Trusts – Principal and Income – Apportionment Under Pennsylvania Rule of Stock Dividends Based on Capital Surplus

Under the terms of a trust established in New York in 1915 income was to be paid to a beneficiary for life and upon his death the principal was to be distributed to certain descendants of the settlor. Two extraordinary stock distributions were received by the trust during the life of the income beneficiary. In issuing the additional shares each of the corporations had transferred to capital stock account its entire capital surplus and sufficient earned surplus to support the additional shares at their par value. At the time of creation of the trust New York applied the Pennsylvania rule for apportioning stock dividends between principal and income. The trustee determined what percentage of the amount transferred to capital stock account on the corporate books represented earned surplus and allocated to income that percentage of the additional stock received by the trustee. The remainder of the stock, which represented capitalization of capital surplus, was allocated to principal, although part of it could have been given to income without impairing the “intact value” of the stock given to the trust by the settlor, that is, the book value at the time of the creation of the trust plus any “natural capital increments.” The life beneficiary’s executors objected to the allocation. In a proceeding to settle the trustee’s accounts the lower court ordered a referee to determine whether certain items were properly includible in capital surplus for trust purposes. The appellate division upheld the apportionment as made by the trustee. On appeal, held, affirmed, two judges dissenting. The income beneficiary is entitled to no more of a stock distribution than can be connected with the capitalization of earned surplus. In re Bingham’s Will, (N.Y. 1959) 163 N.E. (2d) 301.