Chemical Bank & Trust Co. v. Streat

188 N.E. 289, 263 N.Y. 159, 1933 N.Y. LEXIS 812

• Court: New York Court of Appeals
• Decided: December 5, 1933
• Status: Published

Opinions

O’Brien, J.

James Streat, a bachelor nearly eighty years of age, and his sister Bertha, a spinster of seventy, resided together in New York city. The brother possessed a competence and the sister had an annual income amounting to $8,000 or $9,000. In March, 1924, Miss Streat was stricken with apoplexy and in the following month her brother established a trust fund of approximately $100,000 which, under certain conditions, was to be for her benefit. The Chemical National Bank, predecessor of this plaintiff, was made trustee. In December of the same year the settlor died. By his will, executed three months subsequent to the establishment of the trust and six months prior to his death, he directed his executors to purchase an annuity for his sister sufficient to insure payment of $20,000 per annum, and this direction was obeyed. His will also provided that in the event that the trust agreement should be in force at the time of his death, it should remain in force during the lifetime of his sister, and that upon her death all funds subject to that agreement should become part of his residuary estate. His brother Thomas was made the residuary legatee.

After the settlor’s death his sister was adjudged incompetent, and in May, 1925, the Chemical National Bank and another were appointed a committee of her person and property. The committee received the annuity as well as the income from the incompetent’s individual estate. Exclusive of income from the trust fund, therefore, the sum of $28,000 or $29,000 per annum became available for Miss Streat’s maintenance. The committee never expended more than $15,000 in any one year toward her support and this sum is found to be all that was-reasonable and proper. Nevertheless the trustee paid over to the committee between December, 1925, and February, 1927, the sum of $7,408.76 from the income of' the trust fund. In November, 1930, Bertha Streat died intestate and Thomas Streat was appointed her administrator. At the time of the death of the beneficiary, the trustee had in its possession the sum of $17,012.76, accrued income from the trust fund.

The Appellate Division has decided that the $7,408.76 was improperly paid over to the committee and has surcharged the trustee with that stun and has held that it, together with the $17,012.76 accrued income, belongs to the residuary legatee of the settlor, rather than to the estate of the conditional beneficiary of the trust,

.Unless, the settlor made a present unqualified gift of the income to the beneficiary, the judgment is correct. Supported by evidence is , the finding by the Appellate Division That James’ purpose in executing the deed of trust was, not to increase Bertha’s income but it was to insure her against a loss of income in case she should be unable to collect the income from her own property, and also the finding that before making payments, from the trust fund the fact must appear to the trustee either that Bertha was in need of funds for her maintenance or for any other purpose or that the need arose from lack of availability of her own funds or from her inability to take the steps necessary to procure payment of such funds.

During the lifetime of the settlor the gift was, by the terms of the trust agreement, certainly no more than conditional. The right retained by the settlor to receive the income under certain conditions prevents the conclusion that the gift was absolute. The agreement recites James Streat’s purpose to provide a fund which may be available for his sister’s maintenance “ either when her individual income is insufficient for her needs, or when she is unable to obtain prompt payment thereof, whether by reason of her own physical disability, or otherwise.” It authorizes and directs the trustee, whenever in its judgment the sister is in need of funds and “ such need arises from lack of availability of her own funds or from her inability to. take steps necessary to procure payment to her of such funds,” in its discretion to pay out in a spirit of the broadest liberality such amounts, if necessary even from the principal, as may be proper in its judgment adequately to maintain her. James reserves the right to receive and retain any and all income from the securities constituting the trust fund and to revoke the agreement at any time, and he directs, in case of the termination of the trust by his sister’s death subsequent to his own death, that the trust securities shall be turned over by the trustee to his estate. By the terms of his will, the agreement “ shall remain in force during the lifetime of my said sister.” Also appears the provision for the purchase of a $20,000 annuity. There is no language in either instrument indicating an intent to transform, after the settlor’s death, the qualified gift into an absolute one. Whatever conditions, not exclusively personal, existed during his life were to remain in force after his death.

Not only the whole tenor of the trust agreement but the specific verbiage employed in that instrument manifests the clearest intent on the part of the settlor to withhold an absolute gift. The provision made for the sister’s maintenance was expressly held in reserve until such a time as drafts upon it might become necessary. During the lifetime of the conditional donor not one cent was ever expended from this trust fund for the benefit of the sister. It was all received and retained by him. The referee and the unanimous Appellate Division have held as matter of law that such right is a property rather than a personal right and we agree. A property right of course is transferable by will. That at some time necessity might require the use of part or even all of the income and the principal was a contingency clearly recognized by the settlor. Protection of his aged, shattered sister from want, safeguarding her every comfort, convenience and even luxury, appear both in the trust agreement and in the will to have been his dominant purpose. This object he accomplished without drawing upon either the principal or the income of the trust fund which had been designed by him to constitute only the last possible defense. The income from his sister’s individual estate added to the annuity amounted to nearly twice the sum deemed necessary by the trustee to be expended for her support. The conditions prescribed in the deed of trust never arose. The provisional beneficiary was, therefore, not entitled, under the terms of the trust agreement, to the income from the trust fund during the settlor’s life.

