Opinion
Submitted February 14th, 1941.
Decided April 25th, 1941.
1. An infant beneficiary cannot be bound by a settlement agreement, assented to by all the adult beneficiaries, which resulted in the transfer of an uncollectible asset to the corpus of the trust and lessened the infant's one-quarter share in the residue of the decedent's personal estate which the infant would be entitled to receive on the death of his father.
2. Decedent created a spendthrift trust with the definite intention that no part of it should be made available for the benefit of his son's creditors, of whom the estate is one. The trustee was given specific instructions as well as discretion by the codicil creating the spendthrift trust as to the use of trust income. He could apply such part of it as he deemed proper for the son's support, or he could withhold all of it from the son, or use part or all of it for the maintenance of the son's wife and child, but he could not apply it to any other purpose even with the son's consent. Held, no part of the income from the trust fund can be applied on account of the debt due the estate from the son, who is insolvent.
3. A substitutional gift is subject to all the incidents, conditions and limitations which attach to the original gift.
4. By a codicil to his will, decedent revoked each of the unconditional gifts made for his son and gave the same quantity of his estate (reiterating his intention to revoke his original gift to the son) to a trustee to hold in trust for life for a limited and uncertain benefit (and even no benefit) to his son, with provision that the corpus of the trust should go to the child or children of said son. Held, the gift by the codicil is not a substitution for the original gift given by the will, subject to such limitations as by law would attach to the original gift, but rather is a new and independent gift taking the place of the gift annulled by the revocation.
On appeal from a decree of the Prerogative Court advised by Vice-Ordinary Fielder, who filed the following opinion:
"Austen H. McGregor died August 1st, 1927, survived by his wife, Emily R. McGregor, and his four children, Graham B. McGregor, Dorothy McGregor Horner, A. Malcolm McGregor and J. Donald McGregor. He left a will and two codicils admitted to probate by the surrogate of Monmouth County August 15th, 1927, and letters testamentary thereon were granted to Emily R. McGregor, Graham B. McGregor, J. Donald McGregor and Hugh B. Reed.
"By the will the testator gave to his son J. Donald McGregor, a half interest in his common stock in McGregor Co. and some jewelry and directed that the residue of his personal estate be divided into four parts, one of which parts he gave to each of his said four children and he appointed Emily R. McGregor, Graham B. McGregor and J. Donald McGregor executors. He also directed his executors to cause a corporation to be formed and to convey to it all of his real estate, and to receive in consideration therefor the capital stock of the corporation, which capital stock he gave one-half to his wife, one-fifth each to his sons Graham B. McGregor and J. Donald McGregor, and one-tenth to his son A. Malcolm McGregor.
"By his first codicil he revoked each and every devise and bequest to his son J. Donald McGregor under said will (except items of jewelry), and he gave `each and every interest, share and part which in my said will I have given, devised or bequeathed to my said son, J. Donald McGregor, and which I have by this codicil revoked.' to Federal Trust Co. in trust to hold and invest and to use the net income or such part thereof as said trustee should deem necessary or proper, for the maintenance and support of his son J. Donald McGregor for life, giving said trustee discretion to use the net income or all of it for the maintenance and support of said son's wife, or the maintenance, education and support of the child or children of said son, and he directed that after the death of said son the trust fund with all accumulations of income be paid to the child or children of said son. Conditions attached to the trust against participation therein by the son's creditors, disclose that the trust was created as a spendthrift trust.
"By his second codicil the testator revoked the appointment of Federal Trust Co. as trustee for J. Donald McGregor and appointed Hugh B. Reed to act in its place in the same manner as directed by his first codicil, and he also appointed Mr. Reed as executor to act with the executors named in his will.
"The executors filed no inventory and filed no account until May, 1937, to which account seventeen exceptions were filed by the guardian ad litem appointed by the Monmouth County Orphans Court for John McGregor, the only child of J. Donald McGregor, which exceptions were referred to a master for hearing, and his report sustaining some of the exceptions and surcharging the executors, was affirmed by decree of said Orphans Court entered July 20th, 1939. This appeal was taken from so much of said decree as sustains three exceptions and it comes up on the testimony taken before the master and on the Orphans Court record.
"1. The first exception so sustained orders the executors to set up a principal sum of $14,370.50 for the corpus of the trust fund held for the benefit of J. Donald McGregor and his infant son, the interest on said sum to be payable to the testator's estate on account of indebtedness due said estate from J. Donald McGregor.
"When the executors entered upon their duties, the estate consisted of real estate subsequently appraised at $1,254,800 and personal property valued at $63,360.86 and they found that Malcolm McGregor held the decedent's note for $50,000. It therefore appeared that the personal property which had come to their hands would be insufficient to pay decedent's debts, funeral expenses, inheritance taxes and the cost of administration and that there would be no residue to be divided into four shares as directed by the will and that it might be necessary to sell real property which decedent had directed should be conveyed to a corporation to be organized by the executors. They also found that stocks of the appraised value of $115,000 were in possession of Graham B. McGregor, endorsed over to him by decedent; that Dorothy M. Horner held stocks appraised at $88,000 which she claimed as her property; that Graham B. McGregor was indebted to decedent for $43,206.40 and that J. Donald McGregor was also indebted to decedent for $46,933.75. After much negotiation and about October, 1928, Graham, Dorothy and Malcolm agreed with the executors to and did surrender the assets and rights held or claimed by them and that Graham should be charged with his indebtedness to the estate, all on condition that the trust fund created for the benefit of Donald and his son should be charged with Donald's indebtedness to the estate and that the income from the trust created for the benefit of Donald and his children, should not be paid to Donald but should be credited to Donald's said indebtedness.
