A trust created by a father for his three children, providing,
inter alia, that each of them should receive one-third of
the net income and, upon termination of the trust, one-third of the
principal of the trust estate, was amended, as permitted by the
indenture, to declare that the estate should be divided into three
separate and equal shares, to which might be assigned undivided
interests in the whole or any part of it; that such shares should
be designated by the respective names of the three beneficiaries,
and that each of the beneficiaries should have the same rights,
interest, and power in and over his share and the income thereof as
was given to them, respectively, by the original trust instrument
over one-third of the trust estate. The object of the amendment was
to divide the trust into three separate trusts in order to reduce
liability for income taxes. The cash and property of the trust were
accordingly transferred on the books of the trustee, in equal
shares, to three new accounts, one for each of the beneficiaries;
income, disbursements, and new principal were entered in this same
way, and the accounts of the single trust were closed.
Held:
1. That the single trust had been converted into three in
accordance with the intention of the parties. P.
296 U. S.
486.
2. It was not necessary that the cash and securities should be
physically divided. P.
296 U. S.
487.
Page 296 U. S. 482
3. Any vested property right, including an undivided interest,
may constitute the corpus of a trust; a single fund may be held on
several trusts. P.
296 U. S.
487.
75 F.2d 973 reversed.
Certiorari to review a judgment reversing an order of the Board
of Tax Appeals which set aside an additional tax imposed on a
trustee by the Commissioner of Internal Revenue.
MR. CHIEF JUSTICE HUGHES delivered the opinion of the Court.
Petitioner is trustee under a trust created by John P. Wilson in
1913 for the benefit of his three children. Under a reserved power,
the trust was four times amended. The sole question is whether the
amendments created three separate trusts. The question arises in
relation to the taxation of income. If there is but a single trust,
as the Commissioner of Internal Revenue ruled, an additional tax
would be payable. If there are three trusts, as the Board of Tax
Appeals determined, there would be no additional tax. The Circuit
Court of Appeals held that there was only one trust. 75 F.2d 973.
Certiorari was granted because of the conflicting decision of the
Circuit Court of Appeals for the Seventh Circuit in Commissioner of
Internal Revenue,
Helvering v. McIlvaine, 78 F.2d 787.
By the original deed, one-third of the net income of the
securities held in trust was to be paid to each of the three
children while living, and, upon the death of any one, to those who
were to succeed to his or her interest in accordance
Page 296 U. S. 483
with the provisions of the deed. During the first fifteen years
of the trust, the income could be accumulated by the trustee, with
the written consent of the primary beneficiaries, and added to the
principal. The trust was terminable at any time, in whole or in
part, by the three children (or survivors) subject to the approval
of the grantor, if living, and, in any event, was to terminate on
the death of all the children. Upon termination, one-third of the
principal was to be distributed to each of the three children if
living, and the share of a deceased child was to go according to
the provisions of his or her will or, in the absence of such
disposition, to the surviving issue of the decedent or, in default
of such issue, to the surviving issue of the grantor
per
stirpes. Provision was made for the alteration of the trust
"in any respect and to any extent at any time" by the three
children, or survivors, subject to the approval of the grantor if
living. Thereafter the "rights and powers of all parties concerned"
were to be the same as though the trust deed had originally been
executed in the altered form.
In 1918, the three children, with the approval of the grantor,
modified the trust so as to provide:
"The trust estate now held under said trust deed shall be
divided into three separate and equal parts or shares (to which may
be assigned undivided interests in the whole or any part of the
said trust estate), which parts or shares shall severally be
designated by our respective names, and each of us and our
respective legal representatives shall have the same rights,
interest, and power in and over one of said three equal parts or
shares and the income thereof which is given to us respectively by
said indenture over one-third of said trust estate and the income
thereof, except as may be otherwise specifically provided
herein."
It was further provided that the whole of the net income
received from each share during the remainder of 1918,
Page 296 U. S. 484
and one-half of the net income received thereafter and during
the life of the grantor, should be accumulated and added to the
principal of such share, with privilege of withdrawal by the
beneficiary, with the grantor's consent, of the amount so
accumulated. All the provisions of the original trust deed, except
as they were "expressly or necessarily" modified by the new
instrument, were to continue in force.
In 1919, the three children, with the grantor's approval,
executed another modifying instrument which provided that one-half
of the net income "of each of the three trust estates" should be
paid over, as received, to the beneficiaries entitled thereto, and
that the other one-half should be paid to them when the payment was
requested by any two of the original beneficiaries; the net income
not so paid over was to "be added to the principal of the trust
fund from which it is derived." Provision was also made for the
disposition of the net income in case of the death of any of the
original beneficiaries, and for the distribution of the "several
trust estates" upon termination.
In 1920, the three children, with the approval of the grantor,
modified the amendment of 1919 with respect to the disposition of
income by providing that the trustee should pay out "as much of the
net income from each of said separate trusts" to the beneficiaries
as should be requested by a majority in interest of the
beneficiaries, with the added requirement that
"equal payments must be made out of the net income from each of
said separate trusts, to the end that said several separate trusts
may be maintained on a basis of equality in amount so far as
practicable."
There was a further provision that so much of the net income,
"received in any year from each separate trust estate" which was
not paid out should form part "of the principal of the separate
trust estate" from which it was derived, and the trustee was
required to
Page 296 U. S. 485
devote to charitable purposes so much of the net income "of said
trusts" as should be requested by the three children (or
survivors), such payments to be made "in equal amounts from each of
said separate trusts."
