TRUSTEESHIP OF THE MINORS BENIGNO, ANGELA AND ANTONIO ALL SURNAMED PEREZ Y TUASON. ANTONIO M. PEREZ, JUDICIAL GUARDIAN, APPELLANT, VS. J. ANTONIO ARANETA, TRUSTEE APPELLEE.

Perez versus Araneta

The Case

This is the trusteeship of the minors Benigno, Angela and Antonio, all surnamed Perez y Tuason. Antonio M. Perez, their father and judicial guardian, appeals against J. Antonio Araneta, the trustee named in the will of the grandmother, Angela S. Tuason. The guardian claims that a sum realized from the trustee's sale of trust properties is profit or income that must be delivered to the minors. The trustee resists, saying the gain belongs to the capital of the trust. The case matters because it fixes the line between trust capital and trust income, and it teaches that the answer comes from the testator's intent in the trust instrument, not from the labels used in income tax returns.

Procedural History

The trusteeship proceedings were instituted in conformity with the will, and properties of the estate were turned over to the trustee. In September 1959 the judicial guardian and father of the minors filed a motion in the trusteeship proceedings, asking that the trustee be instructed to deliver to him the sum representing the excess of the sale prices over the original appraised value. The trustee objected. After due hearing, the court denied the motion by an order dated March 10, 1960. The guardian appealed from that order, and the appeal came directly to the Supreme Court.

Facts

Sometime in 1948, Angela S. Tuason died leaving a will. In paragraph four she instituted her three children as her only heirs, each to a ninth share of the estate, and made legacies of two ninths each in favor of her son Antonio, of the grandchildren who would be children of her daughter Nieves, and of the grandchildren who would be children of her daughter Angela. The two legacies in favor of the grandchildren were to be administered by her executor, J. Antonio Araneta, and in his default by his brother Salvador Araneta, with wide powers to sell the properties and to acquire other property with the proceeds, and with the right to collect reasonable fees for the administration. The administrator's powers were to be those of a trustee with the widest powers allowed by law. He was to render quarterly accounts to the legatees who were of age and to deliver to each legatee his share in the net rentals of the administration. The administration over a group would cease when all the grandchildren of that group reached the age of majority and a majority of them agreed to terminate it.

In conformity with that provision, the trusteeship proceedings were instituted, and in 1950 properties of the estate valued at 900,000 pesos were turned over to J. Antonio Araneta as trustee for the benefit of Benigno, Angela and Antonio, the grandchildren of the decedent.

Portions of the trust properties were sold in 1956, 1957 and 1958 at prices exceeding the original appraised value by 13,418.42 pesos, 4,023.52 pesos and 81,386.94 pesos, respectively, aggregating 98,828.88 pesos. The guardian moved that this sum be delivered to him as profits or income of the trusteeship under the will. The trustee objected, the motion was denied, and the guardian appealed.

Issues

• Whether or not the sum of 98,828.88 pesos realized from the sale of portions of the trust properties is a profit or income that should be turned over to the guardian of the minors under the provisions of the will.
• Whether or not the treatment of that sum as profit in the statements attached to the income tax returns determines its character as income of the trust.

Applicable Provisions

Article 1442 of the Civil Code of the Philippines provides:

Under the principles of the general law on trust, insofar as not in conflict with the Civil Code, the Code of Commerce, the Rules of Court and Special laws, are now part of our laws.

This is the bridge by which the Court brings the general law on trusts, including the American authorities and the Restatement, into our law to resolve the character of the sale proceeds.

The will of the decedent, in its fourth paragraph, provides:

Los dos legados, a favor de mis mencionados nietos seran administrados por mi albacea, J. Antonio Araneta (y en defecto de este, su hermano, Salvador Araneta), con amplios poderes de vender los mismos, y con su producto adquirir otros bienes, y con derecho a cobrar por su administracion, honorarios razonables.

This grant of power to sell and to acquire other property with the proceeds is the textual anchor of the ruling that the proceeds remain part of the trust capital.

The same paragraph further provides:

Debera, sin embargo, rendir trimestralmente, cuenta de su administracion a los legatarios que fueren mayores de edad. Y asimismo, debera hacerles entrega de la participacion que a cada legatario corresponda en las rentas netas de la administracion.

What the will entitles the legatees to receive is their share in the net rentals, and the Court reads that term as excluding gains from the sale of trust property.

Ruling

On the first issue, the Court held that the sum is not profit or income deliverable to the minors. The entitlement of the minors depends exclusively upon the conditions of the trust as established in the will, which in turn depends upon the intent of the testatrix. The proceeds of the sale of portions of the trust real estate merely take the place of the property sold. Moreover, the will explicitly authorizes the trustee to sell the trust property and to acquire other property with the proceeds, which leaves no room for doubt about the intent of the testatrix to keep those proceeds as part of the trust and not to turn them over to the beneficiaries as net rentals.

On the second issue, the Court rejected the guardian's reliance on the income tax returns. Whether a sum is profit under the internal revenue law depends upon the provisions of that law, regardless of the will of the decedent, whereas the rights of the minors depend upon the will. The two questions are governed by different instruments.

Turning to the general law on trusts, the Court quoted the rule that:

A provision in the instrument to the effect that the beneficiary shall be entitled to the income and profits of the trust estate is not ordinarily sufficient to indicate an intention that he should be entitled to receive gains arising from the sale of trust property.

The Court also adopted the principle that the corpus of the estate, no matter what changes of form it undergoes, should be regarded as the same property, so that trust property originally in money, later in bonds, and still later in real estate, does not change its status as the capital fund. Hence profits realized in the sale of trust properties are part of the capital held in trust, to which the beneficiaries are not entitled as income. The Restatement rule was quoted to the same effect, that money or other property received by the trustee as the proceeds of a sale or exchange of the principal trust property is principal, and that where trust property is sold at a profit, the profit is principal.

Doctrine

First, the rights of trust beneficiaries are measured by the trust instrument and the intent of the settlor or testator, not by the accounting labels used in income tax returns. Second, under the general law on trusts, which forms part of our law by force of Article 1442 of the Civil Code, the proceeds of a sale or exchange of principal trust property are principal and not income, because the corpus remains the same property notwithstanding changes in form. Third, a provision entitling the beneficiary to the income and profits of the trust estate is not ordinarily sufficient to give him the gains from the sale of trust property. Fourth, where the will entitles the legatees only to their share in the net rentals and expressly empowers the trustee to sell and to reinvest the proceeds, the gains on sale stay in the trust capital.

Disposition

The Supreme Court affirmed the order appealed from, with costs against the appellant, Antonio M. Perez. The trustee prevailed, and the sum of 98,828.88 pesos remained part of the trust capital.

Remember This

Memorize the line that the corpus of the estate, no matter what changes of form it undergoes, should be regarded as the same property, so that profits on the sale of trust property are capital and not income. Examiners use this case in trusts and estates, and in succession, to test the capital and income distinction and the rule that the settlor's intent, not the tax return, controls.