For affirmance -- Chief Justice Weintraub, and Justices Wachenfeld, Burling, Francis and Proctor. For modification -- Justice Heher. The opinion of the court was delivered by Burling, J. Heher, J. (for modification).
This is an appeal from the disallowance of exceptions to a first intermediate accounting of an inter vivos trust in the Chancery Division of the Superior Court. We certified the cause on our own motion prior to hearing in the Superior Court, Appellate Division.
On January 21, 1920 Isaac Guggenheim, a resident of New York, executed a trust indenture in New Jersey, with express provision that the trust be administered according to the laws of this State. Three daughters of the settlor were the life beneficiaries, remainder to their respective issue per stirpes. The corpus consisted of 1267 Chile Copper Company Collateral Trust 6% Gold Bonds, Series A, with the face value of $1,000 each due April 1, 1932.
The settlor named the Commercial Trust Company of New Jersey as corporate trustee and George I. Mason, his personal secretary, as individual trustee. The trust provided that the settlor was to retain absolute control over investments during his lifetime, and upon his death the power to veto investments was given to brothers and nephews.
The settlor died in 1922, and from that date until December 4, 1937, when they notified the trustees they were no longer willing to serve in the manner provided in the trust indenture, all investments were made by the trustees only with the written consent of one or more of the brothers and nephews of the settlor. Since December 4, 1937, as provided by the trust indenture all "sales, exchanges, substitutions, investments or reinvestments" of corpus were "in the discretion of the Trustees: and the Trustees shall not
be restricted from continuing any investments for the trust fund in their then existing form, or from changing the same to any other form that may be deemed proper as above provided; nor shall they be obligated to invest the same as might otherwise be provided by law."
The Chile Copper Company bonds were redeemed by the obligor for $1,393,700 in 1927. The policy of investment at that time was formed by the Guggenheim brothers who determined that the corpus be invested in tax-exempt securities. This policy of purchasing tax-exempt securities has since been pursued by the trustees. All of the securities held by the trustees at the terminal date of the instant first intermediate account were of the tax-exempt class.
The account, covering the 35-year period from January 21, 1920 until April 6, 1955, was filed on October 14, 1955. Six exceptions to the account were filed jointly by the income beneficiaries, the three daughters of the settlor, and by the adult remaindermen. Substantially similar exceptions were presented by James M. McGovern, Jr., attorney pro se, acting as guardian ad litem for infant remaindermen and as attorney for William I. Spiegelberg appointed to represent the interests of unborn issue.
The issues which emerge from the exceptions are whether the trustees may be surcharged for continuing in the policy of investing in low-yield governmental securities from 1945 until the terminal date of the account, and whether the individual trustee, Mr. Mason, is entitled to any commissions or compensation in excess of $500 per year under the terms of the trust instrument. The trial court disallowed all exceptions and affirmed the account as stated.
The gravamen of the complaint of the life income beneficiaries is that "the trustees have never attempted to exercise any judgment with regard to diversification, except within the narrow confines of low-yield governmental obligations." The remaindermen joined in this exception.
The life income beneficiaries have introduced into evidence a chart showing the average annual yield of the trust from the time of the redemption of the Chile Copper Company bonds, 1927, until April 1, 1955. The yield is computed upon the basis of $1,393,700 (the redemption value of the Chile Copper bonds). No adjustment of the basis was made for deductions from corpus of $58,706.35, representing premiums for securities purchased over the years and held to maturity, and for other deductions totalling $60.49 (at the same time, however, $16,995.57 representing corpus gains from discount purchases, were not included). We might note at this point that one of the exceptions originally filed on behalf of the remaindermen sought a surcharge for the failure of the trustees to amortize from interest received the beforementioned premium loss of $58,706.35, thus favoring income beneficiaries, but the exception was withdrawn at trial.
For present purposes the following summary of the chart submitted by exceptants is a sufficiently accurate indicator of the average annual yield of the trust:
The average annual yield of the trust for the period from April 1, 1927 until the end of 1944 ranged in a descending scale from a high of 4.27% in 1927 to a low of 2.34% in 1944. From 1945 to date the average annual yield ranged in a descending scale from a high in 1945 of 2.17% to a low in 1955 (to April 1) of 1.51%.
The exceptants maintain that the trustees should have at least considered revising their investment policy in 1945 when the average annual yield fell below 2 1/4%. They contend that average discretionary trusts were yielding a 4 1/2% or better return on investments during the period from the beginning of 1945 until the terminal date of the account, and seek to surcharge the trustees for the difference between the actual yield and the alleged 4 1/2% yield earned by average discretionary trusts, plus interest.
In order to demonstrate the prevailing policies of investments in discretionary trusts the exceptants called as an
expert witness an attorney with experience in the fields of trusts and estates. The expert had been a member of a sub-committee of the American Bar Association inquiring into the "Changing Concepts of Trust Investments," and had personally acquired data and statistics on that subject for the States of New York and New Jersey in preparation for a report of the committee submitted to the American Bar Association in 1955. In addition, he had surveyed the investment policies of common trust funds in New York and New Jersey and had investigated a sample of some 20 or 25 accountings of discretionary trusts handled by his own office over a period of years. Without going into detail, we might summarize the expert's findings as follows: that trustees of discretionary trusts invest, on the average, some 40% of the corpus in common stock and that these trusts yield, on the average, approximately 5%. These figures are, of course, statistical averages, and it is of significance that when counsel on cross-examination inquired of the expert as to what the policies of trustees would be with regard to investing in common stocks where the income beneficiaries were in high tax brackets, he responded "I don't know what the fiduciary would do in a particular case."
In order to demonstrate the net return to the beneficiaries when income taxes are taken into consideration, the trustees introduced into evidence tables showing the income tax brackets of the life income beneficiaries, excluding capital gains and losses and before income from the trust. (The basic information concerning the exact net income of the beneficiaries was acquired by ...