Opinion
No. 39348
Decided January 5, 1966.
Wills — Construction — Intent of testator governs — Exception — Testamentary trust created — Broad powers granted to trustees — Allocation of capital gains and stock dividends to income — Courts will not interfere with allocation, when.
1. The fundamental rule of construction of a will is that the intent of the testator must govern, unless to give effect to that intent would create an estate forbidden by law.
2. Where a will which establishes a trust grants to the trustees of the property broad powers of sale, investment, voting of stock and all other powers to act which, in their judgment, are necessary to proper and advantageous management of the trust, and gives the trustees the power to determine the propriety of their own actions by a majority vote of the trustees, and gives the trustees discretion to allocate all receipts and all disbursements between principal and income, with the sole exception that premiums on investments shall be charged against principal, such powers indicate that it was the intention of the testator to permit the trustees, in the exercise of their discretion, to allocate capital gains and stock dividends to income, and in the absence of bad faith, abuse of discretion or action inconsistent with the purposes for which the trust was created, the court will not interfere with such allocation.
APPEAL from the Court of Appeals for Montgomery County.
John Q. Sherman died testate on July 27, 1939, leaving his widow, Katherine M. Sherman, and eight living and unmarried children, the oldest of whom was approximately 20 years of age. There were no grandchildren at the time of Sherman's death. His will was dated May 4, 1937.
As of the time of the institution of this action, all the children were living, and there were 16 grandchildren.
By item III(a) of John Q. Sherman's will, he directed the creation of eight equal separate trust funds of which the appellees are trustees, and by item III provided further:
"(b) If my wife, Katherine M. Sherman, shall survive me, my trustees shall pay to her during her lifetime, the sum of twenty-five thousand ($25,000) dollars per year, out of the net income derived from the trust funds herein created.
"(c) After payment of said twenty-five thousand ($25,000) dollars per annum to my said wife, 80% of the remaining net income derived from each trust fund shall be considered and hereinafter referred to as `surplus income.' After the death of my said wife, 80% of the net income derived from each trust fund shall be considered and hereinafter referred to as `surplus income.'
"(d) My trustees shall pay the `surplus income' derived from trust A to my son, John Neary Sherman, as long as he shall live, and after his death, if he leaves a lawful descendant or lawful descendants surviving him, the `surplus income' shall be paid, share and share alike, per stirpes and not per capita, to such lawful descendants of his as may be living on the date each installment of income becomes due (said lawful descendants to share only in case the parent through whom they claim is dead) until the death of all of my said son's lawful descendants or the sooner termination of this trust.
"Upon the death of the final survivor of my said son and all of his lawful descendants, my trustees shall divide equally and distribute the trust estate, including both principal and income among the other trusts set up and provided for under paragraph (a) hereof, and then remaining in effect; if none of said trusts then remain in effect, my trustees shall divide and distribute the trust estate, including both principal and income, in the proportions and to the persons then living who would be entitled to take under the Ohio laws of descent and distribution in effect as of the date of the execution of this will."
By provisions of subparagraphs (e), (f), (g), (h), (i), (j) and (k) of said item, provisions of trusts "B" through "K" were made, in terms identical with the provisions of item III(d) set forth above, each for the benefit for one of the other seven children. Under item IV of said will, the testator granted, inter alia, to his trustees the following powers:
"(a) In their discretion, to retain and continue to hold as a part of the trust estate any property or investment owned by me at the date of my death without liability for depreciation or loss occasioned by doing so;
"(b) To sell at public or private sale, to grant options to sell, to exchange, re-exchange or otherwise dispose of all or part of the property, real or personal, at any time belonging to the trust estate upon such terms and conditions and for such considerations as they shall determine and to execute all instruments of sale or conveyance necessary or desirable therefore [ sic];
"* * *
"(e) To invest any money in the trust estate in stocks, bonds and other securities or property, real or personal, secured or unsecured, whether the obligations of individuals, corporations, trusts, associations, governments, or otherwise, either within or outside of the state of Ohio, as they shall deem advisable, without any limitation whatsoever as to the character of investment under any statute or rule of law regarding trust funds or investments by fiduciaries or otherwise:
"* * *
"(j) To consent to the reorganization, consolidation, readjustment of the financial structure, or sale of the assets of any corporation or other organization the stocks or securities which are owned by my trustees and to take any action with reference to such stocks or securities which in the opinion of my trustees is necessary to obtain the benefit of any such reorganization, consolidation, readjustment or sale; to exercise any conversion privilege or subscription right given to it as the owner of any property constituting a portion of the trust estate; to accept and hold as a part of the trust estate, the securities or stocks resulting from any such reorganization, consolidation, readjustment, sale, conversion or subscription;
"* * *
"(m) To determine in their discretion how all receipts and disbursements shall be credited, charged, or apportioned between income and principal except that premiums on investments shall be charged against principal and shall not be amortized against income; [Emphasis added.]
