Executors and Administrators - Distribution of Assets - Specific Devise of Mortgaged Real Estate under Revocable Trust - Applicability of EPTL 3-3.6

Levene, Gouldin & Thompson, LLP (Margaret J. Fowler and Karen J. McMullen of counsel) for trustee.

Hancock Estabrook, LLP (Jaime J. Hunsicker and James J. O'Shea of counsel) for objectant.

{**87 Misc 3d at 1113}Marie Alberti died a resident of Broome County, New York on May 1, 2022. At the time of her death her assets were held in a grantor trust which was established by her in 2006 and amended by her in 2009 (the trust). On August 28, 2024, Michael Alberti (objectant), one of the decedent's three children and a beneficiary of the trust, petitioned to compel his sister, Marissa Alberti, the successor trustee (trustee) and also a beneficiary, to account for her period of service as trustee subsequent to decedent's death. That petition was granted, and the trustee was directed by order of the court dated September 3, 2024, to file a petition to account and accounting by November 1, 2024.

On October 29, 2024, the trustee filed a petition to account and accounting with the court. One of the assets held by the trust at the time of decedent's death is a residential property at 1124 Greenwood Glen, Endicott, New York (the property). Article 3 (B) of the trust specifically devises the property to objectant. The accounting sets forth that at the time of decedent's death there was a home equity line of credit mortgage (HELOC) on the property. The accounting takes the position that the specific gift of the property to objectant is subject to the outstanding HELOC at the time of decedent's death. Mortgage and tax payments made by the trust with respect to the property after decedent's death are set forth in the accounting as partial residuary distributions to objectant.

Objections to the accounting were filed by objectant on November 13, 2024. Article 3 (D) of the trust states "[a]ll loans that the grantor has made to her son, Michael Alberti, or to his business interests shall be forgiven and discharged in full and neither Michael nor his businesses shall be obligated to make any further payments on said loans." That article goes on to set forth a formula for calculation of a reduction in objectant's share of the residuary of the trust based on the balance of loans outstanding to him and his businesses, and his share of the residuary as otherwise calculated. Objectant takes the position that this language compels the trustee to convey the property to him free and clear of the HELOC by paying it off from the trust.

There are other objections raised with respect to the accounting, but the specific issue of the allocation of responsibility for the HELOC as between objectant, the specific devisee of the property, and the trust, as the owner at the time of decedent's death, is the subject of a motion now before the court.{**87 Misc 3d at 1114}

By notice of motion dated March 27, 2025, the trustee moved for an order declaring that objectant takes title to the property subject to the HELOC and with full responsibility for that debt, and that the HELOC payments and real estate taxes paid by the trust with respect to the property were partial residuary distributions to objectant. A memorandum of law in support of this position was filed by the trustee with the accounting on October 29, 2025, as were supplemental affidavits and a second memorandum of law, with the motion. In addition to his answer and objections filed November 13, 2024, objectant filed his affidavit and an affidavit of counsel, with a memorandum of law in opposition to the requested relief. The trustee filed a reply affidavit and memorandum in further support of her position. Those pleadings, and all other papers filed in this proceeding, to the extent relevant to this issue, have been considered by the court. There was oral argument on the motion on May 12, 2025.

The relevant, undisputed facts with respect to this situation are as follows. The decedent purchased the property in July of 2001, in her own name. In November of 2006, contemporaneously with the creation of the trust, the decedent transferred the property and other real estate she owned to the trust. In 2010, the decedent entered into the HELOC (a $150,000 "credit agreement" with Tioga State bank, secured by a mortgage, only on the property). A ledger of the draws on the HELOC shows the decedent drew about $50,000 for her own use, with another $70,000 either drawn or paid to objectant's business. The withdrawn principal remained outstanding as of the decedent's death. The mortgage is currently in foreclosure. There were no changes to the trust after the HELOC was taken out.

The decedent had a history of making substantial loans to objectant and his businesses. It is alleged that there were other transfers by the decedent to objectant and/or his businesses that were gratuitous or equity investments; the nature and magnitude of those transactions has not been confirmed. The parties do not dispute documented loans of nearly $900,000, which are by the terms of the trust forgiven, and are the basis for a calculation of a reduction in objectant's residuary share. The 2009 amendment to the trust limited the reduction in objectant's share relating to these forgiven loans to the lesser of (1) the gross amount of the loans and (2) 70% of objectant's share as otherwise calculated. The parties also do not dispute that, given the magnitude of the loans, 70% of objectant's share{**87 Misc 3d at 1115} as otherwise calculated is in fact going to be the lower number, which will be applied as a reduction in his share of the residuary of the trust.

