Opinion ID: 1970636
Heading Depth: 1
Heading Rank: 3

Heading: The Pre-Agreement Developments:

Text: In 1929, George Gund, being a resident of Ohio and an officer of The Cleveland Trust Company, established a revocable trust with Wilmington Trust, the sole purpose of which was to transfer legal title of certain stock out of Ohio and into Delaware in order to avoid possible Ohio taxes. The function of Wilmington Trust was to provide safekeeping for the stock, hold title, and collect and transmit dividends as Gund directed. For these services, a trustee's fee was established on the basis of $1,000 per year for the period during which the trust has actually been in existence. In 1935, the trust was revoked by Gund. At his insistence, the fee was computed and paid on a per diem basis for the part of the year 1935 during which the trust existed. In the interim, during 1931, there had been an exchange of correspondence between Gund and Wilmington Trust as to trustee's fees in the event Gund made the trust irrevocable. Wilmington Trust informed Gund on that occasion that its usual fee for handling irrevocable trusts of over $100,000 was an annual charge of 3% of income and a distribution fee upon the final termination of the trust of 1% of principal. In a later letter, responding to Gund's suggestion that the fee arrangement on an irrevocable trust be the same $1,000 per year arrangement as he had for the revocable trust, Wilmington Trust stated: Our regular rate is three percent of income and one percent of principal upon final distribution at the end of the trust; but that these rates were subject to modification and could be substantially reduced. Nothing came of these negotiations and, as has been stated, Gund terminated the 1929 revocable trust in 1935. In 1940, Gund again evidenced interest in creating irrevocable trusts with Wilmington Trust. These plans also had tax purposes: tax laws required that trust assets be removed completely from the ownership and control of the settlor in order to exclude the income from the settlor's income taxes and the principal from his gross estate upon death. Moreover, Gund was interested in Delaware trusts because he considered beneficial the apposite rule against perpetuities and the Delaware rule pertaining to retention by the settlor of voting control of stock made part of the res. A letter of June 20, 1940 from Gund to Wilmington Trust was the first of a series of important communications. It outlined the kind of irrevocable trust Gund was considering and concluded: Please also state your basis of charges on irrevocable trusts. In its response dated June 22, 1940, Wilmington Trust stated: As to our basis of compensation, it is our practice these days to have written into our trusts a general fee clause, reading somewhat as follows: Trustee shall be entitled to receive, as compensation for its services hereunder, an annual commission upon the gross income of the trust fund and a fee upon distribution of a part or all of the trust fund at the usual rates charged for trusts of a similar character; and in case of any extraordinary services performed by it hereunder Trustee shall be entitled to receive a reasonable compensation therefor. The above clause, as you surmise, gives the Trustee the opportunity to keep fees in line with those being charged on new business, which is a reasonable protection to both Trustee and the beneficiaries. Particularly would such a clause be in order in a long-term trust such as you are contemplating. In this connection I am enclosing herewith a schedule now in force in this community covering fees for `living trusts', which would be the basis for our compensation until such time as the local schedule might be changed. The printed schedule of fees thus forwarded to Gund contained a preamble stating that the trust institutions of Wilmington had agreed upon that schedule of fees as a guide in fixing their compensation as trustee under living trusts and life insurance trusts; that the rates specified were intended to be minimum rates contemplating normal services only, and intended to be applied impartially and uniformly to all customers alike. The schedule for Living Trusts first set forth the rates of Annual Commission on Income Received, ranging on a graduated scale from 2% to 5%. It then set forth the graduated rates of Commission on Principal, culminating in the rate pertinent here of 1% on all over $1,000,000. Immediately under that specification was the following statement: Commission on principal is to be taken on the fair value of all trust principal when withdrawn or distributed or transferred to a successor trustee   . The following appeared immediately thereafter: [1] Exception 1. SHORT TERM TRUSTEESHIP. If withdrawal or distribution or transfer of trust principal to a successor trustee takes place within three years, the commission on the principal involved shall be three tenths of the commission at the scheduled rates, and thereafter one tenth additional for each year up to the tenth year, after which the scheduled rates shall be charged. Apparently, there was no further communication after June 22 until Gund's letter of December 19, 1940 to Wilmington Trust stating that he was thinking of an irrevocable trust of certain stock for his four children. Gund stated that there would be only one income check of over $650,000. each year; and as to trustee's compensation he asked for a favorable basis say 1½% and 1% for final distribution. This inquiry was answered in a telephone conversation on December 21, in