432 Pa. 184 | Pa. | 1968
Lead Opinion
Opinion by
An inter vivos trust was created in 1935 by H. T. Hallowell (settlor) by transferring to his son, H. T. Hallowell, Jr., as trustee, 1,000 shares of Standard Pressed Steel Company common stock. In the trust agreement, the settlor directed that: the trustee “shall hold the said shares of stock and any stock dividends paid thereon intact”;
In the years 1955 through 1961—that is, subsequent to settlor’s death and during the life tenant’s lifetime—
The Orphans’ Court of Montgomery County decided the stock dividends should be treated as income and not principal and awarded the dividends to the life
Certain facts are undisputed: (a) this trust antedated the 1945 and the 1947 Principal and Income Acts; (b) the dividends involved are at the rate of six per cent or less, payable in stock of the same class of the same company; (c) all the dividends were received at times when the 1947, i.e., the second, Principal and Income Act
The “rules in regard to allocation [of stock dividends] were devised to achieve a fair apportionment between beneficiaries and remaindermen, for the purpose of carrying out the putative intent of the settlor of the trust” and these “same rules should not be used where the settlor’s intent has been expressed with sufficient clarity, and where the question is whether the settlor’s expressed intent is to be defeated." See: 44 Cornell Quarterly 284, 290 (1959).
It was the theory of the court below that all small stock dividends, i.e., at the rate of six per cent or less, whether received prior to the passage of the 1945 and 1947 Principal and Income statutes when the so-called Pennsylvania Rule of Apportionment prevailed or subsequent to the passage of and during the time when the 1945 and 1947 Principal and Income statutes were in effect, must be considered income not principal, and that, despite what these statutes declare and, even though the settlor has clearly expressed his intent such dividends be considered principal and not income, the Act Against Accumulations strikes down the settlor’s intent because such intent contravenes the public policy expressed in the accumulations statute. Both premises, in our opinion, are erroneous.
With certain inapplicable exceptions, the Act Against Accumulations strikes down the accumulation
In reaching our conclusion in this matter Maris need not be overruled because since the decision in Maris the law has been changed by a legislative definition as principal of “all dividends”
Prior to the period wherein the instant small dividends were received the legislature had seen fit to classify such dividends, whether received in a pre-1947 or post-1947 trust, as “principal” and not “income”. The power and authority of the legislature to change the definition of dividends from “income” to “principal” is beyond question. See: McEldowney, supra, Norvel, supra, Reznor, supra, and Arrott, supra. In Norvell, supra, Mr. Justice Roberts, speaking for this Court, said (pp. 433, 434, 435) : “We are therefore led to the question whether the Legislature possesses eon
“We have no hesitancy in concluding that the Legislature has the power to define income.
Acting within the scope of its power and authority, the legislature designated small stock dividends as “principal”, not “income”, and, in so doing, it changed the so-called Pennsylvania Rule of Apportionment which was in effect when Maris was decided and upon which the Maris ruling was bottomed. It requires no citation of authority to establish that the Act Against Accumulations, supra, does not strike down accumulations of “principal” and these small stock dividends, by legislative fiat, deemed “principal at the time they were received”, could not be struck down by the Act Against Accumulations, supra.
Under Catherwood and Pew, stock dividends, up to and including six per cent, were considered not ap
“It would seem clear that to reaffirm and apply to small stock dividends the doctrine of Maris’s Estate would be out of keeping with the public policy of today, both in Pennsylvania and in other states. The whole situation is much changed since the decision of that case. The beneficiaries of a trust have no vested interest in the old rules of law. It would be unwise to make the legality of a direction by the settlor to allocate to principal what would otherwise be presumed to be income depend upon the time of the creation of the trusts, whether before 1939, before 1945 or 1947, before 1956, before 1963, or thereafter. Any such distinction as to the time of creating the trust would involve much trouble for future decisions.”
The basic error in the ruling of the court below lies in its refusal to recognize and heed the legislative
We disagree with the interpretation placed by the court below on Pew that all small stock dividends, regardless of when received and regardless of what the legislature has declared such small stock dividends to be deemed during the period of receipt of such dividends, must be classed as income. Pew does not stand for this proposition.
In Pew, Chief Justice Bell stated: “To summarize: We hold (1) that as to wills of persons dying before and inter vivos trusts created prior to the effective date of the Principal and Income Act of 1945, a gift of income or net income included small stock dividends of 6% or less, unless the testator or settlor clearly expressed a contrary intent; and (2) it is especially clear that in the light of the facts and circumstances which surrounded Mrs. Pew at the time she created the trust, she gave and intended to give to her grandson Arthur E. Pew, Jr., the life tenant of this trust, the small stock dividends which were paid annually, or as often as possible, to the owners of the common stock of the Sun Oil Company.” (Emphasis supplied) (411 Pa. at 109-110).
