Most trustees are accountable to two types of beneficiaries—present and future. The present beneficiary relies on the income from the trust. Typically, the future beneficiaries are paid the principal remaining in the trust after the present beneficiary dies. For instance, O could execute a will containing the following language: “I leave the residuary of my estate in trust for the benefit of my daughter for life. After the death of my daughter, the remaining assets are to be held in trust for my then living grandchildren.” O’s daughter has a life estate in the first trust; O’s grandchildren have a contingent remainder in the second trust. The trustee has to make sure that the trust produces enough income to meet O’s daughter’s needs. In addition, the trustee has to act to ensure that there will be enough money left in the trust to create the second trust for O’s grandchildren. There is tension between the interests of beneficiaries entitled to income and those who may later be entitled to the principal. According to the duty of impartiality, a trustee has a duty to deal with both the income beneficiary and the remainderman impartially. Consequently, the trustee must make sure that the trust property produces a reasonable income while being preserved for the remaindermen. In order to accomplish that goal, the trustee must preserve the trust property and make it productive so he will have the resources to meet the needs of both the present and future beneficiaries. The decision often comes down to investing in income-producing property that does not appreciate or investing in property that increases in value that produces little income.
Pennsylvania Company For Insurance on Lives and Granting Annuities v. Gilmore, 43 A.2d 667
SOOY, Vice Chancellor.
This is a bill filed by the trustee of the estate of Frederick Hemsley, deceased, in part asking for instructions as to its duty with respect to certain ‘tax free’ securities held by it in its capacity as trustee.
The bill was filed May 15, 1944, final hearing was held on December, 6, 1944, and final briefs on July 2, 1945. This history of the litigation is not intended as showing any lack of diligence on the part of the litigants under the circumstances of this case but to make record of the fact that there has been no delay on the part of the Court.
That which gives rise to the request for instructions by the trustee is the question as to whether it should sell all or part of certain ‘tax exempt’ securities now held by it as a part of the residuary trust in its hands for a ‘profit’ of approximately $212,381.25 over par, and also certain Government Bonds which are partially tax exempt on which there is a profit of approximately $19,000 over par. These securities constitute somewhat over 50% of the original ‘residuary’ trust estate, which aggregated $3,075,000.
This Court uses values that were fixed as of November 27, 1944 but it is conceded that any variances which have or will result is of small importance ‘because the Court is asked to adjudicate upon policy and not upon precision and upon the effect generally upon the life tenants and the remaindermen respectively and not upon the precise dollars which either will gain or lose.’
While this Court is not called upon to execute the trustee’s discretion (3 Bogert on Trusts and Trustees § 559, page 1787), it would seem that on the facts presented herein the trustee was amply justified in asking for the Court’s aid. The trustee had advised the life tenants and vested remaindermen of the possibility of the sale of the tax exempts at a price which would augment the corpus of the trust fund and the life tenants and vested remaindermen objected to such a sale. The contingent remaindermen are infants and not in position to voice their wishes. The trustee was in duty bound to consider the interests of these minors and the only avenue for a full and fair determination of the question was the filing of the bill and the appointment of the guardian and counsel to represent the infants, with the resultant decree as to the rights of all parties. This course has not been resisted by the life tenants or remaindermen and the guardian ad litem for the infants has requested the Court’s determination, and the Court having assumed jurisdiction without objection, should be very hesitant of its own motion to deny the trustee the protection a decree will afford on a question which the trustee could not answer in safety.
It is argued by counsel for the life tenants and vested remaindermen that the position of the trustee is that of stakeholder and that it has assumed the attitude of a champion for the sale of the tax exempts. I do not so find. True, it has presented its approach to the solution of the problem and the result of its consideration of that problem, but in so doing has only given to the Court the benefit of the picture as it sees it, conceding at the same time that there is another side to that picture which it leaves for the Court to determine. This is the proper procedure and it would be improper for the trustee to supinely submit to a decree at the dictation of some of its cestuis.
Testator died March 15, 1915, leaving a will dated January 12, 1905, with 2 codicils dated respectively February 20, 1911 and February 11, 1914. Decedent, by his will and codicils, created 5 separate trusts but the only one we are now considering is that denominated by the parties as the ‘residuary trust,’ with assets amounting to $3,075,000 at its inception, which was in the form of cash received by the trustee from the executors of the estate over a period from 1919 to 1928. This residuary trust, as provided by the decedent, gave a life estate of two-thirds of the income to the widow, Mrs. Hemsley, and as to one-third of the income, to decedent’s only child, Mrs. Gillmore. On Mrs. Hemsley’s death her two-thirds of the income passes to Mrs. Gillmore and on the death of Mrs. Gillmore and Mrs. Hemsley the entire principal of the trust vests in Mrs. Gillmore’s children equally, if living, the issue of any deceased child to take per stirpes. These great grandchildren of testator are herein referred to as contingent remaindermen. It should be here noted that under the terms of the will the vesting in the children of Mrs. Gillmore is determined by the mother’s death, so that if she predeceased Mrs. Hemsley her children’s interest becomes absolute even though the question of the quantum of that interest will be later increased by the death of the grandmother, Mrs. Hemsley.