It is the express policy of this state that encumbrances on property of a decedent are not chargeable at first instance against the assets of the estate. (EPTL 3-3.6; Matter of Griffith, 183 Misc 2d 210 [Sur Ct, Nassau County 2000].) If the decedent had retained title to this property and specifically devised it by will to objectant, then he would have taken it subject to the mortgage. (Id.) The statutory exception to this rule is where the decedent, in the case of a will, "has expressly or by necessary implication indicated otherwise. A general provision in the will for the payment of debts is not such an indication." (EPTL 3-3.6 [a].) Thus, there are two parts to the question before the court. First, does this devise by the trust to the objectant fall within the provisions of EPTL 3-3.6? If so, does the debt forgiveness language included in the trust trigger the statutory exception to the general rule? For the reasons set forth below, the court finds that the answer to the first question is yes and that the answer to the second question is no.

Objectant is correct that EPTL 3-3.6 does not by its express language apply to property that does not pass by will or intestacy. (Seamen's Bank for Sav. v Smadbeck, 293 NY 91, 95 [1944]; Estate of Marco Mason Family Trust, NYLJ, Mar. 22, 2017 at 26, col 4, 2017 NYLJ LEXIS 763 [Sur Ct, Kings County 2017].) In the 80 years since the Seamen's Bank decision, courts, including this court, have equitably applied the provisions of EPTL 3-3.6^[FN1] to mortgaged properties that pass outside a decedent's estate, treating the mortgage as "running with the land." The rule has been extended to property passing to a tenant by the entirety (Matter of Ryan, 44 Misc 2d 477 [Sur Ct, Broome County 1964]; Matter of Griffith, 183 Misc 2d 210 [Sur Ct, Nassau County 2000]), to a joint tenant (Matter of Fleisher, NYLJ, Oct. 14, 2015 [Sur Ct, NY County 2015]), and to property held in a trust (Mason). In each of these cases courts found that equitable principles support application of the statutory principle to situations where the transfer is by testamentary substitute, effectively equivalent to a testamentary devise or intestate devolution. As stated by this court in Ryan, "it would seem that equity and good sense would require that anyone receiving the entire title to property . . . should take the property {**87 Misc 3d at 1116}in the condition in which it exists at the date of the death of the person who makes their title complete." (Ryan at 478.)

In Mason, the decedent created a trust for the benefit of his two daughters. The decedent funded the trust by transferring shares of an LLC of which he was the sole member. The LLC had held the real property which was subject to a mortgage. By the terms of the trust the trustee was directed to sell the property and distribute the net proceeds to the beneficiaries upon the decedent's death. The trustee did sell the property, paid off the outstanding mortgage and distributed the net proceeds of sale. In the trustee's accounting proceeding, an objecting beneficiary asserted the trustee should have sought payment of the mortgage debt by the decedent's estate. The court held the provisions of EPTL 3-3.6 applied and the trust which succeeded to the ownership of the property properly was responsible for the debt. (Mason, 2017 NYLJ LEXIS 763, *16-24.)

In this case, the equitable basis for application of the rule of EPTL 3-3.6 is even clearer. The trust was unquestionably a testamentary substitute designed to effectuate the decedent's testamentary plans. Her probated will, executed the same day as the 2009 amendment to the trust, leaves her entire estate to the trust. The will goes on to repeat verbatim the dispositive terms of the trust, in the event "the disposition to [the trust] is ineffective for any reason, including that the trust is not in existence at my death or is unable to accept distribution of my estate." Ownership of real estate as a joint tenant or a tenant by the entirety is specific to the deeded real estate. A grantor trust is an expression of the grantor's overall testamentary plan, exactly analogous to the expressed testamentary plan of a will, or the statutory testamentary plan of intestacy, to either of which EPTL 3-3.6 applies.

The cases cited by objectant in opposition to the application of the rule of EPTL 3-3.6 to the trust are distinguishable from this case. In each of those cases, the issue before the court was the creditor's ability to pursue recovery on the note from the obligor or guarantor, rather than being compelled to look to the property first, not the issue of whether the devisee of the property took title subject to the outstanding mortgage. (Bank of N.Y. v Spring Glen Assoc., 222 AD2d 992, 994 [3d Dept 1995]; Seamen's Bank at 96; Wells Fargo Bank N.A. v Kokolis, 2013 WL 789448, *3, 2013 US Dist LEXIS 31070, *6-10 [ED NY, Mar. 1 2013, No. 12-cv-2433 (DLI) (JO)].){**87 Misc 3d at 1117}

The court finds that the devise of the property by decedent's grantor trust to the objectant is subject to the provisions of EPTL 3-3.6. The trustee's initial memorandum of law in support of this accounting states that "New York case law has also long-held that the provisions of EPTL § 3-3.6 apply to trusts," without citing any case law. This court has also searched and has not found a case directly on point with respect to a devise from a grantor trust. It is surprising that this might be a question of first impression, but the applicability of EPTL 3-3.6 to a grantor trust is clearly supported and consistent with other applications of this statute.

