Title: In Re Estate of Perkins

State: minnesota

Issuer: Minnesota Supreme Court

Document:

182 N.W.2d 881 (1970) In re ESTATE of Lillian C. PERKINS, Deceased. FIRST NATIONAL BANK OF WINONA and Mrs. Clifford Dartt (nee Bertha Featherstone), et al., beneficiaries under the last will and testament of Fred O. Perkins, Deceased, Appellants-Respondents, v. MERCHANTS NATIONAL BANK OF WINONA, Respondent, Mrs. Lillian Walker, et al., beneficiaries under last will and testament of Lillian C. Perkins, Deceased, Respondents-Appellants. Nos. 42411, 42412. Supreme Court of Minnesota. December 24, 1970. *882 Bernard M. Harroun, Minnetonka, for appellants. Harold J. Libera, Winona, George Neperud, for Walker et al. R. N. Thomton, Litchfield, for respondents. NELSON, Justice. Appeals were taken to the District Court of Winona County from orders of the probate court of said county allowing the final accounts in the matter of the estate of Fred O. Perkins, deceased, and in the matter of the estate of Lillian C. Perkins, deceased. The two matters were consolidated for trial and were finally disposed of by an order of the district court on December 4, 1969, amending the original findings of fact, conclusions of law, and order for judgment and denying a new trial. Separate appeals were thereafter taken to this court by the First National Bank of Winona and Mrs. Clifford Dartt (nee Bertha Featherstone) and other beneficiaries under the last will and testament of Fred O. Perkins; and by Mrs. Lillian Walker and other beneficiaries under the last will and testament of Lillian C. Perkins. The pertinent facts are as follows: Fred O. Perkins died testate November 3, 1932. The third paragraph of his will, dated January 16, 1929, reads as follows: During the course of the probate, Lillian C. Perkins petitioned the court to set aside the homestead and various personal property in the amount of $975, which was allowed by the probate court. The final decree was issued December 2, 1933, covering various stock and the homestead valued in the amount of $22,987.08. In its final decree the court dealt with the property as follows: Subject to the use, interest, rights, and estate of Lillian C. Perkins, specific bequests were vested and the rest, residue, and remainder decreed to 22 various nieces and nephews as provided for in the will. Subsequently, Lillian transferred all of the stock to her name and controlled and managed it until her death. Cash dividends were paid directly to her from 1933 to 1967. She treated these dividends as income and paid a resulting income tax thereon. The assets of Fred Perkins' estate included 1,100 shares of International Harvester stock, of which Lillian Perkins sold 100 shares on or about July 24, 1935, and 100 shares in 1937. In 1953 she sold all of the stock in the Merchants National Bank of Winona, and in 1962 she sold all of the Red Wing Sewer Pipe stock, both of which were also included in Fred Perkins' estate. Stockholder records from International Harvester Company indicate that prior to June 5, 1948, there appeared outstanding 900 shares of common stock in the name of Lillian C. Perkins. On that date an additional 1,800 shares were issued in the name of Lillian C. Perkins, making a total of 2,700 shares. On March 20, 1965, an additional 2,700 shares were issued in the name of Lillian C. Perkins, making a total of 5,400 shares, which appeared in her name at the time of her death. On February 9, 1967, Lillian C. Perkins executed her last will and testament, leaving the residue of her estate to five nieces and nephews, all of whom were remaindermen under the will of Fred O. Perkins with the exception of Lillian Walker and Blanche Greene, and to three other legatees who were heirs of remaindermen under the will of Fred O. Perkins. Lillian C. Perkins died testate on February 19, 1967, and an inventory and appraisal was filed with the court showing the assets of her estate to be $117,080.07. This figure did not include any of the stock which was held in the name of Lillian C. Perkins at the time of her death. It was stipulated by the parties that the homestead located in Winona, Minnesota, was the property of Lillian C. Perkins and should pass in her estate; that the will of Fred O. Perkins did not create a trust; and that the proceeds from any corporate stock sold by Lillian C. Perkins during the life estate became her property absolute. The district court made findings of fact, conclusions of law, and order for judgment on September 15, 1969, the following portions of which are pertinent here: The heirs of Lillian C. Perkins moved to amend the findings of fact, conclusions of law, and order for judgment, or, in the alternative, for a new trial. The court entered an order amending the findings of fact, conclusions of law, and order for judgment, and denying a new trial. The order provided in part: 1. The district court, in its memorandum attached to the amended findings and made a part thereof, stated that the original *886 findings were erroneous in that the court failed to give due consideration to the right of the life tenant to the ownership of income, interest, and cash dividends acquired during her tenancy as a result