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.”
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:
- Removal must be requested by all of the qualified beneficiaries;
- Removal best serves the interests of all beneficiaries;
- Removal is not inconsistent with a material purpose of the trust; and
- 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.”
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.