In a highly anticipated opinion, the Pennsylvania Supreme Court has prevented an end around the no fault removal provision of Uniform Trust Code (“UTC”) Section 706.  As we discussed in “An ‘End Around’ Trustee Removal,” UTC Section 706 provides that a court may remove a trustee if removal is requested by all of the qualified beneficiaries and the court finds that removal “best serves the interests of all of the beneficiaries and is not inconsistent with a material purpose of the trust.”  In Edward Winslow Taylor, Irrevocable Trust, only three of the four beneficiaries wanted to remove the Trustee, Wells Fargo.  Since all of the beneficiaries did not agree to remove Wells Fargo as the Trustee, they could not use the no fault removal provision of UTC Section 706.  So, the beneficiaries came up with an end around.  They filed a petition in the Court of Common Pleas of Philadelphia County to modify the trust agreement using Pennsylvania’s version of UTC Section 411 in order to add a provision to the trust agreement which would permit a simple majority of the beneficiaries to remove the Trustee.  Their petition to modify the trust agreement was denied by the Court of Common Pleas, and the beneficiaries appealed to the Superior Court of Pennsylvania, an intermediate appellate court, which sided with the beneficiaries and blessed the modification.  Wells Fargo then appealed to the Pennsylvania Supreme Court, and, not surprisingly, the Pennsylvania Bankers Association filed an Amicus Curiae brief in support of reversal of the Superior Court’s decision.

A Win for the Trustees

On appeal, in a unanimous decision, the Pennsylvania Supreme Court reversed the decision of the Pennsylvania Superior Court and set aside the trust modification.  The Court held that allowing the beneficiaries, through modification of the trust, to do something which UTC Section 706 expressly prohibits (that is, removal of a trustee without court approval and unanimous consent of all beneficiaries) would circumvent the very purpose of UTC Section 706 and render it useless.  The Court ruled that UTC Section 706 is the exclusive provision for removal of a trustee and that beneficiaries cannot use the modification statute to add a provision to a trust agreement which would permit the removal of a trustee.

The Problem

A significant number of trust documents which were drafted and executed before the 1990’s do not include a “portability provision” which gives the beneficiaries the power to remove and replace a trustee.  Portability provisions only became widely prevalent in the past few decades.  Many older trust agreements were actually prepared by the very banks which were named as the Trustee, or the banks provided specific language to the grantor’s attorney to include in the trust agreement.  The banks obviously had no incentive to include a clause which would provide the beneficiaries with the power to remove and replace the bank.  Likewise, many grantors, those who established trusts, typically had no incentive to include a clause providing the beneficiaries with the power to remove and replace the trustee.  When these trusts were drafted decades ago, many banks were small businesses which delivered a high level of customer service.  The grantors typically had personal relationships with the bank employees in the trust department and other bank staff.  As the banking industry has experienced a tidal wave of mergers and acquisitions over the past few decades, the grantor’s small bank has long since been gobbled up, and trust beneficiaries find themselves frustrated with the lack of attention and personal service.  Indeed, as the Pennsylvania Supreme Court itself noted in its opinion, the original trustee of the Edward Winslow Taylor Trust, the Colonial Trust Company in Philadelphia, through a series of mergers became Wells Fargo, the 3rd largest bank in the United States headquartered in San Francisco.

A Way Forward?

So, does this court opinion mean that beneficiaries are helpless in the face of a trustee which is not responsive or meeting expectations?  No.  Can the trustee hold the trust at ransom?  No.  There are alternatives to free a trust from an indifferent or incompetent trustee.  If you have questions or concerns about your Trustee, an attorney with deep experience in trust law may be able to help.

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It is not uncommon for tensions to develop between a trustee and trust beneficiaries.  In such cases, trust beneficiaries may want to remove a trustee and appoint a different trustee.  Some causes of beneficiary complaints include poor trustee communication, poor investment results, decisions about the distributions of trust income and principal, and the failure to report and account to trust beneficiaries, among others.

