Trusts – Construction – Distinction Between “Stock Dividends” and “Stock Spit” for Allocation Purposes

In 1918 a settlor created two identical trusts, the corpus of each consisting of 300 shares of General Electric no-par common stock. The income was to go to life beneficiaries, and at their deaths the principal was to revert to the settlor or his residuary estate. The trust instrument directed the trustee to transfer to the settlor or his executor, “free of all trusts hereby created, any and all stock dividends …. ” In 1954 the corpus of each trust included 1200 shares of G.E. no-par stock with a stated value of $6.25 per share, there having been two stock splits unaccompanied by any transfer of accumulated earnings to the capital stock account. The corporation then converted each of its outstanding no-par shares into three $5 par value shares and increased its capital stock account from $180,287,046 to $432,688,910.40 by transferring $252,401,864.40 from earned surplus. In exchange for the 2400 no-par shares the trustee received 7200 par value shares. In an action to construe the trust instrument the lower court and the appellate division ordered that seven-twelfths, or 4200, of the new shares be allocated to the settlor’s residuary legatee and 1500 shares be allocated to the corpus of each trust. On appeal, held, affirmed, one judge dissenting. The new shares attributable to the accumulated earnings transferred to capital account constitute a “stock dividend” within the meaning of the trust instrument and are therefore not part of the trust corpora. Matter of Fosdick, 4 N.Y. (2d) 646, 152 N.E. (2d) 228 (1958).