Chemical Bank & Trust Co. v. Streat , 263 N.Y. 159 ( 1933 )

James Streat, a bachelor, who for many years had resided with a sister, Bertha Streat, on April 10, 1924, made a trust agreement in which she was named as cestui que trust and plaintiff was named as trustee. The sister owned property which, under ordinary conditions, would provide an income of from $8,000 to $9,000 per year. About a month prior to the execution of the trust agreement, she was stricken with apoplexy with resulting paralysis which rendered her almost entirely helpless, physically, and caused impairment of her mentality. James Streat, the settlor, also had suffered one stroke of apoplexy and his state of health was precarious. A solicitous interest in the welfare of his sister is evidenced not only by the previous relationship of the parties and their physical impairments at the time, but as well by the language and provisions of the trust agreement, the material parts of which read as follows:

"WHEREAS the first party desires at all times to fully provide for the care, maintenance, and support of his sister, Miss Bertha Streat, and although his said sister owns a considerable amount of cash, securities and property, nevertheless, at times her physical health is such that she is unable to perform the acts necessary to collect the income therefrom so as to provide her with needed funds,

"Now therefore, for the purpose of providing a fund which may be available for and applied to the care, maintenance, and support of his said sister, Bertha Streat, 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, the first party does hereby assign, transfer and set over unto the second party the securities set forth in Schedule ``A' hereto annexed. Said fund is to be held by the second party until the death of Miss Bertha Streat, the sister of the first party, or the revocation of this instrument by the first party, whichever event shall first happen.

"The first party reserves the right from time to time to change or alter the securities constituting the trust fund and to receive and retain any and all income that may have been collected thereon.

"The second party is authorized and hereby directed at any time it may be made to appear to it that Miss Bertha Streat, first party's said sister, is in need of funds for care, maintenance, or support, or for any other purpose, 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, to pay out for the care, maintenance, and support of the said sister of the first party, or for any other similar purpose, such amounts as may be proper in its judgment to adequately care for, maintain, and support her. In exercising such discretion it is the desire of the first party that the broadest liberality be shown. Such payments to be made out of the accumulated income of the trust fund, if there be sufficient on hand, and if such income be insufficient, then out of the principal of the trust fund.

"The first party reserves the right to revoke this agreement at any time and to retake and repossess himself of the securities constituting the trust fund. In case of the termination of this agreement by the death of the first party's said sister, Miss Bertha Streat, then the securities constituting the trust fund, or so much thereof as may remain, shall be turned over by the second party to the first party, or to his estate, if he be not then living."

From the time of the execution of the agreement to the date of his death on December 21, 1924, James Streat, the settlor, exercised the right reserved in the third paragraph quoted to take the income collected by the trustee from the trust fund.

On July 2, 1924, less than three months after signing the trust agreement, James Streat executed a will in which he directed his executors to purchase annuities amounting to $20,000 per year for his sister, Bertha Streat, and directed that if the trust agreement should still be in force at the time of his death, the same should remain in force during the lifetime of his sister, and that upon her death all funds then subject to said agreement be disposed of as provided as to his residuary estate. The use of the words "all funds" does not indicate that he had in mind or referred to accumulated income as those are the very words which he repeatedly used in the trust deed as meaning the principal of the trust. He devised and bequeathed his residuary estate to his brother, Thomas Streat.

After Mr. Streat's death, Bertha Streat was found to be incompetent to manage her affairs and a committee of her person and property was appointed. The executors of the will of James Streat purchased for Bertha Streat annuities sufficient to insure her an annual income of $20,000, and payments were thereafter made by them to the committee of Bertha Streat at that rate down to the time of her death.

Following the death of James Streat, the trustee made certain disbursements for the account of Bertha Streat to her, to Thomas Streat and to others. After the appointment of the committee, the trustee adopted the practice of paying over income to the committee and between December 16, 1925, and February 28, 1927, paid over income amounting to $7,408.76. On or about the latter date, Thomas Streat, the residuary legatee, notified the trustee that he objected to the payment of income to the committee, and thereafter no payments were made.

