Opinion
October 6, 1966. —
November 1, 1966.
APPEAL from an order of the county court of Milwaukee county: MICHAEL T. SULLIVAN, Judge. Reversed, with directions.
For the appellants there were briefs by Arthur T. Spence, attorney, and Ellis R. Herbon of counsel, both of Milwaukee, and oral argument by Mr. Spence.
For the respondent there was a brief by Whyte, Hirschboeck, Minahan, Harding Harland, attorneys, and G. Hans Moede III, of counsel, all of Milwaukee, and oral argument by Mr. Herbert C. Hirschboeck and Mr. Moede.
First Wisconsin Trust Company, the trustee of a trust established by the will of Rudolph Nunnemacher, petitioned the county court for an order determining the validity of a certain assignment by one of the trust beneficiaries, Pauline N. Sawyer, to Joseph L. Rosenberg.
Rudolph Nunnemacher died testate, and his will, part of which placed funds in trust for the benefit of his daughters, was admitted to probate by the Milwaukee county court on February 6, 1895. The portion of the will involved in this case provided for an original sum of $50,000 to be held in trust for the benefit of his child, Pauline. The will provided that after this child attained majority she was to receive the annual income of the trust for life. The will also provided that upon the child's death the trust estate should be disposed of in the following manner:
"After the death of any child, the Fifty Thousand Dollars ($50,000.00) so reserved shall be paid to the legal heirs of the same, or to such person or persons as such child may have given the same to by will."
Pauline Sawyer executed two separate assignments of her interest in the trust prior to the assignment in question here. On December 16, 1916, she and her sister Gertrude each executed an assignment directing the trustees to pay from their respective trusts whatever income was necessary for payment of up to one half of the funds needed to pay a certain annuity. In 1922, Pauline Sawyer executed another assignment, this one purporting to assign all of her property, including her entire interest in the trust fund involved in this litigation, to the trustees of an irrevocable spendthrift trust declared by her for her own benefit. The 1916 assignment of the income was construed in the following order of the Milwaukee county court, dated August 4, 1925:
"IT IS FURTHER ORDERED AND ADJUDGED that the trust fund in the hands of the trustees originally of Fifty Thousand Dollars ($50,000.) held in trust for the benefit of Pauline N. Sawyer under a proper construction of the will should be held, and the will of Rudolph Nunnemacher is hereby construed as requiring the trustees to hold such trust fund, until her death, and upon her death said trust fund shall be distributed and transferred to such person or persons as she may by will appoint or in default of appointment to her legal heirs, and that, in accordance with the will of Rudolph Nunnemacher and the agreement between Gertrude N. Schuchardt and Pauline N. Sawyer above referred to, the trustee, so long as said fund is held in trust, pay from the income thereof, one-half of the amount necessary to pay the said annuity to Jacob Nunnemacher and Lizzie Nunnemacher, after applying toward the payment of such annuity the income from the trust fund referred to in the preceding paragraph hereof, and that the balance of said income' be paid to said Pauline N. Sawyer in accordance with the terms of said will."
In 1939, while traveling abroad, Pauline Sawyer executed an instrument purporting to assign to Mr. Rosenberg, for value received, a first and prior interest in $32,500 of the corpus of the trust remaining at her death, plus any expenses incurred by the assignee in collecting his interest. At the same time, she apparently bequeathed $32,500 to Mr. Rosenberg. However, as noted below, she subsequently changed her will.
On October 15, 1945, Pauline Sawyer attempted to revoke the assignment to Mr. Rosenberg, and on November 22, 1945, the assignee notified the trustee that he rejected the attempted revocation. Pauline Sawyer died on September 19, 1964. Her will, which was admitted to probate by the Milwaukee county court on June 30, 1965, left her entire estate to her children and did not purport to exercise any power of appointment.
On March 15, 1965, the First Wisconsin Trust Company petitioned the county court to determine the validity of the purported assignment to Mr. Rosenberg. Pauline Sawyer's two daughters filed an objection to the validity of the assignment on April 20, 1965, and on September 30, 1965, Mr. Rosenberg petitioned the court for an order determining the assignment to be valid and directing the trustee to pay him $32,500 plus expenses.
The county court found that the will of Mr. Nunnemacher vested Pauline Sawyer with a life estate and also with a general and beneficial power to bequeath the remainder in fee, thus giving her an absolute power of disposition for the purposes of secs. 232.11 and 232.08, Stats. 1939. It found that she possessed an absolute fee with respect to purchasers and therefore held the assignment to Mr. Rosenberg to be valid. The county court issued an order directing the trustees to pay Mr. Rosenberg $32,500, plus costs, from the trust estate. Pauline Sawyer's daughters appeal from this order. The statutes involved remained unchanged from 1939 to 1965, when ch. 232 was completely revised. Ch. 52, Laws of 1965.
Statutes Involved.
