Case Name: The New York Life Insurance and Trust Company, as Substituted Trustee under the Will of James Baker, Deceased, Appellant, v. William J. Baker et al., Respondents
Court: New York Court of Appeals
Jurisdiction: New York
Decision Date: 1901-02-05
Citations: 165 N.Y. 484
Docket Number: 
Parties: The New York Life Insurance and Trust Company, as Substituted Trustee under the Will of James Baker, Deceased, Appellant, v. William J. Baker et al., Respondents.
Judges: 
Reporter: New York Reports
Volume: 165
Pages: 484–495

Head Matter:
The New York Life Insurance and Trust Company, as Substituted Trustee under the Will of James Baker, Deceased, Appellant, v. William J. Baker et al., Respondents.
Trusts — Duty of Testamentary Trustee to Create Sinking Fund to Meet Loss on Account of Premiums on Trust Investment. Where there is nothing in the surrounding facts and circumstances to show that a testator in his will intended any different treatment of a trust than that which the language of the clause creating it plainly indicates, viz., that the capital of the trust should be kept intact and that to that end an adequate proportion of the annual income should be set apart to make good the amount paid in premiums in order to secure a proper investment, it is the duty of the trustee, who has invested the trust funds in bonds, purchased at a premium, to set apart out of the income payable to the life beneficiary a sufficient sum each year with which to form a sinking fund of such extent that the principal of the trust will be kept intact and unimpaired. Matter of Hoyt, 160 N. Y. 607, distinguished.
N. Y. Life Ins. & Trust Co. v. Baker, 38 App. Div. 417, modified.
(Argued December 14, 1900;
decided February 5, 1901.)
Appeal from a judgment of the Appellate Division of the Supreme Court in the second judicial department, entered March 15, 1899, modifying and affirming as modified a judgment entered upon the report of a referee.
The plaintiff, as substituted trustee under the will of James Baker, deceased, brought this action for the purpose of securing an accounting of its trust. The order appointing the plaintiff as substituted trustee recited that the preceding trustee, James Baker, Jr., had invested the sum of $91,525 in certain bonds of the United States of the par value of $81,000, At the time of the making of the order the four and a half per cent bonds, of the face value of $31,000, were worth $35,533.75, and the four per cent bonds of the face value of $50,000 were worth $59,814.15, so that their market value exceeded at that time the amount of the original investment therein of the principal of the estate. About five years after the plaintiff’s appointment as trustee, the $50,000 of four percent bonds were sold for $54,750, while the $31,000 of four and one-half per cent bonds were held until their maturity, when they were paid; so that the proceeds of the bonds at maturity and on sale was less .by a number of. thousands of dollars than the investment therein. The trustee received the quarterly interest on the bonds and at once paid the whole thereof, less commissions, to the beneficiary of the trust, instead of retaining a part of the interest receipts as a sinking fund with which to keep good the capital of the trust estate, and paying only the remainder thereof to the beneficiary.
The sixth clause of the will of James Baker, by which the trust was created, reads as follows: “ And (6) in case my son William Jacob Baker is living at the time of the expiration of the estate hereinbefore devised to my executors, I give, devise and bequeath one of said shares to my friend John H. Lynde in trust, however, to collect and receive the rents, income in dividends and profits thereof, and apply the same to the use of my said son William during his natural life, and after his death, I give, devise and bequeath the whole of said share, with all arrearages of income, to the then surviving lawful child or children of my said son William, and the then surviving lawful issue of any child or children of my said son who may have died before him leaving issue, in equal shares, the issue of any deceased child of my said son, however, to take only the share which the parent would have taken if living ; and in case my said son William shall die without leaving any lawful issue him surviving, then I give, devise and bequeath the whole of said share and arrearages of income to my own right heirs and next of kin the same as if I had owned the said share at the time of my death and had died intestate. And in case my said son William is not living at the expiration of the estate hereinbefore devised to my executors, then I give, devise and bequeath the said share to his lawful issue, if any there be then living. And I give to the said John H. Lynde full power and authority to sell and convey any or all the property, both real and personal, which may vest in him as such trustee at public or private sale, and at such times and ujion such terms as he may think best, and invest the proceeds thereof in bonds secured by mortgage on real estate in fee in the cities of New York and Brooklyn, or in the public stocks of the United States or of the State of New York or of the City of New York, and such investments from time to time to change into one or other of said securities at his discretion.”
