Pennsylvania Orphans’ Court 101: All the Basics You Need to Know Before Venturing In

When I first meet any client about an Orphans’ Court matter, I start with a brief explanation about this unique court system and how its judges think. It’s important to grasp these basic concepts from the beginning of each Orphans’ Court situation, so that it’s easy to understand what is happening, when it is happening, and why. For my clients now reading this piece, this basic “primer” will also help you to understand why I may recommend certain actions along the way.

“Courts of Law” vs. “Courts of Equity”

From the birth of our court system until 1968, Pennsylvania’s state trial courts (our “Courts of Common Pleas”) were divided into “Courts of Law” and “Courts of Equity.”  Whether you ended up in a Court of Law or a Court of Equity depended on the type of relief you were seeking. Beginning centuries ago in England, courts “at law” dealt with actions involving claims of money damages (think breach of contract cases or personal injury cases). Actions “at equity” involved claims for legal relief not involving monetary damages (think divorce/custody of children or disputes between joint owners of land about whether one owner can build a house on that land).

The Orphans’ Court

The Orphans’ Court (named because of its historical role as the protector of “widows and orphans”) has always been its own separate “Court of Equity.” It has its own rules, procedures, and common law (judicial decisions) developed over centuries. Folks go to the Orphans’ Court to resolve disputes about estates, trusts, guardianships for incapacitated persons, and issues related to the conduct (or misconduct) of agents under powers of attorney.

In 1968, Pennsylvania formally merged its “Law” and “Equity” courts into one unitary Court known as the Court of Common Pleas. The Orphans’ Court is now a “division” of the Court of Common Pleas. The fact that the Orphans’ Court is a separate “division” of the Court of Common Pleas in any given county highlights the fact that the Orphans’ Court is fundamentally different and separate from the Civil Division of the Court of Common Pleas – the court where most folks involved in litigation end up.

Why Am I in the Orphans’ Court?

In my very first blog article, I discussed in more detail the various kinds of cases that end up in the Orphans’ Court. (You can read that blog post here.)

Although many Orphans’ Court situations arise out of someone’s illness, aging, or dementia, if you find yourself in the Orphans’ Court, then that probably means that something went wrong with someone’s money.

Maybe your mom is experiencing dementia, and one of her children has stolen some of her money, whether acting as her Agent under a Power of Attorney or simply by cunning or trickery. Maybe your dad has died, but he left his entire estate to an exotic dancer and nothing to his children. Maybe you are the beneficiary of a trust or an estate, and you receive in the mail an Account filed by the Executor or Trustee, in which that fiduciary details every dollar in and every dollar out of the estate or trust. That document , however, arrives in a format that prevents most ordinary human beings from figuring out that the Executor or Trustee made critical mistakes or paid herself or her counsel way too much money.

As I often sum it up when people ask me what I do for a living, I practice at the fascinating and often fiendish intersection of family, sickness, death and money. These are the types of cases that are handled by the Orphans’ Court within each county of Pennsylvania.

Your Orphans’ Court Matter is Not Remotely Unique

Folks have been fighting in court about sick and dead people and their assets for almost as long as people have been dying. So, although this might be your first trip into the Orphans’ Court, and although every family is of course different and special in its own way, please know and accept the reality that the Orphans’ Court has seen every type of case there is, including yours. The names, of course, change, and every family and every estate planning document and situation is, of course, unique to each Orphans’ Court matter, but trust me when I tell you that the judges and experienced practitioners of the Orphans’ Court have already seen your type of case countless times.

Do I have an “Estate” Even When I am Alive?

We think about “estates” as something that beneficiaries receive when a person dies.  But every single person on earth has an “estate” during her lifetime. Your “estate” is everything that you own – however it is titled – and even if your “estate” has no real dollar value. Maybe the only value in your personal estate today is your collection of Star Wars action figures.  Maybe that collection has dollar value. But even if worthless from a dollars and cents perspective, those action figures have emotional significance and value to you. If you were to die tomorrow, then you probably know who you would like to receive them.  And you might “give someone her inheritance early” by handing over a piece of your personal estate – say one or more of those Star Wars action figures –while you are still alive to see her face light up when you hand them to her.

Although Orphans’ Court litigation, then, often involves the estates of dead people, we also often litigate about the “estates” of folks who are very much alive. An Agent under a Power of Attorney, for example, must account to his principal (the person for whom the Agent is acting) at any time that the principal asks – especially during the principal’s lifetime when the stealing can still be stopped.

Similarly, when an Orphans’ Court judge concludes that a person is legally incapacitated, then the judge appoints a Guardian of the Person (who makes medical and living decisions) and a Guardian of the Estate (who handles the money). They are sometimes, but not always, one person. If the sum of money is large or the financial talents of the Guardian of the Person are questionable, then the Orphans’ Court will let one person handle the medical side of things and another person (or even a bank) handle the money side of things. Guardians of the Estate must file annual reports explaining what they did with the money each year, and Guardians of the Estate can be compelled to file a complete and formal Account at any time.

“Personal” vs. “Subject Matter” (In Rem) Jurisdiction Explained in Two Paragraphs

As a law school student at Temple University in the late 1980s, I recall putting toothpicks into my eyes when learning about personal jurisdiction vs. subject matter/”in rem” jurisdiction (no offense intended, Professor Greenstein). Having thought a lot about those concepts in the ensuing decades, they boil down to this: most Courts have jurisdiction (the legal right, power, and authority) to decide cases because one person alleges that another person did something wrong and caused financial harm.   He breached a contract.  She ran me over with her car.  He sold me counterfeit tickets to the Super Bowl. You get it.

But the Orphans’ Court is different. The source of the Orphans’ Court’s jurisdiction is the money – the “Estate” of the alive or dead person at issue. “In rem” is Latin for “about a thing.”  The Orphans’ Court has jurisdiction not over the people involved, but over the money – the “thing.”

So, Do I “Sue” Anyone in the Orphans’ Court?

People do not enter the Orphans’ Court by “suing” someone. Instead, they enter it by either filing a Petition or responding to a Petition filed by someone else. And although the Petition may ask one person to come into the Orphans’ Court and explain him or herself, the Petition is not filed “against” anyone. Instead, a Petition is more of a request to come into the Court and explain something in question. There are no plaintiffs or defendants. Instead, there are Petitioners and Respondents. Perhaps more importantly, every person with an interest in a particular estate or trust (eg, all beneficiaries) will be identified as Interested Parties who will have an opportunity to participate in the proceeding.

Every Petition in the Orphans’ Court is about a fund of money in the hands of a fiduciary but controlled ultimately by the Orphans’ Court. The point of the Petition—and the objective of the Orphans’ Court judges— is to ensure that the fund of money at issue is in the correct amount and ends up in the correct hands.

In the Orphans’ Court, then, our papers are never captioned as “Joe Smith vs. Suzy Smith.” Instead, in the Orphans’ Court we file papers asking people who have been holding money to explain what they did with that money, or we file Petitions asking the Court to rule that our client is entitled to some or all of the money at issue.

The Orphans’ Court as Protector and Defender of “The Fund”

The Orphans’ Court cares about and focuses on that fund of money more than anything else. I often tell my clients, the Orphans’ Court judge cares about your family in the same broad sense that anyone cares about anyone else’s family. But the Orphans’ Court judges don’t actually care whether their rulings will help put your broken family back together or “right a wrong for Mom” in the same way you might wish.

No, indeed. Instead, the Orphans’ Court judge is the ultimate defender and protector of the fund in question, and the Orphans’ Court will protect that fund and ensure that the fund is distributed to the correct beneficiary under the law without regard to anyone’s “feelings” and without regard to anyone’s personal perceptions of “what is right under the circumstances.”

What is a “Fiduciary” Anyway?

A fiduciary holds money or power for the benefit of another person. In the Orphans’ Court, the fiduciaries we deal with include: Executors or Administrators of Estates, Agents under a Power of Attorney, Guardians of a Person or Estate, or Trustees of a Trust. Fiduciaries are expected and required to act in the best interests not of themselves, but of the folks who empowered them and of their beneficiaries. A fiduciary holds a position of trust.

As Ronald Reagan once famously intoned, however, “trust, but verify.”

The most fundamental way to verify that a fiduciary is complying with his or her obligations is to force that fiduciary to file an “Account.”

The Critical Importance of the Fiduciary Account

Almost nothing important happens in the Orphans’ Court unless and until the fiduciary files an Account. Why? An Account is like a giant spreadsheet showing every dollar in and every dollar out while the fiduciary controlled the money. Unless and until we see that Account, then we won’t necessarily even know where to begin examining the situation. Beneficiaries need not figure out for themselves what happened. The fiduciary must tell the beneficiaries – and the Orphans’ Court – exactly what happened, when, and why with the fund. Fiduciaries hold positions of trust, after all. And anyone who can’t explain to you immediately and with receipts and bank statements exactly what they did with every dollar they ever held in a fiduciary capacity should be fired immediately.

We don’t always learn from an Account exactly what happened. And some treacherous fiduciaries file the dreaded “Zero Account” in which they contend that they “never acted” (usually, as Agent) and therefore cannot be required to “account” to anyone. Ah yes, Mr. Badguy, I see, your 94-year-old mother transferred all of her assets electronically into the names of your children but you never touched the money and had nothing to do with that.  Very interesting.

But let’s assume for today’s purposes that Badguy’s Account as filed with the Orphans’ Court reveals that Badguy in fact pocketed the dead person’s money/gave the dead person’s money away, or engaged in any of the hundreds of different ways that people steal from each other. The beneficiaries of the Estate will file Objections to that Account, cataloguing Badguy’s financial sins. And if the beneficiaries are correct, then the Orphans’ Court judge will eventually force Badguy to pay money into the Estate, or to re-title assets back into the name of the Estate. The fund will be made whole. When a fiduciary steals, then the Orphans’ Court will force the fiduciary (and sometimes the fiduciary’s counsel) to make the fund whole by taking money out of their pockets and putting that money back into the Estate. Remember: the Orphans Court judge is always focused on making the fund in question whole and on ensuring that is distributed to the intended beneficiaries.

Follow the Money

In many Orphans’ Court matters—and especially the many fiduciary misconduct Orphans’ Court matters we handle at Smith Kane Holman, LLC—the underlying passions run high, and the facts are complicated. It is often especially complicated to “follow the money” and other assets which used to belong to a dead person. In a typical case, those assets should have been part of that dead person’s Estate but were instead stolen before death. By engaging in electronic fund transfers from the comfort of their own homes, an Agent under a Power of Attorney can effectively steal or give assets away to someone else by changing a beneficiary designation or re-titling a bank account from the dead person’s name alone into the name of the “helpful” Agent or someone else, for example.

