Phipps Family Trusts, In re

Decision Date10 December 1976
Citation371 A.2d 316,147 N.J.Super. 331
PartiesIn re Bessemer Trust Company's Interim Accountings and Initial Application for Corpus Commissions for PHIPPS FAMILY TRUSTS. 1
CourtNew Jersey Superior Court

Dickinson R. Debevoise, Newark, for plaintiff Bessemer Trust Co. (Riker, Danzig, Scherer & Debevoise, Newark, attorneys).

Kevin J. Coakley, Newark, for exceptants (McElroy, Connell, Foley & Geiser, Newark, attorneys; and Paul J. Foley, District of Columbia Bar, Washington, D.C., of counsel).

DWYER, J.S.C.

Three individuals who are income beneficiaries during their respective lives and hold testamentary powers to appoint corpus under one or more of the five trusts for which interim accountings have been filed object to the payment of any corpus commissions. The specific grounds of exception are treated hereafter.

After gradually increasing the percentage of income taken as income commissions from 1% On September 30, 1955 to the full statutory rate of 6% On January 1, 1973, in 1972 the board of directors of Bessemer Trust Company (BTC), a New Jersey corporation, commenced to take corpus commissions at the rate of 1/10 of 1%, or $1,100, under N.J.S.A. 3A:10--2 as supplemented by L.1972, c. 147, and in 1974 decided to collect the maximum allowable corpus commissions on the trusts which it was administering for the descendants of, and the spouses of the descendants of Henry Phipps who organized BTC in 1907 as a trust company to administer family trusts. Until the 1960s BTC did not accept trust accounts from persons who were not descendants of, or married to descendants of, Henry Phipps.

Pursuant to the decision in 1974 to charge corpus commissions BTC commenced to obtain approval by settlement agreement, or judicial action, of interim accounts which made allowance for payment of corpus commissions in approximately 550 trusts. The aggregate amount of corpus commissions sought is estimated to be between $10,000,000 and $12,000,000.

The main factor leading to this decision was increased cost related to changes in the roles to be played in the affairs of the Phipps family by BTC and Bessemer Securities Corporation (BSC), a Delaware corporation. The latter is a 'personal holding company' within the meaning of Internal Revenue Code, 26 U.S.C.A. § 542, and is exempt from the Investment Company Act of 1940, 15 U.S.C.A. § 80a--1 Et seq., and the Investment Advisers Act, 15 U.S.C.A. § 80b--1 et seq. It has 500,000 shares of common stock. BTC separately or with certain cotrustees administers trusts holding over 480,000 of said shares.

Until approximately the 1960s BSC staff rendered, without charge, personal services to members of the Phipps family, such as planning family budgets, paying bills, purchasing both ordinary and exotic items, tax assistance, suggestions as to investments in tax shelters, etc. BSC staff, without charge, also rendered assistance to the board of directors of BTC in making recommendations for investments in trusts which had corpus assets other than BSC common stock to invest, in respect to which the said board then made decisions, and rendered tax advice in preparing returns. Without detailing the dates and the intervening steps by which a system of charges for these services was implemented, it is sufficient to state that BTC by 1972 was paying for computer services, tax assistance and investment advice. Family members began paying for personal services in 1957.

BSC, and its corporate predecessors, is and has been one of the largest investment companies in the United States, with activities currently divided into three areas: (1) management of a diversified portfolio of bonds and common stocks; (2) venture capital with special emphasis on opportunities in technologically related industries; and (3) real estate, with total assets now aggregating between $400,000,000 and $500,000,000 depending on when and how they are valued. The basic capital was part of the proceeds of $75,000,000 received by Henry Phipps when he and his partners, Andrew Carnegie and Henry Fisk, sold their steel business to J. P. Morgan to form the United States Steel Corporation in about 1900. Henry Phipps organized BSC in 1911.

The fact that BSC was an investment company made it necessary that it have a competent staff to deal with investments. As the regulatory and tax laws were enacted and expanded in the 1930s and 1940s it was necessary that the staff of BSC grow to cope with them. Within certain parameters, once a core staff for an investment company is assembled it can manage more funds than it presently has charge of without substantial increase in personnel--I.e., the economy of size. See remarks of Merill Griswold, then chairman of the board of trustees of Massachusetts Investors Trust, at Senate hearings on the Investment Company Act, reproduced in Report of the Securities and Exchange Commission on Public Policy Implications of Investment Company Growth, H.Rep. No. 2337, 89th Cong.2d Sess. (SEC Rep.), at 94--95. The court finds that BSC staff had the capability to handle BTC work without serious incremental cost.