R. E. Robinson for appellant.
It was no part of the duty of the substituted trustee to look behind the order of appointment for its guidance as to creating a sinking fund. (Roderigas v. E. R. S. Inst., 63 N. Y. 460.) The will gives no direction that the ¡iremiums paid for investments shall be deducted from income, but on the contrary indicates an intention on the part of the testator that premiums paid on such investments as those in question should be paid out of principal. (Brown v. Chesterman, 20 N. Y. S. R. 537; N. Y. L. Ins. & T. Co. v. Kane, 17 App. Div. 542.) Apart from any direction by the creator of a trust, a premium paid upon an investment is to be regarded as a charge against the principal — the life beneficiary being deprived of interest upon it. (Farwell v. Tweddle, 10 Abb. [N. C.] 94 ; Turner v. Newport, 2 Phil. 14; Cox v. Cox, L. R. [8 Eq.] 343; Matter of Pollock, 3 Redf. 100; People ex rel. v. Davenport, 30 Hun, 177; McLouth v. Hunt, 154 N. Y. 179 ; Hite v. Hite, 93 Ky. 257, Peckham v. Newton, 15 R. I. 322; Shaw v. Cordis, 143 Mass. 443 ; Hemenway v. Hemenway, 134 Mass. 446.)
Jesse Grant Roe for William J. Baker, respondent.
The respondent is entitled under the will to all of the income. (McLouth v. Hunt, 154 N. Y. 179 ; Matter of Hoyt, 160 N. Y. 607.)
Rastus S. Ransom and Porte V. Ransom, as guardian ad litem, for William Ver Planck Baker etak, respondents.
The accounting trustee should have set apart out of the income a sufficient sum each year to form a sinking fund to keep the principal of the trust intact and unimpaired. (McLouth v. Hunt, 154 N. Y. 179 ; Matter of Hoyt, 160 N. Y. 607; N. E. T. Co. v. Eaton, 140 Mass. 532 ; Balch v. Hallet, 10 Gray, 402.)

Opinion:
Parker, Ch. J.
The only question arising on this appeal to which reference will he made in this opinion is whether this accounting trustee should have set apart out of the income a sufficient sum each year with which to form a sinking fund of such extent that the principal of the trust would be kept intact and unimpaired. The referee before whom the case was tried decided that it was the duty of the trustee under the will to have so set apart out of the income a sufficient sum each year so that at all times the principal of the fund would be unimpaired, and that because of its failure to do so the trustee was properly chargeable for an amount equal to such a portion of the income as should have been, so set aside while it was the trustee. Such portion was found to amount to the sum of $5,260.75, and with that sum the trustee was charged.
