South Carolina National Bank v. Arrington

165 S.E.2d 77, 252 S.C. 1, 1968 S.C. LEXIS 115

• Court: Supreme Court of South Carolina
• Decided: December 11, 1968
• Docket: 18849
• Status: Published

Opinions

Moss, Chief Justice.

John W. Arrington, a resident of Greenville County, South Carolina, died on November 14, 1938, leaving in force and effect his will dated September 26, 1935, and two codicils thereto dated July 16, 1937, and May 11, 1938, respectively. The will, with the codicils, was duly admitted to probate in the office of the Probate Court for Greenville County, South Carolina.

The testator left surviving him his widow, Mary Carter Arrington, and three sons, John W. Arrington, Jr., Richard W. Arrington and Nelson B. Arrington, and one daughter, Octavia A. Cameron. Under the terms of his will his three sons were named as executors and also as trustees of a trust created therein. The three sons duly qualified as executors of said will and were discharged on December 19, 1941.

After a bequest of certain personal property to his wife, the remainder and residue of his property was left in trust with the trustees as aforesaid, and they were directed, by Item II of said will, to apply the net income or profits to the payment of $100.00 per month to his mother, $75.00 per month to his aunt, $75.00 per month to each of the sisters named in his will, and the sum of $50.00 per month to a sister-in-law. It is then provided in Item II of said Will, as follows:

“(3) To pay the balance of the net income from the date of my death to my wife, Mary Carter Arrington, during her life. I make no provision for the payment of any fixed income to my wife for the reason that I have made provision for her by insurance and by a trust fund which I have created.

“(4) After the death of my wife, to divide and pay over the net income to my said three sons, share and share alike; the issue of any deceased son to take the parent’s share, per stirpes; and should there be no issue at the time of distribution such share shall go to the heirs at law of such deceased son determined as though he had died at the time of distribution.

“For the purposes of distributions hereinabove provided for, all income which may accrue to, or be received by, my executors during the period of administration, shall be treated as income, and not principal, nor corpus, whether in their hands or in the hands of my said trustees.

“Should the income at any time be insufficient to make all the payments hereinabove provided, the payments to my mother, as provided in subdivision (1) of this item, shall be made in preference and priority to any other payment herein provided for. Should the net income, after making the payments provided for in sub-division (1) be insufficient to cover in full the payments provided for in subdivision (2), such payments provided for in subdivision (2) shall be abated ratably. Should the income be insufficient at any time to make the payments to my mother, as provided in subdivision (1), my said trustees, in their discretion, may make such payments out of the corpus. In the event of the death of any beneficiary named in subdivisions (1) and (2), the monthly payments hereinabove provided to be made to her shall cease and be disposed of as the balance of the net income.”

The testator, by Item III of his will, provided:

“Upon the death of the last survivor of my said sons, or the death of the last of those who shall not have withdrawn as hereinafter provided, or the withdrawal of the last of them as hereinafter provided, or upon the death of the last survivor of the beneficiaries hereinabove named, whichever event is latest, the trust, herein provided for, shall cease and determine and the corpus of the trust estate, with any accumulation of undistributed income, shall be divided and distributed in the proportion of one-third to the issue of each of my said sons, per stirpes. Should there be no issue of either of my said sons surviving at the time of distribution, then his share shall pass to his heirs at law, determined as though such son had died at the time of distribution; provided, however, that at any time after the death of the last survivor of the beneficiaries mentioned in subdivisions (1), (2) and (3) of Item II, either of my said sons may withdraw his share; that is to say, one-third of the corpus of the trust estate, with his proportionate part of the undistributed income, and, thereupon, he shall receive his part or share, freed of all trusts, and he shall thereupon cease to be a trustee of the trusts herein provided for. Any distribution herein provided to be made may be made in kind; if made within the lifetime of any of my said trustees, the discretion of the trustees or of the survivor to be conclusive as to valuation and distribution.”