We conduct financial autopsies at Smith Kane Holman, LLC, because your bank accounts die with you. But your bank statements live for years in the files of the banks we subpoena. Any given wrongdoer may have done a great job of hiding his thievery from his mom or his siblings when mom was alive.  But death equalizes everything.  Death impacts control. Death shuts off exit lanes, and all roads lead to the Orphans’ Court.  We will find and expose in the Orphans’ Court the evidence of a wrongdoer’s treachery, and the Orphans’ Court will make that individual pay for their financial sins against the fund.

But My Case Isn’t About the Money – It’s Really “All About Mom”

Although most folks embroiled in Orphans’ Court situations may proclaim that their fight really “isn’t about the money” or that they are “truly and only” focused on “Dad’s best interests” or are “only trying to accomplish what Mom wanted,” when you get right down to it, the fight is almost always about the money.  And there is nothing wrong with that!

My Orphans’ Court experience teaches me to find nothing wrong when a person loves both Mom and her money and wants to ensure that both live long and happy lives and that Mom’s money ends up exactly where she wants/wanted it to go. You must understand, however, that Orphans’ Court judges hear testimony every day that “this whole thing is all about my Mom,” in cases where that is obviously not true. Please pardon the Orphans’ Court’s skepticism, then, of those who paint themselves as seeking only justice “for Mom” or for anyone other than themselves.  Even when all litigants truly do love Mom, the Orphans’ Court will keep everyone focused at all times on the money, because “justice for Mom” is ephemeral.  Dollars and cents are real, and the ultimate focus of the Orphans’ Court judges.

If I “Win” in the Orphans’ Court, Will Anyone Write Me a Check for My Mental Anguish?

Except in extraordinary cases, Mr. Badguy never writes a personal check or transfers an asset to an individual beneficiary, no matter what he did. Because the Orphans’ Court focuses only on protecting the fund, and ensuring that someone replenishes the fund to the correct amount. The Orphans’ Court does not care, for example, that you suffered mental anguish when you learned after your mom died that your sister, acting as Agent under a Power of Attorney, looted your mom’s bank account and changed all of her life insurance beneficiary designations to benefit herself. The Orphans’ Court, an In Rem jurisdiction Court, cares only about protecting the fund and ensuring that money is right.

We do not seek and the law prohibits us from recovering “money damages” in the Orphans’ Court beyond the money damages necessary to ensure that the fund is restored to the correct amount. We do not have “punitive damages” in the Orphans’ Court either. The thief caught red-handed in the Orphans’ Court (and sometimes even the thief’s lawyer) will be forced to pay money into the fund and perhaps even forced to pay my law firm’s legal fees and costs to ensure that the fund is right and that my client did not lose money for having protected the fund from a predator. But the Orphans’ Court does not impose further financial punishment even on proven and quite horrible thieves (at least not yet).

The Critically Important “Equity Powers” of the Orphans’ Court

Orphans’ Court judges wield extraordinary power over the fiduciaries who appear before them and over the fiduciary funds that these judges oversee and protect. The source of that extraordinary power? As mentioned earlier, the Orphans’ Court is a “Court of Equity.”

As noted in an early Orphans’ Court opinion, an Orphans’ Court Judge can ignore the facts and ignore the law if strictly applying the law would create an “inequitable result,” because the Orphans’ Court Judge’s singular obligation is to ensure an “equitable” outcome of any given situation. See, e.g. In re: Cave’s Estate, 26 Pa. D&C 295 (1936) (“Since the Orphans’ Court is a court of equity, it administers the law with great informality, and rules of procedure which relate only to the usual methods of practice will not be allowed to become the means of working an injustice.”).

Put Your Thinking Cap On, and Stay Tuned

Wow. Think about that one for a while, because until you really wrap your head around the extraordinary power of each and every individual Orphans’ Court judge, then you will never understand Orphans’ Court litigation.

I will soon post about some recent Orphans’ Court opinions in which the judges demonstrated the extraordinary power they wield to set things straight – no matter how hard any given person or lawyer tries to keep things confused.

Watch this blog for further updates. In the meantime, if you need an Orphans’ Court litigator, I invite you to contact me at tholman@skhlaw.com or by phone at 610-518-4909.

The Empire Crushes the Rebellion: PA Supreme Court Overturns Ruling on Taylor Trust

In a stunning, unanimous decision today—reversing that of the Pennsylvania Superior Court—the state’s Supreme Court has declared that it is unlawful to modify a trust to add a portability provision.

That is, the Court has essentially decreed that the beneficiaries of many trusts (mostly those created before the 1980s) are almost powerless to change the Corporate Trustees originally named by their trust’s Settlor.

As I’ve written about in previous blog posts, folks interested in Pennsylvania fiduciary law have been eagerly awaiting this ruling by the state Supreme Court since May 2016, when it agreed to take up the appeal filed by Wells Fargo Bank.

The Back Story

The question at hand was this: Can beneficiaries of a trust, by their unanimous agreement, modify that trust to add a portability provision, allowing them the ability to remove and replace the Corporate Trustee chosen by the Settlor at any time and for any reason, or even for no reason at all.

Since at least the 1980s, estate planners have routinely, if not by default, included portability provisions in every trust they create. Portability provisions ensure that a Corporate Trustee doesn’t become complacent about either its investment decisions or its customer service. As such, a bank or trust company that meets their basic investment and administration duties need not fear portability provisions. In fact, the free market activity encouraged by such provisions could even bring any bank more business.

In a nutshell, the addition of a portability provision is nothing more than a “facelift” to the trust document, because under all circumstances, there will always be a bank in charge – just perhaps not the small town bank Uncle Alfred chose 63 years ago before it was swallowed up by a much larger one.

This explains why since Pennsylvania implemented its version of the Uniform Trust Act in 2006, countless trusts have been modified to include these provisions. Most banks, with some notable exceptions, have traditionally not viewed these modifications as objectionable or as violating a material purpose of the trust.

Nonetheless, those days of trust modifications to add portability provisions have come to a crashing end in Pennsylvania with today’s decision. (Trust Under Agreement of Edward Winslow Taylor, Appeal of Wells Fargo Bank, 15 EAP 2015 – Decided July 19, 2017). Even if all trust beneficiaries and the Corporate Trustee agree to adding this provision, this opinion now makes a modification for this purpose prohibited and unlawful.

Who “Wins”?

Well, first, Wells Fargo. It will now presumably remain Corporate Trustee of the Taylor Trust forever. But was that all that their case was about? Or did Wells Fargo litigate this case up to the Supreme Court level seeking a broader-scale victory?

Although they did not explicitly state it, oddly enough, the Pennylvania Supreme Court has unmistakably concluded that the identity of the Corporate Trustee is a “material purpose” of each and every trust in the Commonwealth that does not include an explicit right to remove and replace provision.

In doing so, from my perspective, it may have been unaware of the following facts:

– Countless trust Settlors over the years have signed trust documents that contained no remove and replace language and that were prepared by the very Banks named as Corporate Trustees in those documents. Often these Settlors were unrepresented by counsel.

– If a  trust document does not contain a remove and replace clause, the Banks contend that the Settlor intentionally did not want to give anyone the right to ever remove or replace the named Corporate Trustee. But isn’t that pure speculation? Does everyone assume that a Bank that prepared a trust document naming itself as Corporate Trustee necessarily told the Settlor about the option of a remove and replace provision?

– Many Corporate Trustees–especially large ones like Wells Fargo–are “legacy” trustees. In other words, they were not the original bank appointed as Corporate Trustee by the Settlor, but assumed this role by simply acquiring the original bank that the Settlor had named in the document.

Is this a Case-Closed Development?

Because the Supreme Court admitted that its opinion arose out of statutory confusion, I believe this issue requires a legislative fix. The fact that a trust document does not include specific remove and replace language is not evidence that even one Settlor intentionally omitted it from their trust document or had even heard those words before signing the document. It is difficult to believe that any Settler, properly informed, would ever refuse to include such a clause.

Perhaps the legislature could consider amending Section 7740.1 to note that unless a Corporate Trustee can prove that the option of including a right to remove and replace clause in the trust document was (1) explained to the Settlor and (2) intentionally rejected by that Settlor, then the beneficiaries of that trust can indeed modify it to add a portability provision, provided that any successor Corporate Trustee must have assets under management at least equal to those of the current Corporate Trustee.

But waiting for the legislature can take forever. So if you are the beneficiary of a Pennsylvania trust with no portability provision, does that mean you have no meaningful voice?

Not at all. If you have questions or concerns about your Corporate Trustee and your personal efforts to address those issues have failed, a lawyer well-versed in fiduciary law may be able to help. Contact me at tholman@skhlaw.com

The Empire Strikes Back? PA Supreme Court Agrees to Hear Wells Fargo Appeal in Taylor Trust

Edward Winslow Taylor, Intervivos Trust, No. 3563IV of 1939 (O.C. Phila. 08/08/14), rev’d, 124 A.3d 334 (Pa.Super. 2015), No. 692 EAL 2015 (Pa) (April 12, 2016)

In a landmark opinion last October, the Pennsylvania Superior Court held that beneficiaries of a trust administered by a Corporate Trustee, yet lacking an explicit “portability” aka “remove and replace” provision, could in fact modify that trust to add such a provision, even over the current Corporate Trustee’s objection. [Edward Winslow Taylor, Intervivos Trust (“Taylor Trust”)]

As predicted in the post I wrote on that opinion, the Pennsylvania Supreme Court recently agreed to hear Wells Fargo’s appeal on the matter. Clearly, the Supreme Court understands this is an important issue requiring clarity, because the Court typically rejects without even considering most appeals.

Whatever the Court decides will have broad and important implications for all trust and estate practitioners. In the meantime, there are some interesting points to review as we await the forthcoming opinion.

The Crux of Taylor Trust

To me, the question at hand in Taylor Trust is this: Does it violate a material purpose of a trust to allow the beneficiaries to modify it to add a portability provision, allowing the beneficiaries to remove the current Corporate Trustee and replace it with another Corporate Trustee?

Since at least the 1980s, estate planners have routinely, if not by default, included portability provisions in every trust they create. These provisions typically give either a majority or unanimous group of beneficiaries the right to remove and replace the Corporate Trustee chosen by the Settlor.

Older trusts seldom included these provisions. Interestingly, many of those older trusts were drafted by or in heavy consultation with the very banks named in those documents as Corporate Trustees.

Settlor’s Intent is Paramount in Trust Interpretation

Courts strive mightily to uphold Settlor’s intent. The best place to find such intent is in the trust document itself. Today, certain Trustees of older trusts contend that the absence of a portability provision in a trust document means that the Settlor intended not to give the trust beneficiaries that right. I respectfully disagree. When a trust document merely names a Trustee and fails to speak to the issue of removing or replacing that Trustee, this tells me that the Settlor probably never knew and was never made aware that she could have granted or explicitly denied her beneficiaries such a right. In my world, silence does not equate intent.

