTL section 2-1.9,

its legislative history, the case law, and the expert

commentary on this subject, we hold that New York law

directs use of the aggregate approach of funding hybrid

pecuniary bequests (unless the will or other governing

instrument expressly provides otherwise).

b. Intent

As stated above, the provisions of EPTL section

2-1.9(b)(2) apply "Unless the instrument expressly provides

otherwise".

EPTL sec. 2-1.9(b).

Petitioners argue that

Mr. de St. Aubin's intent is clearly consonant with the

application of EPTL section 2-1.9.

They assert that the

choice of a hybrid pecuniary bequest with a floor indicates

that he did not wish to obligate the executors to distribute

to the marital trust a share of the appreciation of the

- 44 estate assets.

Petitioners further point out that use of

the fairly representative method of funding would convert

the hybrid pecuniary bequest into a fractional bequest,

which would conflict with Mr. de St. Aubin's express intent.

Respondent argues that Mr. de St. Aubin's overriding

intent, judged from a review of his entire estate plan,

was to provide for his widow.

On this basis, respondent

contends that, under the circumstances that unfolded,

decedent was entitled to share in the appreciation of the

estate assets.

In construing any will under New York law, the

fundamental rule is to ascertain the intent of the testator

from a sympathetic reading of the will in its entirety.

In re Kosek's Will, 294 N.E.2d 188, 191 (N.Y. 1973); In

re Larkin, 172 N.E.2d 555, 557 (N.Y. 1961); In re Fabbri's

Will, 140 N.E.2d 269, 271 (N.Y. 1957).

Such intent is to

be gleaned from the four corners of the will.

In re Cord,

449 N.E.2d 402, 404 (N.Y. 1983); In re King, 603 N.Y.S.2d

827, 827 (App. Div. 1993); In re Knapp, 500 N.Y.S.2d 804,

804 (App. Div. 1986).

As explained above, Mr. de St. Aubin created a hybrid

pecuniary bequest with a floor to fund the marital trust.

Article Sixth of his will provides that "the total value of

such cash and/or property [used to fund the Marital Trust]

- 45 at the time of distribution to my said trustees shall be at

least equal to the amount of this bequest."

Aubin further provided:

Mr. de St.

"My Executors, hereinafter named,

shall have the power and sole discretion to satisfy this

bequest wholly or partly in cash or in kind and to select

the assets to be included therein".

Thus, he clearly chose

the aggregate approach of funding the marital trust, which

is the basis for EPTL section 2-1.9.

We reject respondent's argument that Mr. de St.

Aubin's intent to provide for decedent overrides his

explicit instructions regarding the funding of the marital

trust.

We doubt whether such a general intent, if it did

exist, would be sufficient to satisfy the proviso that EPTL

section 2-1.9 will be applicable "unless the instrument

expressly provides otherwise".

EPTL sec. 2-1.9(b).

In any

case, we find that Mr. de St. Aubin's will expresses no

intent to require that decedent share in the appreciation

of the estate assets.

Mr. de St. Aubin could have chosen to bequeath his

entire estate outright to decedent.

He also could have

chosen to leave her a fractional bequest.

choose to do so.

He did not

Mr. de St. Aubin provided for decedent by

making extensive specific bequests to her, which ensured

that on his death in 1967, she would receive property with

- 46 a value of almost $400,000.

Further, it would be

reasonable to assume that Mr. de St. Aubin knew that

decedent owned an additional $100,000 of insurance in his

life.

He also made her income beneficiary of both the

marital trust and the residuary trust.

Finally, he

authorized the invasion of the principal of the residuary

trust for her benefit.

We find no evidence in the record

to challenge the meaning of the explicit language in

Mr. de St. Aubin's will.

C. Alternative Arguments

Respondent argues that the marital trust is entitled

to share in the appreciation of the estate assets because,

under New York State law, executors have a duty to

distribute assets impartially among beneficiaries.

In

support of this argument, respondent again cites In re

Bush's Will and its progeny.

However, as discussed above,

the In re Bush's Will line of cases was vitiated by EPTL

section 2-1.9.

See Estate of Goutmanovitch, 432 N.Y.S.2d

768, 774 (Sur. Ct. 1980); Estate of Lasser, N.Y.L.J.,

Nov. 20, 1987, p. 15 (Sur. Ct.).

That statute was created

to overrule the In re Bush's Will line of cases.

See

Fourth Report of the Temporary State Commission, N.Y.