Mrs. Hemsley (87 years of age) and Mrs. Gillmore (60 years of age) are living. Mrs. Gillmore has 3 children, all of whom are of full age.
It thus appears that the parties in interest are first, the life tenants, secondly, the vested remaindermen, they being the living children of Mrs. Gillmore, and thirdly, the issue of the grandchildren, the contingent remaindermen. In other words, the interest of the great grandchildren of decedent is conditioned upon their parent predeceasing Mrs. Gillmore. The great grandchildren are a minor child of testator’s grandson, born June 2, 1936; another grandchild has 2 children, a minor son born July 7, 1931 and a minor daughter born May 22, 1933; and another grandchild has 2 children, a minor daughter born February 12, 1940, and another minor daughter born August 19, 1942. These 5 minor children, the contingent remaindermen of the residuary estate, were represented at the final hearing by guardian ad litem duly appointed by this Court, as well as by counsel also so appointed.
The life tenants, Mrs. Hemsley and Mrs. Gillmore, as well as the remaindermen, the adult children of Mrs. Gillmore, protest against the sale of any of the securities in question. Counsel for the infant contingent remaindermen says: ‘If the reinvestment of the moneys secured from such a sale is limited to the purchase of new U. S. Government securities then this respondent can offer no objection on behalf of the infant defendants who are contingent remaindermen since the security of the corpus has not been lessened. Neither can this respondent object to the reinvestment of said moneys at a later date in municipal securities provided said municipal bonds are of equal security with those now held. * * * It is the opinion and contention of the Guardian ad litem for the aforesaid contingent remaindermen that the Court should follow the line of conduct expressed in the above cited case of Bliss v. Bliss, 126 N.J.Eq. 308, 8 A.2d 705, ‘It is the duty of the court to protect the remaindermen as well as the life beneficiary [under a trust.] Such is also the duty of the trustees. It is not the province of [the Court of Chancery] to allow trustees to speculate in stocks which might result in a loss to the remaindermen,’ and should not by its order lend its aid to the trustee in speculating in stocks which might result in a loss to the contingent remaindermen but should, if such order is entered, instruct the complainant to confine its investments to investments having equal security with these that complainant now holds.’
The basis for the position of the life tenants and vested remaindermen is generally that the requested sale of the tax exempt securities would discriminate against and result in great loss of income to them and that it would also eventually depreciate the value of the corpus.
It may be well, before considering the evidence adduced at final hearing, to note the applicable law.
Both sides agree that the rule is correctly set up in Section 232 of the Restatement of the Law of Trusts, as well as comments following that rule:
‘If a trust is created for beneficiaries in succession, the trustee is under a duty to the successive beneficiaries to act with due regard to their respective interests.
‘If by the term of a trust the trustee is directed to pay the income to a beneficiary during a designated period and at the expiration of the period to pay the principal to another beneficiary, the trustee is under a duty to the former beneficiary to take care not merely to preserve the trust property but to make it productive so that a reasonable income will be available to him, and he is under a duty to the latter beneficiary to take care to preserve the trust property for him.
‘Although the trustee is not under a duty to the beneficiary entitled to the income to endanger the safety of the principal in order to produce a large income, he is under a duty to him not to sacrifice income for the purpose of increasing the value of the principal.’
Professor Bogert, in his work on Trust and Trustees, Vol. 4, § 801, says:
‘The trustee who holds for successive beneficiaries owes a duty to them to conduct the trust with equal consideration for the interests of all the beneficiaries. He should not unnecessarily show a preference either for the present cestuis or those who are to take income or capital later. * * * ‘A trustee has no right to take sides as between the life tenants and remaindermen. If he has an election of taking one of several courses, he must take, if possible, that which will not benefit one at the expense of the other.’’
Professor Pomeroy, 4th Edition, Vol. 3, Sec. 1071, says:
‘It is the trustee’s duty to use diligence in investing the trust property so that it may produce as much income as possible, and also to use care and prudence in investing it in such securities as will render its loss highly improbable, even if not virtually impossible.’
And again in Section 1072:
‘It is the trustee’s imperative duty to render the trust property as productive as possible consistent with its security and with the demands of ordinary business prudence and judgment.’
Reference is also made to Restatement of the Law of Trusts, Section 227, pages 651 and 652.
In McCracken v. Gulick, 92 N.J.Eq. 214, 112 A. 317, Mr. Justice Swayze said:
‘The fundamental principle is to carry out the intent of the testator. Clearly when he has created a trust fund and directed that the income be paid a beneficiary for life, he *57 intends to secure that income to the life tenant; that is the very object of the fund.’
‘To withhold all dividends would strengthen the corpus of the estate, but the testator can hardly mean to starve the life tenant for the benefit of remaindermen, whom he often has never seen.’
