Guaranty Trust Co. v. Halsted

This action was brought by a trustee under a trust indenture for the purpose of procuring a decree determining the persons to whom certain surplus earnings of the trust fund should be paid. The trust indenture was executed on July 28th, 1919, by one Angier B. Duke, against whom an action of divorce brought by

The trust indenture required the trustee to collect and receive the income from the securities transferred and directed that, after deductmg expenses of admmistration, it should “ pay, apply and distribute the residue of the same ” as provided in certain clauses of the indenture designated (A), (B), (C) and (D).

Clause (A) provided that the trustee should make payments as follows: “ To the said Cordelia B. Duke the sum of Twenty thousand dollars a year in equal montMy installments so long as she shall five; or if the grantor or the said Cordelia B. Duke shall hereafter obtain a decree of divorce one from the other and the said Cordelia B. Duke shall thereafter remarry, thereafter the sum of Ten thousand dollars a year, in equal montMy installments so long as she shall live.”

Clause (B) provided that the trustee should make further payments as follows: “ To each of said children, Angier B. Duke, Jr., and Anthony Newton Duke, for his maintenance, education and support, the sum of Five thousand dollars m equal montMy installments so long as he shall live and tMs trust shall continue; ” if either of said cMldren should die before the termination of the trust, then to the surviving issue of such child for their maintenance, education and support, so long as the trust should continue; if either of said children should die without issue before the termination of the trust, then the said five thousand dollars of income to the surviving child or Ms issue.

Clause (C) provided that the trustee should make the

Clause (D) provided that all income not distributed as provided in clauses (A), (B) and (C) during the continuation of the trust should “ be paid annually, in quarterly installments so long as this trust shall continue to said grantor, or in case he dies before the termination of this trust, after his death to those who may be entitled thereto by virtue of the will of said grantor, or in case he leave no such will, to those who may at the time of his death be his next of kin under and in accordance with the then statutes of distribution of the State of New York.”

The indenture also provided that the trust should continue during the fives of Angier B. Duke and Cordelia B. Duke; that it should terminate upon the death of the survivor of them; that thereupon the trustee should divide and distribute all the properties then held by it in equal shares between the two children, if then surviving; that in case either of the children should then be dead the share of such child should become payable to his issue per stirpes; that if there were no such issue such shares should become payable to the surviving child or his issue then living; that if there were no surviving child the trustee should distribute the properties held among the next of kin of the grantor.

On October 24th, 1921, the marriage between Angier B. Duke and Cordelia B. Duke was dissolved by a decree of divorce duly obtained by the plaintiff in the action above referred to. On September 3d, 1923, Angier B. Duke' died, leaving as his only heirs at law and next of kin Angier B. Duke, Jr., and Anthony Newton Duke, the two children named in the trust agreement, the former being then of the age of eight years and the latter of the age of five years. He also left him surviving his 'father, Benjamin N. Duke; his mother, Sarah B. Duke; and his sister, Mary Duke Biddle. . On April 24th, 1924, Cordelia

The will of Angier B. Duke made certain specific bequests to legatees. It then directed that the executors cause an inventory and appraisal to be made of “ all the property (which shall include all rights, powers and interests in, over and concerning property of every kind and wheresoever situated) which I may own at my death, setting forth every item therein at what is, in their judgment, its then cash value.” Whatever might remain of the property thus inventoried and appraised “ after satisfying and performing the other items of this will, paying my just debts and defraying the costs, the charges and expenses of administering my estate, including therein all taxes legally assessed against the same,” was expressly denominated by the testator “ my residuary estate.”

The residuary estate thus to be constituted was devised and bequeathed by the will as follows:

(a) One-fourth in value to the testator’s mother for life, remainder in fee to his sister, but if his sister left no issue living at her death, to his then heirs according to the statutes then governing the descent of real estate in New York;

(b) One-fourth in value to the testator’s sister, but if she left no issue living at her death, then to his mother for life and at his mother’s death or at his sister’s death without issue then living, if his mother be not then alive, to his then heirs according to the statutes then governing the descent of real estate in New York;

“ (c) One-fourth in value of said residuary estate to The Farmers’ Loan and Trust Company, in trust, however, for the uses and purposes following: Said Trustee shall collect and receive the income, revenues and profits thereof, and shall pay, apply and distribute the same to and for the support, education and maintenance of my son, Angier B. Duke, Jr., so long as he shall five, and after

(d) One-fourth in value to the Farmers’ Loan arid Trust Company upon a trust for Anthony Newton Duke and his lineal descendants, expressed in words identical with the words of the trust last above given, except that the name Anthony Newton Duke appears in place of the name Angier B. Duke, Jr., and vice versa. '

The trust indenture provided, as we have stated above, that the surplus income, after the death of the grantor of the trust, should be “ paid annually, in quarterly installments, so long as this trust shall continue ” to “ those who may be entitled thereto by virtue of the will of said grantor ” or “ in case he leave no such will, to those who may be at the time of his death his next of kin under and in accordance with the then statutes of distribution of the State of New York.” In default of “ such will,” Angier B. Duke, Jr., and Anthony Newton Duke, the grantor’s only children, would be entitled to