"(n) To do all other acts in their judgment necessary or desirable for the proper and advantageous management, investment and distribution of the trust estate;
"(o) To allot to any separate trust or share hereunder an undivided interest in any part or all of the trust estate, to make joint investments for two or more separate trusts or shares, to make division or distribution wholly or partly in property in kind, and the decision of my trustees respecting the value of any property so allotted, divided or distributed shall be binding upon all beneficiaries concerned;
"(p) To pay to any beneficiary of any trust hereunder or expend for his or her benefit such portions of the principal of the trust estate from which he or she is deriving income, as the trustees in their uncontrolled discretions shall deem necessary or advisable to meet the expenses of education, illness, marriage, death or other emergency;
"* * *
"(q) To determine in their discretion how the annual payment of twenty-five thousand ($25,000) dollars to Katherine M. Sherman, shall be charged or apportioned among the trust funds created by item III hereof. It is my desire that said annual charge be equally apportioned among said trust funds if possible."
The eight trusts have been administered in substantially the same manner and are to last for 21 years beyond the life of the last survivor of the settlor's eight children.
The cost value of the assets of each trust was approximately $375,000, and the market value of each as of November 30, 1960, was $2,397,000. Each income beneficiary is presently receiving approximately $50,000 per year from his or her respective trust. The surviving widow of the settlor receives a fixed annual income of $25,000 per year to be apportioned equally among the eight trusts prior to disbursement to the children.
After the payment of $25,000 to the widow, 80% of the remaining net income was paid to the children, and 20% was transferred to corpus. The retained income as of November 30, 1960, amounted to $103,357.81 for each trust.
In December 1941, the John Q. Sherman estate sold 110 of the original shares of Standard Register stock to each of the trusts, resulting in a net capital gain of $134,076.80, which was added to corpus. In October 1956, a recapitalization of Standard Register occurred, and, in November 1956, each trust, for its 110 shares of capital stock in the Standard Register Company, received a recapitalization exchange of 1650 class A shares, and 5,280 common shares.
In 1958, the executors distributed equally to each of the eight trusts 10,835 A shares and 26,003 common shares.
In November 1956, as part of a public offering of the stock of Standard Register Company, the John Q. Sherman estate and each of the eight trusts sold 25% of the common shares for $22.45 per share. The estate realized a net capital gain of $1,329,191.36 and each of the eight trusts realized a net capital gain of $22,111.46. This was accounted for as corpus.
Each of the eight trusts retains 13,109 shares of class A and 31,462 common shares of the stock of the Standard Register Company, having a cost value of $141,684.04 and a market value of $2,147,765 as of November 30, 1960.
On February 15, 1960, a 5% stock dividend was declared by the Standard Register Company, which resulted in each of the eight trusts receiving 624 shares of class A and 1,498 common shares of the Standard Register Company, having a market value of approximately $127,320.
All the capital gains realized and the newly issued shares of stock in the estate and in the trusts have been allocated by the executors and the trustees to corpus, except the 5% stock dividend of 1960, which remains unallocated.
The accountant for the trusts and several of the life beneficiaries raised the question, at the time of the recapitalization and public sale of Standard Register Company stock and the declaration of the 5% dividend, as to whether the trustees might not allocate some or all of these items as receipts to the income beneficiaries under the provisions of item IV (m) of the will, granting discretionary power to apportion receipts between income and principal.