The McCracken case was followed by Graves v. Graves, 115 N.J.Eq. 547, 171 A. 681 and reference is also made to National Newark & Essex Banking Co. v. Work, 109 N.J.Eq. 468, 158 A. 109, 110::
‘There is another phase of this matter which should be borne in mind, that is, the intent of the testator. I have no doubt that he wished his children to enjoy a reasonable income during their lives. His grandchildren, the remaindermen, some of whom were not in existence when the will was drawn, could not have interested him particularly. * * * To hold the entire proceeds of the Meadowbrook income would prevent his children from living in the manner to which they have always been accustomed, and deprive them of the ability to care for their own children, the remaindermen, during their minority; and I believe would defeat the intent of the testator as I gather it from the will. The trustees admit such a construction would be a hardship upon the life tenants.’
‘My conclusion is that the dividends which were received by the testator through Meadowbrook be considered as income and paid to the life tenants. If it be true that this procedure will deplete the estate, it is unfortunate, but it is no concern of this court. The testator clearly desired his children to enjoy a proper income, and it is no fault of any one, if, in the problematical future, this income diminishes or ceases.’
If it were possible to gather testator’s intent as to the solution of the problem before the Court from the context of the will and codicils the result would be a decree in conformity therewith. But the Court is not permitted to speculate as to what testator would do were he confronted with these problems. The question of intent must be answered by the language used by testator, but it is obvious that in 1905, 1911 and 1914 testator was not contemplating a situation brought about by conditions all of which arose long after these years. At the time of his death income taxes had been imposed, it is true, but these taxes financed necessities of the Government as they then existed and these necessities had not brought about the high income tax impost of later years. Since the making of the will and codicils and testator’s death the depression of the late 20s and early 30s and 2 World Wars have ensued. All we gather from a reading of the will is that testator’s first consideration was for his widow and daughter. He evidently desired them to have an income befitting the manner and style of living to which they were accustomed. To accomplish this he devoted a greater portion of his entire estate, giving them an income amply sufficient. His grandchildren were a secondary consideration. He did not, until 1914, create any separate trust for them. He made them remaindermen after the life estates. But as conditions were at the time of the execution of the will and codicils and at the time of Mr. Hemsley’s death, he had a right to believe and evidently did, that he had amply provided for his widow and daughter for their lives and for his grandchildren thereafter, and under certain contingencies, his great grandchildren.
The trustee rightfully says that testator’s choice of the life tenants as the main object of his bounty cannot be urged as evidence that he intended ‘to extend to them an ease and insurance against conditions which he could not have visualized or contemplated at the time he made his will and codicils.’
The question before the Court must therefore be decided on its legal aspects and the question is, what is the duty of the trustee of this residuary trust? That duty, as laid down in the Restatement of the Law of Trusts, is ‘to deal impartially’ as between the successive beneficiaries, and to act ‘with due regard to their respective interests.’ To accomplish this result where, as in this case, the trustee is directed to pay income for life to one set of beneficiaries and at the end of that period pay over the principal to the remaindermen, ‘the trustee is under a duty’ to the life tenants ‘to take care not merely to preserve the trust property but to make it productive so that a reasonable income will be available for the life tenants,’ and it is under a duty to the remaindermen to ‘take care to * preserve the trust property for them.’ The trustee ‘is not under a duty to the life tenants to endanger the safety of the principal in order to produce a larger income,’ but he is under a duty ‘not to sacrifice income for the purpose of increasing the value of the principal.’
I think it is generally conceded that a sale of the tax exempts and the purchase of 2% Governments, as contemplated by the trustee, would not endanger or in any way jeopardize the value of the trust estate.
Would the plan of sale of tax exempts sacrifice income? It will be demonstrated hereafter that the loss of income to the life tenants would be great and that it would also be detrimental to the interests of the vested remaindermen.
The duty of the trustee, as I see it, is to act with due regard to the respective interests of the successive beneficiaries, to deal impartially as between them. To do this, it seems to me, requires the trustee to view the overall picture as it is presented from all the facts, and not close its eyes to any relevant facts which might result in an excessive burden to the one class in preference to the other. To say the trustee may blind itself to the fact that the income of the life tenants bring them within the high brackets of income tax payments would be unjust. That fact must be taken into consideration with all other facts and with them in view, the question of fairness must be answered. The trustee also has a duty to see that the increase to corpus goes to the contingent remaindermen who may never take, and while the interest of these contingent remaindermen must be zealously guarded, the trustee’s duty to the life tenants may not be served by saying-we have nothing to do with the question of income tax and its effect on your interest as life tenants if the sale is made-nor may the trustee say that the income remaining after the payment of tax if the tax exempts are sold is sufficient for your needs. It is the duty of the trustee to return the highest income to the life tenants consistent with the safety of the corpus, and not an income which the trustee may deem to be sufficient for their purposes.
It is said by counsel for the trustee, ‘if income changes impose new burdens they should be shared proportionately and not added expense for the one for the alleviation of the others.’ If the sale is made of the tax exempts the benefit is an increase of corpus for the contingent remaindermen and not for the benefit of the life tenants. The sale would be to the sole detriment of that life tenants and vested remaindermen, with no benefit to them at all, and all benefit to the contingent remaindermen.
The trustee, as well as the life tenants and the guardian ad litem, each produced experts to testify as to their opinion as to the propriety of the sale of the whole or a part of the tax exempts. Each one of these expert witnesses are men of ability, integrity and wide experience and each gave his expert opinion from his own individual standpoint and experience.