In removal proceedings, at one end of the spectrum is a trustee who prudently carries out its fiduciary duties with careful judgment and beneficiaries who are impatient and foolish.  At the other end of the spectrum is a trustee who breaches its fiduciary duties to prudently administer the trust, allows the trust assets to diminish or engages in self-dealing.  Cases involving either end of the spectrum are typically relatively simple for a court to decide.  In the first example, a beneficiary’s petition to remove and replace the trustee is denied.  In the second example, the trustee is removed (and, depending on the nature of its breaches, may be subject to far worse).  In between the two ends of the spectrum are many cases which are much more challenging for a court to determine.

Before the promulgation and adoption of the Uniform Trust Code by a majority of the states, removing a trustee was largely a matter of a Court applying common law to a particular petition to remove a trustee.  Typically, common law required some act of egregious conduct before removing a trustee.  Now, in the absence of a provision in the trust instrument regarding trustee removal, the Uniform Trust Code provides a definite standard to use when a Court determines whether to remove a trustee when the Trustee has not breached its fiduciary duties (referred to as “No Fault Removal,” which we have previously looked at here).  Uniform Trust Code Section 706(b)(4) provides that a court may remove a trustee if “[1] removal is requested by all of the qualified beneficiaries, and [2] the court finds that removal of the trustee best serves the interests of all of the beneficiaries and [3] is not inconsistent with a material purpose of the trust. . . .”  The requirements in [1] and [2] are straight forward.  The requirement in [3] that removal must not be inconsistent with a material purpose of the trust begs the question, “What is a material purpose of the trust?”  The Kansas Court of Appeals recently weighed in on this question.

MATERIAL PURPOSE

A finding of [a material] purpose generally requires some showing of a particular concern or objective on the part of the settlor.

In the case of In re Trust of Hildebrandt, the beneficiaries of a trust petitioned a Kansas court to remove a law firm which was serving as the trustee of the trust and replace the law firm with the beneficiary’s niece.  The law firm trustee challenged its removal.  On appeal to the Kansas Court of Appeals, the central issue was whether the appointment of the law firm as the trustee of the trust constituted a “material purpose” of the trust.  The law firm argued that their appointment as trustee did, in fact, constitute a material purpose of the trust, while the trust beneficiaries argued that the appointment of the law firm did not constitute a material purpose of the trust.

In finding that the appointment of the law firm did not constitute a material purpose of the trust, the court cited the Restatement (Third) of Trusts: “A finding of [a material] purpose generally requires some showing of a particular concern or objective on the part of the settlor.”  The law firm trustee argued that the concern and objective of the settlor in appointing the law firm a trustee was to ensure administration by an independent, third-party trustee (rather than a family member as the trust beneficiaries desired).

In looking at the specific language of the trust instrument, the Kansas Court of Appeals found nothing which expressly indicated why the settlor chose the law firm as the trustee.  If anything, the evidence suggested that the idea of appointing the law firm as the trustee was not the settlor’s idea but was in fact the idea of the attorney in the law firm who drafted the instrument.  Therefore, the court found that the law firm was unable to establish that its appointment as trustee constituted a material purpose of the trust, removed the law firm, and appointed the niece as trustee.

TAKE AWAY

The Uniform Trust Code’s no fault removal statute gives trust beneficiaries more tools to seek the removal of a trustee and appointment of a new trustee.  In no fault removals, it is critical to examine the specific language in the trust instrument in order to determine what the material purposes of the settlor were when he or she appointed a specific trustee.  Specifically, it is necessary to determine whether the settlor had a particular concern or objective which led the settlor to appoint the trustee which the beneficiaries want to remove.

Uniform Trust Code Section 706 permits the removal of a trustee under specific circumstances, such as (1) commission of a serious breach of trust or (2) where removal is requested by all of the qualified beneficiaries, but only if a court finds that removal of the trustee best serves the interests of all of the beneficiaries and is not inconsistent with a material purpose of the trust.  This last circumstance, (2), is known as “no fault removal” because it permits removal of the trustee even though the trustee has not committed a breach of trust.  However, no fault removal requires all of the qualified beneficiaries to agree to request the removal.  (We have previously looked at a case out of Pennsylvania, In Re McKinney, in which the court applied the no fault removal provision to remove a trustee.)