A Disconnect in the Argument

In my experience as an Orphans’ Court litigator who regularly tangles with banks of all shapes and sizes on behalf of unhappy trust beneficiaries, there are three banks in the Commonwealth of Pennsylvania that routinely balk at adding portability provisions – BNY Mellon, N.A., PNC Bank, N.A., and Wells Fargo Bank, N.A. It’s important to note that each of these banks became the large entities they are today by swallowing up many smaller banks and trust companies. In the process, they also swallowed up the trusts of countless families whose trust settlor forebears never even heard of them.

Yet, each of these three banks repeatedly objects to amending trusts to include portability provisions, typically citing “Settlor’s intent.” It just doesn’t add up.

“No-Fault Trustee Removal”: Why the Controversy?

As discussed in my earlier post, the well-written opinion of Superior Court Judge Anne E. Lazarus for the majority in Taylor Trust is a close cousin of the Superior Court’s important opinion in McKinney Trust, 67 A.3d 824 (Pa. Super. 2013). In McKinney, the Superior Court allowed the beneficiaries – none of whom lived in Pennsylvania and whose ancestor entrusted his funds to a small bank that was later acquired by PNC – to remove and replace PNC under Pennsylvania’s Uniform Trust Act. The Superior Court in McKinney did not force the beneficiaries to first prove that PNC’s conduct required its removal under traditional “fault-based” grounds such as defalcation or waste of assets. Instead, the McKinney Court held that Pennsylvania’s Uniform Trust Act authorized the “no-fault trustee removal” of PNC. More recently, the Superior Court in another matter quoted McKinney’s “no-fault trustee removal” language favorably. [Fumo Trust, 104 A.3d 535, 549-51 (Pa. Super. 2014).]

In Taylor Trust, however, the beneficiaries did not even seek the removal of Wells Fargo. They sought only to amend the trust at issue to give them the right to remove and replace Wells Fargo at any point in the future. The Honorable John W. Herron of the Philadelphia Court of Common Pleas, Orphans’ Court Division, however, looked past the beneficiaries’ stated intent and concluded that the request to modify the trust was essentially a ruse. He suggested that the Taylor Trust beneficiaries secretly intending to remove Wells Fargo at their first opportunity – thereby bypassing the more onerous “fault-based” trustee removal provisions of 20 Pa.C.S.A. §7766.

In overruling Judge Herron, the Superior Court emphasized the fact that the petition sought only to modify the trust and not to remove Wells Fargo. Another trusts and estate law blogger, Daniel Evans, Esquire, suggested in a recent blog post that the Superior Court’s analysis on that point was akin to that of the famous Joseph Heller novel, Catch-22, as follows:

“the title referred to a (hopefully imaginary) rule that was in place in World War II. Airmen who were insane were not required to fly combat missions, but had to request that they be released from combat duty. The ‘Catch 22’ was that asking to be released from combat duty was evidence of sanity, so the request would be denied. According to the Superior Court, beneficiaries can have the power to remove and replace trustees as long as they don’t want to exercise the power. If they actually want to exercise the power, they can’t have it. Catch 22.”

I agree with Mr. Evans (at least on that point), and I hope that the Supreme Court affirms the Taylor Trust outcome, yet removes any “beneficiaries’ intent” component. I see no valid reason to prevent any beneficiary from amending a trust to include a portability provision – whether she intends to remove the Corporate Trustee immediately or not. Remember: portability provisions are not without restrictions. They typically require a unanimous or majority vote of the current beneficiaries. They also require a replacement Corporate Trustee that meets generally accepted minimum standards. In other words, the sky is not falling here.

Why Portability Provisions in Trusts Matter

The existence of a portability provision ensures that a Corporate Trustee doesn’t become complacent about either its investment decisions or its customer service. Otherwise, the beneficiaries might choose to remove and replace it with a competitor. Without these provisions, banks and trust companies have little incentive to provide their best service to these trusts.

No bank or trust company that conducts its business with proper regard for its investment and trust administration duties needs to fear portability provisions. Indeed, plenty of them welcome portability provisions into documents that had never contained them previously. Ever since Pennsylvania implemented its version of the Uniform Trust Act in 2006, estate planners all across Pennsylvania have prepared and their clients and their trustees have executed countless Non-Judicial Settlement Agreements modifying trusts. The single most common modification is no doubt the addition of a portability provision.

Because 20 Pa.C.S.A. §7740.1 prohibits parties from entering into Non-Judicial Settlement Agreements that violate a trust’s “material purpose,” every one of these agreements recites that the “modification does not violate a material purpose of the trust.”

For the Superior Court to be wrong and Judge Herron to be right, then, the Supreme Court will need to conclude that modifying the trust to add a portability provision will in fact violate a material purpose of that trust, notwithstanding the fact that the Settlor in Taylor entrusted his funds not to Wells Fargo, but to a much smaller predecessor, and that the Settlor did not state in the document that the Corporate Trustee could never be removed.

What would such a decision mean for all of the trusts that were modified to include portability provisions via Non-Judicial Settlement Agreements since 2006?  Hopefully those modifications will survive any future attacks. If the Supreme Court reverses the Superior Court, however, then estate planners can forget about drafting Non-Judicial Settlement Agreements adding portability clauses going forward.

Did the Supreme Court Forecast Its Ultimate Ruling?

While the Supreme Court’s decision to grant Wells Fargo’s Petition for Allowance of Appeal is noteworthy, so is the language used in the Court’s Order agreeing to hear the appeal.

The Supreme Court stated, “[t]he issue presented by petitioner and rephrased for clarity is whether the Superior Court erred in holding that trust beneficiaries may circumvent the requirements for removal of a trustee in Section 7766 of the Trust Act, 20 Pa. C.S.A. § 7766, by amending the Trust Under 20 Pa.C.S.A. §7740.1.”

One might suspect that the unidentified Justice who penned that “Per Curiam” (Supreme Court speak for “anonymous”) Order using the word “circumvent” has already decided to reverse the Superior Court.

Despite that pessimistic note, I am hopeful that when the issues are properly briefed and argued, the Pennsylvania Supreme Court will affirm the Superior Court’s Taylor Trust opinion – and even expand on it by eliminating any need to analyze the alleged intent of any given beneficiary who wishes to add a portability provision to a trust that is otherwise silent on whether the Corporate Trustee can be removed.

As I often tell clients who ruminate about the meaning of an adversary’s silence on any issue, “silence means nothing more than silence.”  For the Pennsylvania Supreme Court, or anyone else, to conclude that the absence of a portability provision in a trust means anything more than that the Settlor never knew about or considered one would be an epic mistake.

Despite suggestions to the contrary by Judge Herron and presumably by the author of the Per Curiam Supreme Court Order, allowing trust beneficiaries to modify trusts to add portability provisions will also not render useless the traditional “fault-based” removal provisions of 20 Pa.C.S.A. §7766. After all, countless Settlors did explicitly prohibit the trust beneficiaries from removing and replacing their Corporate Trustees. And there is no shortage of trusts in which a majority of the beneficiaries will never agree on anything, much less modifications to the trust. Furthermore, countless trusts name individual trustees whose conduct will be policed via the traditional “fault-based” rules.

When you boil it all down, the addition of portability provisions to some trusts may result in some Corporate Trustees losing their jobs if their investment or customer relations performance require that. By the same token, those same Corporate Trustees will now have an expanded opportunity to acquire new trust business previously locked up in other banks. Again, portability provisions have restrictions requiring one Corporate Trustee to be replaced by another Corporate Trustee. So this issue is, in fact, no big deal, and the Pennsylvania Supreme Court can affirm the Superior Court’s wise Taylor Trust decision without doing any actual damage to Pennsylvania trust law or administration.

Isn’t competition good for every industry? Should any Corporate Trustee keep its job forever even when the Settlor never expressly provided for that in the trust document? To ask those questions is to answer them, and I hope that the Pennsylvania Supreme Court, which is privileged to consider matters of public policy in rendering its decisions, asks those questions when it sits down to decide the Taylor Trust appeal.

Free at Last? A Landmark PA Superior Court Opinion Levels the Playing Field for Trust Beneficiaries Seeking to Change Trustees

Edward Winslow Taylor, Intervivos Trust, No. 3563IV of 1939 (O.C. Phila. 08/08/14), rev’d, 2015 Pa. Super. 199, No. 2701 EDA 2014 (09/18/15)

For decades, the beneficiaries of many trusts have been almost powerless to change the Corporate Trustees who govern their trust assets. That all changed recently with a landmark opinion issued by the Pennsylvania Superior Court.

The bottom line: If you are the beneficiary of a trust that lacks a “portability” aka “remove and replace” clause, you may now petition the Orphans’ Court to modify your trust to include such a clause—giving you the power to replace your trust’s Corporate Trustee for any reason.

For many trust beneficiaries who have grumbled for years about alleged shabby treatment and poor service from their trust’s Corporate Trustees, this is welcome news. But to truly understand the magnitude of this ruling, it’s helpful to understand a little history and to review the details of the case that led to this historic decision.

The Traditional Trust: Who Needs a Portability Clause?

If you are the beneficiary of a trust created before the 1980s, it’s quite likely that your trust does not include a portability clause. That means that once the Settlor (the person who created the trust) appointed a Corporate Trustee, no beneficiary could remove and replace that Trustee, absent compelling and egregious evidence of a breach of fiduciary duty—such as theft of trust assets or gross negligence in managing them. Interestingly, many Corporate Trustees were also the preparers of these trust documents which conveniently provided for their permanent employment.

For many Settlors in earlier times, this made sense. They often had personal relationships with the banks they appointed as their Corporate Trustees. And as such, they trusted that these banks would be there to do right by their trusts and designated beneficiaries. What they did not foresee was that most of those small banks would be swallowed up over the years by larger institutions, which have grown even larger in the flurry of bank mergers over the past few decades.

As part of these mergers, Corporate Trustee duties and powers have always passed from the original banks directly to the much larger—and often much different—institutions that acquired them. And the original trust rules, excluding any “right to remove and replace” always transferred along with them. Pennsylvania law has always dictated that successors by merger are one and the same as their predecessors.

In addition to being stuck with Corporate Trustees never actually appointed by the Settlor, beneficiaries have also been subject to their investment and distribution whims. For instance, Corporate Trustees typically invest trust assets according to rigid portfolio models often heavily invested in their own funds. Don’t like that? Want to discuss? The Corporate Trustee has no obligation to act on your opinions, trust beneficiary. And without a portability provision, they have nothing to lose in ignoring you.

It’s no wonder then that people often come to me with sad tales of shabby treatment by a never-ending rotation of trust officers who won’t take their calls, who ignore their reasonable requests for information, or who make them feel ashamed to request a distribution.