The testator, under Item II of his will, devised his real and personal property to his three sons as trustees, giving to them, as such, authority to hold, control and manage the same, and to collect rents, profits, income and proceeds therefrom, and with the right,

“to sell, resell, exchange or re-exchange, convey or reconvey, assign or reassign, any portion of the trust res, or any substituted property, including specifically the power to exchange stock or securities of one corporation for stock, common or preferred, or securities, of the same corporation or any other corporation; to hold, invest and reinvest proceeds of sale, and to collect and receive the. income and principal of such investments; * * *.”

The will provided that in all matters pertaining to the administration of the trust and in the distribution of the funds pursuant to Item III thereof, the decision of a majority of the said trustees, or the decision of the survivor if but one survived would be final and conclusive.

Richard W. Arrington died on December 18, 1947; John W. Arrington, Jr. died on November 27, 1956; and Nelson B. Arrington died on September 8, 1964. Each of said sons left a widow and children surviving, Polly P. Arrington, the appellant herein, being the widow of Nelson B. Arrington. Mary Carter Arrington, the widow of John W. Arrington, died October 15, 1953, and the last of the beneficiaries named in said will and codicil died August 3, 1966, and the trust was at that time terminated.

The South Carolina National Bank was added as a trustee on April 2, 1955. The bank brought this action asking for judgment declaring that capital gains from the sale of stocks, stock dividends, and stock splits received during the period of the trust, be declared corpus and that it be authoriztd to distribute the same to those entitled to such corpus. All necessary parties were properly joined in this action. An answer was filed by a duly appointed guardian ad litem on behalf of the minor defendants individually and as class representatives, submitting their interest to the protection of the court. Another granddaughter filed an answer joining in the prayer of the complaint.

Polly P. Arrington (now Polly P. Hudson), the widow of Nelson B. Arrington, filed an answer alleging that capital gains, stock dividends and stock splits should be apportioned between the life income beneficiaries and the remaindermen in accordance with the rule announced by this Court in Cothran v. South Carolina National Bank of Charleston, 242 S. C. 80, 130 S. E. (2d) 177. She asserts that a portion of the aforesaid assets should be apportioned to the estate of her husband, Nelson B. Arrington, of which she is a beneficiary according to the terms of his will.

The Master for Greenville County, to whom this case was referred, after holding a number of hearings, filed his report finding that it was the intent of John W. Arrington, expressed in his will, that all capital gains, stock dividends and stock splits received by the trustees during the administration of the trust, were properly allocated to the corpus thereof and no part of such items constituted income within the meaning of the trust. He recommended that the court authorize the bank, as trustee, to distribute that portion of the trust arising from these capital gains, stock dividends and stock splits to those entitled to the corpus of the trust. Within due time the appellant filed exceptions to the Master’s report and these exceptions were heard by The Honorable Wade S. Weatherford, presiding judge, and by his order he sustained the report of the Master. Polly P. Hudson prosecutes this appeal from the order of Judge Weatherford affirming the Master’s report.

We think that this appeal can be disposed of by an answer to the question of whether the testator by his will revealed an intent that capital gains, stock dividends and stock splits should be treated as corpus of his trust estate.

The appellant contends that the language of the will expressed no intention on the part of the testator that capital gains, stock dividends and stock splits should be treated as corpus of his trust estate. In the absence of such intention it is contended that the Pennsylvania Rule, established in the Cothran case, should be applied. However, the appellant does agree that if the testator’s intention is expressed in the trust, such will govern with respect to the distribution of the benefits between income beneficiaries and remaindermen.

In the construction of a will, the primary purpose of the court is to arrive at testator’s intention as expressed in his will considered as a whole. His intention must be ascertained from the language he used where it is clear and unambiguous. In construing a will primary resort is to the words used by the testator. Black v. Gettys, 238 S. C. 167, 119 S. E. (2d) 660; Shelley v. Shelley, 244 S. C. 598, 137 S. E. (2d) 851.