But, assuming that a trustee has not committed a breach of fiduciary duty, what if all of the qualified beneficiaries do not agree to request removal of the trustee.  Do trust beneficiaries have any other avenues to remove a trustee?

EDWARD WINSLOW TAYLOR, IRREVOCABLE TRUST

In an “end around” Uniform Trust Code Section 706, the beneficiaries in another case out of Pennsylvania, used the trust modification provision of Uniform Trust Code Section 411 to remove a trustee.  Uniform Trust Code Section 411 provides that a trust may be modified upon consent of the beneficiaries if a court concludes that modification is not inconsistent with a material purpose of the trust.

In Edward Winslow Taylor, Irrevocable Trust, three of the four beneficiaries of a trust established in 1928 brought suit to modify the trust agreement.  The 1928 trust agreement did not contain a clause which provided the beneficiaries with the power to remove the trustee, who at the time of suit was Wells Fargo.  In their suit, the beneficiaries sought to modify the trust to add a trustee removal provision.  In an opinion handed down on September 18, 2015, the Superior Court of Pennsylvania, an intermediate appellate court, granted the beneficiaries’ request to modify the trust agreement and a trustee removal provision was added which gave the beneficiaries the power to remove the trustee.

STAY TUNED

Wells Fargo has appealed the decision of the Superior Court.  On April 12, 2016, the Supreme Court of Pennsylvania granted Wells Fargo’s Petition to Appeal.  In a possible tip of its hat, the Supreme Court’s Order granting the Petition of Appeal states that the issue presented is “whether the Superior Court erred in holding that trust beneficiaries may circumvent the requirements for removal of a trustee in [Pennsylvania’s trustee removal statute] by amending the Trust under[Pennsylvania’s trust modification statute].”  By using the verb “circumvent,” the author of the Supreme Court’s Order granting Wells Fargo’s Petition to Appeal may have tipped his or her hat that the decision of the Superior Court is likely to be reversed.

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No fault removal statutes begin a power shift. Trust beneficiaries who are faced with lack of personal service, high fees, and unsatisfactory trust administration now have a powerful tool to tip the scale.

Traditionally, it has been difficult to remove a trustee unless the trust agreement provides that the beneficiaries have the power to remove the trustee.  In the past, where the trust agreement does not provide the power to remove a trustee, beneficiaries would have to prove that the trustee was at fault or breached a fiduciary duty.

The “No Fault” removal provision of the Uniform Trust Code, now enacted in 31 states and the District of Columbia, provides beneficiaries with a powerful tool to remove a trustee where the trust agreement does not provide the power to remove and where the trustee is not at fault.  Under Section 706 of the Uniform Trust Code, a court may remove a trustee if “removal is requested by all of the qualified beneficiaries, the court finds that removal of the trustee best serves the interests of all of the beneficiaries and [removal] is not inconsistent with a material purpose of the trust, and a suitable cotrustee or successor trustee is available.”

CASE STUDY

In a recent case, In Re McKinney, a Pennsylvania appellate court used the no fault removal provision in Pennsylvania’s version of the Uniform Trust Code to remove a trustee.  Donald McKinney and his wife, Katherine, residents of Pennsylvania, created two trusts for the benefit of their daughter, Jane, and Jane’s four children.  Donald appointed the Pennsylvania Bank and Trust Company as trustee of one trust, and Katherine appointed Pennbank as trustee of the other trust.  Through various bank mergers, Pennsylvania Bank and Trust Company and Pennbank became PNC Bank.

Jane and her children wanted to remove PNC Bank as the trustee of both trusts and appoint SunTrust Delaware Trust Company, which is based in Virginia where Jane and her four children live, as the trustee.  Neither trust gave Jane or her children the power to remove the trustee and PNC was not at fault; that is, PNC Bank had not breached a fiduciary duty.  Jane and her children asked PNC Bank to voluntarily resign, but PNC Bank refused.  So Jane and her children went court to remove PNC.  PNC filed an objection and requested that PNC remain the trustee of both trusts and that the court award PNC all of its attorney fees incurred in responding to the petition to remove.

