Valentine, D. W.

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Wills - Rights of Devisees and Legatees - Whether Income Arising under a Testamentary Trust Released from Unlawful Accumulation Passes by Intestate Succession

Chicago-Kent College of Law

Chicago-Kent Law Review Volume 38 Issue 2 Article 5 October 1961 Wills - Rights of Devisees and Legatees - Whether Income Arising under a Testamentary Trust Released from Unlawful Accumulation Passes by Intestate Succession D. W. Valentine Follow this and additional works at: https://scholarship.kentlaw.iit.edu/cklawreview  Part of the Law Commons Recommended Citation D. W. Valentine, Wills - Rights of Devisees and Legatees - Whether Income Arising under a Testamentary Trust Released from Unlawful Accumulation Passes by Intestate Succession, 38 Chi.-Kent L. Rev. 197 (1961). Available at: https://scholarship.kentlaw.iit.edu/cklawreview/vol38/iss2/5 This Notes is brought to you for free and open access by Scholarly Commons @ IIT Chicago-Kent College of Law. It has been accepted for inclusion in Chicago-Kent Law Review by an authorized editor of Scholarly Commons @ IIT Chicago-Kent College of Law. For more information, please contact jwenger@kentlaw.iit.edu, ebarney@kentlaw.iit.edu. DISCUSSION OF RECENT DECISIONSand the Courts). But the Cohn case5 7 holds that depreciation deductionsshould be disallowed to the extent that the taxpayer underestimates theproceeds to be realized upon resale. In the application, therefore, capitalgains on depreciable property 58 are totally eliminated, a result that isimpossible to reconcile with the adoption of Section 1231. What is more,this same result is quite repugnant to the purpose behind the liberalizeddepreciation method5 9 for it tends to block the incentive for a rapid turn-over of depreciable property. So, it would appear that at long last, theTreasury Department has achieved through the courts the curtailmentof capital gains treatment which it has been attempting to attain since1947 through legislation.60"Many inequities are inherent in the income tax. We multiply themneedlessly by nice distinctions which have no place in the practical admin-istration of the tax law. "'1J. P. GRAvSWILLs-RIGHTS OF DEVISEES AND LEGATEES--WHETHER INCOME ARIS-ING UNDER A TESTAMENTARY TRUST RELEASED FROM UNLAWFUL AdcuMu-LATION PASSES BY INTESTATE SUCCESSION-An interesting question con-cerning the disposition to be made of income which had accumulated in atestamentary trust for a longer period than permitted by law, wasrecently presented to the Supreme Court of Illinois in the case of Murphyv. Northern Trust Company.' In that case, the testator had left hisresiduary estate in trust under a will dated in 1932 which directed thetrustee to pay his widow a specified sum monthly from the net incomethereof and to accumulate any sums in excess and to add them to the57 Cohn v. United States, 259 F. 2d 371 (6th Cir., 1958).58 Note 56, ante.59 Note 49, ante. "The stimulus to investment through liberalized deprecia-tion is most important with respect to the creation of new assets."60 In 1947 and 1948 Congress held extensive Revenue Revision Hearings. TheTreasury Department submitted an accelerated depreciation report in an attemptto reduce the effect of Section 117(j) of the 1939 Internal Revenue Code.Congress, in adhering to a policy of encouraging the sale and purchase of capitalequipment failed to take any action on this attempt. Again in 1950 the Secretaryof the Treasury attempted to persuade Congress to treat losses on depreciableproperty as capital rather than ordinary losses. Congress rejected this recommenda-tion as it did a similar one drafted by the Committee on Federal Taxation of theAmerican Institute of Accountants and submitted to Congress during the hear-ings on the 1954 Code. Finally, on January 18, 1960, during the course of thislitigation, the President in his budget message to Congress, recommended thatgain on the sale of depreciable property be treated as ordinary income.61 United States v. Lewis, 340 U. S. 590, 71 S. Ct. 522, 95 L. Ed. 560 (1951)(Douglas, Dissenting).1 17 Ill. (2d) 51g, 162 N. E. (2d) 428 (1959), affirming 20 Ii. App. (2d) 244,155 N. E. (2d) 821 (1959).CHICAGO-KENT LAW REVIEWprincipal. The will further directed the trustee to divide the corpus andaccumulated income among certain remaindermen after the death of thewidow. When the testator died in 1937, the Illinois version of the so-called Thellusson Act 2 prohibited the accumulation of income for morethan twenty-one