Senate Bill S7159

                                
 
BILL NUMBER: S7159

SPONSOR: GOLDEN
 
TITLE OF BILL:  An act to amend the estates, powers and trusts law, in
relation to establishing what transactions constitute a testamentary
substitute

 
PURPOSE:

To clarify that retirement benefit distributions from a governmental
plan do not constitute testamentary substitutes when such distributions
are made in accordance with either a domestic relations order or a sepa-
ration agreement relating to marital property.

 
SUMMARY OF PROVISIONS:

Section one of this bill amends Estates, Powers and Trusts Law section
5-1.1-A(b)(1)(G) to provide that distributions from a governmental plan
that are made to a beneficiary whose designation was required pursuant
to either a separation agreement or a domestic relations order is not a
testamentary substitute. The term "governmental plan" is defined using
              

the Employee Retirement Income Security Act of 1974, Public Law 93-406,
88 Stat. 829, ("ERISA") definition.

Section two of this bill provides that this act shall take effect imme-
diately and shall apply to the estates of decedents dying on and after
such date.

 
JUSTIFICATION:

The surviving spouse's right of election has existed in New York law for
almost 90 years. See, Ch. 229, L.1929. The current right of election was
enacted as Chapter 595 of the Laws of 1992. In 1992, statutory language
concerning retirement benefits as testamentary substitutes was changed
from "(n)othing in this paragraph shall affect, impair or defeat the
right of any person entitled to receive (A) payment in money, securities
or other property under a thrift, savings, pension, retirement, death
benefit, stock bonus or profit-sharing plan, system or trust..." (EPTL §
5-1.1(b)(E)) to "any money, securities or other property payable under a
thrift, savings, retirement, pension, deferred compensation, death bene-
fit, stock bonus or profit-sharing plan, account, arrangement, system or
trust, except that with respect to a plan to which subsection (a) (11)
of section four hundred one of the United States Internal Revenue Code
applies or a defined contribution plan to which such subsection does not
apply pursuant to paragraph (B) (iii) thereof, only to the extent of
fifty percent of the capital value thereof." (EPTL § 5-1.1-A(b)(1)(G)).

The current definition of testamentary substitute is not as broad as the
previous definition. The exemption language in the Estates, Powers and
Trusts Law section 51.1-A relies on the applicability ERISA's joint and
survivor annuity requirement to defined benefit plans to determine
whether distributions from a defined benefit plan are a testamentary
substitute. Internal Revenue Code section 401(a)(11) is inapplicable to
governmental plans because, when enacting ERISA, the focus of Congress
was on private retirement plans. See, Feinstein v. Lewis, 477 F. Supp.
1256 (S.D.N.Y. 1979).  Among the many reasons why governmental plans
were specifically excluded from many of the ERISA provisions was the
thought that "'State and local governments must be allowed to make their
own determination of the best method to protect the pension rights of
municipal and state employees." Gualandi v. Adams, 385 F.3d 236 (2d Cir.
2004) quoting 119 Cong. Rec. 741 (statement of Sen. Bentsen).  Thus, it
is up to the State to determine how the rights of retirement plan
members and beneficiaries should be protected.

To determine how best to protect the retirement benefit rights public
employees and their beneficiaries, we need to look at ERISA and the
significant amendments to ERISA made by the Retirement Equity Act of
1984, Public Law 98-397, 98 Stat 1426 ("REA"). Among the issues that REA
sought to address was "(c)onfusion ... over whether ERISA preempted
State divorce laws, thereby preventing pension plans from complying with
domestic relations court orders allocating to a spouse a portion of the
worker's pension as part of a property settlement."  Social Security
Bulletin, Vol. 48, No. 5, p.38 (May 1985). Much of this confusion arose
from a split in the Courts with regard to whether ERISA's spendthrift
provisions would trump a domestic relations order issued by a State
court in a divorce proceeding that distributed pension benefits to a
pension plan participant's former spouse. See, Id. at 43; See also, 26
USC 401(a)(13) and 29 USC 1065(d). REA cleared up this confusion by
creating an exception to ERISA's spendthrift provisions for a qualified
domestic relations order, which is a domestic relations order that meets
certain requirements. See, 26 USC 414(p). A domestic relations order is
defined as "any judgment, decree, or order (including approval of a
property settlement agreement) which- (i) relates to the provision of
child support, alimony payments, or marital property rights to a spouse,
former spouse, child, or other dependent of a participant, and (ii) is
made pursuant to a State domestic relations law (including a community
property law)." 26 USC 414(p)(1)(B). As with ERISA, this provision of
REA did not apply to governmental plans.

Without ERISA and REA to lean on, former spouses and beneficiaries who
have a domestic relations order or property settlement agreement that
includes a distribution from a governmental retirement plan are finding
themselves fighting for the retirement plan benefits afforded them by
the domestic relations order or property settlement agreement when the
governmental retirement plan participant dies. While it appears that the
Courts have had infrequent opportunities to resolve the question of
whether a distribution from a governmental retirement plan that is made
pursuant to either a domestic relations order or a property settlement
agreement constitutes a testamentary substitute under Estates, Powers
and Trusts Law section 5-1.1-A(b)(1)(G), Surrogate's Court in Bronx
County has had occasion to determine this issue.

In Matter of Calligaro, 19 Misc 3d 895 (Surr. Ct. Bronx Co. 2008), the
decedent's surviving spouse sought to exercise her right of election
against the decedent's NYCERS retirement benefits that were, in accord-
ance with a separation agreement, being distributed to the decedent's
minor daughter from his first marriage until she reached the age of
majority. Here, the Court held that the surviving spouse was entitled to
an elective share of the decedent's retirement benefits that are payable
after his minor daughter reached the age of majority. The Court further
held that the surviving spouse does not have the right to elect against
any benefits payable during the decedent's daughter's minority because
her right to such payments is derived from a separation agreement that
she could have enforced against the decedent if he had not designated
her as the beneficiary of the retirement benefits as required by the
separation agreement.  See, EPTL 5-11-A(b)(5). The decision in Calligaro

is consistent with the Court of Appeals decision in Kaplan v. Kaplan, 82
NY 2d 300 (1993).

The dissolution of a marriage and the division of martial assets is a
difficult and frequently emotional process. When a property settlement
agreement or domestic relations order requires one former spouse to
designate his or her former spouse or children from their marriage as
the beneficiary or beneficiaries of his or her retirement benefits, it
should not matter that the retirement plan is a governmental plan. The
beneficiary who was designated pursuant to such agreement or order
should not have to expend additional resources to secure the benefit
granted to him or her once the retirement plan member dies.

This legislation provides clarity in a murky area by expressly providing
that distributions from a governmental plan that are made pursuant to a
domestic relations order or property settlement agreement are not a
testamentary substitute pursuant to Estates, Powers, and Trusts Law
section 5-1.1-A(b)(1)(G).

 
LEGISLATIVE HISTORY:

New bill

 
FISCAL IMPLICATIONS:

None to the State

 
EFFECTIVE DATE:
This act shall take effect immediately and shall apply to the estates of
decedents dying on and after such date.