Legislative Document 1965, No. 19, Report No. 5.4.2A,

p. 326 (stating that the In re Bush's Will result,

- 47 "certainly, was not the testator's purpose when he selected

a pecuniary form for the bequest.

Had it been so, the

fractional formulation would have been the appropriate

means to insure that result.").

Respondent has presented no evidence that the In re

Bush's Will duty impartially to allocate assets survives

the imposition of EPTL section 2-1.9 (except where the

will by its terms requires impartial allocation).

In fact,

the cases explicitly state that the Bush approach has been

legislatively overruled.

See Estate of Goutmanovitch,

supra at 774 ("This statute adopted the aggregate approach,

rather than the Bush rule * * * whenever a pecuniary

disposition requires the fiduciary to value the assets

distributed as of a date other than the date of

distribution"); Estate of Lasser, supra at 15 ("[the]

enactment of EPTL 2-1.9 * * * represents a legislative

rejection of [Bush]").

It is true, as respondent points out, that the

catalyst for the passage of EPTL section 2-1.9 was the

desire to protect residents of New York from loss of the

marital deduction under Rev. Proc. 64-19, 1964-1 C.B.

(Part 1) 682.

However, EPTL section 2-1.9 clearly did more

than protect estates from loss of the marital deduction.

We note that EPTL section 2-1.9 applies generally to

- 48 "Distributions in kind by executors and trustees" and not

only to distributions to spouses.

In addition, EPTL

section 2-1.9(b)(2) provides the following ceiling on the

value of pecuniary bequests, including hybrid pecuniary

bequests:

the assets selected by the fiduciary for that

purpose, together with any cash distributed,

shall have an aggregate value on the dates of

their distribution amounting to no less than,

and to the extent practicable no more than,

the amount of such testamentary disposition or

transfer in trust as stated in , or determined

by the formula stated in, the instrument.

This valuation ceiling is clearly directed at vitiating the

In re Bush's Will result.

Before concluding, we briefly address respondent's

remaining alternative arguments.

Respondent argues that

the marital trust is entitled to share in the appreciation

of the estate assets because:

(1) The executors'

discretion was "nullified by the executors' failure to

expeditiously and properly administer the estate", and (2)

the delay in funding the marital trust violated "the spirit

of the marital deduction".

by the executors.

Petitioners deny any wrongdoing

However, even assuming that the

executors did act improperly, respondent has failed to

show why the appropriate remedy would be a share of

appreciation.

See Estate of Lasser, supra at 15 (refusing

- 49 to allocate appreciation where marital trust was not funded

for more than 25 years).

As noted above, New York provides

other avenues of relief for aggrieved beneficiaries,

including actions for removal and surcharge of fiduciaries.

See, e.g., In re Van Bokkelen's Estate, 33 N.E.2d 87 (N.Y.

1941); In re Epstein, 557 N.Y.S.2d 907, 910 (App. Div.

1990); In re Birnbaum, 555 N.Y.S.2d 982, 991 (App. Div.

1990); In re Lirakis, 491 N.Y.S.2d 36 (App. Div. 1985);

Velez v. Feinstein, 451 N.Y.S.2d 110, 114 (App. Div. 1982).

Given Mr. de St. Aubin's intent and the law of

the State of New York, we hold that decedent's estate had

no claim to appreciation on the undistributed assets in her

husband's estate.

III. Right To Compel Funding of the Marital Trust With

Interest at the Legal Rate

Petitioners move for a ruling that "Neither Honore nor

the Estate [of Honore] had a claim under EPTL to compel

funding of her pecuniary [marital] trust with interest at

the legal rate."

Petitioners base their argument on an

assertion that EPTL section 11-1.5 is inapplicable to

pecuniary legacies in trust.

Petitioners contend that the

statute only applies to outright general legacies.

Petitioners argue that decedent and her estate were

entitled to only the average rate of net income earned by

- 50 her husband's estate under EPTL section 11-2.1(d)(2),

rather than interest under EPTL section 11-1.5.

Respondent asserts in a trial memorandum that EPTL

section 11-1.5 authorized decedent or her estate to

maintain an action for payment as a person entitled to a

disposition after the expiration of 7 months from the time

letters testamentary were granted.

Respondent also

contends that decedent or her estate was entitled pursuant

to this section to interest at the legal rate commencing 7

months after letters testamentary were granted.