which Gund was informed by Walter J. Laird, vice president and trust officer, [2] that as to the trustee's fee on income, Wilmington Trust would accept a minimum of 1½% for one trust or 1¾% for each of four trusts. There apparently was no reference in this reply to Gund's request for a fee arrangement of 1% for final distribution, and up to this stage of the discussions, there was no suggestion of any special provision for removal of the trustee and transfer of the trust property to a successor trustee. On December 26, Wilmington Trust received Gund's letter of December 23, enclosing a draft of trust agreement prepared by his attorney and stating that he had just about decided on four separate trusts for each of his children. No copy of the draft was preserved; but it appears that this draft presented for the first time the idea of expressly providing for the possible removal of the trustee and transfer of the trust assets to The Cleveland Trust Company as successor trustee, at the option of the children and grandchildren of Gund. By letter dated December 27, Wilmington Trust confirmed a telephone conversation between Laird and Gund of that date stating that, while it had a series of specified suggestions for improvement of the draft agreement, it was in general accord with the draft except for the compensation clause; that a tentative understanding had been reached in the telephone conversation regarding a fee clause showing a top commission on income of 2½% and a minimum commission on income of 1¾%; that a suggested compensation clause was enclosed with the letter. The first subsection of the clause thus transmitted provided a schedule of fees on gross income, ranging from 1¾% to 2½% based upon the fair market value of the principal of the fund on the anniversary date of the trust when the commission is charged; and in the second subsection of the proposed clause, the following appeared: (b) A fee upon principal of 1% of the fair market value at the time distributed or transferred. On December 28, Gund wrote two letters to Wilmington Trust, both focusing on the principal fee clause forwarded with Wilmington Trust's letter of December 27. In the first letter, Gund discussed the proposed principal fee to be charged at the time of distribution to beneficiaries. He stated: As the Trust is irrevocable, I cannot see how any distribution can occur before approximately twenty-one years in any event. After bargaining for a schedule of distribution charges of 1% if distribution be made within 5 years, ¾% between the 5th and 10th years, and ½% thereafter, Gund stated in this letter: Please do not telephone me Monday. Simply send me a wire via Western Union stating that you are agreeable to ½ of 1% distribution fee as outlined herein. As I understand it, this ½ of 1% fee at the time of distribution applies only to the actual final distribution of the Principal or Corpus of the trust; in other words, there will be only one charge ever made as a Distribution Charge. Answer this in your telegram, also, please. Evidently, after the first letter of December 28 was mailed, Gund spoke with Laird by telephone on that day. The result was a second letter to Wilmington Trust of December 28 in which Gund stated:    I had not thought seriously of the possibility of ever seeing the trust withdrawn from the Wilmington Trust Co. Consequently that idea never seemed to be in my calculations of the distribution fee; and my letter of today did not contemplate such likely action. However, I do feel that my setting up a scale reduction, after a period of years is exactly what has recently been offered me elsewhere. It is eminently fair. I can only say that I cannot finally approve any other basis. I want to put through the trust if it can be done in time and on a basis reasonable for the size of the trust. Wilmington Trust replied to Gund's two letters of December 28 by its telegram of December 30 stating:    Accept your ideas on revision of distribution fee but while have no complaint on annual fee under present circumstances feel that since trust may last for seventy or eighty years we either ought to have an opportunity for reconsideration of annual fee after five or ten years experience or a one-half of one percent higher annual fee from the beginning. Stop. Fee on principal only charged once by us. Stop. If trust transferred to another trustee fee would be prorated.   . On December 30, Gund sent to Wilmington Trust an executed trust agreement for his son George Gund, III. He stated in a covering letter that the agreements for his three other children would follow on the same or the following day; that an immediate proof-reading of the agreement by Laird was requested, to be followed by a telegram of approval; that he had signed the agreement as of December 31, and that he wished the transaction to be completed without fail as of that date. On December 31, Wilmington Trust sent Gund the following telegram: Your letter and trust just received. Stop. Will proof-read promptly as possible but have to advice we will not accept trust except on compensation basis given in our letter twenty-seventh or our wire thirtieth. Stop. Please advice acceptance or rejection. By handwritten note dated December 30, Gund informed Wilmington Trust: We are accepting your basis. Gund requested therein confirmation by telegram that Everything was closed December thirty-first. By letter of January 2, 1941, Wilmington Trust advised Gund that all four trust agreements had been received, approved, and executed as of December 31.