The trustee’s investment officer on trusts, Mr. Ashbridge, disclosed that it was his opinion that a sale should be had. Mr. Boyd, for the trustee, advocates a sale and reinvestment in 2% Government Bonds for a period of time and then a sale of the 2% Bonds and reinvestment in new municipal tax exempts as opportunity offers. Mr. Boyd did exclude from the sale tax exempts of very short maturity. He said, however, that he was not considering the duty of the trustee toward the life tenants insofar as protection of income was concerned. Mr. Collings, for the guardian ad litem, was of the opinion that it was unwise to sell. He was viewing the matter more from the interest of the life tenants. He said, however, disregarding the life tenants’ interests and only considering the remainder interest, a sale should be had. The final question to Mr. Collings was: ‘Now having in mind the life tenants’ interest, also having in mind the remainder interest, are you able to form a judgment as to whether the plan is good or not?’ Answer: ‘If you consider both interests then I think I wouldn’t sell the bonds.’ Mr. Brombach for the life tenants and remaindermen, from whose testimony the result of the sale of the interest of the life tenants and remaindermen is taken, though it unwise to sell. General Gillmore for the life tenants and vested remaindermen likewise thought it unwise to sell.
From the above very sketchy reference to the evidence adduced at final hearing it would seem that the Court has before it the testimony of men of wide experience in the financial world and that there is a divergence in the opinion arrived at by these experts, and that that divergence might be said to leave the weight of the expert testimony in equipoise. I think it may be fairly said, however, that if the client of any one of these experts happened to be an individual seeking advice from the standpoint of an investor of his own funds that the answer would have been a unanimous opinion that the tax exempts should be sold, this depending, of course, on the income bracket of the individual investor who might be seeking advice. I think it may also be said that the testimony of the experts, in some instances at least, displayed a failure to comprehend the trust aspect involved in the question, to the extent that it was necessarily involved for a fair solution as between the divergent interests of the life tenants and remaindermen to those interests of the contingent remaindermen.
Counsel for the life tenants and vested remaindermen have attached to their brief tables to show the result of a sale of all or half of the tax exempts on the life tenants during their joint lives, and also on Mrs. Gillmore in the event she survives her mother, which tables, generally speaking, show, as stated by counsel, ‘that if the sales are made on the basis as requested in the bill of complaint, and then reinvested on a 2% basis as now suggested, Mrs. Hemsley will sustain a 58% loss in her retained income after payment of income tax; Mrs. Gillmore will sustain a 46% loss, and in the event of Mrs. Hemsley’s death, Mrs. Gillmore’s loss would soar to 64%. The comparable figures, if only one-half were sold as suggested at the hearing, would be a 28% loss for Mrs. Hemsley; a 22% loss for Mrs. Gillmore and a 31% loss for Mrs. Gillmore following Mrs. Hemsley’s death.’ These figures, according to counsel, were on the basis of data produced at the time of the hearings and are not necessarily the correct percentages as of the date of the filing of briefs. However, it is suggested that the percentages will not very materially change.
Counsel for the defendants concede that as the tax exempts mature, and assuming that it is impossible to replace them with new and comparable tax exempts, the foregoing percentages will change, but alleges that allowing for maturities at the earliest possible dates on the various tax exempt issues, a sale at the present time would, at the end of 5 years, result in a loss of approximately $210,000 of tax free income to the life tenants, and at the end of a 10 year period a loss of approximately $366,000 of such tax free income. These are minimum figures, assuming payment at the earliest possible maturity dates of the bonds, and it is alleged that there would be a substantial loss to the 3 grandchildren, but at a greatly reduced percentage because these grandchildren are in lower tax brackets.
We have before us a picture where if all tax exempts are sold a profit over cost of approximately $231,000 or a premium over par of over approximately $240,000 may be gained, which will be added to the corpus of the trust. Such gain, of course, would be subject to reduction by capital gain tax. This profit would be added to the corpus and be invested so that the annual income yield would be less than if they were not sold. If sold, we have as heretofore set forth, a very substantial shrinkage of the yearly income of the life tenants and a smaller reduction as to the vested remaindermen. From this it is obvious that considering the interest of these two classes of beneficiaries alone, a sale of the tax exempts should not be made. We can readily see that the beneficiaries of the result of the sale will be the contingent remaindermen by the increase of corpus. The result of a sale, insofar as these contingent remaindermen are concerned, considered alone, would be for their best interest. But the proposed plan of sale and repurchase of other securities out of the proceeds of sale will not add to the security of the corpus as it now exists. These tax exempts are ‘blue chip’ investments and while the contemplated purchase of bonds to replace those sold carries with it the intent to purchase Government securities of like character, there may arise a contingency not now foreseen which would render these repurchased bonds less desirable, and the duty of the trustee of the contingent remaindermen does not carry with it a requirement that the corpus be augmented unless that result may be accomplished in fairness to the interest of the life tenants and vested remaindermen. It is, of course, plainly the duty of the trustee to in no wise speculate with the trust funds.