Sec. 232.08, Stats. 1939:
"Life estate, when changed to fee. When an absolute power of disposition, not accompanied by any trust, shall be given to the owner of a particular estate for life or for years such estate shall be changed into a fee, absolute in respect to the rights of creditors and purchasers, but subject to any future estates limited thereon in case the power should not be executed or the lands should not be sold for the satisfaction of the debts."
Sec. 232.11, Stats. 1939:
"Power to devise inheritance. When a general and beneficial power to devise the inheritance shall be given to a tenant for life or for years such tenant shall be deemed to possess an absolute power of disposition within the meaning and subject to the provisions of sections 232.08 to 232.10."
We must determine whether a beneficiary of a testamentary trust with both a life interest in the income of such trust and the power to appoint by will possesses a sufficient interest in the trust corpus to assign a portion of it for value during the beneficiary's lifetime even though such assignment is to take effect at death. The trial court concluded that Mr. Nunnemacher's will provided his daughter Pauline with a life estate and also with a general and beneficial power of appointment to bequeath the remainder in fee, thus giving her an absolute power of disposition for the purposes of secs. 232.08 and 232.11, Stats. 1939. Accordingly, Pauline Sawyer's assignment to Mr. Rosenberg was held to be valid.
Under sec. 232.08, Stats. 1939, when a person owns a life estate and also has an absolute power of disposition of the property, his estate is changed into a fee with respect to the rights of creditors and purchasers. Under sec. 232.11, Stats. 1939, a person is deemed to have an absolute power of disposition if he is a tenant for life with a general and beneficial power to devise his inheritance.
Pauline Sawyer was a beneficiary of a trust created by her father's will which provided that she was to receive the annual income of the trust for her life, and upon her death the corpus was to be paid to her legal heirs "or to such person or persons as such child may have given the same to by will." On those facts the trial court concluded that Pauline Sawyer was a tenant for life.
The principal thrust of the appellants' argument is that Pauline Sawyer was not a true "tenant for life" within the meaning of sec. 232.11, Stats. 1939, but, on the contrary, was a life income beneficiary of a testamentary trust. We believe that this is a significant and meaningful distinction and that the trial court erred in reaching the conclusion that Pauline Sawyer was a tenant for life.
Although ch. 232, Stats., was revised by ch. 52, Laws of 1965, the governing statutes are those which prevailed in 1939, which is the date of the challenged assignment. In In re Cudahy Family Trust (1963), 22 Wis.2d 198, 205, 125 N.W.2d 344, this court considered the validity of a partial release of a testamentary power of appointment and decided the matter under the laws applicable in the year the release was made. Similarly, Pauline Sawyer's assignment must be tested by the law which governed at the time the assignment was made.
Another preliminary matter relates to the distinction between personal property and real property. We do not believe there is any dispute over the proposition that ch. 232, Stats., applies to powers over personalty as well as real estate. Will of Uihlein (1953), 264 Wis. 362, 59 N.W.2d 641, 38 A.L.R.2d 961; Will of Zweifel (1927), 194 Wis. 428, 216 N.W. 840. The appellants have cited a number of cases which establish that an individual may become a life tenant of personal property as well as real property, and that under certain circumstances a life tenant having title and possession of personalty will be named as trustee of the property for the benefit of the remaindermen. Estate, of Martin (1963), 21 Wis.2d 334, 124 N.W.2d 297; Estate of Larson (1952), 261 Wis. 206, 52 N.W.2d 141; Estate of Lenahan (1951), 258 Wis. 404, 46 N.W.2d 352. However, the dispute in the case at bar is whether a lifetime income beneficiary of a testamentary trust is the equivalent of a life tenant; the answer is not dependent upon whether the corpus of the trust is real property or personal property.
In determining the nature of Pauline Sawyer's interest in the corpus, we think it is also immaterial whether the person attempting to obtain such corpus is a creditor of Pauline or the life beneficiary herself. The crucial question, in our opinion, turns on the simple fact that a beneficiary who is entitled to receive trust income for life does not own or hold title to the corpus and thus cannot be said to be a life tenant or a tenant for life.
This matter was considered in Cawker v. Dreutzer (1928), 197 Wis. 98, 221 N.W. 401. Mr. Cawker died in 1893, leaving two daughters who were to receive trust income for life. The will provided that each daughter should have the power of appointment by will to bequeath her share of the corpus to any beneficiary she chose. One of the daughters contended that the father's will gave her an absolute power of disposition over her share and therefore entitled her to receive her share of the corpus. The court stated the problem as follows, at page 133:
"So it is claimed by the plaintiff-respondent that, having the power of appointment whereby they may dispose by will of the whole estate absolutely, and having a life estate, the two estates merge, and the daughters have the complete or absolute title in the property."
The court went on to state its view as follows, at page 133:
"Here the estate is given to trustees to hold for the life of the beneficiaries. They are to invest the corpus and pay over the income only. The testator's intent is manifest. He desired to put the corpus beyond the reach of such legatees so that they might have an assured income for life. So he tried to put it beyond their power to dispose of the estate during their life. . . . The powers of appointment are not the powers of absolute disposition of the estate."