On November 25, 1930, the date of the death of Bertha Streat, the amount of the income of the trust fund held by the trustee amounted to $17,012.76. This action was instituted by the trustee for the settlement of its account and for advice as to the proper distribution of the balance of income remaining in its hands.

The action was tried before a referee who approved the accounts with minor corrections, and held that the deed of trust made a present valid gift of the entire income from and after the death of the settlor to Bertha Streat, that the income in the amount of $7,408.96 paid to her committee during her life was properly paid, and that Thomas Streat, as administrator of her estate, was entitled to receive all income remaining in the hands of the trustee as of the date of the death of Bertha Streat.

The judgment of the Supreme Court entered upon the report of the referee was modified by the Appellate Division by surcharging the trustee with the amount of the payments made to the committee of Bertha Streat; by directing that all accumulated income be paid to the defendant Thomas Streat individually, and by surcharging the committee with the further sum of $606.98, interest on the accumulations of income in its hands. The important question for determination is whether Bertha Streat became entitled to the entire income from the trust fund from the date of the death of James Streat during the remainder of her lifetime despite the conditions contained in the trust agreement as to payment and disbursement of such income for her benefit.

We believe a proper construction of the trust agreement requires an affirmative answer to that question.

It is a general rule, well supported by authority, that instruments creating trusts under which the trustee is directed to pay over such income as may be necessary for the care, support and maintenance of a designated beneficiary vest in the designated beneficiary the entire income and not merely such portion as the trustee finds is actually necessary for the care and support of the beneficiary, and that an unexpended part of income becomes a part of the estate of the beneficiary. (Bloodgood v. Lewis,209 N.Y. 95; Matter of Keogh, 112 App. Div. 414; affd., 186 N.Y. 544;Matter of Megrue, 170 App. Div. 653; affd., 217 N.Y. 623.)

The fact that the majority of the cases supporting the rule involve the construction of testamentary trusts is due rather to the greater frequency with which the question has been presented in the construction of testamentary trusts than to any difference in principle.

The two conditions upon the happening of which the trustee was authorized to pay out the income of the trust fund for the benefit of the sister were not conditions precedent to her right to receive the income, but were conditions which attach only to the paying out of the income. The income was absolutely appropriated by the terms of the trust and the limitation was on the distribution of such income. There is a broad distinction between ownership of an income held in trust and the right to receive such income under the terms of the trust. The trustee was, under the terms of the trust deed, the custodian and conserver of the income of the trust fund with a discretion as to when and how it should be paid out for the benefit of the sister. (Matter of Hoyt, 116 App. Div. 217; affd., 189 N.Y. 511.)

Nor does the fact that James Streat, the settlor, reserved the right to change the securities in the trust and have the income paid to him during his lifetime make necessary the application of a different rule. The right reserved was personal. No grant of such a right to another upon his death is contained in the trust deed. That he intended to make the trust provision for his sister and to so limit the grant as to give to another the right to defeat the entire purpose of the trust is not to be presumed.

It is contended that unless the right to receive the accumulated income be held to pass under the will of deceased, the trust must be held void because violative of the statute against perpetuities. Since we hold that the gift was of the entire income not paid to the settlor under the right reserved, no question of a possible unlawful accumulation is presented.

The object of the statute is to prevent postponement of the vesting of title to property beyond the prescribed period and not to make it unlawful to place restrictions upon the time of payment or application of the property in fulfillment of the purposes of the trust. The securities were placed in the hands of the trustee for the sole purpose of the protection of the sister Bertha. No restriction is placed upon the title to the income; no gift over is made in the event that the trustee shall not find it necessary to pay to or for Bertha Streat, and the direction as to what is to be done upon the death of his sister is limited specifically to the securities constituting the trust fund or so much thereof as may remain, which securities are directed to be turned over to his estate.

That he meant that the principal and not accumulated income should be turned over to his residuary estate is indicated by the fact that the instrument recites the assignment to the trustee of "the securities set forth in Schedule ``A' hereto annexed. Said fund is to be held by the second party, * * *."