The trustees brought an action in the Probate Court of Montgomery County requesting the construction of certain provisions of the will, a declaration of rights of the parties, and the direction and instruction of the trustees. That court determined, inter alia, that, under the provisions of item IV (m) of the will, the trustees had discretion to allocate receipts between income and corpus contrary to the established law of Ohio, that receipts which had previously been allocated could not be reallocated, and that the trustees, under item IV (m) of the will, could allocate the 5% stock dividend to income or corpus. Upon appeal on questions of law and fact, the Court of Appeals found that the trustees have the power, under item IV (m), to distribute as income capital gains derived from the sale of stock constituting the corpus of the trusts, and to distribute the 1960 5% stock dividends and future stock dividends as surplus income, since this reflects the intention of the testator as expressed by his will.
The cause is before this court upon allowance of a motion to certify the record.
Messrs. Turner, Wells, Granzow Spayd and Mr. Robert Vaughan Spayd, for plaintiff appellees (trustees).
Messrs. Lair, Herkins, Lair Wiseman and Mr. Anthony R. Lair, for defendant appellees (life tenants).
Messrs. Beigel, Mahrt, O'Grady Duffy and Mr. Louis R. Mahrt, for appellant, Henry L. Beigel, guardian ad litem for minors and trustee for unborn persons.
The question presented to this court for decision is whether the trustees of the Sherman trusts have discretion under item IV (m) of the will of John Q. Sherman to allocate stock dividends and capital gains to income.
The answer to this question depends upon the intent of the testator in creating the power granted the trustees under item IV (m) of the will.
The fundamental rule of construction of a will is that the intent of the testator must govern unless to give effect to that intent would create an estate forbidden by law. Carter v. Reddish (1877), 32 Ohio St. 1; Linton v. Laycock (1877), 33 Ohio St. 128. This does not, however, prevent a testator from giving his trustees power to act in a manner in which they could not act if the will were silent.
With regard to the question before the court, a rule has previously been approved which allows full effect to be given to the intent of the testator. That rule is that, in the absence of an expressed intention of the testator to the contrary, stock dividends and capital gains are a part of corpus and not income.
In Devenney v. Devenney (1906), 74 Ohio St. 96, 102, the court stated the generally accepted rule with respect to increase in the value of corpus, or capital gain, as follows:
"* * * That rule is that, in the absence in the will of an expressed intent otherwise, the increase in the value of the corpus held by a trustee from natural causes is principal and not interest."
In Lamb v. Lehmann, Trustee (1924), 110 Ohio St. 59, the court had before it a question relating to the characterization of stock dividends as "income" or "principal," under a testamentary trust agreement providing that the trustee should pay the net income to the life beneficiary during her lifetime and at her death distribute the principal to the remainderman. The court held that stock dividends should be considered as principal, in the absence in the agreement of a definition of income. The court stated in paragraph three of the syllabus:
"Where a will disposes of the net income upon stock in a corporation, without defining the term `income' or limiting its meaning within or expanding it beyond that which would depend upon the regular action of the board of directors of such corporation, the testator will be presumed to have had in mind the lawful power and control of the corporation over the use and distribution of profits."
In both those cases, it is implicit that if the testator had desired a contrary result with respect to the allocation of stock dividends or capital gains and had expressed that desire, the court would have given effect to it. See, also, Millar et al., Admrs., v. Mountcastle (1954), 161 Ohio St. 409; Hopkins, Trustee, v. Cleveland Trust Co., Trustee (1955), 163 Ohio St. 539; 1 Restatement of Trusts 2d (1959), 563, Section 233, comment (p.); III Scott on Trusts 2 Ed. (1956), 1773, Section 233.5.
The questions, then, are: Did the testator intend to include stock dividends and capital gains as receipts, and did he intend that the trustee should have the power to allocate such receipts between principal and income?
There is no serious contention that capital gains can not be treated as receipts. The contention of appellant is that stock dividends are the identical property which the trustees had prior to the declaration of such dividends. The appellant contends that such a dividend could not be considered a receipt on authority of Millar v. Mountcastle, supra.
In order to determine the answer, it is necessary to look to the provisions of the will.
The provisions with which this appeal is concerned gives the trustees the following powers, among others:
"(m) To determine in their discretion how all receipts and disbursements shall be credited, charged or apportioned between income and principal except that premiums on investments shall be charged against principal and shall not be amortized against income."