In view of the facts as the Court sees them, as heretofore outlined, the instructions to the trustee will be that it is not its duty to sell all or any part of the securities herein referred to as tax exempts in order that it may capture for the corpus of the residuary trust the profit now realizable upon said municipal and Government bonds.
Sturgis v. Stinson, 404 S.E.2d 56
In this will construction case, we determine whether the testator placed restrictions on the amount of income which the income beneficiary was to receive and, if not, whether the executor was required to administer the assets of the trust created by the will in a manner which did not discriminate between successive beneficiaries and which produced a reasonable level of income in relation to the value of the trust assets.
Dr. William J. Sturgis, Jr., died testate in 1986, leaving an estate valued at $1,140,462 consisting of an automobile, approximately $300,000 in various stocks and bonds, and two parcels of real estate-Bush Hill Farm (the farm), valued in the estate inventory at $708,500, and a one-third undivided interest in another parcel of land with a value of $126,000. His will provided that his widow, Anne Sturgis, receive all the income from his estate for her lifetime. At her death, or if she were to renounce the income, the residue of the estate was to pass to his children, Susan Sturgis Stinson and Christopher S. Sturgis (the remaindermen).
The testator named his wife and Robert C. Oliver, Jr., as co-executors. Upon the wife’s election not to serve, Oliver qualified as executor of the estate. In 1989, he filed a bill of complaint stating that the income beneficiary, Mrs. Sturgis, had complained that “the income derived from the estate is insufficient based upon the value of the assets of the estate” and asked that property of the trust be sold and so reinvested as to derive greater income. The remaindermen opposed the sale of the property and maintained that the trust assets could not be sold without their consent. The executor sought the guidance of the chancellor.
After an ore tenus hearing, the court entered a final decree holding that the will “created a trust;” that the executor had the obligation to deliver all the net income of the trust to Mrs. Sturgis and to invade the trust corpus when he determined the income therefrom was insufficient to meet the needs of the income beneficiary; that the executor had the “authority, but not the obligation, to convert assets of the estate … including real estate, to forms other than those in which he received them, so long as he behaves consistently with the ‘prudent man’ rule;” and that the executor “has performed properly under the terms of the will.” We awarded Mrs. Sturgis, the income beneficiary, an appeal from this decree.
The primary controversy here revolves around a single, but valuable, asset of the trust-Bush Hill Farm. This farm constitutes approximately 75% of the corpus of the trust and, at the time of trial, had a fair market value of $1.5 million. The maximum annual net income generated by this asset and paid to Mrs. Sturgis was $1,265.99 in 1988.
Mrs. Sturgis asserts that this return on the property, representing eighty-four one-thousandths of one percent of its fair market value, classifies this property as an unproductive asset and that, under general trust principles, the executor has an obligation to sell it and reinvest the proceeds. The executor and remaindermen contest Mrs. Sturgis’ assertion that selling the farm is required in this case.
Under general trust law principles, where, as here, a trust is created for successive beneficiaries, the trustee has a duty to * deal impartially with them. Shriner’s Hospitals v. Smith, 328 Va. 708, 710, 385 S.W.2d 617, 618 (1989); Patterson v. Old Dominion Trust Co., 139 Va. 246, 257, 123 S.E. 549, 552 (1924). The parties agree that the executor’s duties in relation to trust assets set out in the Restatement (Second) of Trusts embody sound and appropriate principles:
The trustee is under a duty to the beneficiary to use reasonable care and skill to make the trust property productive. Restatement (Second) of Trusts Code § 181 (1959).
Unless it is otherwise provided by the terms of the trust, if property held in trust to pay the income to a beneficiary for a designated period and thereafter to pay the principal to another beneficiary produces no income or an income substantially less than the current rate of return on trust investments, and is likely to continue unproductive or under-productive, the trustee is under a duty to the beneficiary entitled to the income to sell such property within a reasonable time. Id. at § 240.
The executor and remaindermen assert that the trial court was correct in declining to apply these principles and require sale of the farm because the disposition and management of the farm and other trust assets were “otherwise provided by the terms of the” will. The remaindermen argue** that the testator intended that the farm not be sold unless necessary to meet the needs of the income beneficiary. The executor argues that as long as the income beneficiary is receiving income sufficient to meet her needs, his discretion as to the management of trust assets should not be disturbed.
In contrast, Mrs. Sturgis argues that the will places no condition or limitation on the amount of income she is to receive and contains nothing to support the inference drawn by the chancellor that the testator wished to retain the farm as a family heritage.
Resolution of the dispute rests upon the testator’s intention as reflected in the will. The chancellor held that Mrs. Sturgis was entitled to “all net income of the trust,” but he also found that the testator intended that she receive income necessary to provide her with “comfortable maintenance and welfare according to her standard of living.” Therefore, the trial court concluded, in effect, that the executor was not required to manage the trust assets in a manner designed to provide income in excess of that amount.
As a general rule, the factual determinations of the trial court are accorded substantial deference on review and will be reversed only if plainly wrong or without evidence to support them. However, that standard is inapplicable here because the trial court’s conclusions regarding the testator’s intent and its construction of the will were opinions based solely on the will, and on testimonial evidence and other documents not in material conflict. Hankerson v. Moody, 229 Va. 270, 274, 329 S.E.2d 791, 794 (1985); Durrette v. Durrette, 233 Va. 328, 332, 288 S.E.2d 432, 434 (1982); Rinehart & Dennis Co. v. McArthur, 123 Va. 556, 567, 96 S.E. 829, 833 (1918). We begin our review by examining the relevant portions of the will.