That it was intended that the accumulated income should at all times be available for use in the care of his sister and that it was contemplated that the income would accumulate in the hands of the trustee, is evidenced by the provision in the agreement reading as follows: "such payments to be made out of the accumulated income of the trust fund, if there be sufficient on hand, and if such income be insufficient, then out of the principal of the trust fund."

There is nothing inconsistent with this purpose or indicating any different intent on the part of James Streat in the fact that he created an annuity for his sister under his will. He recognizes in his will the existence of the agreement. He says in that will: "If the agreement heretofore entered into by me, under date of May 10, 1924, with the Chemical National Bank of the City of New York, shall still be in force at the time of my death, I direct that the same shall remain in force during the lifetime of my said sister, Bertha Streat, and that upon her death all funds then subject to said agreement shall be disposed of as hereinafter provided as to my residuary estate."

The funds which he had in contemplation when that clause was inserted in the will is indicated in the trust agreement where direction is given as to the disposition of the principal of the trust fund. Nothing in the deed of trust, in the will or the relation of the parties indicates an intent on the part of the settlor that the income in question should go to any one other than his sister Bertha.

Doubtless the settlor at the time he executed the trust deed and placed therein the clause reserving the right "from time to time to change or alter the securities constituting the trust fund and to receive and retain any and all income that may have been collected thereon," had in mind that as long as he lived he could and would look personally after the welfare and financial interests of his sister. He, therefore, reserved to himself the right to the income from the trust fund as long as he lived. He then provided for the payment of the income to his sister after his death. His purpose is unmistakable. It was to place with the trustee securities that would provide an income which the trustee might expend as and when needed by the sister, "such payments to be made out of the accummulated income of the trust fund, if there be sufficient on hand, and if such income be insufficient, then out of the principal of the trust fund."

At that time no one knew what the needs of the sister might be. In a certain year she might not need any of the income or only a part of it. Another year she might need more than the income for that year. If so, the trustee was empowered to use accumulated income and part of the principal if necessary. The provision is inconsistent with the notion that the residuary legatee, under the settlor's will, might draw the income which the testator had expressly provided in the trust fund should be used for his sister.

We must look at the situation as the settlor looked at it at the time of executing the trust deed. What was his intent at that time? The fact that it afterwards happened that the sister did not need the entire income has no bearing upon the question of the settlor's intent. He was not going to take any chances that she should ever be in need. It was to prevent that very possibility that the trust was established. At that time his will had not been executed. We cannot know that at the time of the execution of the trust deed he even contemplated providing an annuity for his sister by will.

During the interval of about three months between the date of the trust deed and the execution of the will, there was in existence no provision disposing of any surplus income from the trust fund after the death of the sister. The terms of the trust deed did not make any such provision. It only provided that the securities should be turned over by the trustee upon the death of the sister. The will did not change the situation.

Since there is no express direction as to disbursement of the accumulated income upon the death of Bertha Streat, it must be held to pass to her estate in accordance with the general principle above set forth. It, therefore, follows that since the income vested in the beneficiary subject to the restriction placed upon the trustee in paying it out, it acted in a proper exercise of its discretion in making payments to the legally appointed committee of the cestui qui trust and should not be surcharged with the amount of such payments. Likewise, it should pay over to the legal representative of her estate the accumulated income which accrued prior to her death, with interest thereon at clearing house rates from February 28, 1922, to November 25, 1930, as specified in the judgment entered upon the report of the referee.

We think the allowances made to counsel were excessive, and should be reduced in accordance with the judgment of the Appellate Division.

The judgment of the Appellate Division should be modified in accordance with this opinion and as modified affirmed, with costs in this court to each appellant filing a brief, payable out of the principal of the trust fund.

POUND, Ch. J., LEHMAN and KELLOGG, JJ., concur with O'BRIEN, J.; HUBBS, J., dissents in opinion in which CRANE and CROUCH, JJ., concur.

Judgment affirmed, etc.