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Matter of Estate of William F. Conway

Decided: October 28, 1966.


Sullivan, Kolovsky and Carton. The opinion of the court was delivered by Carton, J.A.D. Kolovsky, J.A.D. (dissenting in part).


The appeal and cross-appeals are from final judgments of the Essex County Court, Probate Division, instructing plaintiff First National State Bank of New Jersey (trustee), as the surviving trustee of a trust established under the will of decedent, William F. Conway, with respect to the allocation as between principal and income of certain shares of corporate stocks received by the trustee as a stockholder in each of two corporations.

Decedent executed his will on June 30, 1950. He died later the same year, and his will was admitted to probate on November 10, 1950. In paragraph Sixth of his will, he directed that one-half of the residue of his estate be placed in trust, and that the sum of $500 be paid quarter-annually,

"out of the net interest and income therefrom," to each of his two children.

In paragraph Eighth of his will, decedent provided:

"Eighth: I further direct that all dividends of money which may be received by my executor and trustees, whether ordinary or extraordinary, shall be considered as income and treated as such as herein provided; and all dividends of stock or other things of value, including all proceeds from the sale of 'rights' shall be treated as income, notwithstanding any legal rule to the contrary."

He further provided that his widow should have complete authority to increase the payments to whatever amount she deemed proper. The power was exercised by the widow on April 25, 1952, at which time she increased the childrens' allowance to "one-half to each of them of all the net interest and income from said trust."

Decedent further declared that the principal of the trust, upon the death of the last surviving child, should go to his widow, if she were alive, and if not, to whomever she appointed in her own will. The widow died in 1953. In her will she exercised this power by directing that upon the death of the last surviving child, the principal should be shared by seven institutional charities. The value of the principal was $245,238 in October 1953, the time of the first accounting, and had increased to $416,280 as of December 31, 1963, which was the close of the accounting period in the present proceedings.

Among the trust assets were a number of shares of common stock in E. I. DuPont de Nemours & Company. About 40 years ago, DuPont had purchased shares of stock in General Motors Corporation as an investment at a cost of about $132,000,000. Over the years this stock had undergone a tremendous increase in value, so that in 1962 DuPont carried the stock on its own books at a value of about $1,250,000,000. In that year, however, continued ownership by DuPont was held to be in violation of the federal antitrust laws. Consequently, DuPont was ordered by the United

States District Court for the Northern District of Illinois to divest itself of the stock "by such means as it [DuPont] may select." United States v. E. I. DuPont de Nemours & Co., 126 F. Supp. 235 (N.D. Ill. 1954) Pursuant to resolutions of its board of directors, DuPont decided to divest by distributing the stock in kind to its own shareholders in accordance with their respective holdings of DuPont stock.

Also among the assets of the trust were 170 shares of capital stock in The Chase Manhattan Bank. On January 29, 1964 the board of directors of the bank by resolution declared "a 50% dividend on its capital stock," payable March 6, 1964. The shares of stock which the bank used for payment of the dividend were new shares authorized by its stockholders on January 28, 1964, and the full amount of the aggregate par value of these new shares ($12.50 each, the same as the existing shares) was transferred from the bank's accumulated and undivided profits to its capital account. The bank's total capital was thereby increased from $174,594,425 to $261,891,638, and its earned surplus, which would have been available for payment of cash dividends to the stockholders, was substantially reduced. As a result of this dividend, the trust received 85 additional shares of Chase Manhattan stock.

The trustee now seeks instructions whether the 136 shares of General Motors stock and the 85 shares of Chase Manhattan stock should, under the terms of the decedent's will, be allocated as income to testator's children or retained as part of the principal of the trust.

The trial court concluded that the DuPont distribution of General Motors stock "was not a dividend of stock" within the meaning of paragraph Eighth of decedent's will, and therefore was allocable to trust principal. He concluded that the distribution of Chase Manhattan stock was such a dividend of stock and must be treated as trust income.

St. James Hospital of Newark (St. James), one of the remaindermen of the trust, appeals from that part of the judgment directing the allocation of the Chase Manhattan

stock to income, and Mary I. Rogers and James A. Conway, decedent's children, and life beneficiaries of the trust, appeal from those parts of the judgments directing the allocation of the DuPont stock to principal.

In construing a will the court is required to give legal effect to the testator's intent as expressed by the language used, and the circumstances from its execution until the testator's death. In re Cook's Estate, 44 N.J. 1 (1965). The court must place itself in the position of the testator and endeavor to accomplish what he would have done had he envisioned the present inquiry. Fidelity Union Trust Co. v. Robert, 36 N.J. 561, 573 (1962).

In general, whenever a testator creates a trust with life estate and remainder, it may be assumed that he intended the corpus to be preserved for as long as necessary to benefit the income beneficiaries during their life span. Where the testator has clearly expressed his intention as to whether dividends or other corporate distributions should be recognized as income or principal for purposes of allocation in a trust estate, such provision will be given controlling effect. In re Fera's Estate, 26 N.J. 131, 143 (1958); In re Armour, 11 N.J. 257, 279 (1953). The critical issue here is whether decedent, in the language used in his will, manifested an intention as to the treatment to be accorded to the DuPont and Chase Manhattan distributions. If no such intent can be ascertained governing the allocation of principal and income, the Principal and Income Act applies. N.J.S. 3A:14A-1 to 9 (1952), as amended, N.J.S. 3A:14A-4 to 9 (Supp. 1965)

The record is bare as to the circumstances surrounding the execution of the will in 1959, except for the statement appearing in the trustee's brief that the widow's will was made at the same time and that it contains an apportionment clause identical to that appearing in paragraph Eighth of testator's will. At that time New Jersey had not yet enacted the Principal and Income Act. Under then existing law, where not provided otherwise by will, stock dividends,

dividends payable in the stock of another corporation, and extraordinary cash dividends were apportioned between income and corpus under what is known as the Pennsylvania rule. Koehler v. Koehler, 99 N.J. Eq. 141 (Ch. 1926).

Decedent was a resident of Essex County, New Jersey, when he executed the will. He designated a Newark trust company as alternate executor and trustee. The language of paragraph Eighth (as well as the remainder of the will) clearly bears the imprint of having been drafted by an attorney. Since the verbiage used in this clause employs legal terms of art, it is a reasonable inference that the scrivener was a lawyer or one familiar with legal terminology and with the purpose of this clause. See In re Pleasonton's Estate, 45 N.J. Super. 154, 160 (App. Div. 1957).

On this hypothesis, and bearing in mind the very fact that testator saw fit to give specific direction with respect to allocation, it seems reasonably inferable from the language used in paragraph Eighth that this paragraph was designed to avoid the apportionments between income and corpus required under the Pennsylvania rule. The use of the phrase "notwithstanding any legal rule to the contrary" appears to be a direction in general terms that this rule of construction, otherwise applicable, was not to be applied in the allocation as between principal and income.


We come now to the inquiry whether the testator has manifested an intention that the DuPont distribution of stock of the General Motors Corporation was to be treated as income. The income beneficiaries contend that testator's direction that "all dividends of stock or other things of value shall be treated as income" is a clear mandate on this question.

Because of its unusual nature, the DuPont distribution does not fall readily into the familiar categories by which trust receipts are commonly allocated to principal or income, either under well established trust terminology and ...

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