Under the former long-standing regime of “no portability,” some banks and trust companies have seemed to view their only (or at least most important) “client” in a trust relationship as the person who created the trust.  Acting in loco parentis, if you will, some have assumed an authoritarian and often disapproving role toward the beneficiaries.

What Portability Provisions Offer

Since the 1980s, trust portability provisions have become more common.  Today portability is the norm.  With this provision in place, beneficiaries unhappy with the Corporate Trustee’s performance can move the trust to a new Corporate Trustee, following the procedure set forth in the trust’s language.

Portability provisions are not without restrictions, however.  First, they typically require a unanimous or majority vote of the current trust beneficiaries to proceed with changing Corporate Trustees. You typically can’t name the Bank of Yourself as the new Corporate Trustee. And you must typically appoint a replacement Corporate Trustee that meets generally accepted minimum standards.

One of the main benefits of portability clauses in general is that they make the trust market more efficient. This is because banks and trust companies are incentivized to compete for the business and provide superior investment attention (and outcomes) and excellent customer care.  Otherwise, they may be replaced. Banks confident of their investment performance and client relationship skills generally welcome this competition.

The Uniform Trust Act Opens the Door to Modifying One’s Trust

In 2006, Pennsylvania adopted its version of the Uniform Trust Act. For the first time, a Pennsylvania statute embraced the right of trust beneficiaries to modify their trusts if the majority agreed to do so and if the modification did not violate a “material purpose” of the trust. For years, it has been a gray area: Does adding a portability (remove and replace) clause violate a “material purpose” of a trust?  Many savvy estate planners have been saying “no” since 2006, and have been using the UTA to modify trusts by non-judicial agreements premised upon the position that, if asked, a Court would agree. Until Taylor Trust, no appellate court of Pennsylvania had spoken to that issue.

Taylor Trust Confirms It: Trust Beneficiaries May Modify their Trust to Include the Right to Remove and Replace the Corporate Trustee

In Taylor, a Philadelphia Orphans’ Court matter, the beneficiaries proposed the heretofore unthinkable – the Court could approve a request by the beneficiaries of a trust lacking a portability clause to modify that trust to include one – even if the beneficiaries had no present gripe with the Corporate Trustee.

The Taylor Trust beneficiaries did not actually seek to remove their Corporate Trustee, Wells Fargo Bank, N.A. (”Wells Fargo”).  Instead, they sought only to give themselves the right to remove and replace Wells Fargo in the future should they someday wish to do so.  That is an important distinction upon which the Superior Court relied in issuing its ruling.

The Birth of the Taylor Trust

Before we get to the happy ending for trust beneficiaries saddled with Corporate Trustees who infuriate them, let’s go back to the beginning of the Edward Winslow Taylor Inter Vivos Trust.

Edward Winslow Taylor executed the Taylor Trust on February 9, 1928, and amended it twice before dying, with the last amendment on September 15, 1930 (85 years ago, but who’s counting).  When he died, the Corporate Trustee was the Pennsylvania Company for Insurance on Lives and Granting Annuities.  That trust company ultimately became extinct via a merger. After countless further mergers, the Corporate Trustee had become Wells Fargo.

After a series of births and deaths and even the exercise of a power of appointment (if you don’t know what it is, don’t worry about it), the Taylor Trust was divided into four separate sub-trusts, each valued at about $1.8 million, each set to terminate in 2028, and each with Wells Fargo as the Corporate co-Trustee.

Which “Section” of the PEF Code Governs?

In 2013, three of the four surviving children (the “trust beneficiaries”) filed a petition to modify the trust to include a portability provision, giving them the right to remove and replace Wells Fargo in the future without seeking court approval. As mentioned, their petition did not seek to appoint a new Corporate Trustee at that time, nor did it include any grievances against Wells Fargo or a request to remove it.

In August 2014, the Honorable John W. Herron of the Orphans’ Court of Philadelphia denied the beneficiaries’ petition to modify the trust. Judge Herron’s ruling cited two sections of the Pennsylvania Probates, Estates and Fiduciaries Code or PEF Code: Sections 7740.1 and 7766.

Section 7740.1 provides, in relevant part, that “[a] noncharitable irrevocable trust may be modified upon the consent of all the beneficiaries only if the court concludes that the modification is not inconsistent with a material purpose of the trust,” and  “[i]f not all the beneficiaries consent to a proposed modification or termination of the trust … the modification or termination may be approved by the court only if the court is satisfied that: (1) if all the beneficiaries had consented, the trust could have been modified or terminated under this section; and (2) the interests of a beneficiary who does not consent will be adequately protected.”

Note that I bolded the words above and underlined “this section.”  If all (or some) of the Tayor Trust beneficiaries had consented to the trust modification, it certainly could have been modified under that section – i.e. PEF Code § 7740.1. The Philadelphia Orphans’ Court, however, interpreted the words “this section” to broadly mean the entire PEF Code, which meant that the Court necessarily included PEF Code § 7766 in its analysis as well.

PEF Code § 7766 specifically addresses the removal of Trustees and provides the circumstances under which a court may remove a Trustee[i].  I have footnoted the specific statutory language, but in essence, one can only force the removal of a trustee that has behaved very badly. PEF Code § 7766 does not allow beneficiaries to remove a trustee simply by agreeing unanimously among themselves.

In denying the Taylor Trust beneficiaries’ petition to modify the trust, the Philadelphia Orphans’ Court emphasized that they failed to identify any “bad acts” detailed in PEF Code § 7766 to justify Wells Fargo’s removal.  In other words, even though the trust beneficiaries’ petition on its face did not seek to remove Wells Fargo, Judge Herron concluded that they were attempting an “end run” around centuries of jurisprudence and a competing PEF Code provision by invoking PEF Code § 7740.1 to modify the trust now, while secretly intending to remove Wells Fargo as soon as they could.

The Appeal

In the appeal of that Philadelphia Orphans’ Court decision, the Honorable Anne E. Lazarus (herself a former colleague of Judge Herron on the Philadelphia Orphans’ Court bench) and her fellow Superior Court panel members needed to determine whether PEF Code § 7766 forbade trust modifications to include portability provisions via PEF Code § 7740.1.

Wells Fargo argued that under the rules of statutory interpretation, PEF Code § 7740.1 (which does not specifically address trustee removal) must yield to the specific removal provisions of PEF Code § 7766.

The Taylor Trust beneficiaries, by contrast, argued that the only “section” of the PEF Code relevant to the case was § 7740.1, which provides for trust modification and does not specifically forbid modifications to add portability provisions. Also, they argued, adding a portability provision does not violate a material purpose of the trust.

In reversing the Philadelphia Orphans’ Court’s decision, Judge Lazarus, writing for the Superior Court majority, suggested that the Orphans’ Court had assumed a few things about the intentions of the Taylor Trust beneficiaries:

We reject the Orphans’ Court’s conclusion for several reasons.  First, contrary to … the conclusion reached by the court, Appellants [the Trust beneficiaries] did not seek currently to remove Wells Fargo as trustee.  Rather, Appellants requested strictly to amend the trust to provide the flexibility to allow the beneficiaries to remove the trustee if, at some future point, they saw fit to do so. By imputing motives to the Appellants based on assumptions not supported by the record, the court engaged in inappropriate speculation and conjecture and based its finding on a false premise.

The Superior Court further determined that:

 …having established that false premise, the Orphans’ Court proceeded to improperly apply the rules of statutory construction to interpret [PEF Code § 7740.1] a statute that is, in fact, unambiguous on its face. The court’s contorted reading of the words “under this section” in section 7740.1(d)(1) – apparently construed as a reference to the Uniform Trust Act as a whole – provided an opening for the wholesale importation of the requirements of section 7766. We see no textual support for this strained interpretation. Rather, it is clear that subsection (d)(1)’s reference to “this section” refers only to section 7740.1 itself. Read in its proper context, subsection (d)(1) allows modification by some beneficiaries, with court approval, in the same manner as would have been allowed under subsection (b), which permits court modification where (1) all beneficiaries consent and (2) the modification ‘is not inconsistent with a material purpose of the trust.’ 20 Pa. C.S.A.  § 7740.1(b).

The Superior Court emphasized that if the Pennsylvania legislature intended to prevent beneficiaries from using PEF Code § 7740.1 to modify trusts to include portability clauses, it could have created an exception or cross-referenced PEF Code § 7766, but instead “chose not to do so.”

So, under the Superior Court’s ruling, the Taylor Trust beneficiaries who lack a more traditional PEF Code § 7766 basis to remove Wells Fargo as Corporate Trustee (such as theft or grossly negligent behavior) could petition to modify the trust to include a portability clause, which would allow them ultimately to circumnavigate PEF Code § 7766 and remove Wells Fargo as their Corporate Trustee for any reason.

The Message: Giving trust beneficiaries the flexibility to remove and replace Corporate Trustees does not violate a material purpose of the trust.  

One can hardly fault Judge Herron for assuming that the Taylor Trust beneficiaries did intend at some point in the future (perhaps in the very near future) to remove Wells Fargo. The bottom line is: So what? Will society be torn asunder if trust beneficiaries are given the right to select a different Corporate Trustee, following a prescribed protocol? I don’t think so, and here’s why.

Common sense suggests that all interested parties – settlors, beneficiaries, banks, trust companies and the court system itself – will benefit from a system whereby beneficiaries have the right to remove and replace Corporate Trustees.

First, the trust assets will always be protected. Orphans’ Court judges who approve a petition to modify a trust to include a “remove and replace” right are always able to ensure that the successor Trustee is a bank or trust company that meets minimum approved standards—such as sufficient assets under management (often $500 million minimum) or inclusion on the Approved List of Fiduciaries for Philadelphia County (there is such a list, by the way). Trusts modified via non-judicial settlement agreements under the UTA also contain similar requirements.

No trust beneficiary will be stuck with a bank or trust company it cannot stand to work with, and vice versa.

The Pennsylvania Orphans Courts and appellate courts will be relieved of the burden of litigation resulting from trust beneficiaries who allege an avalanche of insults from their Corporate Trustees which they consider sufficient “cause” to meet the heavy removal burden of proof under PEF Code § 7766.

Frankly, Taylor Trust presents no potentially terrifying “parade of horribles.” A few very large institutions may now be forced to pay closer attention to client service and investment performance at the risk of losing business to competitors.

Most institutions are more than happy to compete for the business and to work to resolve any concerns their trust beneficiaries have. Taylor Trust will help to ensure that those conversations happen.

From my perspective, with the Taylor and relatively recent McKinney opinion (also about trust portability), the Superior Court is bringing Pennsylvania and its trust beneficiaries into an age of enlightenment.