In the Cawker Case, the court specifically discussed the impact of secs. 232.08 and 232.11, Stats., which were in the exact same form at that time (1928) as they were in 1939. Nevertheless, the court concluded that the daughter did not gain full title to the property by operation of law and that the testator did not intend to give his daughters an absolute power of disposition. The court also found that sec. 232.08 did not govern and cited Cutting v. Cutting (1881), 86 N.Y. 522, in which the New York court held that property in trust is not subject to the claims of creditors of an income beneficiary when the beneficiary has only the power to bequeath the property and does not have the use of the property.
There are a number of other New York cases which forcefully demonstrate that a life income beneficiary of an express trust is not considered a life tenant of the corpus in that state. Hirsch v. Bucki (1914), 162 App. Div. 659, 148 N.Y. Supp. 214; Dudley v. People's Trust Co. (1907), 57 Misc. 230, 107 N.Y. Supp. 930. These two cases point out that the life income beneficiary does not have the title to the corpus, but rather that such title is vested in the trustee.
An especially analogous New York case is Farmers' Loan Trust Co. v. Mortimer (1916), 219 N.Y. 290, 114 N.E. 389. Mrs. Mortimer left an estate in trust with the income to be applied for the use of her son; the principal was to pass as the son's will directed, via a power of appointment. During his lifetime the son entered into a contract, for consideration, in which he agreed to exercise his power of appointment in favor of a finance company. The New York court held that the finance company was not entitled to specific performance of its contract. Writing for the majority, Mr. Justice CARDOZO stated, at page 295:
"The promisor [the son] was not the owner of any legal estate. He was the beneficiary of a trust. In such circumstances a power of appointment does not involve that absolute power of disposition which is equivalent to a fee."
Only a few years ago in In re Steidinger's Will (1962), 36 Misc.2d 119, 231 N.Y. Supp.2d 963, the New York courts again ruled that the assignees of an income beneficiary of a trust who also held a power of appointment were precluded from reaching the corpus upon the beneficiary's death since the beneficiary did not possess a legal life estate in the trust property. See also Powell, Powers of Appointment, 10 Brooklyn Law Review (1941), 233, 241-243; Whiteside and Edelstein, Life Estates with Power to Consume: Rights of Creditors, Purchasers and Remaindermen: A Study of New York Real Property Law Sections 149-153, 16 Cornell Law Quarterly (1931), 447, 460-468.
This court has examined numerous cases cited by the respondent Rosenberg in support of his position. Auer v. Brown (1904), 121 Wis. 115, 98 N.W. 966; Hershey v. Meeker County Bank (1898), 71 Minn. 255, 73 N.W. 967; Matter of Moehring (1897), 154 N.Y. 423, 48 N.E. 816; Deegan v. Wade (1895), 144 N.Y. 573, 39 N.E. 692; Hume v. Randall (1894), 141 N.Y. 499, 36 N.E. 402. The significant point of each of these cases which distinguishes them from the case at bar is that there was in each an outright estate in favor of the life tenant; the crucial element of an intervening trust was absent.
In Michigan, as in the state of New York, persons possessing an interest similar to that of Pauline Sawyer are deemed not to be life tenants for purposes of the Michigan equivalents of our secs. 232.08 through 232.11, Stats. 1939. In re Peck Estates (1948), 320 Mich. 692, 32 N.W.2d 14; Hunt v. Hunt (1900), 124 Mich. 502, 83 N.W. 371. In the Hunt Case, at page 505, the court stated the distinction in the following terms:
"The absolute title is vested in the trustees, and they alone have the right of possession. Upon them alone is the legal duty to pay the taxes, and to protect and care for the property. The interests of Charles and Joseph as cestuis que trustent have none of the attributes of a life tenancy. The trustees alone are charged with the control of the property, or of the fund which they are authorized to realize from its sale."
The respondent Rosenberg contends that the New York cases are inapplicable "because income interests in New York trusts were not assignable, by statutory command, until June 1, 1965." However, our examination of the New York cases, as well as those of Michigan, demonstrates that the courts in those cases have not relied on a statutory limitation regarding assignability but instead have bottomed their decisions on the fact that an income beneficiary for life of an express trust does not have possession of or title to the trust corpus.
We hold that Pauline Sawyer was not a life tenant for purposes of secs. 232.08 and 232.11, Stats. 1939, and her creditors, purchasers and assignees are precluded from reaching the principal of her trust. In view of the foregoing, we do not deem it necessary to determine whether she possessed a "general and beneficial" power or a special power of appointment, nor is it necessary that we determine the applicability of sec. 232.40, Stats. 1939. In addition, we do not consider the 1925 order of the Milwaukee county court determinative of the case at bar because that order actually determined only that Pauline could properly assign the income of her trust; the 1925 order did not resolve the validity of an assignment of trust corpus.
We conclude that the order of the county court of Milwaukee county must be reversed with directions to declare the assignment to the respondent Rosenberg unenforceable.
By the Court. — Order reversed, with directions.
HALLOWS, J., took no part.