Decided February 28, 1947.
Trusts — Amendable and revocable living trust, reserving income to settlor, valid — Section 8617, General Code — Where settlor retains dominion and control over trust property — Widow may assert right to distributive share, when.
Under the provisions of Section 8617, General Code, the transfer of property to a trustee is valid under an agreement whereby the settlor reserves to himself the income during his life with the right to amend or revoke; but when such settlor does not part with dominion and control over the trust property, his widow may elect to take under the statutes of descent and distribution and may assert her right to a distributive share of such property after his death. (Paragraph three of the syllabus in the case of Bolles v. Toledo Trust Co., Exr., 144 Ohio St. 195, approved and followed.)
APPEAL from the Court of Appeals for Summit county.
The plaintiff, Henrietta C. Harris, is the surviving spouse of Stanley W. Harris who died testate October 11, 1942, without issue.
The will, dated March 4, 1940, contains a provision for a testamentary trust with a direction to pay the surviving spouse a sum not to exceed $5,000 annually from the income of the trust.
However, investigation disclosed that the trust obviously could produce income amounting to but a mere fraction of the $5,000, and the widow then elected to take under the statutes of descent and distribution rather than under the will, inasmuch as the will contained no provision for the use of any part of the corpus of the trust for her benefit.
Furthermore, it was discovered that previously, on May 12, 1939, the testator had executed an agreement providing for another trust. This is revocable, and it provides that during his life the settlor shall be the sole recipient of the income. The spouse is not mentioned. The corpus of this trust consists of personal property of the value of approximately $75,000.
The plaintiff surviving spouse instituted this action for the purpose of having this trust inter vivos declared void as to the attempted disposition of the corpus after her husband's death; and she asks that this property be administered as a part of her husband's estate.
The Court of Common Pleas held the trust valid and dismissed the plaintiff's petition.
On an appeal to the Court of Appeals on questions of law and fact a decree was rendered in favor of the plaintiff. The court held that the trust inter vivos is valid except that "Stanley W. Harris retained such dominion and control over the corpus of the trust estate as to make said trust ineffective to deprive appellant, Henrietta C. Harris, of her interest in the assets thereof as the surviving spouse of said Stanley W. Harris, deceased; and that the said Henrietta C. Harris, as such surviving spouse, having duly entered her election in writing in the Probate Court of Summit county, Ohio, not to take under the said last will and testament and codicil of the said Stanley W. Harris, deceased, and, on the contrary, having elected to take under the laws of descent and distribution, is, accordingly, entitled to her distributive share, as provided by General Code Section 10504-55, in the corpus of the trust of the said Stanley W. Harris, deceased, in the principal amount of $75,000, hereinabove referred to now in the hands of Dudley W. Maxon, trustee under the instrument of trust, executed by the said Stanley W. Harris, hereinabove referred to."
The case is in this court for review by reason of the allowance of the defendants' motion to certify the record.
Messrs. Brouse, McDowell, May, Bierce Wortman, for appellee.
Messrs. Foust Holden, Messrs. Carson Roderick and Messrs. Wise, Roetzel, Maxon, Kelly Andress, for appellants.
Was the Court of Appeals in error in holding that the plaintiff's husband retained such dominion and control over the corpus of the trust inter vivos as to render the provisions of that trust ineffective to deprive the plaintiff, as the now surviving spouse, of her interest in that property?
The discussion in the opinion of the Court of Appeals is succinct, pertinent and decisive of the sole question presented. Reliance properly is placed upon the rule of law stated and applied by this court in the recent case of Bolles v. Toledo Trust Co., Exr., 144 Ohio St. 195, 58 N.E.2d 381, 157 A. L. R., 1164. The first three paragraphs of the syllabus of that case read as follows:
"1. A husband may dispose of his personal property during his lifetime without the consent of his wife; but a husband may not bar his widow of her right to a distributive share of any property which he owns and of which he retains the right of disposition and control up to the time of his death.
"2. Section 8617, General Code, which provides that a revocable and amendable living trust 'shall be valid as to all persons' except creditors, does not deprive the settlor of all dominion over the trust res so that a widow electing to take under the statute of descent and distribution is barred from claiming a distributive share of the property in such trust.
"3. The transfer of property to a trustee under an agreement whereby the settlor reserves to himself the income during his life with the right to amend or revoke, is valid by virtue of Section 8617, General Code, but under such a trust agreement settlor does not part absolutely with the dominion of such property and his widow electing to take under the statute of descent and distribution may assert her right to a distributive share of the property in such trust at settlor's death."
The defendants contend, first, that these quoted paragraphs of the syllabus are obiter dictum, second, that they are incorrect and should be overruled, and, third, that, even if proper, they are not applicable to the facts in the instant case.