In the Cothran case this court was faced with the problem of whether stock dividends and profits realized by a trustee from the sale of stock were to be treated as principal or subject to apportionment as between principal and income, in the absence of an expression of the testator’s intention as to whether such should be considered principal or income. We held that stock dividends paid to the trustee and profits realized by it on the sale of stock did not go as principal but was subject to apportionment between the life income beneficiaries and remainder-men. In so holding we followed the Pennsylvania Rule. Stock splits were not involved in the Cothran case and our decision had no application to such. In the case of In re Pew’s Trust Estate, 398 Pa. 523, 158 A. (2d) 552, the Pennsylvania Court held that there is a substantial difference between a “stock split” and a “stock dividend”; in the former a division of shares of stock, not of earnings or profits of the corporation, takes place without any change in or impingement upon then existing status on corporate books of earned surplus and capital accounts; in the latter, an addition of shares of stock and a division of, at least, some of the earnings or profits of the corporation takes place, such division being reflected on corporate books by irreversible allocation of corporate funds from earned surplus to the capital account. It was held that a stock split represented neither a division of corporate earnings or profits and such stock split was not apportionable between life tenant of trust and remaindermen and was properly allocated to the trust corpus. This rule is here applicable.

The plan of John W. Arrington, as revealed by his will, demonstrates an intent to pass the corpus of his estate to the children of his three sons per stirpes, subject to payments out of the corpus under the conditions mentioned in Item II of the will; and also subject to the provision in Item III that at any time after the death of the last survivor of the beneficiaries mentioned in subdivisions (1), (2) and (3) of Item II of said will, either of his said sons might withdraw his share of the trust estate, with his proportionate part of the undistributed income. The testator made no provision for his daughter, Octavia Arrington Cameron “for the reason she is amply provided for.” He did make provision for monthly payments for his mother, his aunt and his two sisters and a sister-in-law, with the remainder of the income to his widow. The remainder plus the income from his insurance and from a trust previously established provided for her needs. Upon the death of the widow, the net income after the monthly payments provided in Item II of the will was to be paid over to and shared equally by his three sons during their lifetime. Finally the will provided that upon the death of the last survivor of the sons, or the death of the last of those who had not withdrawn their share, or upon the death of the last of the survivor of the beneficiaries mentioned in Item II of said will, whichever event was latest, the trust was to terminate and the corpus thereof with any accumulation of undistributed income was to be divided and distributed in the proportion of one-third to the issue of each of the said sons per stirpes.

There is express language in the will indicating the intent of the testator that capital gains from stock sales should be treated as corpus. In directing the trustees to hold, control and manage the trust assets, they were empowered to sell securities and directed “to hold, invest and reinvest proceeds of sale.” The trustees were not authorized to distribute to the income beneficiaries any portion of the proceeds of the sale of a security even if it was sold at a profit. To the contrary, he directs the reinvestment of these proceeds. The trustees were also directed to collect the income “of such investments”. We agree with the Master and the circuit judge that the foregoing language shows an intent that capital gains were to be treated as corpus.

We come now to the question of whether the will of the testator reveals an intent that stock dividends should become a part of the corpus of his trust estate. We have read and reread the will here involved and find no language therein which evinces an intent that stock dividends received by the trustees should become a part of the corpus of the trust.

The lower court assigned a further reason for treating capital gains, stock dividends and stock splits as corpus and not as income. It held that under Item IV of the will the trustees had the power and authority to allocate the foregoing items to corpus or income. This item of the will is as follows:

“In all matters pertaining to the administration of the trust herein provided for, and in all matters pertaining to the distribution of the trust funds pursuant to the provisions of Item III, the decision of the majority of my said trustees, or the decision of the survivor, if but one survive, shall be final and conclusive. In making investments they shall not be confined to investments authorized by law for trustees, but shall have the right to exercise their judgment without restriction and to make any investments, and, generally, to deal with the trust estate as freely as I, myself, if living, might do, and particularly, they shall have the right to invest in the stocks, common or preferred, and the securities of corporations.”

We find no authority in Item IV or any other part of the will authorizing the trustees to decide what constitutes income and what corpus. In the absence of such express authority the trustees did not hav-e the authority to allocate stock dividends between corpus and income. All that Item IV of the will does is to give a majority of the trustees named the right to perform the administrative and ministerial acts authorized under the provisions of the will.

