Fid. Union Trust Co. v. Mcgraw

• Decision Date: 01 August 1946
• Docket Number: 148/640.
• Citation: 48 A.2d 279
• Parties: FIDELITY UNION TRUST CO. et al. v. McGRAW et al.
• Court: New Jersey Court of Chancery

48 A.2d 279

FIDELITY UNION TRUST CO. et al.

v.McGRAW et al.

148/640.

Court of Chancery of New Jersey.

Aug. 1, 1946.

Suit in equity by the Fidelity Union Trust Company, as executor and trustee under the will of William Scheerer, deceased, and others, against James H. McGraw, III, and others for construction of, and instructions as to, portions of the will.

Decree construing the will and instructing complainants.

Syllabus by the Court.

1. The creation of a sinking fund to provide against deterioration and obsolescence of the property held in trust by complainants in the instant matter is consistent with the power granted complainants under the will here under consideration.

2. As part of the duty of complainants to use skill and care to make the trust property productive, complainants are authorized to invest accumulated income. It is generally the duty of trustees not to suffer money of others to remain idle. The term ‘trust funds' as used by the testator in his will is broad enough to include accumulated income.

3. Trustees under the terms of the will held authorized to borrow cash from income accounts to pay obligations which would normally be chargeable to principal.

Hood, Lafferty & Emerson and Sigurd A. Emerson, all of Newark, for complainants.

Smith & Slingerland and Archibald F. Slingerland, all of Newark, for defendants.

STEIN, Vice Chancellor.

Fidelity Union Trust Company as executor and trustee, Paul R. Scheerer, Joseph D. Scheerer and Lois S. McGraw, individually and as executors and trustees under the will of William Scheerer, deceased, seek construction and instruction with relation to portions of the will concerning which they are in doubt.

The decedent was survived by his widow Lois Durand Scheerer, and his three children: Paul R. Scheerer, Joseph D. Scheerer and Lois S. McGraw. Paul R. Scheerer has three children: Lynda F. Scheerer, Mary L. D. Scheerer, and Paul R. Scheerer, Jr. Joseph D. Scheerer has two children: William Scheerer, II and Joseph D. Scheerer, Jr. Lois S. McGraw has one child, James H. McGraw, III. All are parties to the proceeding and represented by counsel.

Under paragraph ‘Fourth’ of his will the testator sets up separate but identical trusts for the benefit of each of his three children and directs that upon the death of the survivor of the children the principal and all unexpended income of the three trust funds are to be considered as one fund and divided per capita among his grandchildren.

Each trust provides for certain payments out of principal to his widow, Lois Durand Scheerer, upon her requests for such payments; and, further, during the lifetime of the widow, for such income or principal payments to the widow or the named child as the corporate trustee may consider necessary or advisable. The life beneficiary of each trust, it is to be noted, is not given the net income from the separate trust fund outright. After the death of the testator's widow, the trustees are authorized to pay to each child, upon request, the sum of $15,000 annually out of principal, and so much of the income or of the remaining principal for the use, enjoyment or benefit of the respectively named life beneficiary or his or her spouse or children as the corporate trustee shall consider necessary or advisable. In the event of the death of the respective life beneficiary before the death of the widow or upon the death of the respective life beneficiary, the income from the separate trust fund is directed to be paid to or expended for the benefit of the issue of the respective life beneficiary until the death of the last survivor of the testator's children.

The decedent was the owner of a number of stocks and other securities and of several parcels of real estate. Practically all of the stocks and other securities have been retained by the executors as assets of the estate. The real estate has been sold with the exception of 118-122 Market Street, Newark, which has been transferred to the trustees and is now held by them as an asset of the trusts.

This property has a frontage of 44 feet on Market Street and extends in ‘L’ shaped fashion to Halsey Street where it has a frontage of 90.57 feet. Erected thereon is a theater building of concrete, steel and brick construction, and also one store on Market Street and two stores on Halsey Street. The building was erected in 1915. These premises were leased by the decedent in 1925 to the 120 Market Street Corporation for a period beginning January 1, 1926 and ending May 1, 1950, at the following net rentals: January 1, 1926 to February 1, 1929, $40,000; February 1, 1929 to May 1, 1936, $45,000; May 1, 1936 to May 1, 1950, $60,000. The lease at divers times was modified and substantial reductions in rental granted.