The first question we have to determine is whether or not, if “ such will ” has been made, i. e., a will naming persons entitled to the surplus income, such persons would take under the trust indenture or under the will. The case of Genet v. Hunt ( 113 N. Y. 158 ) seems conclusive upon the point. In that case a woman, who was about to marry, conveyed property to trustees. The trustees were directed to pay the income of the trust estate to. the settlor during coverture; if she survived her husband, to pay her the principal fund; if she did not survive her husband, then to make payments as she might direct by her last will. The settlor died during coverture leaving two children named “ George ” and “ Mary.” By her last will she directed her executors to divide her, property into two equal parts; to pay to George the income on the half set apart for him, during life; to pay to Mary the income on the half set apart for her, during fife; at the death of either child to pay the principal to the heirs and next of kin of such child; if either child should die without issue before attaining lawful age, then to the survivor upon the same terms as his own share. It is apparent that, if the remainder was limited to pass by the trust deed, the absolute power of alienation might unlawfully have been suspended for more than two lives, viz., the lives of the settlor, of George, and of Mary. On the other hand, if it was limited to pass by the will, the power would have been suspended at the most for the lives of the two children. It was held that the source of the title was the trust indenture, not the will; that the validity of the suspension provided in the will was to be determined by the test of the validity to be applied in case the provisions of the will had been incorporated in the trust deed; that, so construed, the trust created an unlawful suspension and the gift of the remainder was invalid.

The case of Doctor v. Hughes ( 225 N. Y. 305 ), much relied upon by the respondents, holds nothing to the

The Genet and McComb cases conclusively establish that the surplus income in question is not an asset of the estate of Angier B. Duke; that the right thereto passes by the trust deed and not by the will; that such income is not payable to the executors under the will for accumulation or disbursement; that the will can operate only as a designation of the beneficiaries of the trust; that the duty rests upon the trustee itself to pay over surplus income

The will makes no reference to the trust. It in terms makes no- designation of beneficiaries to take thereunder. Nevertheless, designation may be present in the will by virtue of the terms of section 18 of the Personal Property Law (Cons. Laws, ch. 41), which are as follows: “ Personal property embraced in a power to bequeath, passes by a will or testament purporting to pass all the personal property of the testator; unless the intent, that the will or testament shall not operate as an execution of the power, appears-therein either expressly or by necessary implication.” The will in question does purport to pass all the personal property of the testator, including “ all rights, powers and interests in ” property owned by him. Howev'er, if the testator made dispositions of his property which by their very nature are inapplicable to the subject of the power, the intent of the testator not to execute the power would “ by necessary implication ” appear and the power would fail of exercise.

The testator did not himself determine the persons to whom specific securities or properties should pass, and thus, by the indirect method of bequeathing to particular persons properties necessarily inclusive of the subject of the power, accomplish a designation of beneficiaries entitled to the surplus trust income. The allotment of specific securities and properties to particular legatees and the devotion of such properties to specific purposes was committed by the testator into the hands of his executors. Thus, if the testator made an appointment of beneficiaries to receive the trust income, he may be said to have done so only through an allotment to be made by his executors within the terms of the will. The question is, therefore, May the executors, in accordance with the terms of the will, make a disposition of the trust

The executors were authorized by the will, after the payment of certain specific legacies, to apply to the payment of the testator’s debts such part of his remaining assets, as might be necessary. May the executors direct the trustee finder the trust indenture to apply surplus income to that end? It seems clear that the testator could not have contemplated such a disposition of trust income. He could not well have supposed that his .creditors would consent to deferred payments of their claims, in quarterly installments through a series of years, when the estate was otherwise amply supplied with funds to make full and immediate satisfaction. Manifestly the testator could not have intended the trust income to be so used. Moreover, it would seem to be clear that the devotion of stich income to that purpose would accomplish an unlawful accumulation. An unlawful accumulation occurs not only when income is added directly to capital, but when capital is indirectly increased by the application of income to debts which otherwise diminish capital. (Hascall v. King, 162 N. Y. 134 .)