The Appellate Division affirmed the judgment entered upon the report of the referee in an opinion that fully covers the question whether under this will it was the duty of the trustee to keep intact the principal of the trust fund by devoting yearly such portion of the income of the bonds as should be required to pay the amount of premiums that the trustee was obliged to pay in order to secure the bonds in which the trust estate was invested. We approve of what was said in that opinion and should affirm on it without further comment were it not that since it ivas written this court has decided the Hoyt case (Matter of Hoyt, 160 N. Y. 607), which it is strenuously insisted is in conflict with the views expressed by the Appellate Division in the case under review. In support of that contention the provisions of the two wills creating the trusts and making disposition of the income are compared, and as a result of the comparison it is urged that on whichever side of the dividing line in such cases the one' belongs the other should be held to belong also. But the difficulty with the argument is that the decision in the Hoyt case was not based solely upon the language of the will. It was not held by this court that the language creating the trust, standing alone, would permit of a construction authorizing the payment to the life tenant of all of the income arising troin the bonds in which the capital had been invested by the payment of a large premium. What was held was that it was the duty of the court to ascertain the intention of the testator in that regard, and for that purpose the court in construing the language employed in the will should consider all the surrounding facts and circumstances attending the execution of the will, and if as a result of such examination the conclusion should be reached that it was the intention of the testator that his daughter should have all the income arising from the investment, without allowing any abatement therefrom for the purpose of keeping intact the capital of the trust estate, then such construction should be given to the will, notwithstanding its phraseology, in obedience to that rule of construction, which, as has often been said by this court, makes the intention of the party the polar star of construction. Therefore, at the very outset of the discussion, the 'learned judge who wrote the opinion asserted the proposition that in order to ascertain the intention of the testator in that particular case it was necessary to go outside of the will and learn the situation of the parties, the facts and circumstances surrounding them and the execution of the will by the testator, in order to determine his intention, and that proposition was stated in these words : "In order to determine the question presented by this appeal it is necessary to consider the facts surrounding the execution of the will." Then fol lows a detailed account of such facts and circumstances, among which were that the testator was a man of large fortune, estimated at from six to eight million dollars, the bulk of which he bequeathed to his brothers and their children; that he had only one child, a daughter, and for her benefit he set apart §1,250,000, to be held in trust for her benefit during life, and after her death the principal to go to the brothers and children to whom the bulk of the estate had been given. He appointed one of his brothers a trustee, who insisted upon investing the money in bonds bringing a large premium, and then keeping the capital of the estate intact out of the income derived therefrom. Aside from the fact that the will directed that the life tenant should receive " the interest, dividends and income therefrom and from each and every part thereof," the will also expressed the desire of the testator to provide for her in a " most bounteous and liberal manner as to expenditure, and so as to promote her convenience and comfort and gratify her reasonable desires." After a careful analysis of the facts outside of the will that the court deemed it wise to consider in ascertaining the intention of the testator, together with expressions therein outside of the fourth clause by which the trust for the benefit of the daughter was created, and an extract from the opinion in McLouth v. Hunt (154 N. Y. 179), asserting the principle that the intention of the testator is to control, and that such intention is " to be derived from "the language employed in the creation of the trust, from the relations of the parties to each other, their condition and all the surrounding facts and circumstances of the case,"the judge proceeds: " In considering the surrounding facts and circumstances in the case at bar, to which we have already alluded, it is reasonable to infer that the testator intended in this sole provision for his daughter that she should receive, as he expresses it in the fourth subdivision of the will, ' the interest, dividends and income therefrom, and from each and every part thereof,' " and thus reasoning the conclusion was reached that while the language employed in the creation of the trust, and the paying over of the income, standing alone, would not admit of a construction that it was the intention of the testator to impose the loss of premium upon the remainderman, nevertheless, when construed in the light of the other provisions of the will, together with the condition of the parties, and the facts and circumstances surrounding them, it was necessary to hold that it was the intention of the testator to give to the life tenant all of the income of the trust fund, no matter in what securities it should be invested.
In the surrounding facts and circumstances in this case we find nothing that leads us to the conclusion that the testator intended any different treatment of the trust than that which the language of the clause creating it plainly indicates, viz., that the capital of the trust should be kept intact, and that to that end an adequate proportion of the annual income should be set apart to make good the amount paid in premiums in order to secure a proper investment.
The referee made a slight error in calculation resulting in an overcharge of $146, as the respondent concedes.
The judgment should, therefore, be modified by deducting therefrom the sum of $146 as of the date of its entry, and as thus modified should be affirmed, with costs to the guardian ad litem, against the plaintiff, appellant.