Paragraph Four of the will consists of three sections. The first declares that Mrs. Sturgis is to receive “[a]ll of the income of my estate, of every nature and wheresoever situate,” during her lifetime.
The second section of Paragraph Four provides that:
If at any time, … in the opinion of my Co-Executor, … the income of my estate together with such other income available to my wife is insufficient to meet any unusual expense … or to provide for her comfortable maintenance and welfare, then such Co-Executor may pay to my wife … such amounts from the principal or corpus of my estate as such Co-Executor deems necessary for such purposes.
The final section of Paragraph Four provides that when Mrs. Sturgis dies or “if she should decide that she has no need for such income” the estate devolves upon Christopher Sturgis and Susan Stinson.
Paragraph Six provides in pertinent part:
It is my will, and I direct that my Executors and their successors have, in addition to all other powers granted by law, the powers set forth in Section 64.1-57 of the Code of Virginia (1950), as in force on the date of the execution of this will, together with the right to sell, pledge, or hypothecate real estate and other property.
Contrary to the argument advanced by the executor and the remaindermen, the second section of Paragraph Four imposes no limitation on the first section of that paragraph. Indeed, the second section confers a separate benefit upon the widow; in the event the income otherwise available to her “is insufficient to meet any unusual expense … or to provide for her comfortable maintenance and welfare,” the executor is empowered to invade and deplete the corpus of the trust for her benefit. Consideration of the widow’s need is of concern to the executor and a precondition to his actions only for depletion of the trust corpus. The power to deplete the corpus for that purpose is irrelevant to the issues framed in this appeal.
The power of the executor to convert and reinvest corpus assets is granted by Paragraph Six, in which the executor is given the right to dispose of property and to exercise all powers and rights afforded a fiduciary under general law and as set forth in Code § 64-1-57. The will does not specify any criteria of need or other preconditions for the executor’s exercise of these powers. Nor is there any indication that the income beneficiary would receive anything less than all the net income, regardless of amount, and irrespective of need, generated from the executor’s exercise of his investment and management authority.
This interpretation is consistent with certain actions of the executor. As he testified, he had converted a number of the stocks in the trust corpus to investments that generated more income, including some stocks which would have appreciated in value but which did not generate much income. His conversion of the trust corpus was not limited to personality; the executor had also agreed to the sale of a portion of the real estate in which the trust held a one-third undivided interest. There is no indication in the record that the executor sought the remaindermen’s consent for this sale, that the conversion was required due to Mrs. Sturgis’ unusual expenses, or that the payment to Mrs. Sturgis of the income the new assets produced was based on the executor’s determination of her need.
Furthermore, there is nothing in the will or the record to suggest that the executor was required to treat Bush Hill Farm in a different manner than other trust assets. Although the testator easily could have addressed the disposition of the farm, he did not. Indeed, the will does not even refer to the farm specifically. While Bush Hill Farm had been in the Sturgis family for many years, neither the remaindermen, Dr. Sturgis, nor his parents had ever lived on the property. The only dwellings on the property were tenant farmers’ shacks which had burned prior to Dr. Sturgis’ death. This record does not reflect any connection the testator had with this piece of property which would support the conclusion that the testator intended to distinguish its treatment from that to be accorded other real or personal property in the trust.
We conclude, therefore, that the testator intended that Mrs. Sturgis, the income beneficiary, receive unconditionally all the income generated by the trust’s assets. Additionally, if, in the opinion of the executor, the income from the trust and any other income available to her should become insufficient to meet her needs, the executor would be required to provide payments to her directly by depleting the corpus of the trust. Furthermore, we conclude that the testator did not intend to, and did not, direct or restrict the executor’s management of the trust’s assets, including Bush Hill Farm, except as provided under general law.
We have not previously addressed the duty of a fiduciary regarding the level of productivity of trust assets in circumstances where there are successive beneficiaries and no explicit instruction by the testator concerning that duty. Cf. Patterson v. Old Dominion Trust Co., 149 Va. 597, 612-13, 140 S.E. 810, 814-15 (1927) (explicit instruction). We agree with the parties that the trust principles expressed in the Restatement and quoted above are appropriate, and we adopt them here.
Except for the directive on depletion of the corpus occasioned by Mrs. Sturgis’ needs, the will contains no other directions regarding the management of the trust assets. Although the management discretion afforded a trustee under the Code of Virginia is extensive, see Code §§ 64-1-57 and 55-253 et seq., that discretion is subject to the requirements of the “prudent man rule,” Code § 26-45.1. The Restatement principles adopted above define a trustee’s obligations under the “prudent man rule” regarding productivity of trust assets. These principles are applicable to the executor in this case as the return generated by Bush Hill Farm is so disproportionate to its value, the farm is rendered an unproductive asset.
