198 P. 209 | Cal. | 1921
Objections interposed to the settling of an annual account of a testamentary trustee form the basis of the present appeal. The decedent, Abraham Gartenlaub, who died June 1, 1914, devised and bequeathed the greater part of his estate in trust to the Union Trust Company of San Francisco and empowered the trustee to convert into money the estate thus received and invest the same in certain described bonds. By the terms of the will the trustee was directed to pay to Alice G.B. Gartenlaub, the wife of the testator, monthly, during her lifetime, three-fourths of the "entire net income, revenue and profit of every kind arising *650 from said estate in said month in any way whatever." The said Alice Gartenlaub appeals from an order of the superior court of San Francisco settling the fourth annual account of the trustee. Sarah Fox, who is the sister of the testator and the life tenant in respect to the remaining one-fourth of the "net income, revenue and profit," her two children, Harry and Gussie Fox, who are the remaindermen under the trust, and the trustee are the respondents. Appellant contends that, in the account attacked, the trustee has erroneously deducted certain sums from "income" and credited them to "principal."
Pursuant to the provisions of the will, the trustee has invested funds of the trust estate in certain bonds which it purchased at a premium. Obviously the amount of the premium cannot be collected from the obligor when the bonds mature, for the latter is liable only for the face value thereof. Consequently, if the bonds are retained by the trustee until maturity, the principal of the trust estate will be depleted by an amount equal to the premium paid. For the purpose of preventing a shrinkage of the principal in this manner, the trustee has, on each coupon date, deducted a portion of the interest collected on the bonds and credited the same to principal. It is calculated that at maturity the sum of the amounts thus taken from interest and credited to principal will equal the premium originally paid for the bonds. This deduction from interest is assigned by appellant as an unwarranted diminution of the income of the life tenant.
Whether a premium paid for securities purchased by a trustee for a trust estate should be charged against the principal or the income of the estate has never been decided in California and upon this question we find the decisions in the other states in sharp conflict. Whatever view may be accepted, it is clear that stone definite rule of action must be prescribed by this court and departures therefrom permitted only where the creator of the trust has given a clear and unmistakable direction to the contrary of that rule. The determination of the course to be pursued by trustees in such cases cannot be made wholly dependent upon the peculiar circumstances of each case as it arises, as has been attempted in some states. (McLouth v. Hunt,
The decisions which hold that a premium must be charged wholly to the principal of the trust estate, which is the rule contended for by appellant, are based largely upon the reason that a premium is paid to secure safety of investment, as well as high interest, and that, therefore, the premium is for the benefit of the remainderman as well as the life tenant. There is also the argument that there is a possibility that the bonds may be sold before maturity and, owing to fluctuations in market value, may, when thus disposed of, bring more than the sum for which they were purchased, so that these matters are likely to balance themselves in time. (Hite v. Hite,
A testator who creates a trust such as that in the instant case has two objects in view: First, the payment of the income arising from a fund to certain persons during lifetime; second, the transfer of that fund to certain individuals upon the death of the life tenants. The existence of a corpus, principal, or fund is an essential element of the trust and the preservation of this principal until the termination of the life estates is indispensable to the fulfillment of the testator's plans. Therefore, any depletion of the principal tends to frustrate the fundamental purpose of the trust and should be avoided and, where the price paid for a bond consists of more than the par value thereof, that method of accounting should be adopted which will prevent the impairment of the principal unless the testator has clearly directed to the contrary. Otherwise the life tenant, who is entitled to receive only income, will, in effect, have received a part of the principal. In other words, where a premium is paid, the ostensible interest yielded by the bond cannot be considered entirely as interest on the face value of the bond, for a sum in excess of the face value has gone into the investment and the amount of interest remains unchanged, resulting, necessarily, in a decreased rate of return. A portion of the nominal interest is, therefore, a repayment of the premium.
This duty to restore to principal the total amount invested in the bonds cannot be evaded upon the theory that the bonds may, as a result of fluctuations in market value, be sold at higher prices than those for which they were purchased. A trustee is not permitted to buy and sell on speculation. The fluctuations in market value after purchase by the trustee are merely changes in the value of the assets of the trust estate, which are to be wholly disregarded in any accounting between life tenant and remainderman for funds from the trust estate invested in income-bearing property. (In re Stevens, supra.)
[2] The deduction from interest of the amount paid as premium is not a violation of sections
In the present case the testator has given no direction that the principal of the trust estate should bear the loss occasioned by the wearing away of premium. The bequest to appellant of three-fourths of the "entire net income" cannot be interpreted as such a direction in view of the fact that part of the interest on the bonds is not, strictly speaking, income, but a return of capital. It is pointed out that the testator provided that no investments of trust funds should be made in bonds of the United States, "for the reason that said bonds yield too low a rate of interest." At the time of the hearing, United States Liberty bonds were yielding a higher rate of interest than many of the bonds of the trust estate after the deduction from their interest return of a proportionate part of the premium. This, it is urged by appellant, shows that no deduction should be made from the interest on the bonds of the trust estate, since the return to the life tenant would thereby be made lower than intended by the testator. This inference cannot be drawn from the provision in question, for any inference deduced from the provision in regard to United States bonds must be based upon the facts existing at the time the testator made the provision. At the time the will was executed and that the testator died, the year 1914, the interest on United States bonds was far lower than the lowest yield of any bonds of the trust estate after deductions on account of premium. The will contains the following provision: "If at the end of any one year it shall appear that my said wife has not received an average of at least the sum of seven hundred and fifty ($750) dollars for each month of said year . . . then andin that event said trustee shall resort to the personal property of the corpus of said trust estate, and thereout shall take sufficient to make up and pay over to my said wife a sum sufficient to make the aggregate receipts of my said wife the equivalent of seven hundred and fifty ($750) dollars for each month of said year." (Italics ours.) Appellant's income from the estate has not fallen below the sum of $750 per month, but has far exceeded that minimum and, consequently, *654 the only contingency upon which the testator has authorized payments to the life tenant from the corpus of the trust estate has not arisen. The testator has not only not directed the charging of premium to principal, but has clearly indicated that the corpus is not to be resorted to unless the income falls below the specified minimum.
The order appealed from made an allowance to the trustee of five hundred dollars as compensation to its attorney for legal services rendered by the latter upon a former appeal to the supreme court from an order settling the second annual account of the trustees (Estate of Gartenlaub, ante, p. 375, 16 A.L.R. 520,
The five hundred dollars thus allowed the trustee for attorney's services rendered in the litigation, as well as an additional allowance for so-called "ordinary" services of attorneys in connection with the preparation and presentation of the annual account of the trustee, were ordered paid from the income of the trust estate. The reasonablenoss of the sums allowed is not questioned, but it is claimed that they should have been charged to principal rather than income. The decision of Cogswell v. Weston,
The order appealed from must be modified in accordance with the rule set forth in the immediately preceding paragraph. That is to say, the income must be credited and principal charged with the amount allowed to the trustee as compensation for its attorney for "extraordinary" services in connection with the execution of the trust. The trial court is directed to so modify the order, and when so modified the order will stand affirmed, without costs to either party upon this appeal.
Sloane, J., Wilbur, J., Olney, L., Shaw, J., Angellotti, C. J., and Lawlor, J., concurred.
A petition for modification of judgment was denied by the court on June 9, 1921.
All the Justices concurred.