Stay Tuned…

Wells Fargo will surely file a request for a rehearing en banc in the Superior Court (if it has not done so already). It will likely seek a review by a panel of seven Superior Court Judges – including Judge Lazarus – for a more “authoritative” ruling on this important issue.  Frankly, this issue warrants en banc review because clarity is important on this critical issue.

The spirited dissent of Judge Platt went so far as to accuse the majority of engaging in “judicial activism” for essentially “ignoring” the “more onerous removal provisions” of § 7766.  Can trust beneficiaries only be unshackled from a Corporate Trustee when they are forced to endure “onerous” conditions? I respectfully disagree with Judge Platt’s characterization of the majority opinion.

I will report on further updates as they develop.  In the meantime, if you are looking to modify your trust to add a portability provision, go find yourself the right lawyer.

IMPORTANT TAKE-AWAYS:

— If your trust lacks a “portability” or “remove and replace” clause, your Corporate Trustee is unwilling to resign and you lack a traditional “fault” basis to remove the Corporate Trustee (such as theft or gross negligence), under Taylor Trust, you may now petition the Court to modify your trust to include a portability clause, which will allow you to remove and replace the Corporate Trustee for any reason.

— This development should lead to better communication and fair compromises between Corporate Trustees and trust beneficiaries who find themselves in disagreements. Corporate Trustees want to keep your business and avoid litigation, and most of all, they want to avoid getting fired.

— Having said that, it is critical for trust beneficiaries to understand that moving from one Corporate Trustee to another will not solve all (or, necessarily, any) of your trust-related concerns.  Settlors often put money into trust because they prefer stable, less risky investment strategies and because they want a Corporate Trustee who will not indulge every whim of every beneficiary. Before you pick a fight with your Corporate Trustee, look in the mirror and ask whether you are being reasonable. Or call me, and  I’ll tell you.

Pennsylvania’s Dead Man’s Rule – the Big Bad Wolf? Not Really.

Does Pennsylvania’s Dead Man’s Rule prevent a claimant from being paid by a Decedent’s estate for services performed pre-death when Decedent in fact paid that claimant during Decedent’s lifetime for various other services the claimant had performed?  Does Pennsylvania’s Dead Man’s Rule serve generally as a serious obstacle to a claim against a Decedent’s Estate when other witnesses and documents can testify about and substantiate that claim?  No.

On November 24, 2014, the Honorable John W. Herron of the Orphans’ Court Division of the Court of Common Pleas of Philadelphia County, sustained the claim of Smith Kane Holman client Dorothy Martin (“Dorothy”), in the matter of Estate of Rose Rubenstein, Deceased, Phila. O.C. No. 337DE of 2011, even though our opponents relied heavily on the Dead Man’s Rule in trying to bar Dorothy’s claim.

Pennsylvania’s Dead Man’s Rule, 42 Pa. C.S.A. § 5930, generally speaking, bars any claimant from testifying herself about interactions between the Claimant and a Decedent.  In other words, after someone dies, the Dead Man’s Rule bars you from walking into a Courtroom and stating, “I loaned Decedent $20,000 cash six months before she died, and she promised to repay that money at 10% interest.”  Why not?  Well, the Decedent isn’t there to testify to the contrary, now is she?  So it just doesn’t seem fair that someone should be able to testify about interactions with Decedent if that claimant would be the only witness.

Because the Dead Man’s Rule prevents a judge or jury from even hearing certain testimony, however, the Court system generally dislikes the Rule, and seeks to find ways to admit the challenged testimony into evidence.  The idea of a trial is to get all of the evidence out there, right?  So the Dead Man’s Rule, which literally keeps the mouth of a witness firmly shut, seems to go against the American legal system’s general tendency to allow all kinds of testimony into evidence and to then let the judge or jury give the testimony whatever weight they think it deserves – including no weight at all if they think that the claim is totally bogus or made up.

Among the numerous exceptions to the otherwise harsh application of the Dead Man’s Rule, for example, are:

1. The Dead Man’s Rule does not prevent a claimant against an estate from testifying about all things.  Instead, it only prevents a claimant from testifying about her interactions with the Decedent.  Hera v. McCormick, 625 A.2d 682, 688 (Pa. Super. 1993).  In other words, as happened in our case, Dorothy Martin was allowed to tell the Court about herself, including her educational background and prior work history.  Dorothy could not and did not testify, however, about the services she performed for the Decedent which were the subject of her claim;
2. The Dead Man’s Rule does not prevent a claimant from testifying about documents created prior to Decedent’s death which support or otherwise relate to the claimant’s claim.  Larkin v. Metz, 580 A.2d 1150 (Pa. Super. 1990); Freil Estate, 16 Fiduc. Rep. 182 (O.C. Montg. 1966).
3. A party otherwise entitled to assert the Dead Man’s Rule to prevent a claimant from testifying can easily and often inadvertently does waive the protections of the Rule altogether, most typically by serving either formal or informal discovery requests on a claimant whose testimony otherwise would have been barred by the Rule.  See, e.g., Schroeder v. Jaquiss, 861 A.2d 885, 890 (Pa. 2004); G.J.D. v. Johnson, 669 A.2d 378 (Pa. Super. 1995), aff’d, 713 A.2d 1127 (Pa. 1998); Miller Estate, 25 Fiduc. Rep. 2d 135 (O.C. Alleg. 2005).  You see, once you ask a claimant to open her mouth and speak, then you have lost your chance to ever use the Dead Man’s Rule as a basis to get her to shut up.

The case of Dorothy Martin, on its face, presented classic Dead Man’s Rule issues.  After all, Dorothy asserted a claim against the Estate of Rose Rubenstein, who was dead when Dorothy first presented her claim.  As you will see below in the discussion of the case, and in greater detail in the Opinion itself, (link here Audit Memorandum Herron), no Dead Man’s Rule issues presented any problems for Dorothy, because Dorothy had plenty of other evidence supporting her claim.

Dorothy was hired in the late 1980s to provide nursing services to husband and wife, Emmanuel and Rose Rubenstein (“Decedent”).  After Emmanuel’s death in 1990, Dorothy continued to provide nursing services to Decedent.  Shortly after her husband’s death, however, Decedent needed 24-hour nursing care and assistance.  Dorothy’s duties escalated by necessity to include hiring, firing and training caregivers while continuing to provide caregiving services to Decedent herself.  In the later years of Decedent’s life, Dorothy was pressed into duty to act as Agent Under the General Power of Attorney of Decedent.  In that role, she handled all of Decedent’s financial obligations, ensured the maintenance and repair of Decedent’s home (in which Dorothy and the other caregivers, including Quinette Rodgers and Alice Collins, gave Decedent the very definition of tender loving care), and oversaw Decedent’s medical care, including accompanying Decedent to all of her medical appointments. Indeed, the scope of Dorothy’s duties far exceeded the role of the typical caregiver and, we argued on her behalf, were more in line with the duties of a care manager.

Although Decedent paid Dorothy a fair, if a bit low, wage for her nursing services, Decedent never compensated Dorothy for the vast realm of financial, household, and management services she provided from 1990 through Decedent’s death in 2010. Decedent suffered from dementia for many years prior to her death and, although Dorothy as Agent could have given herself a raise, Dorothy chose not to do so because it just did not seem fair to Dorothy to give herself a raise when her boss lacked the ability to understand that sort of thing.  After Decedent died, Dorothy filed a claim seeking payment for the pre-death services she provided during Decedent’s lifetime.

The Administrator of the Estate denied the claim, taking the position that the payments accepted by Dorothy for her nursing services during Decedent’s lifetime barred Dorothy from being paid post-death for those wholly different services for which Decedent never compensated Dorothy.  When the Administrator denied Dorothy’s claim formally in the Account he filed with the Court, Smith Kane Holman filed Objections to the Administrator’s Account on Dorothy’s behalf.  Because Decedent’s will left her entire estate to several charities, the Attorney General, as parens patriae, (i.e. as watchdog for all charitable interests in Pennsylvania) joined into the litigation and worked with the Administrator in aggressively opposing Dorothy’s claim, including by taking the position that the Dead Man’s Rule barred Dorothy’s testimony entirely.

Judge Herron held a hearing on Dorothy’s Objections on May 5, 2014, and Judge Herron’s Opinion discusses at length the testimony of witnesses – including Dorothy and four additional independent witnesses – and the many documents we entered into evidence in support of Dorothy’s claim.  After the hearing, we filed comprehensive post-trial briefs on Dorothy’s behalf, in which we argued that the evidence showed quite clearly that Dorothy performed extraordinary and valuable work for Decedent – work for which Decedent never did pay Dorothy during Decedent’s lifetime.

Judge Herron’s analysis of the myriad pieces of evidence that Smith Kane Holman weaved into a narrative for the Court proves that, although fiduciary litigators must always be mindful of the Dead Man’s Rule, the Rule should not prevent them from succeeding when other witnesses and evidence support their clients’ claims.

Judge Herron’s Opinion also confirms this law firm’s belief in Dorothy and the strength of her claim, and validates our many months of effort on her behalf, in the face of intense opposition from our adversaries.

Click here to read the thoughtful and well-written opinion of Judge Herron, which we believe fairly and equitably resolved the complicated legal issues presented by this very unique and compelling set of facts. The world needs more people in it like Dorothy Martin, and we were honored to seek and obtain justice on her behalf.

Can I Recover My Attorneys’ Fees in the Pennsylvania Orphans’ Courts?

A common question I’m often asked during my first conversations with potential clients is: “Can I make [my brother/sister/the Executor/Trustee] pay my fees if I win in the Orphans’ Court?” Folks often have a vague idea that the American legal system works that way, or at least, they hope it does.  Interestingly enough, a litigant in the Orphans’ Courts does have a better chance of having his or her attorneys’ fees paid for than do most litigants—but only in very specific cases.  I‘m writing this blog post to explain this concept to my clients and to share it with others who are wondering about it.

The American Tradition is to Pay Your Own Way

Under the “American Rule,” litigants in all manners of civil cases pay their own legal fees, even if they win convincingly. But there are a few exceptions. In certain limited cases, a governing statute or a  contract between the parties requires  the losing party to pay the winning party’s fees. In most cases, however, no such statute or contract applies. Contrast that with the “British Rule.” It requires the loser to pay the winner’s attorneys’ fees and costs in civil cases. It’s the ultimate indignity, really. After you’ve just lost your case and paid your own lawyer, now you have to pay the legal fees of the party who just beat you – even if the decision was a close one.

Why is the American Rule different?  Law professors say it’s because we Americans think it’s more fair. We don’t like to think that, for instance, someone might be discouraged from seeking justice because they were afraid of having to pay double the attorneys fees, even for a close call. Nor would we like to think that a litigant with more money might be able to first “buy” a victory by overwhelming the adversary with legal papers, discovery requests, and so on and then force the loser to reimburse for those massive fees that led to the win.  Something about that seems unfair and  “un-American,” because it kicks the underdog when he is down.  In any event, whether you agree or disagree with it, the “American Rule” of pay-your-own-fees to protect your self-interests is the general rule in Pennsylvania and the rest of the United States.