The lease was assigned to the present tenant, the Stanley Fabian Corporation, in 1930; and by agreement dated July 3, 1931 the net annual rental under said lease was guaranteed by Warner Brothers Pictures, Inc., and again guaranteed by agreement with said Warner Brothers Pictures, Inc., dated February 18, 1944. February 18, 1944, the lease was extended for an additional term of five years commencing May 1, 1950 and ending April 30, 1955. Presently the net annual rental is $50,000.

Since the date of the death of the testator, no part of the income of the estate or of the principal and income of the trusts has been paid by the executors and trustees. No requests for such payments have been made. The net yearly income in the executors' account amounts to approximately $28,500, and the present yearly net income from the Market Street property amounts to $30,500. Accumulations of income amount to $48,856.43 in the executors' account and $18,986.81 in each of the three trust accounts.

Paragraph ‘Fifth’ of the will provides: ‘Fifth: In order to avoid forced liquidation, my Executors and Trustees in setting up the trust funds provided for by my will may, in lieu of cash, make use of stocks, bonds, securities or other real or personal property of which I may die possessed, such stocks, bonds, securities or other real or personal property to be taken for this purpose at their reasonable value, in the judgment of my trustees, as of the time such trust funds are set up. The trustees may continue to hold, in their discretion, any stocks, bonds, securities or other real or personal property which I may possess at the time of my decease. The trustees may invest and reinvest the said trust funds in such stocks, bonds, securities or other real and personal property as the trustees in their discretion shall deem suitable for the best interest of said trusts, notwithstanding that the same may not be such as are classified now or hereafter as legal investments for trust funds under the statute or case law of the State of New Jersey. The trustees may in their discretion borrow upon the security of the trust funds, and pledge the same in that connection for any purpose deemed by them to be in the interest of the trusts. The trustees need not make any provision for amortization of premiums paid on any securities, and need not apportion any income which may be received by them to principal, except in their discretion.’

Paragraph ‘Fourteenth’ of the will reads: ‘With respect to any real estate which the Trustees may hold as part of the principal of any of the trusts, my Trustees shall be empowered to make such provision for deterioration and obsolescence with respect thereto as in their judgment may be wise.’

I. May complainants out of the net annual income from the Market Street property now held in the trusts create a sinking fund to recover deterioration and obsolescense of the property and so preserve intact the physical and economic integrity of the trust corpus? In addition to seeking judicial sanction of the creation of such a fund, complainants further seek the Court's approval in respect of the mechanics of allocating or apportioning income to such a fund whereby the annual sum allocated to the fund for deterioration is to be determined by complainants in the exercise of a reasonable judgment and whereby the annual sum allocated to the fund for obsolescence is to be determined on the basis of some portion of the net annual rental received from the property.

In order to determine what was the intention of the testator, a discussion of the use of the words ‘deterioration and obsolescence’ is required as well as their peculiar applicability to the property held in the trusts, and the propriety of creating a sinking fund under the will.

The terms ‘deterioration’ and ‘obsolescence’ are not interchangeable but refer to separate and distinct means whereby a capital asset suffers a diminution in value.

Deterioration is defined as ‘Impairment, as in quality, character, or value, due to use, wear and tear or other physical causes.’ Webster, New International Dictionary, 2d Ed. unab.

Depreciation, which for the past fifty years has been given extended and increasing consideration by accountants, engineers and appraisers, is recognized legally as an important element in the determination of value, net earnings and income. Cf. Whittaker v. Amwell National Bank, 52 N.J.Eq. 400, 29 A. 203, and has as its function the establishment of a fund sufficient in the aggregate to restore a capital asset at the end of its estimated physical life. It is recognized as an element present in the administration of trusts with successive beneficiaries. See, 2 Scott on Trusts, § 239.4; In re Matthew's Estate, 1932, 210 Wis. 109, 245 N.W. 122.

On the other hand, obsolescence refers to an element that is separate from the physical decline in value and is utilized to describe the fact that the useful life of an asset is often terminated or its value decreased by reason other than physical deterioration. It refers to a functional capital loss or a diminution of economic usefulness and ‘may arise from changes in the art, shifting of business centers, loss of trade,...