For the period from 1911 to 1957, the three sons of Henry Phipps--John S. Phipps, Howard Phipps and Henry C. Phipps--as well as Henry Bradley Martin, husband of Helen Phipps Martin, daughter of Henry Phipps, were active in managing the affairs of both BSC and BTC. The fifth child, Amy Phipps Guest, served as a director of BTC. Each child had an equal one-fifth interest in BSC from 1911 and in BTC from 1907.

In the early 1930s the Congress enacted a gift tax effective in mid-1932. This as a result of testimony before the Senate to the effect that individuals of substantial wealth avoided paying estate taxes by giving their assets to their children and grandchildren while alive, by creating trusts, the income going to their children and the corpus to their grandchildren.

It is fair to assume that the tax consequences to future generations resulting from the retention of individual ownership of the BSC common stock until after the effective date of the gift tax was obvious to the five children by Henry Phipps. In June 1932, with the exception of Howard Phipps who did not then have minor children, each of the children of Henry Phipps executed indentures of trust with the Palm Beach Trust Company, which was and is another wholly-owned family trust company, and one or more of their brothers or sisters as trustees, and transferred to said trusts their respective holdings in BSC. Subsequently, Howard Phipps created similar trusts for the benefit of his children. As of December 31, 1933 Palm Beach Trust Company resigned as trustee and BTC replaced it as trustee, effective January 1, 1934. Subsequent to the commencement of this action BTC has abandoned claims for corpus commissions prior to January 1, 1934.

One of the June 1932 trusts was established by Amy Guest for the benefit of her daughter, now known as Diana Guest Manning. This trust is designated by BTC as D--6. Since there are five branches of the family, each branch is designated alphabetically by a letter from A to E; E.g., John S. Phipps, A; Henry C. Phipps, B; Howard Phipps, C; Amy Guest, D; and Helen Martin, E, and each trust is designated by a number indicating the sequential order in which that trust was established within that branch of the family. The individual trustees were given broad powers to withhold and accumulate income, and to pay out corpus as well as accumulated income to the named beneficiary or his or her brothers and sisters, except that no individual trustee could ever direct payment to himself or herself.

In respect to income, the indenture for D--6 provides:

2. During the lifetime of the said Diana Henrietta Cornelia Guest to pay out so much of the net income of said trust estate as the said Individual Trustees shall direct and appoint in monthly installments to the said * * *. Any income not directed to be paid by the said Individual Trustees shall be held by the Trustees as part of the capital of the trust fund as hereby established.

5. Whenever the net income of the trust estate is referred to in this trust deed, it shall be construed to mean the income of the principal of the trust after the proper deduction of all expenses and charges chargeable to the trust estate, less any allowance for depreciation or reserve for any purpose which the Trustees, in their sole discretion, shall deem advisable, and after the provision has been made by amortization for the wearing of premium on bonds. Extraordinary dividends upon stock shall be distributed to the life tenant only after due provision has been made to protect the integrity of the capital of the trust fund as established.

BTC and the guardian Ad litem urge that under said provisions any corpus commissions which are allowed should be charged to income. BTC has computed the corpus commissions chargeable to this trust to be about $505,000 and states that not more than 15% Of income for any one year, or $60,000, whichever is less, should be paid in that year.

At the time D--6 was established it was funded with common stock of a wholly-owned Phipps' corporation entitled the Potomac Corporation, which through reorganization became part of BSC. All parties to this action have treated the situation as if the trust had been initially funded with BSC common stock. For practical reasons the court concludes that no other approach is possible based on the extensive record before the court. The significance lies in the fact that since 1911 BSC stock has been subject to a restriction against sale to any one but a member of the Phipps family, a trust for the benefit of one of them, or a trust established by one of them for educational or charitable purposes.

The said restriction was placed on the BSC common stock purportedly to carry out the desire of Henry Phipps that his children regard the original gifts to them as being in trust for...

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