There are Few Exceptions to the “American Rule”

In the Orphans’ Courts, we’re typically litigating over a defined fund of money, such as the assets of an estate or trust.  Certain Orphans’ Court disputes involve allegations that a fiduciary, such as an Executor or a Trustee, has breached a duty and caused economic harm to that fund. Maybe the fiduciary stole the money.  Maybe she lost it on a crazy investment. Maybe she loaned it to someone who couldn’t repay it. There are countless ways that a fiduciary can cause harm to a fund they are supposed to be protecting.

When a fiduciary screws up or misbehaves and the beneficiaries of the estate or trust lose money as a result, the beneficiaries can pursue a “surcharge” action in the Orphans’ Courts.  A surcharge action seeks to replenish the fund to the same amount that existed before the fiduciary’s misdeed or mistake. Oftentimes, the only way to make that happen is to force the fiduciary who caused the problem to repay the lost money out of his own pocket—to make the fund whole again, if you will. Typically, a beneficiary will hire a lawyer to help attain that relief.

Some estates or trusts, of course, have multiple beneficiaries.  What if only one or two of those beneficiaries has hired and paid the lawyer to get the fiduciary to pay back the money that she lost/stole/squandered?  Those one or two beneficiaries would have paid the legal fees for a result that would monetarily benefit all the beneficiaries.

Here’s a scenario to consider: A beneficiary might have a one-tenth interest in an estate or trust. If the fiduciary pays back $100,000 to the trust or estate, that beneficiary will receive only a $10,000 benefit of that pay-back – assuming that the money brought back in is ever distributed back out to the beneficiaries.    What if that beneficiary paid $20,000 to her lawyer to get that $100,000 result?  Would it be fair for the other beneficiaries to reap the benefits of the surcharge award without paying their fair share of the counsel fees and costs?  The Pennsylvania Orphans’ Courts think not. It is first and foremost a court “of equity.” And the Judges of the Orphans’ Courts uphold the concept of “no free riders.”

For centuries, the Pennsylvania Orphans’ Courts have declared that when a litigant’s efforts have helped to replenish all or some of the money wrongfully depleted from a trust, estate, or other fund, that litigant  can be reimbursed by the fund for the legal fees incurred to obtain that benefit for himself and for all of its other beneficiaries. This concept of replenishment, which is key, is often referred to as “creating a fund.”

Here’s another thing to consider. “Free rider” beneficiaries of a replenished trust could include minor beneficiaries, remainder beneficiaries, or even beneficiaries who have not yet been born but who have nevertheless benefited from the attorney’s work.  Let’s say that a trustee damaged a trust to the tune of $500,000, and the trustee is forced to repay that sum. In effect, the trust will not only be replenished by that $500,000 but also by the interest, dividends, stock splits, and so forth that otherwise would have been lost over the years without that $500,000. So, that trust’s beneficiaries who are not even yet born may benefit from the legal fees spent today by a beneficiary more senior to them.

Again, if a litigant’s efforts “created a fund,”—or in essence, “replenished” it— then it is only fair that the other beneficiaries who share in that fund should pay their proportionate share of the counsel fees that benefited them all.

Having said that, I must emphasize that these scenarios that lead to attorneys’ fees awards are unusual.

The Essential Question: Did You Protect the Fund or Protect Your Interest in the Fund?                  

A 2013 opinion by The Honorable Chad Kenney of the Delaware County Orphans’ Court reminds us not to get too excited at the prospect of making someone else pay our legal fees when we are thinking about litigating in the Orphans’ Court.  Pepper Trust, 4 Fiduc. Rep. 3d 49 (O.C. Delaware 2013).

In Pepper, Eulalie W. Pepper created a trust for her daughter Lalite Lewis under her will. Lalite had three children, each of whom had their own children.  At some point, Lalite’s son, Perry Lewis, adopted a 23-year old woman named Marian Francis Kerr.  In January 2010, the co-trustees PNC Bank N.A. and M.L. Lewis, filed a petition for adjudication in which they asked the Court to determine whether Marian, an “adult adoptee,” qualified as a beneficiary under the trust and in which they suggested the correct answer was “no.”  Marian, unsurprisingly, did not like that answer. She joined the fray in the Orphans’ Court and argued that the Court should declare her a beneficiary of the trust.  The co-trustees, apparently satisfied with raising the issue but not feeling obligated to defend their position, stepped to the sidelines—leaving it to the known and admitted beneficiaries of the Trust to either litigate or settle with Marian.

If Marian was a beneficiary of the Trust, then there would have been fewer dollars for each of the other beneficiaries.  Also unsurprisingly then, those beneficiaries joined the litigation and argued that Marian—who was adopted at the age of 23, for crying out loud—could not possibly be a beneficiary of the Trust.  Fortunately for those beneficiaries, Judge Kenney’s predecessor, Judge Joseph P. Cronin Jr. held that because Perry and Marian did not have a parent-child relationship during Marian’s minority, Marian was not properly a beneficiary of the Trust.  The attorneys for the beneficiaries billed 178.80 hours on that matter, for which they hoped to be paid and/or reimbursed by the Trust.

In March 2013, the trust beneficiaries who paid the lawyers who prevented Marian from becoming another beneficiary filed a Petition in which they asked the Orphans’ Court to order the Trust to pay their counsel fees and costs. In September 2013, Judge Kenney denied the Petition.

Judge Kenney noted, as discussed above, that under certain circumstances, the Orphans’ Courts will order “free-rider” beneficiaries to contribute proportionately to a litigant’s attorney’s fees.  The Court emphasized, however, that “where the fund is in the hands of the court and in no jeopardy, except from the possible mistake of the court in dealing with it, and an expectant is merely protecting his own interest, he will not be allowed counsel fees, although through his efforts others may also be benefited.”

Judge Kenney noted in Pepper that “attorneys’ fees may only be awarded from a common fund, such as the Trust in this case, when one’s efforts recover, preserve, protect, or increase the subject common fund.” Unfortunately for the trust beneficiaries seeking counsel fees in Pepper, they had not created a fund, brought in additional assets to the fund, or protected the fund from illegal activity or waste.  Judge Kenney emphasized that the petitioners only “maintained the status quo,” ensuring that the distributions from the trust would remain unchanged and they would not have to share with Marian.  Further, the trust was never in jeopardy, because although Marian thought she had the right to be a trust beneficiary, she was simply mistaken—no fraud or illegal activity had taken place.  So, the Court denied the request that the Trust reimburse for the beneficiaries’ attorneys’ fees. Consistent with centuries of law on this topic, Judge Kenney left them on their own to pay their lawyers.

What if, say, only one of the four beneficiaries had hired and paid the lawyer? Shouldn’t the other beneficiaries, whose one-quarter interests in the trust were “saved” from becoming one-fifth interests, have to pay too? In a word, no. Consider, for instance, that maybe those non-paying beneficiaries didn’t object to Marian becoming a co-beneficiary. While they certainly benefitted monetarily from the legal fees they didn’t pay, again, under my hypothetical scenario, the one party who paid for the legal action did not succeed in bringing any additional money to the Fund or protecting it from fraud or illegal activity. He was primarily protecting his self-interest in it.

In future blog posts, I will discuss some cases in which legal fees have been awarded in the Pennsylvania Orphans’ Courts—and sometimes even paid by the fiduciaries themselves or their counsel. However, it’s important to typically assume that you and only you will be paying your legal fees and costs in Orphans’ Court matters. If anyone (including a lawyer) tells you to expect otherwise, be sure to get an intelligent and written explanation as to why.

Important Take-Aways

— If you and your Orphans’ Court counsel succeed in increasing the current size of the Estate or Trust OR protecting it from illegal activity or waste, then you can ask the Judge to allow the fund to pay your legal fees. Otherwise, your fellow beneficiaries would be “free riders.”

–In most cases, you are not actually protecting or increasing a fund.  You are instead acting primarily to protect your own interests in that fund. That’s fine and to be expected, but doesn’t warrant payment of your associated attorneys’ fees by the fund or anyone else. As a general rule, if you reap the benefits (or not) of the work done by your lawyer—and the size of the fund is unchanged as the result of your counsel’s efforts —then you pay your own legal fees. It’s “the American Rule.”

For Agents Under A Power of Attorney, Meticulous Records are a MUST

When you serve as a fiduciary, it’s important to  keep detailed records explaining how you acted in that role.  This concept is especially important when you act as an Agent under Power of Attorney.  Countless fiduciaries have met with woe because they could not produce receipts or provide proper and logical explanations for checks they had written, charges they had made on a principal’s credit card,  and so on.  A simple fact is: Fiduciaries must account for each and every dollar that passes through their hands. The recent opinion of Judge Herron of the Orphans’ Court of Philadelphia County, Bitschenauer, Incapacitated, 3 Fiduc. Rep. 3d 186 (O.C. Div. Phila. 2013), serves as a helpful guide on this critical issue.

The Fundamentals of Being an Agent Under Power of Attorney

The Agent under a Power of Attorney has a fiduciary relationship with the principal that includes the duty to:  1) Exercise the powers for the benefit of the principal; 2) Keep separate the assets of the principal from those of an agent; 3) Exercise reasonable caution and prudence; 4) Keep a full and accurate record of all actions, receipts and disbursements on behalf of the principal.  See 20 Pa. C.S.A. §5601(e).

In the absence of language in the Power of Attorney document that expressly waives these bedrock principles, all Agents under a Power of Attorney must abide by them.  Indeed, Agents in Pennsylvania are required to sign a document when they accept the appointment as Agent in which they expressly agree to uphold these principles.  Nevertheless, and unfortunately for them and the principals they serve, Agents often fail to heed these duties – especially the obligation to keep full and accurate records.

The Consequences of Disorganization and Dishonesty as an Agent

Bitschenauer shows the consequences of keeping unorganized records (and of dishonesty) while acting as an Agent.  In the case, Anna Bitschenauer (“Bitschenauer”) named Barbara Louise Tucker (“Tucker”) to serve as her Agent.  Bitschenauer had lost all of her family members and trusted Tucker, who had done investing for her in the past.  Bitschenauer did not give Agent Tucker any gifting authority, and crucially, included a clause in the Power of Attorney stating, “[m]y agent shall not be entitled to compensation for serving as agent hereunder, but shall be entitled to reimbursement for reasonable out of pocket expenses.”

Despite the express prohibition against compensation for her duties as the Agent, Agent Tucker in fact paid herself $87,505.00 as compensation for them. Furthermore,  Agent Tucker also  paid her husband $270,138.00, allegedly  as “a loan or advance” for work that he apparently intended to perform in the future for Mrs. Bitschenauer.

