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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.
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.
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.
— 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.
[i] �� PEF Code § 7766 provides that:
(a) Request to remove trustee; court authority. – The settlor, a cotrustee or a beneficiary may request the court to remove a trustee or a trustee may be removed by the court on its own initiative.
(b) When court may remove trustee. –The court may remove a trustee if it finds that removal of the trustee best serves the interests of the beneficiaries of the trust and is not inconsistent with a material purpose of the trust, a suitable cotrustee or successor trustee is available and:
- The trustee has committed a serious breach of trust;
- Lack of cooperation among cotrustees substantially impairs the administration of the trust;
- The trustee has not effectively administered the trust because of the trustee’s unfitness, unwillingness or persistent failures; or
- There has been a substantial change of circumstances. A corporate reorganization of an institutional trustee, including a plan of merger or consolidation, is not itself a substantial change of circumstances.