It is our conclusion that the stock dividends here involved, under the Cothran case, should be apportioned in accordance with the rule set forth therein.

The respondent filed a petition with this court pursuant to the provisions of Rule 8, Section 10, of this court, for permission to argue against the authority of the Cothran case and asks this court to modify or overrule that decision, holding that stock dividends and capital gains held in trust should be apportioned between the life tenants and the remaindermen. It was asserted in the petition that the decision was based upon a misinterpretation of earlier decisions of this court and because the adoption by the General Assembly of the Uniform Principal and Income Act, as is contained in Section 67-501 et seq., of the 1967 Cumulative Supplement to the Code, providing for a treatment of capital gains and stock dividends different from the rule announced in the Cothran case, requires a review of such case to consider its modification to bring the common law rule in line with the statutory rule. The respondent argues that the Pennsylvania Rule, announced in the Cothran case, is unworkable and inequitable.

We have reviewed the Cothran decision in the light of the argument made by the respondent. Our decision in the Cothran case was the result of a careful consideration and analysis of previous decisions of this court. In the Cothran case we pointed out that the Pennsylvania Rule had been criticized and had been changed in some states by the adoption of the Uniform Principal and Income Act. In the face of the criticism made in the Cothran case of the Pennsylvania Rule, we felt that we would not be justified in overthrowing a rule established by our previous decisions, nor do we feel justified now in so doing. We adhere to the rule announced in the Cothran case. In this connection we point out that in accordance with the suggestion made in the Cothran case the General Assembly has adopted the Uniform Principal and Income Act. By the terms of the aforesaid act where an intent cannot be found in a will for the allocation of stock dividends and capital gains between the income beneficiaries and the remaindermen, the act allocates such, subsequent to the effective date thereof, to corpus. The rule applicable prior to such adoption is that set forth in the Cothran case.

It is contended by the respondent that even though stock dividends be treated as income such passes by Item III of the will to the children of Nelson B. Arrington and is not distributable to his estate. This contention is based on the provision of Item III of the will which provides that upon the termination of the trust “any accumulation of undistributed income shall be divided and distributed in the proportion of one-third to the issue of each of my said sons, per stirpes.” It is argued that since the stock dividends were never distributed to Nelson B. Arrington during his lifetime by the trustees and the same are in the hands of the trustees, such stock dividends represent accumulated undistributed income, the disposition of which is governed by the language of Item III of the will. In the case of In re Walbridge’s Will, 192 Misc. 746, 80 N. Y. S. (2d) 676, it appears that the testatrix created a trust in favor of one Benjamin Woods for life, and to pay at his death the principal of said trust fund and “any undistributed income in equal shares” to nine named nephews and nieces. The question was the apportionment of the income between the estate of the life tenant and the remaindermen. The court held that income which had accrued to the life tenant of the testamentary trust, but which had not been paid to the life tenant at the time of his death, was payable to the life tenant’s estate and not to the remaindermen under the provision of the trust that at the life tenant’s death, the principal of the trust and any “undistributed income” should be paid to the remaindermen. In the cited case the court said: “If the words in the will ‘undistributed income’ were interpreted in their literal sense to mean all income in the hands of the trustee not yet paid over to the life tenant, the rights to the income would be dependent upon the punctuality of the trustee, and moreover, the provision would amount to an unlawful accumulation”. The provision in Item III of the will for the payment of “any accumulation of undistributed income” means undistributed income which has been properly accumulated and not undistributed income which has accumulated by reason of the failure of the trustees to pay same over in accordance with the terms of the trust.

It is our conclusion that the stock splits and capital gains here involved should be treated as corpus of the trust created by John W. Arrington, and that stock dividends should be considered as income of the said trust and apportioned as such in accordance with the views hereinbefore expressed. It follows that the judgment of the lower court should be and is affirmed in part and reversed in part and this case is hereby remanded to the lower court so that an accounting can be had in accordance with the rulings herein made.

No opinion is expressed as to the period of time to be covered by the accounting for the purpose of apportionment.

Reversed and remanded.

Lewis and Littlejohn, JJ., concur. Bussey and Brailsford, JJ., dissent.