With these views this court finds itself unable to agree. With reference to the first two contentions it is unnecessary to restate the rationale of the court. This leaves the question whether the law above quoted is applicable to the particular facts in the present controversy.
In the third paragraph of the syllabus in the Bolles case, supra, it is recited that "the settlor reserves to himself the income during his life with the right to amend or revoke" the trust agreement. It is conceded that in the instant case the plaintiff's husband made precisely the same reservations.
Likewise in that third paragraph of the syllabus in the Bolles case it is stated that the "settlor does not part absolutely with the dominion of such property." How does this compare with the action of the husband of the plaintiff in the case at bar? The record discloses that the plaintiff's husband not only expressly reserved the income together with the unrestricted right to modify or revoke, but he did a number of additional things that are important in determining the question of dominion over the trust res. He expressly reserved the right to deliver additional securities to the trustee, and also the right to redelivery of trust property which might be the subject of revocation. Furthermore, it should be observed that there is an omission of certain authority ordinarily conferred upon such a trustee. This trustee is not authorized to sell any part of the trust property. There is no authority to invest any of the trust property. There is no authority to reinvest. Nor is there authority to vote the stock in the trust.
At this point it becomes necessary to mention still a third, related trust dated May 15, 1939, three days subsequent to the previous trust agreement. The corpus of the previous trust consisted of 100 shares of the stock of a corporation called The McNeil Machine Engineering Company in which there were but five stockholders, each owning 100 shares. That trust agreement does authorize the trustee to vote the 100 shares of stock, but this is virtually nullified by a further provision authorizing the trustee to enter into a trust agreement with the remaining four stockholders whereby all of the stock of the corporation was to be surrendered and one certificate issued in the joint names of the trustee and the four other stockholders, all five to be designated as trustees thereof. This was done. As a result there no longer was any stock standing in the name of the original trustee alone, and, of course, he could vote no stock in that capacity. In spite of the new trust agreement the plaintiff's husband continued to serve as the president at a salary of $20,000 per year and as a director of the corporation, and until his death he made the same use of his property as he had done previous to the execution of the trust agreements, while the trustee attended no meeting of the stockholders, attended no meeting of the board of directors, and at no time did he examine the books of the corporation. As well stated by the Court of Appeals in its opinion, "the record shows that Harris, the settlor, engaged in the business of operating the company, along with the other stockholders, and that the activities of his trustee were of a minor character."
As bearing upon the intent of the plaintiff's husband, the record significantly discloses that the wife of each of the four remaining stockholders was fully informed of the execution of the new trust agreement and assented thereto in writing, while the plaintiff had no knowledge of either trust agreement until after her husband's death.
Under the circumstances of this case the Court of Appeals manifestly was not in error in holding that the plaintiff's husband retained such dominion and control over the corpus of the trust estate as to make the trust ineffective to deprive the plaintiff of her interest in the assets thereof as the surviving spouse.
The decree of the Court of Appeals must be affirmed.
TURNER, BELL and SOHNGEN, JJ., concur.
MATTHIAS, HART and ZIMMERMAN, JJ., dissent.
In my opinion, the pronouncements of this court in the cases of Union Trust Co. v. Hawkins, Admr., 121 Ohio St. 159, 167 N.E. 389, 73 A. L. R., 190, and Cleveland Trust Co., Trustee, v. White, 134 Ohio St. 1, 15 N.E.2d 627, 118 A. L. R., 475, are still the law in this state and particularly so in view of the provisions of Section 8617, General Code, as amended effective August 15, 1921.
While these principles are well established, the validity of each revocable trust instrument depends on language used in the instrument and the circumstances surrounding the creation of the trust.
Facts differing from those involved in the above cases were presented in the case of Bolles v. Toledo Trust Co., Exr., 144 Ohio St. 195, 58 N.E.2d 381, 157 A. L. R., 1164. In that case the decedent, George A. Bolles, executed his last will and testament on the 26th day of January, 1928, and on the same day made and executed a trust agreement designated trust No. 331. Another trust, designated trust No. 520, was made January 21, 1930, and a third trust, No. 328, not under attack in that case, was made January 8, 1928. The beneficiary of trust No. 328 was the donor's daughter, Barbara Ruth Bolles, a minor. The donor was beneficiary therein only in case the child predeceased him without issue, or died before reaching the age prescribed for distribution.
In trust No. 331, the donor was named as beneficiary during his lifetime, and entitled to the net income. Upon death of donor and his wife, who was second beneficiary to the extent of $500 per month, the undistributed balance was to go to trust No. 328.
Likewise, in trust No. 520 the donor was named as a beneficiary as long as he lived, as to income and principal, and after his death the trust res was to be transferred to trust No. 331.