This does not end the inquiry. The issue of whether objectant takes title to the property subject to the mortgage on it at the time of his mother's death still depends on whether language in the trust overrides the general rule, expressly or by necessary implication. (EPTL 3-3.6 [a].) The court looks to the trust language because that is the instrument which devises the property; if the rule applies to the trust by extension of the statute, the trust may override the rule, as a will could.

The trust does not contain language which expressly directs that the property be devised to objectant free and clear of the mortgage. In fact, the trust contains no language directing the trustee to pay the decedent's debts after her death. Article 10 of the trust directs payment only of estate taxes and administration expenses.^[FN2] The decedent could have provided that this indebtedness be paid out of trust assets, but there is no such provision in the trust. (Matter of Griffith.) Matter of Stralem and In re Daniels,^[FN3] both cited by the trustee, are instructive, though not exactly on point. (Matter of Stralem, 303 AD2d 120 [2d Dept 2003]; Matter of White, 16 Misc 2d 645 [Sup Ct, NY County 1959].) In both those cases, a child of the decedent executed a note to the decedent which was then assigned by decedent to a trust created by her. In each case, the court found that specific language in the decedent's will forgiving the debt of the obligor child did not preclude enforcement of the obligation by the assignee trust. The courts found that the decedent's assignment to a third party precluded the clear language of her will forgiving the child's debts from being operative with respect to these notes. The debt at issue in this case is not that{**87 Misc 3d at 1118} of the decedent's child, but the decedent herself. And notably, like the trust, the decedent's will also contains no language directing payment of her debts, or the disposition of property free and clear of those debts.

The objectant relies substantially on Matter of Kelley to support his position that the language of the trust which forgives the debts of objectant and his businesses to his mother by necessary implication means the decedent intended the specific devise of the property to be free of the mortgage on it. This reliance is misplaced. The issue in Kelley was whether debts of a trust for the benefit of a child of the decedent were forgiven by necessary implication because the decedent's will included language specifically forgiving debts owed her by those children. The Surrogate found that, since both interpretations were reasonably supported, the specific language of the will which did not include trust debts compelled the finding that forgiveness of such debts was excluded. (Matter of Kelley, 18 Misc 2d 432, 434 [Sur Ct, Nassau County 1959].) The Appellate Division reversed, construing the debt forgiveness language, "in the light of all the circumstances of this case," to include trust debt. (Matter of Glover, 11 AD2d 772 [2d Dept 1960].) The Court of Appeals affirmed the Appellate Division. (Matter of Kelley, 9 NY2d 814 [1961].) The issue in Kelley is the effective equivalency of the identity of the obligor: child vis-à-vis child's trust. Neither objectant nor his businesses are the obligor on the note secured by the mortgage against the property. Kelley goes to the issue of the breadth of a loan forgiveness, not the applicability of the rule pursuant to EPTL 3-3.6. An issue not in this case but which would be analogous to Kelley would be if the debt forgiveness language of the trust referred only to objectant and he were taking the position that it should also apply to debts of his businesses.

It is not disputed that the trust contains a provision forgiving all debts owed to decedent by objectant or his businesses. That provision can and will be given full effect. The finding by this court that EPTL 3-3.6 applies to the specific devise of the property does not impact the application of the debt forgiveness provision of the trust. Objectant will receive the benefit of the debt forgiveness language of the trust. To the extent that funds from the HELOC were the source of loans to him or his businesses, they will be included in the calculation of the{**87 Misc 3d at 1119} indebtedness to be forgiven.^[FN4] Objectant's calculated share of the trust residuary may be sufficient to allow him to pay off the mortgage to which the property is subject. That is distinct from the issue currently before the court.

The court also notes that on the oral argument of this motion, objectant conceded that the portion of the decedent's draws on the HELOC which did not flow to objectant or his businesses, as well as the real estate taxes applicable to the property, are liens he takes the property subject to. Objectant's stated position is that this mortgage should have been paid off by the trust before the property was deeded to him, but clearly recognizes that some of the lien remains his responsibility. This is an acknowledgement that the issues of the allocation of the mortgage to the devised property and the operation of the debt forgiveness clause of the trust are distinct issues.

In furtherance of this decision, it is ordered that the trustee's motion to have the mortgage allocated to and remain a lien on the property specifically devised to objectant is granted, and the related objections are dismissed to the extent inconsistent with this decision.