"The record shows that Donald McGregor was insolvent and that it was not possible to collect the indebtedness due from him to decedent. He had an interest in a trust fund to the extent of $32,563.25, created by decedent in his lifetime which was subject to a judgment which Malcolm and Dorothy paid, taking an assignment of the judgment, thus, in some way not explained, freeing Donald's interest in the trust and enabling the executors with Donald's consent, to take over such interest for which they credited $32,563.25 against Donald's indebtedness to decedent, leaving a balance of $14,370.50 due from him to decedent's estate. The settlement was of great advantage to the estate in that it secured for all beneficiaries under the residuary clause of the will assets appraised at upward of $253,000, made up of $115,000 in stocks held by Graham, and $88,000 in stocks held by Dorothy, and the $50,000 note held by Malcolm was canceled thus enriching the estate to the extent of $253,000. It was a settlement made with the consent of all adult beneficiaries but it left an indebtedness of $14,370.50 due the estate from Donald.
"In their account the executors charged themselves with Donald's indebtedness of $14,370.50 as an asset of the estate, and they prayed allowance for the same sum by charging it in the nature of an asset turned over to the Donald McGregor trust fund, for part of the trust's share on division of the residue of decedent's personal estate into four parts. Notwithstanding that it was done pursuant to the settlement agreement among the adult heirs, it cannot affect the interest the infant beneficiary has in the corpus of the trust fund because the infant could not be bound by a settlement agreement which resulted in transfer of an uncollectible asset to the corpus of the trust and lessened the infant's one-fourth share in the residue of decedent's personal estate, a share which the infant will be entitled to receive on the death of his father. The executors should be surcharged with said amount of $14,370.50 and, because it represented an uncollectible asset, they should be allowed credit for it in their account.
"It is my conclusion that the $14,370.50 indebtedness from Donald should be treated as an uncollectible asset and that no part of income from the trust fund can be applied on account of it. The trust was created as a spendthrift trust with the definite intention that no part of it should be made available for the benefit of Donald's creditors, of whom the estate is one, and the trustee was given specific instructions as well as discretion by the codicil which created it, as to the use of trust income. He may apply such part of it as he deems proper for Donald's support, or he may withhold all of it from Donald, or use part or all of it for the maintenance and support of Donald's wife and child, but he may not apply it to any other purpose even with Donald's consent. If he were to pay the whole or any part of the income to the executors in reduction of Donald's debt, he would defeat the decedent's expressed intention which was that no part of income of the trust should be devoted to any purpose other than the support of Donald, or his wife and children.
"The executors point out that had the share given Donald by the will not been changed by the codicil, such share would have been subject to deduction for his debt and they contend that the change made by the codicil resulted merely in a substituted legacy equally responsible for Donald's debts.
"A substitutional gift is subject to all the incidents, conditions and limitations which attach to the original gift. By his will the decedent had given an absolute interest in some stock and in the residue of his personal estate and in shares of a corporation to be formed, to his son Donald. He gave no direction that the gift should be subject to any condition and if Donald could have taken the gift under the will, his debt would be a charge thereon only by operation of law. By his first codicil he revoked absolutely each of the unconditional gifts made for Donald and he gave the same quantity of his estate (reiterating his intention to revoke his original gift) to a trustee to hold in trust for life for a limited and uncertain benefit (and even no benefit) to Donald, with provision that the corpus of the trust should go to a new beneficiary, thus absolutely cancelling his original gift and completely altering its nature and terms. If Donald's debt should be charged against the corpus of the trust thus provided for, the result would be to charge Donald's children with their father's debt and the intention of the decedent that those children should ultimately receive one-fourth of his residuary personal estate would be frustrated. I cannot regard the gift by codicil to be a substitution for the original gift given by will and subject to such limitations as by law would attach to the original gift, but rather as a new and independent gift to take the place of the gift annulled by revocation. Voorhees v. Voorhees' Ex'r, 18 N.J. Eq. 223; McGill v. Trust Company of New Jersey, 94 N.J. Eq. 657.
"I conclude that the Orphans Court decree should be affirmed to the extent that it orders the executors to set up a principal sum of $14,370.50 for the corpus of the trust, in place of the debt due the estate from J. Donald McGregor which they transferred to the trust fund; that it should be reversed to the extent that it directs that interest or income from the trust during the life of J. Donald McGregor should be paid to the executors to apply on account of said indebtedness."
Mr. Everett B. Smith, for the appellants.
Mr. Harold McDermott, for the respondent.
The decree under review will be affirmed, for the reasons expressed in the opinion of Vice-Ordinary Fielder.
For affirmance — THE CHIEF-JUSTICE, PARKER, DONGES, HEHER, PERSKIE, PORTER, COLIE, DEAR, WELLS, WOLFSKEIL, RAFFERTY, HAGUE, THOMPSON, JJ. 13.
For reversal — CASE, BODINE, JJ. 2.