Since Bertha was not entitled absolutely during her brother’s life to any income from the trust, conditions were not changed by his death. Inasmuch as she possessed no unqualified property interest her estate derived no larger benefit. The settlor, if he had so elected, might have revoked the deed of trust, but so long as he refrained from the act of revocation the deed remained in full force, with all its conditions, until the death of Bertha. Irrespective of the question whether the property right to receive and retain any or all of the income which the settlor reserved to himself passed, during Bertha’s .life, to the residuary legatee by virtue of the settlor’s will, in any event it was not transferred to Bertha, for the contingencies mentioned in the agreement never happened. Moreover, while that instrument stood unrevoked, the settlor himself and his successor in interest were shackled by the conditions which he imposed. His own right to the income was not unrestricted. It was no more free from limitations than his sister’s, but it was subject to her necessities. To hold that James’ intent was to provide a fund available for her maintenance, if in the reasonable judgment of the trustee it should be required, and at the same time to retain an absolute right to compel the trustee to pay over the income to him even if his sister’s necessities were dire, would lead to such an inconsistent result as could follow only from an indefensible interpretation. Always, while the trust was in existence, the trustee was empowered, in the exercise of a reasonable interpretation of the conditions in the deed of trust and even against the consent of the settlor or the residuary legatee, to expend the whole or any part of the income and the principal for the maintenance of the conditional beneficiary.

Even though the trustee never was impelled by its judgment to draw upon the trust fund either during the life of the settlor or after his death, there would be no illegal accumulation. The trust deed did not direct an accumulation of income. It contemplated the probability that it would not be needed for Bertha's support yet also recognized the possibility, in the event of her inability to secure sufficient revenue from her individual investments during his life and the conceivable failure of the annuity after his death, that income from the trust might become indispensable. Such income as might remain uncollected by James or the residuary legatee and unexpended at any particular time by the trustee for Bertha's needs was not intended to exist as a dormant accumulation awaiting the termination of the trust for the benefit of some remainderman. The purpose can fairly be interpreted as a right belonging to the settlor and to the residuary legatee with the trustee’s consent either to receive and retain the income or to allow it to accrue into a reserve to be expended for Bertha in an emergency. At any time it might be called into active service.

The principle in Matter of Hoyt (116 App. Div. 217; affd., 189 N. Y. 511) is entirely different. In that case the courts decided that the entire income was intended absolutely to be devoted to the use of the beneficiary. The same is true in respect to Matter of Keogh (112 App. Div. 414; affd., 186 N. Y. 544). Also in Bloodgood v. Lewis (209 N. Y. 95) an absolute gift was made which was qualified only by the manner of payment. The rule in Cochrane v. Schell (140 N. Y. 516) that, in the absence of an express direction for the accumulation of surplus income, a direction may sometimes be implied is rendered inapplicable by the provision in this trust agreement that the settlor retains the right to eolleet all the income and by the fair interpretation that such conditional property right, subject to the necessities of • the provisional beneficiary, passes after the death of the settlor and before the termination of the trust to the residuary legatee. An implied direction leading to an invalid result must if reasonably possible be avoided. (Equitable Trust Co. v. Miller, 197 App. Div. 391; affd., 233 N. Y. 650.) By the settlor’s testamentary disposition, not only the corpus but “ all funds then subject to said agreement ” became part of his residuary estate. These funds necessarily include the accrued income undisbursed by the trustee for the benefit of Bertha-and uncollected under the terms of the trust by the settlor and his nominee, the residuary legatee. This provision negatives any idea of an absolute gift to Bertha.

The use of the words “ all funds' then subject to said agreement ” in the will is in marked contrast to such phraseology employed in the trust agreement as -was intended to describe merely the'-principal of the trust. In no other instance in either document does the settlor and testator utilize a single phrase to express a combination of principal and income. In the deed of trust appear such verbiage as “a fund,”, “-the securities;” “ said fund,” “ securities constituting- the trust fund,-” “ principal of the trust fund,’-’ all of which must in reason be deemed to apply only to the corpus. Again in thé trust agreement is used, in contradistinction to the -idea of principal, the term- “ accumulated income of the trust fund,” thus, in the deed of trust,' marking as emphatic a separation as is conceivable between the corpus and the product yielded from the principal. In the will James disposes into his residuary estate not alone the principal or the fund or the securities or said fund or the securities constituting the trust fund, but he directs that “ all funds then subject to said agreement ” shall go to his brother Thomas as residuary legatee. To refuse to recognize this distinction would be-- to ignore plain language and to thwart the intent of the settlor and testator.

The judgment should be affirmed, with costs to each appellant filing a brief payable out of the principal of the trust fund.