We have shown that the executors were directed to cause an appraisal to be made of every asset of the estate; that the securities so appraised, after specific legacies and debts were paid, were to constitute the testator’s residuary estate; that the estate so constituted was to be divided into four parts; that “ one-fourth in value ” was bequeathed to the testator’s mother for life, with a remainder to his sister and others thereafter; that “ one-fourth in value ” was bequeathed to his sister, with a remainder to his mother and others thereafter; that “ one-fourth in value ” was bequeathed to a trustee for the benefit of Angier B. Duke, Jr., during his fife, and thereafter in per capita shares for the benefit,of the lineal

May the executors, in apportioning one-fourth of the assets to the satisfaction of any one of the four bequests, include in the fund apportioned the right to surplus trust income at the capitalized valuation of $432,719.97? May they direct the trustees under the trust indenture to pay out the surplus income in accordance with the terms of one of the bequests and thereby accomplish a suitable designation of the persons named in such bequest as the beneficiaries entitled to surplus trust income? Under the terms of the trust indenture the payment of surplus trust income was to continue during the life of Cordelia B. Duke, and at her death to cease. In spite of actuarial computations, Cordelia B. Duke might die immediately following the making of the apportionment. In that event the set of' beneficiaries designated to receive the surplus income would thereafter enjoy a principal fund less by $432,719.97 than that to be enjoyed by the other three sets. Moreover, the value of the right to surplus income, regarded as an asset of the estate, would substantially diminish during each year that Cordelia B. Dukg continued to live, accordingly as her prospects of life grew less with advancing years. In the instance of each of the four bequests, therefore, owing to the wasting nature of the asset, regarded as an asset of the estate, those in remainder would take a principal fund of a value far less than the testator intended they should have, while the first takers, by their enjoyment of the full surplus income, would destroy in part or in whole the value of the right- thereto, considered as a capital asset. This would be true whether the executors directed the trustee to apply the surplus income upon one of the four bequests, to the exclusion of the other three, or equally

The testamentary trustee urges that, in order to maintain a proper balance between the four sets of beneficiaries, as well as between the first taker and the remaindermen of any one set, sufficient sums should be reserved from surplus income to make good the annual loss in value of the right to such income, regarded as a capital asset. Where an asset of an estate is of a wasting character, an asset “which may be consumed in the using,” such a method of amortization, in the absence of a testator’s direction to the contrary, is ordinarily employed. (Howe v. Earl of Dartmouth, 7 Vesey’s Ch. Rep. 137; Cairns v. Chaubert; 9 Paige Ch. 160 ; Matter of Elsner, 210 App. Div. 575 .) Doubtless no illegal accumulation results, since the apparent income is used not to increase but to preserve the capital fund, and since, moreover, the apparent income, to the extent that its disbursement may impair capital, in itself partakes of the nature of principal. There are, however, compelling reasons why no amortization may be had in the case at bar. In the first place it is basically unsound to regard the right to surplus income as a capital asset of the estate of Angier B. Duke. As we have shown, title to such income passes by the trust indenture and not by the will, so that the right thereto is not an asset of the estate over which the executors have control. The income may not be paid to the executors; it must be paid directly by the trustee to the beneficiaries named by the mil, if any.

The will provides in relation to the one-fourth of which Angier B. Duke, Jr., was to be the first taker, as well as to the one-fourth of which Anthony Newton Duke was to be the first taker, that each one-fourth share be paid over to the Farmers’ Loan and Trust Company, as trustee. That trustee is not directed to pay income on either one-fourth share directly to Angier B. Duke, Jr., or to Anthony Newton Duke. On the contrary, it is required to “ pay, apply and distribute the same to and for the support, education and maintenance,” in one instance, “ of my son Angier B. Duke, Jr., so long as he shall live ” and of his descendants after his death, and, in the other instance, for the support “ of my son Anthony Newton Duke ” and his descendants. The will provides that such payments “ shall be in such amounts and at such times as in the uncontrolled discretion of such trustee may be by it deemed necessary and advantageous for such purposes.” It will be remembered that in Herzog v. Title Guarantee & Trust Co. (supra) there was a deed to a trustee of certain property with directions to pay net income as directed

We thus find that the trust indenture, the source of title, and the will, relied upon by the respondents as an instrument of designation of trust beneficiaries, are incapable of reconciliation. The will requires, as stated, that the testator’s estate be divided into four equal

The will, it is true, does purport to dispose of “all rights, powers and interests in, over and concerning property of every kind ” belonging to the testator. It is argued that the reference to “ powers ” conclusively shows that the testator intended to exercise the power of appointment reserved by the trust indenture. That paragraph of the will, which contains the clause referred to and directs the executors to make an inventory, contains also the following clause: “All property of whatever kind and wherever situate which the will of my father or the will of my mother either gives me or gives the right to dispose of by my will shall be included in such inventory and appraisal, it being my intention that this and the succeeding provisions of this will shall be an exercise of any such power or disposition by will given me either by the will of my father or the will of my mother.” It is significant that neither this clause nor any other clause in the will specifically refers to the power reserved by the trust indenture. The omission gives color to the thought that the word “ powers ” in the clause first above mentioned refers only to powers under the will of the father and mother of the testator and that the testator, therefore, did not intend to make a dis

The judgment of the Appellate Division and that of the Special Term should be reversed and judgment ordered directing the trustee, the plaintiff, to make payment as herein provided, with costs in all courts to all the parties appearing, payable out of the fund.

Cardozo, Ch. J., Pound, Crane, Andrews, Lehman and O’Brien, JJ., concur.

Judgment accordingly.