Delaware Trust Co. v. Bradford
59 A.2d 212, 30 Del. Ch. 277, 1948 Del. Ch. LEXIS 64 (1948)
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Rule of Law:
When a trust holds unproductive property, and the trust instrument does not indicate a contrary intent, the net proceeds from its sale must be apportioned between the income beneficiary and the remainderman, with the 'duty to sell' commencing at the trust's inception and accounting for carrying charges and attributable capital gains tax.
Facts:
- Edward G. Bradford, Jr. died on December 3, 1927, leaving a will that created a trust managed by the plaintiff, Delaware Trust Company, to keep property invested in good securities and pay the net income to his wife, Helen S. Bradford, for life.
- The will granted Helen S. Bradford a power of appointment over the trust property, and in its absence, the corpus would go to Yale College, a Connecticut corporation.
- On June 10, 1927, Edward G. Bradford, Jr. purchased a piece of vacant land for $5,000, which, upon his death, became a trust asset valued at $9,800.
- The vacant land remained completely unproductive for 19 years, 9 months, and 21 days (from December 3, 1927, until September 24, 1947), during which $403.98 in carrying charges were paid from the trust income.
- Helen S. Bradford requested the trustee not to sell the land, believing its value would increase, and the trustee independently reached the same conclusion.
- On September 24, 1947, Delaware Trust Company sold the unproductive land, realizing $18,997.63 after deducting real estate commissions.
Procedural Posture:
- Delaware Trust Company, as trustee, filed a petition in the Court of Chancery of Delaware seeking instructions from the court regarding the method of treatment and disposition of net proceeds from the sale of an unproductive trust asset.
- Helen S. Bradford (life income beneficiary) and President and Fellows of Yale College (remainderman) were named as defendants.
- A default judgment was taken against both defendants because neither appeared in court.
- The court subsequently heard testimony on behalf of the plaintiff, Delaware Trust Company, concerning the facts of the case.
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Issue:
When a trustee sells unproductive trust property, must the net proceeds be apportioned between the income beneficiary and the remainderman, and if so, how should carrying charges and capital gains tax be treated in determining the apportionable sum, and what is the appropriate commencement date for calculating the income portion?
Opinions:
Majority - Seitz, Vice-Chancellor
Yes, the net proceeds from the sale of the unproductive trust asset must be apportioned between the income beneficiary and the remainderman, with the calculation deducting carrying charges and the attributable capital gains tax from the sale proceeds, and the duty to sell commencing at the trust's inception. The court inferred that the testator intended the life beneficiary to have the benefit of income from all trust assets, particularly because the beneficiary was his wife and the will directed investment in 'good securities,' thus creating a duty for the trustee to sell the unproductive property and apportion the proceeds. The fact that the income beneficiary requested the trustee to hold the asset is irrelevant since the trustee exercised its independent judgment and reached the same conclusion. The court adopted the apportionment rule from the Restatement of Trusts § 241, which involves calculating the sum that, with interest at the current rate of return (determined to be 3.7%) from the duty-to-sell date, would equal the net proceeds, treating that sum as principal and the remainder as income. For property unproductive from the trust's inception, the 'duty to sell' arises at the inception of the trust (the testator's death). The court further determined that carrying charges, such as real estate taxes and insurance, should be paid from principal and reimbursed to the income beneficiary from principal, and then deducted from the sale proceeds before apportionment. Similarly, the capital gains tax attributable to the sale of the unproductive property should also be deducted from the proceeds to fairly correlate burdens and benefits, calculating the specific amount based on the proportion of gain from the unproductive property to total capital gains.
Analysis:
This case is significant for clarifying the equitable principles governing the apportionment of proceeds from the sale of unproductive trust property between income beneficiaries and remaindermen. By adopting and elaborating on the Restatement of Trusts § 241, the court established a clear framework for such distributions. It importantly defines the commencement date of the 'duty to sell' for assets unproductive from the trust's start and provides practical guidance on how to account for associated costs, like carrying charges and capital gains tax, ensuring a fair allocation of economic burdens and benefits.