The problem with the Agent’s decision to pay herself and her husband should be obvious.  She directly contradicted the Power of Attorney document that did not allow her to pay herself for anything other than reasonable out of pocket expenses.  Using her husband as a “straw” recipient of funds was also a bad move on her part.

Beyond this blatant misconduct, the Agent’s poor recordkeeping caused her severe financial consequences.  The Court relied on Pettit Estate, 22 Fiduc. Rep. 2d 182, 193 (O.C. York Cty. 2001) in establishing that “when an individual renders personal services to another, ‘evidence of the value of such services rendered and accepted is sufficient if it affords a basis for estimating with reasonable certainty what the claimant is entitled to.”  Agent Tucker failed to keep adequate records of her Agency, and was unable to provide evidence of any of her financial dealings to substantiate the fee she paid herself.

For example, Agent Tucker alleged that she distributed $27,875 in cash withdrawals to Mrs. Bitschenauer to use for “her day to day expenses and outings.”  However, Agent Tucker admitted that she lacked any documentation of the purpose of those cash withdrawals.  She had kept no receipts, and could not even prove that the principal received those funds.  As a result of Agent Tucker’s complete lack of recordkeeping, Judge Herron ordered her to return $27,875 to the Estate.

The Agent also improperly paid her husband, Michael Tucker, $270,138.  She claimed that the payment was for cleaning Mrs. Bitschenauer’s apartment, doing her laundry, and giving her medicine, even though Mrs. Bitschenauer’s nursing home already performed those tasks.  The Agent kept no time records, and had no proof of the services provided to Mrs. Bitschenauer.  Even more problematically, the Agent characterized the payment to her husband as a “loan” in her testimony.  The Agent testified that her husband was paying back the loan, which did not bear any interest, by cleaning for and giving medicine to Mrs. Bitschenauer.  According to the Agent, the outstanding amount of her husband’s loan was $160,000, taking into account the work he already performed.  However, she did “not know the exact number,” and had no loan documents.  The Agent provided no proof of the work performed by her husband, and it did not appear in the accounting as a loan.  The Agent even admitted that it wasn’t wise of her to give her husband the money as a loan.  Due to the Agent’s lack of credibility and complete lack of records, she was ordered to return the $270,138 in payments to her husband to the Estate.

With regard to the $87,505 in payments to herself, the Agent again had no documentation of the services she performed.  Aside from completely contradicting the terms of the power of attorney document, which did not allow the Agent to pay herself for her services, the Agent failed to give credible testimony.  For example, in 2005 the Agent paid herself $33,700 for her services at a rate of $35.00/hour.  This meant that the Agent claimed to have worked 20 hours per week for Mrs. Bitschenauer while she was working 50 hours per week as a financial advisor and raising two children.  The Agent couldn’t support this incredible statement with any records, and was ordered to return $87,505 to the Estate.

Finally, the Agent made gifts of $12,000 to herself and to her husband in 2005 and 2006.  Altogether, she gave herself and her husband $48,000 in gifts.  The Agent failed to identify any of those distributions as gifts in her Account.  Instead, she characterized each of those $12,000 distributions as reimbursements for “out of pocket expenses, mileage, and services rendered.”  The Court viewed the discrepancy between the Agent’s testimony and the Account as a concession of the “unreliability of her accounting.”  Further, the power of attorney document did not provide the Agent with any gifting authority.  It is a well-established law that a power of attorney document must provide for gifting authority to authorize the Agent to make gifts.  As such, the Court ordered the Agent to return $48,000 to the Estate.

Important Take-Aways

–Always read and understand the Power of Attorney document before acting under it, and comply strictly with all of its terms. For example, unless the Power of Attorney authorizes gifting, then the Agent can make no gifts of any size without the risk of liability.

—Remember that your every action as Agent must be in the best interest of the Principal. Before you spend each dollar, ask yourself if it meets this duty.

–Agents must keep contemporaneous and meticulous records of every dollar received and how it is spent, no matter how trivial the expense may seem. An Agent Under a Power of Attorney is effectively running a small business, and the boss is the Orphans’ Court Judge.

–An Agent can be required to account not only by the Principal, but also by the Executor or beneficiaries of the Principal’s estate, the Attorney General, and the court—so Agents who plunder their Principals’ assets while assuming no one is watching are making a big mistake.

–Think long and hard before granting your Agent the authority to make gifts on your behalf.  Even the most trustworthy friend or family member can run amok if given the ability to make gifts with someone else’s money.

Will Contest Discovery: Hand Over the Scrivener’s File

In a will contest matter, the main focus is always the Decedent’s intent.  For example, did the Decedent actually intend to sign a will leaving everything to one child while excluding all others? Did the will result from undue influence exerted upon the Decedent by the child who received the entire estate?

A Good Lawyer Documents Everything

To get to the bottom of things in will contests, the parties engage in discovery to investigate the circumstances surrounding the will’s preparation and execution.  In cases involving a will prepared by a lawyer, that lawyer is the one person who should surely know what the Decedent intended.   If that lawyer is a good lawyer, his or her file should contain notes regarding discussions and meetings with the client about the terms of the will.  Indeed, when a testator “cuts out” one or more family members in favor of others, a good estate planning lawyer will know that a will contest may likely arise when the testator dies and will typically insert notes in the file, confirming that he or she explained this likelihood to the testator and documenting the testator’s stated reasons for the disparate treatment.  A good estate planning attorney should also write a letter to the client, documenting the client’s decision to treat family members (or anyone else who might reasonably have been expecting to receive a bequest under the will) disparately.  The lawyer’s file will typically contain other helpful information as well, such as various drafts of a will, which may show a progression of changes from the initial meeting through execution, or changes from a prior will to the “last” will.

Does the Attorney-Client Privilege Apply in Will Contests?

Given the bounty of information a proper will file should contain, lawyers involved in a will contest typically turn immediately to the lawyer who prepared the will (the “scrivener”) and ask that he or she produce the relevant file to counsel.  What about the attorney-client privilege, though?  Doesn’t the attorney-client privilege keep secret what clients have told their attorneys, even after the client has died?  How about the attorney work product doctrine, which generally protects materials or documents prepared by counsel on behalf of their clients?  In the world outside of will contests, those privileges do present substantial hurdles to anyone seeking to access a lawyer’s file.  In the context of a will contest action, however, that file must be produced.  A recent opinion by Judge Gilman of the Bucks County Court of Common Pleas, Orphans’ Court Division, explains why.

Cohen Estate, 3 Fid. Rep. 3d 145 (O.C.  Bucks), is a will contest action in which the contestants allege that the Decedent executed his will as the result of undue influence.   The Decedent in Cohen lived with his nephew between May 2006 and his death in June 2009.  At the time he moved in with his nephew, Decedent executed a power of attorney naming his nephew as agent, with full control and authority over his assets.  Prior to executing that power of attorney, Decedent had never executed any testamentary writings.  The record revealed that Decedent’s nephew contacted and retained a lawyer to prepare three separate wills for Decedent, all of which left a “substantial bulk” of Decedent’s estate to the nephew. The disappointed family members who received little or nothing under Decedent’s will as probated argued that the Court must invalidate the will. They alleged that the nephew (1) had a “confidential relationship” with his uncle, who (2) suffered from a “weakened intellect,” and that the nephew (3) received a “substantial benefit” under the will, thereby rendering it invalid as the product of undue influence.  (We will address those three prongs of Pennsylvania’s “undue influence” standard in future blog posts.)

During the litigation, the disappointed heirs subpoenaed the scrivener’s records, but the scrivener objected to producing the file, citing the attorney-client privilege and work product doctrine.  Judge Gilman overruled those objections and ordered the scrivener to produce the file to contestants’ counsel, emphasizing that the contents of the scrivener’s file are highly relevant to the issues presented by the will contest and noting that it might well contain notes about Decedent’s “mental condition, testamentary capacity, competence and independence of thought, intent and action.”

In support of its decision, the Court cited In Re: Thevaos Estate, 10 Pa. D.&.C. 5^th 481 (O.C. Centre, 2010), which held that applying a  testamentary exception to the attorney-client privilege is proper when the deceased client may have been unduly influenced.  The Thevaos Court found that discovery of the scrivener’s file may either eliminate or affirm any concern about undue influence, and that seeing the testamentary changes made by Decedent was relevant to establishing his intent and determining whether or not he could clearly communicate that intent.

Disclosure of the Scrivener’s File Can Be In A Deceased Client’s Best Interest

The Court also turned to the Supreme Court opinion Swidler & Berlin v. United States, 524 U.S. 399 (1998), which discussed the rationale for allowing a testamentary exception to the attorney-client privilege.  In Swidler, which did not involve a will contest but which contained a lengthy discussion of the attorney-client privilege and various exceptions to the privilege, the Supreme Court noted that in the context of a will contest action the disclosure of attorney-client communications would actually benefit the deceased client, because it would shed light on his specific intent in creating his will.  The Swidler Court also cited a case from 1897 in which it held that, in the context of the testamentary exception applicable to will contest actions, the attorney-client privilege could be impliedly waived in order to fulfill the client’s intent.  See Glover v. Patten, 165 U.S. 394, 406-408 (1897).

As a secondary argument against producing any portion of the scrivener’s file, the scrivener argued that the Orphans’ Court should, at a minimum, conduct an in camera review of the file (i.e., the Judge should read the entire file himself) before ordering that its contents be produced. Judge Gilman wisely rejected that argument and stated that an in camera review was both unnecessary and inefficient because the subject matter of the subpoena was so directly tied to the facts of the will contest cause of action.  In other words, the purpose of an in camera review (a remedy granted rather infrequently by any court) is to ensure that irrelevant and possibly prejudicial information is not disclosed unless a judge first reviews the materials for their relevance. Judge Gilman concluded that the estate planning file could not conceivably contain information irrelevant to litigation involving that very estate plan.  As such, Judge Gilman essentially suggested that a Court review of the file would be an utter waste of the Court’s time.

Counsel who practice regularly in will contest matters know that the scrivener’s file is “Exhibit A” in a will contest.  Not all scriveners, however, understand the law governing will contest actions, and they often reflexively invoke the attorney-client privilege or work product doctrine when asked to produce their files.  Cohen Estate will serve as a helpful guide to all practitioners and scriveners on this important issue.

Points to Take Away

–In preparing wills, lawyers should always advise clients who wish to “cut out” family members or other potential heirs that their will is more likely to be contested. Indeed, good estate planning lawyers counsel their clients strongly against such strident moves. My colleague Margaret E.W. Sager, Esquire says that she tells clients with such desires, “No matter what good you have done during your entire life, the only thing anyone will remember or talk about after you die is that you disinherited (your son, daughter, etc).”