Both trusts No. 331 and No. 520 were revocable and trust No. 328 was irrevocable. The last will and testament of George A. Bolles contained the following provision:
"Item III. All the rest, residue and remainder of my property, both real and personal I do hereby give, devise and bequeath to The Toledo Trust Company, of Toledo, Lucas county, Ohio, and its successors, to be managed and disposed of in accordance with the terms and provisions of a certain trust agreement bearing the date of January 26th, 1928, and known as trust No. 331, wherein The Toledo Trust Company is trustee of certain trust property; and my executor, upon delivery of the property of my estate to said trustee, shall not be obliged or permitted to see to the application and disposal by said trustee of said property, nor be permitted to inquire into the performance of the trust under said trust agreement. * * *"
It is thus clearly disclosed that the entire plan, adopted and carried into execution by Bolles, was testamentary in character, and that was the holding of this court in that case.
The controlling facts in the instant case are as follows:
On the 12th day of May, 1939, Stanley W. Harris entered into a trust agreement with D.W. Maxon of Akron, whereby a trust res of 100 shares of the stock of The McNeil Machine Engineering Company was deposited. The trustee had power thereunder to enter into an agreement of trust with four other persons, who together with Maxon were the sole owners of the stock in the company, and to surrender the stock in the company under a proposed agreement of trust; had power to vote the stock in accordance with the agreement of trust, to receive and remit dividends to the donor and to call upon the donor for contributions if required; and had power, in such capacity, to exercise any rights under the agreement of trust in accordance with his best judgment.
The right of revocation was reserved in this agreement and the beneficiary after the death of the donor was Mary Dailey, to the extent of $100 per month, and after her death, the beneficiaries were the children of donor's brother.
On the 15th day of May, 1939, the proposed agreement of trust was made with four other stockholders whereby the four other stockholders agreed to insure their lives in a certain sum so that upon the death of any one of them, the others could purchase the stock at an agreed value of $400 per share.
During the lifetime of the parties, however, these new trustees were authorized to vote the stock and receive the dividends as they were declared, in accordance with the number of shares put into the trust by each.
On March 4, 1940, Stanley W. Harris executed a will in which another trust agreement was created, by a gift of the residue of his estate to Dudley W. Maxon, trustee, to pay out of the net income thereof to Harris' wife a sum not exceeding $5,000 annually until her death; the remaining, estate to be then paid to Alice Harris, his niece, and Stanley B. Harris, his nephew.
The trust instrument, dated May 12, 1939, was not incorporated in the will or referred to therein.
The widow in the instant case has elected to take under the law, and the only question presented is whether the res of the trust, dated May 12, 1939, is part of the net estate, and whether the widow shares therein under Section 10504-55, General Code.
The decision of the instant case, therefore, must turn on whether the agreement created an agency. If it constituted a trust, it is valid and the res is not a part of the net estate; if an agency, the res did become a part of the net estate.
It is stated in the majority opinion: "The plaintiff surviving spouse instituted this action for the purpose of having this trust inter vivos declared void as to the attempted disposition of the corpus after her husband's death; and she asks that this property be administered as a part of her husband's estate."
In the majority opinion, the finding of invalidity is based on the following facts of dominion by the decedent:
Reserved right to revoke or modify; reserved income; reserved right to deliver additional securities to the trustee; reserved right to redelivery of certain trust property; the agreement did not authorize the trustee to sell the trust property; the agreement did not authorize reinvestment; the agreement conferred no authority to vote the stock in the trust; the agreement provided for transfer to other trustees; when stock was transferred by agreement of May 15, 1939, there was no further right to vote in the capacity of trustee; the donor continued to serve as president at a salary of $20,000 per year; the donor made the same use of the property as he did previous to execution of the agreement; the trustee attended no meetings of stockholders or of the board of directors and did not examine the books of the corporation; and the wife of Harris did not know of either of the trust agreements.
Applying Section 8617, General Code, which is the first criterion to be applied in determining the validity of a trust, we are of the opinion that the enumerated powers retained by the donor are not of such a nature that he could not lawfully grant them to another. Under the provisions of Section 8617, General Code, "the creator of a trust may reserve to himself any use of power, beneficial or in trust, which he might lawfully grant to another, including the power to alter, amend or revoke such trust, and such trust shall be valid as to all persons, except * * * creditors of such creator * * *."
In this case the rights of revocation or modification were never exercised and the plan adopted and carried into execution by Harris was not testamentary in character.
HART, J., concurs in the foregoing dissenting opinion.
In the instant case the trust was created more than three years before the settlor died. Title to the trust property, consisting of personalty, was transferred to the trustee, and the reserved rights of revocation and modification of the terms of the trust agreement were never exercised by the settlor. The indicia of a valid trust are apparent.