Time and again, this Court has stated that, unless in violation of public policy or the law, the intent of a settlor must prevail. For the reasons stated above,
The court below fell into error in two respects: first, in treating as “income” and within the orbit of the Act Against Accumulations, supra, those dividends which, at the time of their receipt, were clearly mandated by the legislature to be deemed “principal” and not “income”; second, in completely ignoring settlor’s unequivocally expressed intent that such dividends be considered as “principal”. Such errors led to a result contrary to the legislative intendment and the views of this Court set forth in Pew.
Decree reversed. Costs on estate.
This provision of the trust agreement clearly expresses settlor’s intent that all stock dividends be treated as principal and not as income.
The son has since assigned portions of his remainder interest so that half of the remainder interest is now owned by Hallowell Foundation (5.85%), Swarthmore College (21.76%) and the balance by the son.
Act of April 18, 1853, P. L. 503, §9, 20 P.S. §301.2 (Historical Note). Later statutes on the same subject (Act of May 25, 1939, P. L. 201, 20 P.S. §301.6 (Historical Note) ; Estates Act of 1947, P. L. 100, §6, 20 P.S. 301.1 et seq.; Estates Act Amendment of 1956, P. L. 1073, 20 P.S. §301.6), being applicable only to “conveyances” which take place subsequent to the passage of the respective statutes, are not applicable to this 1935 trust.
If the life tenant’s estate is correct in its contention, death taxes in that estate would be increased by about $200,000.00.
Emphasis supplied.
The decree of the court below is based upon the Statute Against Accumulations, its interpretation of Pew, Maris Estate, 301 Pa. 20, 151 A. 577 (1930) and McIlkenny Estate, 15 Fid. Rep. 367 (1965).
Act of July 31, 1947, P. R. 1283, §5, 20 P.S. §3470.5.
The Act of August 1, 1963, P. R. 442, 20 P.S. 3470.5, which amended the 1947 Principal and Ineome Act to provide that stock dividends of six per cent or less received thereafter be deemed income, concededly is inapplicable in the case at bar.
In Equitable Trust Co. v. Prentice, 250 N.Y. 1, 164 N.E. 723 (1928) substantially the same issue presented in Maris was presented to the New York Court of Appeals, a Court which up to that time and for sometime thereafter followed the so-called Pennsylvania Rule of Apportionment. Chief Judge (later Mr. Justice) Cardozo, speaking for a unanimous Court, held the discretion given to a trustee to allocate stock dividends to capital should prevail and that an allocation to capital under such circumstances was not an unlawful accumulation. See also: Matter of Heinrich, 90 N.Y.S. 2d 875 (1949) and Matter of Talbot, 9 N.Y.S. 2d 805 (1939).
It is common experience that “income” is a term which is, and always has been defined differently for various purposes by governmental agencies, regulatory bodies, taxing authorities, legislators, accountants, securities analysts, bankers, financial writers, lawyers and laymen.
See: Brief of amicus curiae (Darlington Estate) pp. 10-12.
See Note 11.
McIlhenny Estate, 15 Fid. Rep. 367 (1965), which reached the same result as the minority would reach, was, in our view,
Dissenting Opinion
The Majority Opinion in Hallowell Trust has three vices: (1) it may enrich or pauperize a life tenant every year at the whim of the Legislature, which is ridiculous; (2) in practical effect, it wipes out the applicability of the Statute against Accumulations to trusts and wills and written instruments at the date they were created or became effective; and (3) by necessary implications (or expressly), it overrules this Court’s decisions in Pew Trust, 411 Pa. 96, 191 A. 2d 399; Cannistra Estate, 384 Pa. 605, 121 A. 2d 157; Castner Estate, 412 Pa. 232, 194 A. 2d 330 (October 1963, which we note approved Maris’s Estate, 301 Pa. 20, 151 A. 577); and McIlhenny Trust, 15 Fid. Rep. 367 (Orphans’ Court of Philadelphia County).
In his 1935 inter vivos trust, the settlor Howard T. Hallowell, after giving the trust income to his wife for her life, clearly expressed his intention that stock dividends paid on the Standard Pressed Steel Company stock, which constituted the corpus of the trust, be and remain part of the corpus for the Ufe of his wife. In view of this provision of the trust, it is easily understandable why the Majority desire to reach the result they do. Nearly everybody dislikes the Statute against Accumulations and also the Rule against Perpetuities, each of which nullifies and destroys the intent of a testator or settlor. However, the Statute against Accumulations was the law of Pennsylvania at the time of the creation of the trust and had been the law of Pennsylvania since 1853, and, with a very important change, still is the law. The Majority Opinion is merely another example of the maxim that “hard cases [i.e., claims which are unappealing or inequitable] make bad law.”