The burden on this motion for partial summary judgment

is on the movants, petitioners, to show no genuine issues

Jacklin v. Commissioner, 79 T.C.

of material fact exist.

340, 344 (1982).

EPTL section 11-1.5 provides in relevant part as

follows:

11-1.5 Payment of testamentary dispositions or

distributive shares.

(a) * * * a personal representative may,

but, except as directed by will or court decree

or order, shall not be required to, pay any

testamentary disposition or distributive share

* * * before the expiration of seven months from

the time letters testamentary or of

administration are granted.

*

*

*

*

*

*

*

(c) If, after * * * the expiration of seven

months from the time letters are granted * * *

- 51 the personal representative refuses upon demand

to pay a disposition or distributive share, the

person entitled thereto may maintain an

appropriate action or proceeding against such

representative. * * *

*

*

*

*

*

*

*

(d) In any action or proceeding to compel

payment of a disposition or distributive share,

the interest thereon, if any, shall, in the case

of a disposition, be at the rate fixed in the

will or, if none is so fixed, in any case at the

rate of three percent per annum commencing seven

months from the time letters testamentary or of

administration are granted, unless the delay in

payment was unreasonable, in which case interest

shall be at the legal rate for the period of such

unreasonable delay.

EPTL section 1-2.4 defines a disposition as "a

transfer of property by a person during his lifetime or

by will."

EPTL section 11-2.1(d)(2) provides as follows:

(d) Income earned during administration of

a decedent's estate.

*

*

*

*

*

*

*

(2) Unless the will provides otherwise, income

from the assets of a decedent's estate after the

death of the testator and before distribution,

including income from property used to discharge

liabilities, shall be determined in accordance

with the rules applicable to a trustee under this

section and distributed as follows: (A) to

specific beneficiaries the net income from the

property disposed of to them respectively; (B) to

all other beneficiaries, except beneficiaries of

pecuniary dispositions not in trust, the balance

of the net income in proportion to their

respective interests in the undistributed assets

of the estate computed at times of distribution

- 52 on the basis of inventory value.

added.]

[Emphasis

Petitioners contend that only EPTL section 11-2.1, and

not EPTL section 11-1.5, applies in our case.

They argue

that "Under EPTL 11-1.5, only an outright general legacy is

entitled to interest".

In support, they initially cite In

re Ahrens' Estate, 196 N.Y.S. 313, 314 (App. Div. 1922),

and In re Allen's Will, 165 N.Y.S.2d 614, 617 (Sur. Ct.

1957).

Petitioners' argument fails to account for the fact

that In re Ahrens' Estate and In re Allen's Will were

decided under a different statute, Surrogate's Court Act

(SCA), section 218, the predecessor to EPTL section 11-1.5.

SCA section 218 differs from EPTL section 11-1.5 in a

crucial way:

The provision pertained to "legacies",

whereas EPTL section 11-1.5 affects "testamentary

dispositions".

The court in Ahrens explained that "A

'legacy' referred to in section 218 of the Surrogate's

Court Act is distinguishable from a trust fund created by a

testator in his will.

The latter does not come within the

rule of the statute".

In re Ahrens' Estate, supra at 314.

In Allen, the court cited Ahrens for the proposition that

SCA section 218 "applies to legacies and not trust funds."

In re Allen's Will, supra at 617.

- 53 When recodifying the law in EPTL section 11-1.5, the

State legislature amended the provision in a significant

way.

The word "legacy" was replaced with the term

"testamentary disposition".

EPTL section 1-2.4 defines a

"disposition" as a "transfer of property by a person during

his life time or by will."

This broad definition clearly

encompasses the transfer of assets in trust.

Therefore, on

its face, EPTL section 11-1.5 is applicable to the marital

In re Ahrens's Estate and Allen's Will offer no

trust.

support for petitioners' assertion.

Petitioners next argue that their stance is supported

by recent case law stating the rules for pecuniary bequests

not in trust.

They cite In re Estate of Zalaznick, 389

N.Y.S.2d 736 (Sur. Ct. 1976); In re Lewine's Estate, 286

N.Y.S.2d 566 (Sur. Ct. 1968); and Estate of McKee, 504

N.Y.S.2d 394 (Sur. Ct. 1986).

We disagree.

McKee restates

the rule that all bequests except pecuniary bequests not in

trust share in the estate income under EPTL section 11-2.1.

Estate of McKee, supra at 397.

that point.

The parties fully agree on

Estate of Zalaznick and Lewine's Estate

restate the rule that pecuniary bequests not in trust

accrue interest under EPTL section 11-1.5.