The writer is of the opinion that pronouncements by the majority of the court in the present case and in the case of Bolles v. Toledo Trust Co., Exr., 144 Ohio St. 195, 58 N.E.2d 381, 157 A. L. R., 1164, represent a departure from the principles laid down by this court in former decisions, notably, Union Trust Co. v. Hawkins, Admr., 121 Ohio St. 159, 167 N.E. 389, 73 A. L. R., 190; Cleveland Trust Co., Trustee, v. White, 134 Ohio St. 1, 15 N.E.2d 627, 118 A.L.R., 475; and Central Trust Co. v. Watt, 139 Ohio St. 50, 38 N.E.2d 185.
The writer did not join with the majority of the court in the case of Bolles v. Toledo Trust Co., supra, a principal reason being that he considered the second and third paragraph of the syllabus incompatible with expressions of this court in previous cases.
Section 8617, General Code, as amended in 1921, is declarative of the policy of this state on the subject to which it relates and sanctions the creation of revocable living trusts wherein the settlor retains the income of the trust for life and reserves the right to alter, amend and revoke the trust instrument. The trust here involved is of such a character.
It is interesting to note that the Court of Appeals in the present case held the trust valid, and that the majority opinion herein makes no declarations as to its invalidity. Following the Bolles case, supra, such majority opinion states that because the settlor did not part with dominion and control over the trust property, his widow could, after his death, elect to take under the statutes of descent and distribution and successfully assert the right to a distributive share of the property included in the trust.
It seems incongruous indeed that a trust may be valid giving the trustee title to and a vested interest in the trust property and yet the settlor's widow, upon electing not to take under his will, may be accorded the right by judicial fiat to claim a "distributive share of the trust property under the statutes of descent and distribution.
Such thesis is contrary to the illustration contained in 1 Restatement of Trusts, 177, Section 57, which reads:
"A, a married man, transfers property to B in trust to pay the income to A for life and on his death to convey the property to C. By the terms of the trust A reserves power to revoke or modify the trust. By statute it is provided that on the death of a married man, his wife shall be entitled to one-half of the property owned by him at his death, and that she cannot be deprived of her share of the property by his will. A's widow is not entitled to any part of the trust estate."
A rule generally recognized is that an individual may do as he wishes with his personal property during his lifetime. This principle is accepted in Ohio. See Mark v. Mark, 145 Ohio St. 301, 61 N.E.2d 595, 160 A. L. R., 608; Neville v. Sawicki, Exr., 146 Ohio St. 539, 67 N.E.2d 323.
Speaking on the subject, the Supreme Court of Pennsylvania said, in the case of Windolph v. Girard Trust Co., 245 Pa. 349, 363, 91 A. 634, 638:
"It is the settled law in this state, as was the common law, that during his life a man may dispose of his personal estate by voluntary gift or otherwise as he pleases, and it is not a fraud upon the rights of his widow or children * * *. This power arises from the fact that he is the absolute owner and hence may make a gift, declare a trust, or otherwise dispose of his personal property at his pleasure. During his life, his wife and children have no vested interest in his personal estate, and hence they cannot complain of any disposition he sees fit to make of it. Their right to his property attaches only at his death."
The "good faith" required of a settlor in making an effective disposal of his property in his lifetime does not refer to his purpose to ignore his wife, but to the intent to divest himself of the ownership of the property placed under a trust agreement. Therefore, the fraudulent intent which will nullify the trust cannot be based on the husband's purpose to deprive his wife of her distributive share in his estate as widow. Lines v. Lines, 142 Pa. 149, 21 A. 809, 24 Am. St. Rep., 487; Windolph v. Girard Trust Co., supra; Kerwin v. Donaghy, 317 Mass. 559, 59 N.E.2d 299.
For other cases of similar import, where the excluded spouse was denied any part of the trust property at the settlor's death, see Brown v. Fidelity Trust Co., Trustee, 126 Md. 175, 94 A. 523; Rose v. Union Guardian Trust Co., 300 Mich. 73, 1 N.W.2d 458; Beirne v. Continental-Equitable Title Trust Co., 307 Pa. 570,161 A., 721.
Within the provisions of present Section 8617, General Code, it is plain that an individual during his lifetime may create a valid revocable trust, with the reservations stipulated, which will operate to exclude any claim of the surviving spouse to a "distributive share" of the property in the trust upon the settlor's death. If the existence of a situation of this kind is undesirable in Ohio, the General Assembly is the agency to adopt corrective legislation.
In the writer's view, the majority opinion herein represents a variance from established principles and he cannot subscribe to it.