years from the death of the testator. After the permissi-ble accumulation period had expired, the widow brought an action toconstrue the will, claiming a right to the income so released. The sur-viving remaindermen named in the will also asserted a right thereto.8The trial court decreed that the trustee should distribute the remainderof the net income to the remaindermen and, on appeal, the AppellateCourt for the First District affirmed. The Supreme Court of Illinois,following the granting of leave to appeal, reversed and remanded witha direction that the released income was to pass by intestate successionwhen it concluded that it was impossible, from the language of the will,to identify the person or persons who would have been entitled to theincome if the proper accumulation thereof had not been directed.The instant decision exposes the problem of the uncertainty as towhom distribution of the void accumulation should be made. The statuteprovided that such income shall go to and be received by such person orpersons as would have been entitled thereto if such accumulation hadnot been directed. This provision would seem rather easy to apply. Yetthe courts are still posed with a problem of construction, as in the instantcase, where the testator made no express provision for the destinationof the released income. Thus, the crucial question which faced the courtwas whether the will indicated such a person or persons entitled to theincome and what was to be done if it did not.It was strongly urged by the trustee on behalf of the remaindermenthat in determining where the released income goes, the testator's inten-tion is controlling.4 The trustee claimed that the testator clearly intendedhis widow to have not more than three-hundred dollars per month, and,that his collateral heirs should take his entire estate subject only to themonthly annuity to his widow. To this, the widow responded that thewill showed an equally firm intention that none of the remaindermen2 Ill. Rev. Stat. (1937), Vol. 1, Ch. 30, § 153. The Statute was first enacted in1907.3The testator's scheme for the ultimate distribution of his estate apparentlycontemplated a division thereof, after the death of his widow, into equal sharesamong his brothers and sisters or to the lawful issue of any one of them (exceptas to one named sister) who failed to survive the widow, with a further provisionagainst lapse in case any remainderman died without issue surviving at the timefor distribution.4 Webb v. Webb, 340 Il1. 407, 172 N. E. 730 (1930) ; Carlberg v. State SavingsBank, 312 Ill. 181, 143 N. E. 441 (1924).DISCUSSION OF RECENT DECISIONSshould take anything under the will during her life and that only thesurvivors should take anything at all. The court noted that the will didnot direct a periodic distribution of the released income to anyone. Thecourt further deemed that the presumption against intestacy did notwarrant it to supply the omitted provision, under the guise of construingthe will, when no language was used to show an intention of the testatorto dispose of the property. 5 Consequently, the court construed the willas if the testator made no effective disposition of the released income withthe result that it passed by intestate succession.Although there have been earlier Illinois cases concerning the in-terpretation and application of the Thellusson Act, these decisions didnot make a specific adjudication as to the proper distribution of incomereleased by the operation of the statute.e Of the other states which haveenacted Thellusson statutes, only the Pennsylvania Act contains similarphraseology in the section relevant in the instant case.7  However, theprecise factual situation involved in the instant action has never beenpresented in the Pennsylvania cases, and, besides, construction of thePennsylvania Act by her courts is substantially different from that ofthe Illinois decisions so as to render those Pennsylvania cases of very littlepersuasiveness in this state.8Though the Illinois and Pennsylvania type of provision for the dis-position of illegal accumulation gives rise to a number of questions, the"next eventual estate" type such as is found in New York does not neces-5 Hampton v. Dill, 354 Ill. 415, 188 N. E. 419 (1933) Glaser v. Chicago Title& Trust Co., 393 Ill. 447, 66 N. E. (2d) 410 (1946).6 Booth v. Krug, 368 Ill. 487, 14 N. E. (2d) 645 (1938); Webb v. Webb, 340 Ill.407, 172 N. E. 730 (1930) ; French v. Calkins, 252 Ill. 243, 96 N. E. 877(1911) ; Walliser v. Northern Trust Co., 