Trial Court Decision

The trial court denied Jane’s petition to remove PNC Bank as the trustee and awarded attorney fees to PNC Bank.  The trial court held that in order to remove PNC Bank, Jane was required to show that PNC Bank administered the trust in a way that “undermined” or “harmed” the beneficiaries’ interests; in essence, the trial court required that Jane prove that PNC was at fault.

Appellate Court Weighs In

Jane appealed and a Pennsylvania appellate court reversed the ruling of the trial court, including the award of attorney fees, and removed PNC as the trustee.  The appellate court held that requiring a showing of fault would undermine the intent of the no fault trustee removal provision, and that the trial court erred in requiring a showing of fault before removing PNC Bank.

So, if a beneficiary does not have to prove fault in order to remove a trustee, what is the standard a court should use when applying the no fault removal provision?  Based on the language of Uniform Trust Code section 706, there is a four-part test:

  1. Removal must be requested by all of the qualified beneficiaries;
  2. Removal best serves the interests of all beneficiaries;
  3. Removal is not inconsistent with a material purpose of the trust; and
  4. A suitable successor trustee is available

Parts (1) and (4) are relatively straightforward.  In McKinney, the Pennsylvania appellate court invested most of its analysis on parts (2) and (3).

(2) Does removal best serve the interests of all beneficiaries?

In analyzing part (2) of the test, the Superior Court listed a number of factors that should be considered in order to determine whether a trustee best serves the interests of the beneficiaries: personalization of service, cost of administration, convenience to the beneficiaries, efficiency of service, personal knowledge of the beneficiaries’ financial situations, location of the trustee as it affects trust income tax, experience and qualifications of the trustee, personal relationships between the trustee and the beneficiaries; the settlor’s intent as expressed in the trust document; and any other material circumstances.

The Court held that Jane and her children proved by clear and convincing evidence that removal would best serve the interests of the beneficiaries and focused on a few key facts: (1) because of successive mergers, Jane and her children were no longer receiving the personal service that they once enjoyed when the initial trustees were appointed; (2) because none of the beneficiaries still lived in Pennsylvania and because they had an existing relationship with SunTrust which was knowledgeable of the family’s financial situation and was close in proximity to the beneficiaries, the beneficiaries would have a stronger connection with SunTrust as the trustee than PNC Bank.

(3) Is removal inconsistent with a material purpose of the trust?

In analyzing part (3) of the test, the Superior Court considered whether the appointment of a particular trustee is a material purpose of a trust.  The Court determined that appointment of a particular trustee certainly can be a material purpose of a trust and that some deference should be given to the Settlor’s choice of trustee.  However, in McKinney, Donald and Katherine’s choices of trustees had long ago been merged and ceased to exist; through various mergers, acquisitions and name changes, the Pennsylvania Bank and Trust Company became Pennbank which became Integra National Bank North which became Integra Bank which became National City Bank of Pennsylvania which became National City Bank which ultimately became PNC Bank, the current trustee of both trusts.  As a result, the court ruled that the designation of a corporate trustee was not a material purpose and held that “There is no evidence that the settlors ever even contemplated [PNC Bank] serving as trustee. When the chosen trustee no longer exists, the only material purpose that can be served through designating a trustee is that the trustee effectively administers the trusts. Where both the trustee and the proposed successor trustee are qualified to serve that purpose, we will not find that removal violates a material purpose of the trust.”

LESSONS LEARNED?

So, what lessons might be learned from the application of the no fault removal provision in McKinney?  Traditionally, the difficulty of removing a trustee tipped the balance of power between trustees and beneficiaries in favor of the trustee.  No fault removal statutes begin a power shift.  Trust beneficiaries who are faced with lack of personal service, high fees, and unsatisfactory trust administration now have a powerful tool to tip the scale.  When confronted with a no fault removal statute, many trustees may be more willing to resign rather than contest its removal in court and potentially, as in McKinney, be on the hook for attorney fees and expenses incurred in the process.  A no fault removal statute may also begin a period of increased market competition between corporate trustees who are interested in increasing assets under management.  Ultimately, by shifting the balance of power back towards beneficiaries and increasing market competition, a no fault removal statute may lead to more prudent trust administration and a higher standard of service, both of which are good news to beneficiaries.