## Facts

- Elmer Smathers died in 1928 leaving a will (executed in 1926) that created a residuary testamentary trust.
- The trust term was measured by two lives: Smathers’s niece-in-law and his grandnephew. The niece-in-law died in 1945; the grandnephew was still living in 2008.
- During the trust term, the trustee was to pay $60,000 annually from trust income to the niece-in-law or her issue; by 2008, three individuals shared that income.
- The balance of trust income was payable in specified units to named individuals and, after a beneficiary’s death, to that beneficiary’s surviving spouse or issue; by 2008, there were about 100 income beneficiaries (with additional contingent remainder interests).
- The trust’s principal assets were two Manhattan commercial properties: 18 Broadway (the “Broadway property”) and 562 Fifth Avenue (the “Fifth Avenue property”).
- The will directed that both properties be treated as permanent trust assets and stated that the trustee lacked authority to sell or dispose of either property unless a sale became necessary by law; if any sale became necessary by law, the Broadway property was to be sold last.
- At Smathers’s death, the Broadway property was subject to a 99-year ground lease to Standard Oil Company that allowed the tenant to construct improvements over the land while keeping the land and improvements legally separate; an additional building was constructed early in the lease term.
- In 2008, the leasehold owner’s building interest was sold to Chetrit Group, LLC for about $225 million.
- JPMorgan Chase Bank, N.A., as trustee, negotiated a proposed sale of the trust’s fee interest in the Broadway property to Chetrit for $23.4 million and sought court permission because of the will’s restriction on sales.
- The will also provided that, upon the grandnephew’s death, the trust would terminate and the trust assets would be distributed to Smathers’s corporation, Elmer E. Smathers, Inc., and then the corporation’s stock would be distributed to the then-living income beneficiaries in proportion to their income interests.
- The trustee petitioned to reform that remainder mechanism to allow a limited liability company (or similar pass-through entity) to receive the assets at termination, asserting that later-enacted corporate tax rules would otherwise cause unanticipated double taxation.
- Certain beneficiaries objected to the proposed sale and the requested reformation; guardians ad litem were appointed for beneficiaries under disability and for minors.

## Issues

1. Whether the Surrogate’s Court could authorize the trustee to sell 18 Broadway despite the will’s direction to retain the Manhattan properties and to sell the Broadway property last, given later economic and transactional circumstances.
2. Whether the court could reform the will’s direction to transfer the trust assets to a corporation at termination by allowing a pass-through entity (such as an LLC) to receive the assets to avoid double taxation that arose from post-1926 changes in tax law.

## Decision

- The court authorized the trustee to deviate from the will’s retention and sale restrictions and approved the sale of the Broadway property.
- The court granted the requested reformation allowing use of an LLC (or similar pass-through entity) in place of the specified corporation as the post-termination receiving vehicle.
- The court reasoned that unforeseen changes in circumstances and law made literal compliance with the administrative directions inconsistent with the testator’s dominant objective of benefiting the beneficiaries through prudent trust administration.
- The court found that changing the form of the remainder-holding entity would preserve the will’s proportional allocation among beneficiaries while avoiding a tax result that would substantially reduce the value delivered to them.

## Legal Principles

- A court with equitable authority over trusts may permit deviation from a will’s administrative directions when later, unanticipated circumstances would defeat or substantially impair the testator’s primary purpose.
- Restrictions requiring retention of particular assets may yield where circumstances have changed so significantly that keeping the asset is no longer a sensible method of carrying out the testamentary plan.
- A Surrogate’s Court may construe or reform testamentary provisions to prevent later legal developments—such as changes in tax law—from materially frustrating the economic effect the testator sought, so long as the dispositive scheme and relative beneficial interests remain the same.
- Substituting a pass-through entity for a corporation may be approved where the entity change functions as a mechanical substitute for holding and allocating the same interests, and is aimed at avoiding tax consequences not contemplated when the will was executed.

## Conclusion

Matter of Smathers held that the Surrogate’s Court could approve a sale of 18 Broadway notwithstanding strict retention language and could reform the will’s corporate remainder structure to allow an LLC-type pass-through entity, because later economic circumstances and tax-law changes would otherwise thwart the testator’s central aim of delivering maximum benefit to the trust’s beneficiaries without changing their proportional interests.


Matter of Smathers, 852 N.Y.S.2d 718 (2008)