The Majority reach their result by concluding that the Principal and Income Act of 1947 requires treating
When this trust was created in 1935, it was well settled law that a direction to keep these small stock dividends intact and as additions to principal was invalid and void. See Maris’s Estate, 301 Pa., supra. Mavis’s Estate held that a similar direction to allocate stock dividends to principal was void under the Statute against Accumulations because such stock dividends in fact and in law constituted income. Since Maris was bottomed and decided on the Statute against Accumulations (1853), we must review it and subsequent statutes and decisions.
The Statute against Accumulations, i.e., Act of April 18, 1853, supra, pertinently provided in Section 9: “. . . no person . . . shall ... by any deed, will, or otherwise, settle or dispose of any real or personal property, so and in such manner that the rents, issues, interest, or profits thereof, shall be wholly or partially accumulated for any longer term than the life or lines ... of any such grantor . . . settler [sic] ... or testator . . ."
Section 9 of the Statute against Accumulations was amended by the Act of May 25, 1939,
In 1947, the Rule against Accumulations was incorporated into tlie Estates Act of April 24, 1947, P. L. 100. In this Estates Act, the Rule against Accumulations again permitted a settlor or testator to direct (or authorize) the allocation of extraordinary
The Majority Opinion holds that whether a direction to treat dividends as principal or income depends
Statutes
The Principal and Income Act of May 3, 1945, P. L. 416, was in effect for only about two years when it was repealed in toto by the Principal and Income Act of July 3, 1947, P. L. 1283, 20 P.S. §3470, which reenacted almost verbatim the Act of 1945.
Section 2 of the Principal and Income Act of 191¡"¡ pertinently provided: “This act shall govern the ascertainment of income and principal, . . .: Provided, That the person establishing the principal may himself direct the manner of ascertainment of income and principal . . . and such provision and direction, where not otherwise contrary to law, shall control, notwithstanding this act.” This proviso and condition is utterly ignored by the Majority, even though the Majority Opinion states that “Time and again, this Court has stated that, unless in violation of public policy or the law, the intent of a settlor must prevail.” Furthermore, if the Principal and Income Act of 1947 treated
The Principal and Income Act of 1947 was amended by the Act of August 1, 1963, P. L. 442, 20 P.S. §3470.5, to provide that dividends or distributions of stock of the same class shall be deemed income if the number of shares distributed was six per cent or less. However, this amendment by its terms is applicable only to corporate dividends paid subsequently to August 1, 1963.
Decisions
This is obviously and unquestionably a pre-191f5 trust—such trusts have often vexed and more recently perplexed many. Notwithstanding the Majority’s wishful thinking, Maris's Estate, 301 Pa., supra; Pew Trust, 411 Pa., supra; and the cases hereinafter discussed, together with the Statute against Accumulations, govern, without any doubt, the questions or issues raised or involved in this case. In Maris’s Estate, this Court decided that small stock dividends were, and always had been for 100 years, income
The Pew Trust was created in 1932 and involved the question of whether annual stock dividends of six
“While very few lawyers knew or could unravel and very, very few laymen knew or had ever heard of Pennsylvania’s equitable Rule of Apportionment of extraordinary stock dividends and of proceeds of sale of stock, every lawyer and every layman?’ (testator and settlor alike) and every cestui que trust knew that small stock dividends had for over 100 years always
In the instant case, there was no doubt of the testator’s intent to allocate small stock dividends to principal instead of having them continue to be income. However, a settlor’s or testator’s intent cannot prevail when it is contrary to or violative of the law, and to this extent his intent is limited and must yield to the pertinent law. Pew Trust, 411 Pa., supra; Cannistra Estate, 384 Pa., supra; Castner Estate, 412 Pa. 232, 194 A. 2d 330. In Pew Trust, 411 Pa., supra, the Court said (page 106) : “In Walton Estate, 409 Pa. 225, 186 A. 2d 32, the Court aptly and relevantly said (page 231) : ‘ “ ‘ “No rule regarding wills is more settled than the great General Rule that the testator’s intent, if it is not unlawful, must prevail” ’ ”: Collins Estate, 393 Pa. 519, 522, 143 A. 2d 45. . . .’ ”