There was a further amendment in 1928 enlarging the powers
conferred upon the trustee by the original deed with respect to the
borrowing of money, the borrowed sums to be dealt with "as part of
the principal of the three trusts hereunder, in equal shares."
The purpose of the first amendment and the subsequent course of
dealings are thus described in the findings of the Board of Tax
Appeals, which are adequately supported by the evidence:
"The purpose of the amendment of September 21, 1918, was to
create three separate and distinct trusts, one for each of the
beneficiaries of the single trust then in existence, in order to
reduce liability for income taxes on the income of the trust."
"Prior to the first amendment the trustee kept one cash account
for the trust under the heading 'Trust under deed of John P.
Wilson, for John P. Wilson, Jr., and others' to which was credited
all income of the trust. On September 27, 1918, three accounts were
opened up by the trustee, one in the name of 'Trust under Deed of
John P. Wilson for John P. Wilson, Jr.;' one under the name of
'Trust under Deed of John P. Wilson, for Anna W. Dickinson;' and
the other under the name of 'Trust under Deed of John P. Wilson,
for Martha Wilson.' The single account was then closed by
transferring equal amounts of its balance to each of the new
accounts. Thereafter, cash received and disbursed on account of the
trust property was entered in these accounts, one-third in
each."
"At the same time, the property account kept by the trustee for
the stock of the single trust was closed out by transferring the
items thereof equally to accounts opened up under the names of the
three beneficiaries. There was
Page 296 U. S. 486
no actual division of the property held under the trust
indenture. The new accounts as set up showed that one-third of each
asset of the old trust represented the corpus of three new trusts,
one for each of the three children of the grantor. Acquisitions of
additional principal by purchase were divided equally among the
three trusts."
"The stock certificates acquired by the trustee before and after
September 21, 1918, were carried in the name of the petitioner as
trustee under the deed of trust of John P. Wilson or in the name of
a nominee of the trustee. The cash belonging to the trusts in
question here and all other trusts being administered by the
trustee was kept in one general account with another bank."
"During the taxable years, the trustee rendered separate reports
each month to the beneficiaries on the basis of a separate trust
for each. For each of the years 1924 to 1929, inclusive, it filed
fiduciary and income tax returns on the basis of a separate and
distinct trust for each child. In his audit of the returns, the
respondent determined that the income held in trust under the
indenture of March 12, 1913, as amended, was taxable on the basis
of a single trust and a single return for each year."
The Board of Tax Appeals concluded that "three separate and
distinct trusts" were created.
No question is raised as to the validity of the several
amendments. The only question is as to their construction and
effect. The parties, if they pleased, had power to convert the
single trust into three trusts, and the evidence and findings leave
no doubt as to their intention to do so. The question is whether
they accomplished their purpose.
United States v. Phellis,
257 U. S. 156,
257 U. S. 172.
If the various securities had been divided physically, if new
certificates of stock had been obtained for the several
beneficiaries, and such certificates and specific bonds and cash
had been set aside for each, there would be no room for argument
that three separate trusts were not created. But it was
Page 296 U. S. 487
not necessary to have such a physical division in order to carry
out the clear intention of the parties. An undivided interest in
property may constitute the corpus of a trust. The original trust
deed provided that its provisions and limitations should be
construed according to the laws of Illinois. But the elementary
principle is applied in Illinois, as elsewhere, that "every kind of
vested right which the law recognizes as valuable may be
transferred in trust."
Burke v. Burke, 259 Ill. 262, 268,
102 N.E. 293, 295.
"It [a trust] may be created in any property, real or personal,
legal or equitable, which is in existence, and which in the eye of
a court of equity is of value."
Gurnett v. Mutual Life Insurance Co., 356 Ill. 612,
617, 191 N.E. 250, 252. Perry on Trusts, 7th ed., ยงยง 67, 68. Nor
are the amending instruments open to the objection that the subject
of the trusts was not adequately defined.
Compare Snyder v.
Snyder, 280 Ill. 467, 469, 470, 117 N.E. 465;
Marble v.
Marble's Estate, 304 Ill. 229, 236, 136 N.E. 589. Where there
is an intention to create separate trusts, the fact that "the
trusts" are "kept in one fund" does not necessarily defeat the
intention and require the conclusion that there is but a single
trust.
In re Colegrove's Estate, 221 N.Y. 455, 459, 117
N.E. 813. "In many cases," said the Court of Appeals of New York in
Vanderpoel v. Loew, 112 N.Y. 167, 180, 19 N.E. 481, 484,
where
"income and principal were given in equal shares, although out
of one fund kept
in solido for convenience of investment,
a severance of the trust into its component parts has been
adjudged. . . . The shares and interests are several, although the
fund remains undivided."
See also Rollestone v. National Bank of Commerce, 299
Mo. 57, 71, 252 S.W. 394.
In the instant case, immediately following the first amendment,
the trustee opened separate accounts for the three trusts and the
single account previously kept was closed. Income received and
amounts disbursed were divided
Page 296 U. S. 488
and entered in the separate accounts. The property account of
the single trust was closed, and the items were transferred equally
to separate accounts in the names of the beneficiaries, showing
one-third of the assets of the old trust as representing the corpus
of each of the three trusts. New principal was divided equally in
the same way. If, at the outset, there had been three trust deeds,
each creating a trust for the benefit of a distinct beneficiary in
an undivided one-third of the property involved, no question would
have arisen. We think the same result was achieved by the use of
the power of amendment. We find no ground for concluding that the
purpose of the parties to create the three trusts was not carried
out.
The decision of the Circuit Court of Appeals is reversed, and
the order of the Board of Tax Appeals is affirmed.
Reversed.