In a second assignment of error, Mrs. Sturgis asserts that the chancellor erred “by failing to require the Trustee to sell unproductive trust assets and to allocate a portion of the proceeds of such sale to the income beneficiary as required by the Uniform Principal and Income Act, Va. Code §§ 55-253, et seq.” That Act provides that whenever any asset of a trust, real or personal, is unproductive, the income beneficiary “shall be entitled to share in the net proceeds received from [conversion of] the property as delayed income.” Code § 55-263(1). The term “delayed income” is defined as
the difference between the net proceeds received from the property and the amount which, had it been placed at simple interest at the rate of five per centum per annum for the period during which the change was delayed, would have produced the net proceeds at the time of the change….
Code § 55-263(2) The period of delay is calculated “from the time when the duty to make [a change] first arose, which shall be presumed, in the absence of evidence to the contrary, to be one year after the trustee first received the property if then unproductive, otherwise one year after it became unproductive.” Code § 55-263(3). We think these principles are also applicable here.
We will reverse the judgment of the trial court and remand the case for further proceedings consistent with this opinion, including the allocation to the income beneficiary of any delayed income to which she reasonably may be entitled.
Reversed and remanded.
RUSSELL, Justice, with whom STEPHENSON, Justice, joins, dissenting.
The principles of law that govern cases of this kind are well settled: the testator’s intention, if legal and ascertainable, controls. All refinements of the law must yield to the testator’s power to dispose of his property as he pleases. When this intention is ascertained, the quest is ended and all other rules become immaterial. Picot v. Picot, 237 Va. 686, 689, 379 S.E.2d 364, 366 (1999) (quoting Wornom v. Hampton B. & A. Inst., 144 Va. 533, 541, 132 S.E. 344, 347 (1926). In ascertaining the testator’s intention, the court must examine the will as a whole, giving effect to all its parts if that can be done. Thomas v. Copenhaver, 235 Va. 124, 128, 365 S.E.2d 760, 763 (1988). The intention to be considered is that which is spoken by the words of the will, not an intention deduced from speculation as to what the testator would have done had he anticipated a change in the circumstances surrounding him *540 at the time of its execution. Christian v. Wilson’s Ex’rs, 153 Va. 614, 632, 151 S.E. 300, 305 (quoting Compton v. Rixey’s Ex’ors, 124 Va. 548, 553, 98 S.E. 651, 654 (1919), cert. denied, 282 U.S. 840, 51 S.Ct. 21, 75 L.Ed. 746 (1930).
The will of Dr. Sturgis is unambiguous and his overall intention is clear from its words. He wanted his widow to enjoy all income arising from his estate during her lifetime. If she should experience unusual expenses, or if the income of his estate, together with any “other income available to [his widow]” should prove insufficient to provide for her “comfortable maintenance and welfare,” then the co-executor was authorized to invade the corpus to the extent necessary, in the co-executor’s discretion, to bring the widow’s income up to that standard. At the widow’s death, if she should not sooner renounce the income, the corpus of the estate was to pass to his two children. That, in a nutshell, is the intent of Dr. Sturgis as expressed in his words, and that is the way the trial court construed his will.
Unfortunately, the majority opinion appears to be based upon the notion that when Dr. Sturgis wrote paragraph six, he had forgotten paragraph four. The opinion considers the two provisions in isolation, rather than construing the will as a whole. Indeed, the opinion goes so far as to say that the executor’s power to invade the corpus “has nothing whatever to do with the issues framed on this appeal.”
When Dr. Sturgis executed his will, he knew what his assets were. He knew that some parts of his estate produced substantial income, which would primarily benefit his widow, and that other parts would produce little income, but would constitute a substantial inheritance for his children. When he spoke of “my estate,” he necessarily contemplated that combination of income-producing and non-income-producing assets. If he had intended that his executors convert all his assets into investments producing high income, he could easily have said so. Rather, he provided that his widow receive “the income of my estate.”
Land is not fungible. It is idle to speculate as to the testator’s reason for retaining the farm as a part of his estate, for his children’s benefit, rather than directing his executors to convert it into income-producing investments. The fact remains, however, that for his own reasons, he did so. He could have sold it during his lifetime, as his parents before him might have done, but he did not. Despite its deficiency as a producer of income, the farm was a part of the estate which passed under the will and which he contemplated as one of the sources of income for his widow.
Construed according to the testator’s clear intentions, the co-executor had authority to sell timber from the farm, or to sell or encumber the land, in whole or in part, as might be necessary to maintain the widow comfortably, but not otherwise. That view is reinforced by the circumstances surrounding the testator at the time of execution of his will. Mrs. Sturgis was not the mother of Dr. Sturgis’ children; they were the children of a prior marriage. Mrs. Sturgis came into the marriage with income-producing assets of her own, and it was not apparent that it would ever become necessary to invade the corpus to maintain her comfortably. As it turned out, the co-executor determined that she did need additional income by the time this suit was instituted, and the trial court ruled that the co-executor should invade the corpus as necessary for that purpose.
In my view, paragraph six of the will merely arms the executors with all the powers requisite to carry into effect the intent expressed in paragraph four. Paragraph six does not require the executors to do anything. It certainly does not authorize them, or us, to disregard the clear intent of the testator, to treat land as if it were stocks and bonds, or to require conversion of the land into income-producing assets to the detriment of the testator’s children.