338 Ill. App. 263, 87 N. E. (2d) 129 (1949) ;Carlberg v. State Savings Bank, 312 Ill. 181, 143 N. E. 441 (1924); Sullivan v.Harris Trust & Savings Bank, 8 Ill. App. (2d) 397, 132 N. E. (2d) 69 (1956).7 Purdon's Pa. Stat. Ann., Tit. 20, § 3251.5 In Pennsylvania, directions to accrue and to add the accumulations to theprincipal of the fumd during the life of a life-tenant are bad altogether; Lowe'sEstate, 326 Pa. 375, 192 A. 405. This view has been rejected in Illinois where onlyaccumulations in excess of the permitted periods are void : Sullivan v. HarrisTrust & Savings Bank, 8 Ill. App. (2d) 397, 132 N. E. (2d) 69 (1956) ; Webb v.Webb, 340 Ill. 407, 172 N. E. 730 (1930). A different, though not necessarily in-consistent, result was reached in the decision of In re Maris' Estate, 301 Pa. 20,151 A. 577, wherein the testator directed that all the net income from a testa-mentary trust be paid to his wife, specifying, however, that all stock dividends beaccumulated as principal. The Court, in holding that dividends must be con-sidered as income and that the wife was entitled thereto, sets forth a technicaldistinction between a vested estate in possession and vested estate not in posses-sion stating that the beneficiary must hold a vested possessory interest in order tobe entitled to the income released under the Pennsylvania Act. See also Thistle'sEstate, 263 Pa. 60, 106 A. 94 (1919) ; In re Wright's Estate, 277 Pa. 69, 75 A. 1026(1910).CHICA O-KENT LAW REVIEWsarily provide a solution to these problems. 9 The New York Real Prop-erty Law states that where no valid direction for the accumulation ofincome is given, such income shall belong to the persons presumptivelyentitled to the "next eventual estate".10 The wording of the statuteimmediately raises the question as to who is the person presumptivelyentitled to the "next eventual estate"?" Also there is a question whetherthe Statute is applicable in a case where an illegal direction for anaccumulation can be stricken out, and the creating instrument still con-tains a valid direction for the disposition of the accumulation.1 2In 1953, the Illinois Thellusson Act was amended in order to removethe ambiguity as revealed by the instant decision. The amendment pro-vides that the illegally-accumulated income should "go to and be receivedby the person in whom the beneficial interest in the corpus of the estatefrom which such income was derived is vested"13 Although the amend-ment has no retroactive effect, one might have expected the court to ren-der a decision in accord with this recent enactment in order to removethe cloud of uncertainty connected with void accumulations of incomecreated prior to 1953. Nonetheless, the court did attain a different result,but by doing so, it left corporate and individual trustees still faced withthe disquieting situation as to who is entitled to void accumulations of income which are not covered by the recent amendment.However, once a will is construed to the effect that the testator madeno disposition of the accumulated income, the decision provides an answeras to the destination of the accumulation by holding that such residuaryincome released under the Act will pass as intestate property to thosewho are entitled under the Statute of Descent.D. W. VALENTINE9 For a thoughtful discussion of the Thellusson Act and the problems arisingunder it, see Simes, "Statutory Restrictions on the Accumulations of Income",7 U. Chi. I. Rev. 409 (1940).10 N. Y. Real Prop. Law § 63. There is no "next eventual estate" provision in theNew York Personal Property Law, but it has been held that the provision of theReal Property Law applies to personalty, In re Harteau, 204 N. Y. 292, 97 N. E.726 (1912).11 It has been said that "The persons presumptively entitled to the next eventualestate are those who are entitled to the estate which is to take effect at the endof the period during which the rents and profits are undisposed of, or are invalidlyaccumulated." In re Kohler, 231 N. Y. 353, 132 N. E. 114 (1921). See also annota-tion with respect thereto in 48 C. J. 996, Note 46 and cases there cited.12 See Matter of Hoyt, 116 App. Div. 217, 101 N. Y. Supp. 557 (1906) (aff.189 N. Y. 511, 81 N. E. 1166 (1907)).13 I1. Rev. Stat. 1959, Vol. 1, Ch. 30, § 153.

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Wills - Rights of Devisees and Legatees - Whether Income Arising under a Testamentary Trust Released from Unlawful Accumulation Passes by Intestate Succession

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