In re Estate of

Zalaznick, supra at 738; In re Lewine's Estate, supra at

571.

Of this, there is also no dispute.

From these cases,

- 54 we glean the rule that pecuniary bequests not in trust are

subject solely to EPTL section 11-1.5 and not to EPTL

section 11-2.1.

These cases do not support a holding that

other types of bequests are subject only to EPTL section

11-2.1 and not to EPTL section 11-1.5.

None of these cases

gives any indication why the revisers of the New York

estate law broadened the interest provision, EPTL section

11-1.5, to be applicable to all "testamentary dispositions"

if they did not intend for it to apply to pecuniary

dispositions in trust.

Petitioners contend next that expansive application of

EPTL section 11-1.5 would lead to an absurd result.

All

bequests except pecuniary bequests not in trust would

receive both income and interest.

Pecuniary bequests not

in trust would receive only interest.

Petitioners assert

that this "double recovery" for every bequest except

pecuniary bequests not in trust makes no sense.

Further,

interest would accrue on residuary gifts, which may

themselves be the source of some interest payments.

However, petitioners again fail to explain why the

legislature chose to expand the language of the interest

provision to make EPTL section 11-1.5 applicable to all

"testamentary dispositions".

We note here that respondent

has suggested the theory that the interest provision in

- 55 EPTL section 11-1.5 acts as a floor on the income to be

received by beneficiaries such as decedent.

While it is

not presently clear that respondent is correct, such a

formulation would eliminate the double recovery issue

raised by petitioners.

Petitioners note that the commentary in this area

states that pecuniary dispositions in trust receive income,

whereas pecuniary dispositions not in trust receive

interest.

See, e.g., Covey, Marital Deduction and Credit

Shelter Dispositions and the Use of Formula Provisions, 6166 (1984).

However, the statements offered by the

commentators are merely conclusory.

These sources offer no

additional support for petitioners' argument.

Finally, petitioners assert that, even if EPTL section

11-1.5 were applicable to all testamentary dispositions,

decedent would be ineligible to receive interest under that

statute.

They argue that she was coexecutor of her

husband's estate and at least acquiesced to the actions of

her son in administering the estate.

Therefore, they

argue, she was at least partially responsible for the delay

in funding of the trust.

Petitioners assert that, under

New York law, this involvement by Mrs. de St. Aubin would

make her ineligible for an interest award.

clearly states the contrary.

New York law

The New York Court of

- 56 Appeals, the highest court in that State, squarely

addressed this issue in In re Estate of Crea, 266 N.E.2d

815 (N.Y. 1971).

In that case, the court affirmed the

reversal of the trial court's ruling that a coexecutorbeneficiary was not entitled to interest on her bequest

under SCA section 218 because of her status as coexecutor.

The court reasoned as follows:

Appellant also urges that she is entitled

to interest on her cash legacy because it was

not paid until nearly three years after letters

testamentary were issued. The Surrogate denied

interest on the ground that appellant, as

coexecutor, was equally at fault with her brother

for the delay in paying the bequest. The

Appellate Division, however, modified the decree

holding that under section 218 of the Surrogate's

Court Act appellant was entitled to interest at

the rate of 3% per annum. We agree. Though

section 218 vested the Surrogate with the

discretion to determine the reasonableness of

the delay as a factor in considering whether or

not the legatee was entitled to 6% interest, the

statute specifically provided for the imposition

of 3% interest where the legacy is not paid seven

months from the issuance of letters testamentary.

Thus, it was entirely proper for the Appellate

Division to allow 3% interest * * * [Id. at 817818.]

In re Estate of Zalaznick, 389 N.Y.S.2d 736, 738

(Sur. Ct. 1976) (citing Crea in holding that the same

result obtains under EPTL section 11-1.5).

Petitioners have presented insufficient support to

convince this Court that EPTL section 11-1.5 does not apply

to pecuniary bequests in trust.

In addition, if EPTL

- 57 section 11-1.5 does apply in these cases, the question of

whether the marital trust is entitled to interest at 3

percent or at the legal rate depends on the reasonableness

of the delay in funding.

That is a material issue of fact.

Therefore, petitioners' motion for partial summary judgment

will be denied with respect to this issue.

An order will be issued

granting in part and denying

in part petitioner's motion

for partial summary judgment,

and denying respondent's

cross-motion for partial

summary judgment.