In Cannistra Estate, 384 Pa., supra, the beneficiaries of the testamentary trust sought its termination. The Court aptly said (page 607) : “No rule regarding wills is more settled than the great General Rule that the testator’s intent, if it is not unlawful must prevail! . . . The foregoing century-old principle or rule is nevertheless subject to several exceptions: For example, the testator’s intent cannot prevail when it is against public policy (Moorehead’s Estate, 289 Pa. 542, 137 A. 802; Cf., also, Africa Estate, 359 Pa. 367, 59 A. 2d 925); or violates the rule against perpetuities (Newlin Trust, 367 Pa. 527, 80 A. 2d 819), or statutory restrictions such as the statute of accumulations (Warden Estate, 382 Pa. 311, 115 A. 2d 159); or where the testator gives a fee simple or absolute estate
In Costner Estate, 412 Pa. supra, which involved a 1932 testamentary trust, the Court (in an Opinion by Mr. Justice Benjamin R. Jones) reaffirmed Maris’s Estate, 301 Pa., supra, and held that a testamentary direction to accumulate income in a testamentary trust was void under the Act of April 18, 1853. In Costner Estate, Mr. Justice Jones speaking for the majority of the Court, said (page 240) : “However, as we stated in Howell’s Estate, 180 Pa. 515, 519, 37 Atl. 181: 1 . . when the policy of the law is violated by a direction to accumulate no effect should be given to the intention of the testator ....’” In the dissenting Opinion by Mr. Justice Roberts, he relevantly says (in a footnote, page 241) : “Section 9 of the Act of April 18, 1853, P. L. 503, 20 P.S. §3251, is applicable. It is repealed only as to conveyances effective on or after January 1, 1948.”
The Majority Opinion not only overlooks the facts in Pew Trust, 411 Pa., supra, and mistakes the law, but in order to sustain their conclusions, the Majority have to expressly repeal the 1853 Statute against Accumulations which was in effect at the time of the creation of this trust in 1935.
The error of the Majority is made even clearer by the fact that under their interpretation and theory, they would hold that small stock dividends in a pre1945 trust are principal and after 1945 are principal or income, depending upon the annual whim of the Legislature and changeable retroactively by it every year it meets. This is obviously unrealistic and absurd. Both the settlor’s intention and this provision of the Hallowell trust must be ascertained and governed and limited by the law in effect at the time this inter vivos trust was created.
In this case, President Judge Alfred L. Taxis, Jr., in an able adjudication, correctly held (1) that settlor intended all stock dividends, irrespective of the amount, to be retained in principal; and (2) that the net income from his estate be paid to his wife for her life; and (3) that the Principal and Income Act of 1947 does not apply to stock dividends of six per cent or less; and (4) that the stock dividends of six per cent or less are income unless the settlor or testator (a) clearly directed to the contrary and (b) such direction was valid and not contrary to law; and (5) that a direction in a pre-1945 trust to accumulate stock dividends of six per cent or less by adding them to principal is not valid if and when and to the extent it violates the Act of 1858. It follows that these small stock dividends are payable after settlor’s death as income to the settlor’s wife for her life.
For all of the foregoing reasons, I would affirm the Decree of the Court below.
Italics throughout, ours, unless otherwise noted.
The Majority Opinion quotes at great length from an opinion of Professor Austin W. Scott, which was part of an amicus brief filed in this case. As Scott states: “The Pennsylvania legislature was not satisfied with the decision in Maris’s Estate. By the Act of May 25, 1939, P. L. 201, it is provided that in trusts becoming
It is important to note that both the 1939 and the 1947 Acts which changed the Rule against Accumulations were limited to extraordinary stock dividends and made no reference to small or ordinary stock dividends.
Finally, in 1956, the Statute or Rule against Accumulations, as set forth in the Estates Act of 1947, supra, was amended effective April 1, 1956, P. L. 1073, to provide that: “No direction or authorization to accumulate income shall be void, except . . . [u]pon the expiration of the period allowed by the common law rule against perpetuities as measured by actual rather than possible events, . .
With certain exceptions, not here relevant.
Emphasis in original.
Concurrence Opinion
Concurring Opinion by
In my view this case presents little difficulty. We held most recently in Arrott Estate, 421 Pa. 275, 217 A. 2d 741 (1966) that the 1947 Principal and Income Act could and should be applied to trusts created before its adoption. That legislation clearly provides that all stock dividends shall be deemed principal, a legislative directive which accords with Mr. Hallowell’s expressed intention. Thus, since the Legislature has told us that during the period these dividends accrued, i.e., during the period prior to the 1963 amendments to the Principal and Income Act, all stock dividends are to be deemed principal, obviously a direction by the settlor to accumulate these dividends as part of principal does not violate the Statute Against Accumulations.