of the life estate created by the will of Fred O. Perkins. The district court indicated that the probate court decree in the estate of Fred O. Perkins clearly established a life estate in Lillian C. Perkins with remainder to his heirs. Relying on In re Douglas' Estate, 65 Wash. 2d 495, 398 P.2d 7, the court below concluded that the unexpended income, interest, and cash dividends derived from the estate during Lillian C. Perkins' tenancy constituted a part of her estate at her death, and would not pass to the remaindermen under the will of Fred O. Perkins. We subscribe to the view of the district court that the life estate granted to Lillian C. Perkins was absolute in respect to her right to make full use of the interest, income, and cash dividends. "An absolute gift of income is not cut down or reduced by a subsequent gift of power to make use of the principal if necessary." Perigo v. Perigo, 158 Neb. 733, 743, 64 N.W.2d 789, 795. Consequently we, as did the court below, adhere to the well-established rule that a holder of a life estate created by will is entitled to all income derived from the estate during his tenancy and income which remains unexpended at his death constitutes a part of his estate and does not pass to the remaindermen under the will. 2. There are two principal rules followed in the absence of an expression by the creator of the trust to determine the allocation of cash dividends and stock dividends between income and principal. Under the so-called Massachusetts rule, cash dividends are treated as income and all stock dividends as principal. Under the so-called Pennsylvania rule, the source of the dividend rather than its form determines whether and to what extent it is income or principal. Under this rule, such dividends are income if declared out of the earnings accruing to the corporation during the period of the trust but are principal if declared out of earnings accruing prior to the creation of the trust. In Goodwin v. McGaughey, 108 Minn. 248, 122 N.W. 6, this court adopted the Pennsylvania rule, which was followed in In re Trusts Under Will of Whitacre, 208 Minn. 286, 293 N.W. 784, and In re Trust Under Will of Koffend, 218 Minn. 206, 15 N.W.2d 590. However, due to growing complexities of corporate accounting and the difficulties of determining whether a stock dividend comes from earnings and, if so, when it was earned, have led many courts to adopt and follow the Massachusetts rule. In In re Trust Created by Warner, 263 Minn. 449, 117 N.W.2d 224, part of the trust property consisted of securities including a portion of common stock of the Northern Pacific Railway Company. During the year ending April 30, 1959, Warner Holding Company received 220 shares of common stock of Northern Pacific as a nontaxable stock dividend on the common stock it held. Appellant in that case contended that this stock dividend constituted income and belonged, at least in part, to the income beneficiaries. Respondent in the Warner case contended that, and the trial court held, it belonged to principal. We affirmed without rejecting the Pennsylvania rule, finding that the testator had provided for discretionary allocation by the trustee and that his discretion had not been arbitrarily exercised. Following In re Trust Created by Warner, supra, this court in 1963 decided In re Trust Under Will of Gardner, 266 Minn. 127, 123 N.W.2d 69, which states that in 1951 we adopted substantially § 5 of the Uniform Principal and Income Act, coded as Minn.St. 501.47, which adopts the Massachusetts rule. (Section 501.47 was repealed, L.1969, c. 1006, § 17, but reenacted in substance under Minn.St. 501.52 of the Revised Uniform Principal and Income Act.) *887 3. At the time this act was adopted by the Minnesota Legislature, only two cases had passed on the constitutionality of the retroactive effect of such act, namely, Crawford Estate, 362 Pa. 458, 67 A.2d 124, and Franklin v. Margay Oil Corp., 194 Okla. 519, 153 P.2d 486, which held under the circumstances therein the statute could not constitutionally be given retroactive effect. However, in 1958, the Supreme Court of Wisconsin held to the contrary in Will of Allis, 6 Wis.2d 1, 94 N.W.2d 226, 69 A.L.R.2d 1128, and thereafter the Pennsylvania court, in Catherwood Trust, 405 Pa. 61, 173 A.2d 86, overruled Crawford Estate, supra, and followed the Wisconsin court in Will of Allis, supra. In the Warner case we discussed these cases and said (263 Minn. 468, 117 N.W.2d 236): Thus court said in In re Trust Under Will of Gardner, 266 Minn. 127, 134, 123 N.W.2d 69, 74: We therefore reach the conclusion that the remaindermen under the will of Fred O. Perkins are entitled to the stock that remains, including the increase in stock, while the cash, including interest, income, and cash dividends, and savings bonds may properly be distributed to the heirs of Lillian C. Perkins. We have carefully considered all the issues raised by the appeals herein, and after due deliberation we reach the conclusion that the order amending the findings of fact, conclusions of law, and order for judgment, and denying a new trial finds ample support in the record and is in all respects entitled to an affirmance. Affirmed.