proceeds of the sale are corpus. The establishment of some large industry near a farm, years after the death of an owner of the farm, who has included it in a trust estate, may materially increase the value of the holdings above the figure at which they were appraised and entered on the books of the estate, but although that increase is undoubtedly a gain of the estate after the establishment of the trust, yet it is not income to the life tenant, but an increase in corpus. All the assets of the decedent at the date of death are corpus for whatever values may ultimately be realized. But even with this understanding, the line is not always easy to draw. § 313. Discharging a Mortgage It is evident that taxes, water-rents, and mortgage interest accruing after the death of the decedent, will be charges against the income of the estate, being deducted from the amounts to be turned over to the life tenant; it is equally plain that the paying off of a mortgage must be done out of the corpus. But if the particular piece of real estate on which the mortgage is paid off is not devised to the personal representative for the benefit of the estate in general, and the terms of the trust provide that different life tenants shall receive the income from different specified investments, or if the realty is to go to different legatees upon the death of life tenants, some artificial adjustment must be made in order that the desires of the decedent as to providing for his heirs may be met, because the income is made greater by freeing it from the expense of mortgage interest, while the general corpus is reduced by investing more money in this particular remainder interest. In such cases the courts will often ascertain with the aid of mortality tables: ... the expectation of the life of the life tenant. Then a amount involved for the balance of the life estate. If, for This rule will apply also when a special or other assessment for local improvements is made, and a similar adjustment is usually sought when realty left in trust for a particular legatee is condemned by public authority after the demise. In this case the proceeds would ultimately revert to the heir named, and provision would be made for the life tenant. § 314. Balancing Equities The tenant for life should receive whatever the income may be from whatever the estate is, and if various obligations incurred by the decedent or forced investments such as special improvements cause changes in the corpus and in its incomeproducing power, these facts should cause no change in the above rule. But in the long run the matter comes down to one of the equities, and unless the will is explicit to the contrary, the courts endeavor to find a position midway between that given above, which assumes that the decedent wanted the corpus carried on in its exact entirety to the remainderman, and the other stand, which is based on the feeling that the decedent wished the tenant to have a certain and sure income approximating a certain sum but not guaranteeing it. § 315. "Taxable Income" Not Synonymous with "Trust Estate Income" Attention must be drawn to the fact that income as opposed to corpus is not always the same as income for the pay 13 Conyngton, Business Law, Vol. II, p. 519. ment of federal income taxes. The example given in § 312, in which a gain in the value of real estate is not accounted income for the life tenant, is a case in point. This gain, when realized by sale, is income from an income-tax viewpoint, as it is an increase in wealth over the value at the date of the decedent's death. The tax on this gain will be payable for the year in which the gain is realized by sale. These statements may have to be modified in view of later decisions of the United States courts which indicate that they appreciate the inconsistency of the two conflicting rules and the need for harmonizing them.14 § 316. Proceeds of Insurance Policies Proceeds of fire insurance policies, whether in the form of premiums returned on policies taken out by the decedent and canceled by the personal representative, or money paid to the personal representative to cover a fire loss on property owned by the estate or on which the estate holds a mortgage, are always corpus. Proceeds of life insurance policies, payable to the decedent or to the estate, whether received in a lump sum as a result of the decedent's death or due as the last payment of an annuity formerly payable to the decedent, are corpus. The distribution of proceeds of other forms of insurance may be determined on the same principles. § 317. Live Stock and Crops Live stock born after the date of demise are income. Growing crops belong to the corpus when the land has been sold by the decedent with a reservation of the crops. They are income when the land becomes part of a trust for a life tenant. When the land on which they are growing is not to be held in trust, they go with the land. 14 Eisner v. Mac Comber, 252 U. S. 189. § 318. Miscellaneous Assets If a will specified that certain gifts made by the testator during his life are to be considered as advances and deducted from legacies, the amounts of such advances are a part of the corpus. Many partnership agreements specify that the estate of any partner shall be entitled to that partner's share of the profits earned for a certain period after his death. In such case these earnings are a part of the corpus. There is as yet no fixed rule as to the accrual of royalties, some courts having held that there can be no accrual on this account, while others have approved an accrual of royalties earned prior to the demise. Rents, however, should always be accrued,15 and where so-called royalties are in the nature of rents, they should be so handled. $319. Effect of Federal Tax Laws While the federal law establishing a tax on the transfer of states could have no direct effect on state laws as to what shall constitute corpus and what income, yet the desirability of making the records of the estate consistent has resulted in a more careful drawing of the line even in cases where care to make the distinction was not essential. REVIEW QUESTIONS 1. What is the distinction between corpus and income? 2. In making an inventory, what two reasons make it necessary to distinguish between them? How does it affect a legatee who has only a life interest? 3. Why is the distinction between corpus and income important in connection with the administration of trust estates? What is 15 Article 13 of Regulations 37. meant by a "life tenant"? What is meant by a "remainderman"? What is each entitled to? 4. Why may testamentary trusts be complex? Is it wise to make complex trust provisions? 5. What is the status of interest or rent accrued at time of death? 6. What is the usual rule as to cash dividends? Suppose an unusual cash dividend were declared? 7. What is the situation as to stock dividends? 8. What is the duty of the accountant for an estate in regard to accruals? What is the exact application of the general rule? Does the same rule hold as between life tenant and remainderman as applies in ascertaining the estate for taxation? 9. What is the rule as to rights to subscribe for stock? 10. Is increase of real values after death, corpus or income? 11. If a mortgage is to be discharged, should it be done from income? Why? What adjustments must be made? What is done when special assessments for improvements are made? 12. What do the courts try to do in such cases? 13. Is taxable income the same as the life tenant's income? 14. What is the rule as to proceeds from fire insurance? Life insurance? 15. What is the rule as to live stock and crops? 16. When are advances part of the corpus? When are partnership earnings after the death of a partner part of the corpus? What is the rule as to rents? As to royalties? 17. What has been the effect of the federal tax laws as to distinguish ing between corpus and income? |