Accordingly, I would affirm.
Notes, Questions, and Problems
1. In order to avoid violating the duty of impartiality, the trustee has to carefully balance the interest of both the income beneficiary and the beneficiary who will ultimately receive the principle. Nonetheless, the trustee often intentionally or unintentionally favors the remainderman over the life beneficiary for several reasons. First, the trustee may be reluctant to give the life beneficiary a lot of income because he anticipates that the life beneficiary may need more income later in his or her life. This is a valid concern because as people age they have increased medical and other expenses. However, if the life beneficiary dies sooner than the trustee expected, the remainermen will receive a greater portion of the trust assets. Second, the trustee may be concern about his liability. If the income beneficiary successfully sues the trustee for not distributing enough money, the trustee can simply take the money from the trust. On the other hand, if the remainderman successfully sues the trustee for diminishing the corpus of the trust, the trustee may be personally liable for the loss. Once the money has been paid out of the trust, the trustee cannot recoup it from the life beneficiary. Finally, the trustee may favor the remaindermen over the life beneficiary because he think that the testator so intended. That belief comes from the fact that the remainermen are usually minors or persons who need more financial support. If the trust instrument clearly expresses the testator’s intent that the trustee not deal equally with the two different types of beneficiaries, the trustee can act impartially and not violate his trust duty.
2. The duty of impartiality does not appear to take into consider factors like the age, financial resources and vulnerability of the present beneficiary and the future beneficiary of the trust. Should those factors be relevant to a determination or whether or not the trustee has violated the duty of impartiality?
In which one of the following cases has the trustee violated the duty of impartiality?
a). Bonita stated the following in her will: “I leave my tree farm in trust for the benefit of my son, Gordon, for life. After Gordon’s dies, the tree farm is to be held in trust for the benefit of my grandson, Adam.” After Bonita died, Jacob assumed his role as trustee. Jacob entered into a contract to have all of the trees cut down and sold, so he could have enough trust income to pay Gordon.
b). Leonard placed his apartment complex in trust for the benefit of Edna for life. After Edna’s death, the apartment complex was to be sold and the proceeds paid to Isaac. When Leonard died, Rachel assumed her role as trustee. Rachel used the rents from the apartment complex to pay the income to Edna. In order to save money, Rachel did not do major repairs on the apartment complex.
c). Jillian placed the residuary of her estate in trust for the benefit of Antonio for life. After Antonio’s death, the remaining funds were to be held in trust for the benefit of Antonio’s children. When Jillian died Stefano assumed his role as trustee. Instead of investing the trust funds in the stock market, Stefano placed them in a savings account. As a result, he was only able to pay Antonio six hundred dollars a month.
d). Curtis placed his entire estate in a discretionary support trust for the benefit of Selma for life. After Selma died, the remaining principal was to be held in trust for Selma’s children. When Curtis died, Brooklyn assumed his role as trustee. Brooklyn decided that since Selma’s children were young, they needed the money more than Selma. Thus, he reduced the distribution of the income, so he could preserve the principal for her children’s trust.
Restatement (Third) of Trusts § 79
(1) A trustee has a duty to administer the trust in a manner that is impartial with respect to the various beneficiaries of the trust, requiring that:
(a) in investing, protecting, and distributing the trust estate, and in other administrative functions, the trustee must act impartially and with due regard for the diverse beneficial interests created by the terms of the trust; and
(b) in consulting and otherwise communicating with beneficiaries, the trustee must proceed in a manner that fairly reflects the diversity of their concerns and beneficial interests.
Class Discussion Tool
Sonia left her art collection in trust to Melissa for the benefit of Shirley and Tonya. Melissa was to use the money made from the sell and rental of the art collection to pay income to Shirley for life. The trust was to terminate on Shirley’s death. At that time, Melissa was instructed to distribute the art collection and any trust money to Tonya. Melissa did not have any expertise in the art world, so she periodically contacted Noah, an art collector, for advice. In order to show her gratitude to Noah, Melissa gave him one of the paintings from the trust’s art collection. The art industry suffered an economic downturn, so Melissa was having a difficult time renting the paintings. Thus, she started selling more paintings to have money to pay to Shirley. Melissa met with Noah and told him that she planned to sell a painting call “The Rain.” Noah advised Melissa not to sell the painting until the article, Rayne, died. At that time, Rayne was suffering from terminal cancer. The trust was strapped for cash, so Melissa ignored Noah’s advice and sold the painting for $300,000. A week later, Rayne died. Then, “The Rain” was worth one million dollars. The trust continued to lose revenue. In order to save money, Melissa reduced the amount of insurance she had on the painting. A few years later, Shirley died. Unfortunately, before Melissa could turn the paintings over to Tonya, the paintings were destroyed in a fire. The insurance proceedings only covered 75% of the value of the destroyed paintings. Tonya sued Melissa for a breach of the duty of impartiality. Please analyze the legal issues that arise from the facts in a jurisdiction that has adopted Restatement (Third) of Trusts § 79.