–For clients who have been counseled but nonetheless wish to proceed with disparate treatment, lawyers should keep detailed notes and correspondence in that clients’ file documenting (1) the testator’s stated reasons for such treatment, (2) the fact that testator has been advised of the likelihood of a will contest, and (3) that testator wished to proceed regardless of that knowledge.

–Lawyers who do not keep copious notes on these will preparation discussions as well as different drafts of wills in their files should be prepared for harsh questions and cross-examination should a will contest arise.

–Neither the attorney-client privilege nor the attorney work product doctrine will prevent the disclosure of the estate planning file in the context of a will contest, in which Decedent’s intent is the paramount issue. Under the logic of “testamentary exception,” it is in the testator’s best interest for the Court and other relvant parties to review all evidence that could shed light on his or her intentions. If the Decedent was determined to “cut out” a family member,then the lawyer’s file should be full of information documenting that desire–evidence which the Decedent would want the litigants and Court to see.

Fees, Fees, Fees: Does Pennsylvania Have a Fee Schedule for Estate Executors and Administrators?

When someone dies, beneficiaries of the estate often argue about all sorts of issues. These can range from the mundane (Who gets the antique salt and pepper shakers?) to the treacherous (Does that greedy second wife really deserve to be a beneficiary of the will?)  Even when they disagree, however, most beneficiaries tend to unify on one point—their belief that the executor and/or attorney for the executor have charged unreasonable fees.

Unlike many states, Pennsylvania does not have a published Court-approved fee schedule.  Instead, since 1983, attorneys and fiduciaries have relied to some degree upon a  fee schedule mentioned in and adopted by Judge Wood of the Chester County Orphans’ Court in the matter of Johnson Estate, 4 Fid. Rep. 2d 6 (O.C. Chest. 1983).

The Mysterious but All-Important Johnson Estate Fee Schedule

In Johnson, Judge Wood stated that a “Pennsylvania Attorney General Fee Schedule” existed, which established a graduated scale of fees the Attorney General would deem reasonable in matters involving a charitable beneficiary or interest.  Judge Wood even attached the alleged “Attorney General” fee schedule to the opinion.  Interestingly, the Pennsylvania Attorney General has denied ever since the 1983 Johnson Estate opinion that any such “Attorney General approved” fee schedule exists. Nonetheless, the legend of the Johnson Estate opinion has only grown, mainly because it has been cited repeatedly by other Orphans’ Court judges for its “fee schedule” concepts and percentages.  Interestingly enough, some of the fee categories and percentages described in the Johnson Estate opinion are essentially impossible for even lawyers to understand.  A detailed discussion of the permutations of the calculations is beyond the scope of this blog. I recommend that you review the Johnson Estate fee schedule (included below) for yourselves or consult an attorney experienced in this area of law.

Johnson Estate calculations are relevant to any Pennsylvania matter in which executors, administrators and/or their counsel are seeking fees.  What is essential to understand is that the Johnson fee schedule is a helpful guidepost in evaluating fiduciary fees and commissions, but it establishes no mandatory rules.  The fact is that Orphans’ Court Judges have tremendous discretion to approve or disapprove fees sought by fiduciaries. And once a matter has entered the court system, the fees of fiduciaries and their counsel are always subject to court approval and revision—whether or not any interested parties have objected to them.

For instance, if a fiduciary has expended extremely little effort yet the estate is large (for example, an estate with a $4 million brokerage account, only two beneficiaries, and no real estate, significant debts, or intra-family strife), then the Orphans’ Court will not likely approve a “full Johnson” fee.

A Recent Opinion Based on the Johnson Estate Fee Schedule

Recently, the Honorable Stanley R. Ott of the Orphans’ Court of Montgomery County, one of Pennsylvania’s most well-respected Orphans’ Court judges, reminded us of the limitations of the Johnson Estate opinion in His Honor’s opinion in Duhovis Estate, 2 Fid. Rep. 3d 431 (O.C. Montg. 2012).   In Duhovis, the decedent left equal shares of his estate to his four children, two of whom were named the co-executors in his will. Five days before his death, the decedent transferred his family farm to his son with whom he lived. That son prevailed in a subsequent civil suit filed by the accountants/executors of the decedent’s estate that challenged the transfer of the farm.  The account showed that the decedent’s gross estate contained $48,516.61, and proposed that the commission should total $8,696, or roughly 18% of the gross estate.

 

The son who received the family farm objected to the proposed commission, and sought to limit the commission amount to $2,425.83, or 5% of the gross estate.  The objectant relied upon the Johnson Estate schedule of fees in alleging that the accountants should receive a maximum 5% commission.

 

Judge Ott rejected the objectant’s position that the Johnson Estate opinion established a maximum fee for any matter.  He held that the “schedule, proposed by the Chester County Orphans’ Court, is merely a starting point in the determination of compensation, is not binding on this Court and should not be applied blindly.”  Judge Ott also held that the objectant hindered the estate’s administration and that the co-executors devoted “sufficient time to their fiduciary duties” to justify commissions totaling $4,850 or 10% of the gross estate. Specifically, the objectant refused to let an appraiser onto the farm to appraise the decedent’s personal property, causing one co-executor to spend hours moving items to her garage from the farm.  Further, the co-executors spent time dealing with delinquent real estate taxes on one parcel of the farmland, and they were delayed in obtaining the proceeds of an annuity because the objectant refused to supply necessary information to the insurance company.  In other words, Judge Ott did not allow the son to both force the co-executors to expend significant additional effort and then argue that they should not be compensated for that additional effort.  This is something that folks should keep in mind when they are contemplating picking a fight with a fiduciary.

The Take-Away

Judge Ott emphasized that fiduciary commissions are determined not by blindly adhering to a schedule, but by taking into account an array of factors unique to each case.  Good lawyers remind their clients continually that each case rises and falls on its own facts and circumstances.  Judge Ott’s opinion in Duhovis is a perfect example of that simple truth.

I cannot emphasize enough the need for fiduciaries and their counsel to keep accurate and contemporaneous records of their time and expenses to support their conduct and fees.  Without them, claimed fees may be slashed for lacking evidentiary support.

 

Exhibit A
Johnson Estate, 4 Fid.Rep.2d 6, 8 (O.C. Chester 1983)

COMMISSIONS
						Per Col.	Per Total
	$	00.01	to   $	100,000.00	5%	5,000.00	5,000.00
	$	100,000.01	to   $	200,000.00	4%	4,000.00	9,000.00
Executor or	$	200,000.01	to   $	1,000,000.00	3%	24,000.00	33,000.00
Administrator	$	1,000,000.01	to   $	2,000,000.00	2%	20,000.00	53,000.00
	$	2,000,000.01	to   $	3,000,000.00	1½%	15,000.00	68,000.00
	$	3,000,000.01	to   $	4,000,000.00	1%	10,000.00	78,000.00
	$	4,000,000.01	to   $	5,000,000.00	½%	5,000.00	83,000.00

 

1%	Joint Accounts	1%	P.O.D. Bonds	1%	Trust Funds
3%	Real Estate Converted with Aid of Broker	5%	Real Estate: Non-Converted	1%	Real Estate: Specific Devise

 

	$	00.01	to   $	25,000.00	7%	1,750.00	1,750.00
	$	25,000.01	to   $	50,000.00	6%	1,500.00	3,250.00
	$	50,000.01	to   $	100,000.00	5%	2,500.00	5,750.00
Attorney	$	100,000.01	to   $	200,000.00	4%	4,000.00	9,750.00
	$	200,000.01	to   $	1,000,000.00	3%	24,000.00	33,750.00
	$	1,000,000.01	to   $	2,000,000.00	2%	20,000.00	53,750.00
	$	2,000,000.01	to   $	3,000,000.00	1½%	15,000.00	68,750.00
	$	3,000,000.01	to   $	4,000,000.00	1%	10,000.00	78,750.00
	$	4,000,000.01	to   $	5,000,000.00	½%	5,000.00	83,750.00

 

½%	Regular Commission P.O.D. Bonds and Trust Funds	3½%	Transfer Joint Accounts	3½%	Assets Which Are Taxable at One Half Value
1%	Non-Probate Assets up to $1,000,000	1%	Non-Probate Assets		Joint Accounts Fully Taxable: Full Commission

Welcome to our new blog: Around the Pennsylvania Orphans’ Courts

Welcome to Around the Pennsylvania Orphans’ Courts, our new and hopefully insightful blog for both attorneys and individuals interested in fiduciary litigation matters in Pennsylvania.

Most of you presumably know that the Orphans’ Court in any given county handles litigation involving wills, trusts, estates, and guardianships. On a more light-hearted note, the Orphans’ Court judges also oversee Pennsylvania’s adoption process, and I know from speaking with them that many judges find those days among the most satisfying of their careers—presiding over a proceeding that brings a family together rather than one that often tears a family apart after the death of a parent or other loved one. Litigation in the Orphans’ Court falls within a broader category of law known as “fiduciary litigation,” because included among the parties to every Orphans’ Court action are fiduciaries—whether trustees, executors, agents under a power of attorney, guardians, or others who oversee another’s affairs.

I have been a litigator for 21 years, and I devoted the last 7 years of my practice exclusively to fiduciary litigation at Heckscher, Teillon, Terrill & Sager, the Commonwealth’s finest trusts and estates boutique firm, located in West Conshohocken, Pennsylvania. The tragic death of my dear friend and former law partner, Bill Kane (the “Kane” in “Smith Kane”) on May 29, 2012, led me to return to practice with my good friend Dave Smith. At Smith Kane, I have expanded my practice to again include commercial and bankruptcy litigation, but the vast majority of my practice remains concentrated in fiduciary litigation.

The fascinating world of fiduciary litigation—with its collision of money, death and family—generates new and interesting issues every day. In this blog, Around the Pennsylvania Orphans’ Courts, I will write about some of these issues and share some insights. In many posts, I will discuss recent opinions issued either by Pennsylvania Orphans’ Court Judges at the county level (where the real action is, and where judges often have tremendous discretion, thus dissuading appeals ) or by the appellate courts of the Commonwealth of Pennsylvania. I will analyze cases here in the same way I discuss them with my clients—as simple and logical as I can be. I believe almost every legal issue, regardless of its complexity, can be understood by anyone as long as the story is told correctly. Albert Einstein allegedly once said, “you really do not understand something unless you can clearly explain it to your grandmother,” and I share that sentiment completely.

My blog posts will be brief and will address what I find to be the critical factual and legal issues presented by any given case. I will also throw in my two cents about why the cases I discuss might be relevant to a lawyer or an individual interested or involved in fiduciary litigation.

I hope you find this blog helpful and interesting. If you like what you see, please subscribe (button at top) or revisit to read new posts. If you think someone you know might be interested in some of these issues, share the link with them.