This item provides for discretion in the trustees with respect to the allocation of all receipts and disbursements except premiums on investments.
An examination of the entire will and the broad discretion it grants to the trustees and the complete confidence which it places in their judgment leads to the conclusion that the use of the term, "all receipts," indicates that the testator intended that anything of value which came into the hands of the trustees should be subject to the discretionary power of allocation. The stock dividend in question was received by the trustees and does have value.
While, for the purpose of distribution of property under the so-called half-and-half statute (as in Millar v. Mountcastle, supra), stock dividends may be treated as representing the same property as that property represented by the stock acquired as a result of a bequest in a will before issuance of the stock dividend, that concept is not controlling in this case.
So long as a trustee acts in good faith and exercises sound discretion, a court will not substitute its judgment for that of the trustee. The settlor has placed this discretion in the trustee because he desires the trustee's honest judgment, and not that of the court. Hopkins v. Cleveland Trust Co., supra, 548 and 549.
The law at the time of the creation of the trust was that stock dividends and capital gains were to be allocated to principal, absent an intent of the testator to the contrary. If the testator here had not intended that his property should be allocated other than according to the established law, he could merely have omitted this provision from his will. Appellant argues that the intent was to give discretion only in cases of bona fide doubt as to the nature of the item to be allocated. So to hold would do violence to the language of item IV (m) which uses the term, "all." If the testator had not intended that the trustees should have discretion as to all receipts and disbursements he certainly would not have used the word, "all."
It is also argued by appellant that an interpretation granting the trustees discretion to allocate stock dividends and capital gains to income would render the power to invade corpus under item IV (p) useless. Such is not the case. For example, under the power to allocate, the trustees may, in their discretion, withhold receipts from income and build corpus, thus preventing a lowering in value of the assets. It should be noted that only under the power to invade corpus may the surviving spouse receive more than $25,000 per year. If corpus were invaded the trustees could then replenish it through an allocation of income to corpus.
Appellant argues further that in item IV (p) the trustees were given uncontrolled discretion to invade corpus, while in item IV (m) they were given merely discretion. While this is true, it is also true that this uncontrolled discretion is to be exercised only in case of an "emergency," such as those specifically named.
This court concludes, from a reading of the broad provisions of the will, that items IV (m) and IV (p) are complementary and are not mutually exclusive. The discretionary powers of the trustees were conferred to afford great flexibility in management of the trusts and to afford a workable balance between providing for the life beneficiaries and maintaining the trusts for 21 years beyond the life of the last survivor of the life beneficiaries.
Item IV (r) of the will provides:
"Should at any time a question arise in the minds of my trustees or executors concerning the propriety of doing anything in the discharging of their duties as trustees or executors, then the decision of a majority of my trustees or executors will control." (Emphasis added.)
It is evident from a reading of this provision that the testator intended to place full power over the administration of the trust in the hands of a majority of his trustees, and not in a court, by allowing them to determine the propriety of their own actions. A court will not interfere, so long as the trustees do not act in bad faith, abuse their discretion, or act in a manner inconsistent with the purposes for which the trust was created. There has been no claim that the trustees have done so here.
Therefore, under the provisions of the will here involved, the trustees have sufficient power to allocate both stock dividends and capital gains to income, and the judgment of the Court of Appeals is affirmed.
Judgment affirmed.
ZIMMERMAN, MATTHIAS and HERBERT, JJ., concur.
TAFT, C.J., SCHNEIDER and BROWN, JJ., dissent in part.
For the reasons stated in paragraphs three, four, five and eight of the syllabus of Millar et al., Admrs., v. Mountcastle, 161 Ohio St. 409, and paragraph four of the syllabus of Hopkins, Trustee, v. Cleveland Trust Co., Trustee, 163 Ohio St. 539, stock splits and stock dividends in the nature of stock splits are not receipts which may be allocated to income by a trustee unless the trust instrument specifically confers authority upon the trustee so to do by unequivocal and express language.
I, therefore, dissent from paragraph two of the syllabus of this case so far as it pertains to stock dividends in the nature of stock splits.
TAFT, C.J., and BROWN, J., concur in the foregoing dissenting opinion.