Apparently, nothing is sacred. In yet another opinion that chips away at long standing fiduciary principles, the Pennsylvania Superior Court issued an opinion that seems to adopt no fault trustee removal in Pennsylvania.
In re McKinney Trusts, 67 A.3d 824 (Pa. Super. 2013) is the vehicle of change. In the McKinney opinion, the Superior Court framed its charge as being "called upon here to assess the interplay between the contemporary world of corporate banking and Pennsylvania's law of trusts." In the words of Bette Davis, "fasten your seatbelts; it's going to be a bumpy ride!" A bumpy ride indeed!
Relying on 20 Pa.C.S.A. 7766(b)(4), the McKinney Court determined that a trustee may be removed based upon a "substantial change in circumstance", even in the absence of fault or negligence.
Prior to the passage of the Uniform Trust Act ("UTA"), a person seeking removal of a trustee was required to show fault or negligence on the part of the trustee. Those concepts remain in the UTA and are embodied in 7766(b)(1)-(3). Section (b)(4) was added to provide for removal when a substantial change in circumstances has occurred; however, a substantial change in circumstances alone will not suffice to remove a trustee. Indeed, the exact language of 7766(b)(4) is as follows:
(4) there has been a substantial change of circumstances. A corporate re-organization of an institutional trustee, including a plan of merger or consolidation, is not itself a substantial change of circumstances.
The Comments to Section 7766(b) are also instructive.
A trustee may be removed for untoward action, such as for a serious breach of trust, but the section is not so limited. A trustee may also be removed under a variety of circumstances in which the court concludes that the trustee is not best serving the interests of the beneficiaries. The term “interests of the beneficiaries” means the beneficial interests as provided in the terms of the trust, not as defined by the beneficiaries. See Section 103(8). Removal for conduct detrimental to the interests of the beneficiaries is a well-established standard for removal of a trustee.
The Comments pay tribute to the settlor's intent, which has been the long-standing foundation of trust law and trust interpretation in this Commonwealth. Moreover, a plain reading of the Section and the Comments would lead one to conclude that while "fault" may no longer be necessary, there is still a requirement that the trustee is doing something wrong (untoward or detrimental) and, when deciding if the trustee is doing something wrong, the Court must look to the document, not the beneficiaries, when drawing that conclusion.
Indeed, as part of its analysis, the Crawford County Orphans' Court specifically found that the beneficiaries failed to show harm due to the trustee's management of the trusts. With such a finding, one would conclude, as the Crawford County Court concluded, that the requirements of 7766(b)(4) and Comments thereto were not met and that a petition to remove a trustee should be dismissed.
Our Superior Court felt otherwise. In this "first instance" of interpretation of section 7766(b)(4), the Superior Court relied heavily on other jurisdictions (Connecticut, Missouri and Utah) and essentially interpreted the section as providing for no fault trustee removal. The Superior Court noted that "[t]hese [other state] courts uniformly have found that implicit in the best interests analysis is a comparison between the current trustee and the proposed successor trustee". This is an interesting statement because neither the statute nor the comments thereto reference or suggest a comparison of the existing trustee to its proposed successor.
The Superior Court also stated that "[w]hat is not required of [beneficiaries] under a cause of action pursuant to Section 7766(b)(4), but was considered by the trial court in this case, is a showing that the current trustee had administered the trust in a way that "undermined" or "harmed" the beneficiaries' interests." This is an interesting statement as well, given the Comments which direct one's analysis both to the document naming the trustee and to the concept of harm to the beneficiaries.
The Superior Court then went on to list the factors that "courts should consider …when determining whether a current trustee or a proposed successor trustee best serves the interests of the beneficiaries:
personalization of service; cost of administration;
convenience to the beneficiaries;
efficiency of service;
personal knowledge of trusts’ and beneficiaries’ financial situations;
location of trustee as it affects trust income tax;
experience; qualifications; personal relationship with beneficiaries;
settlor’s intent as expressed in the trust document; and
any other material circumstances.
Settlor's intent (listed 7th and second to last in this list) now seems to be relegated to a position of ignominy. The Court expressly noted that "[n]o one factor in this nonexhaustive list will outweigh the others" and that a trial court is to consider these factors on a "case-by-case basis."
The following facts and factors bear mentioning:
The trust document did not contain a portability clause.
Superior Court found that "…had settlors desired that the trusts be administered by Pennsylvania banks, they would have included that requirement in the trusts explicitly. Indeed, the settlors did specify that the trusts must be governed by Pennsylvania law, but did not indicate that the trustees must be Pennsylvania banks."
The request was to appoint a successor who did not have trust powers in the Commonwealth. The trial court was persuaded that a material term of the trust was that it be governed by a Pennsylvania institution. The Superior Court disagreed.
The Superior Court denied, without citation to any case law, the trustee's "right" to seek payment of its attorneys' fees from trust assets. There was no discussion of prior, long established law that a trustee has an affirmative duty to uphold the terms of a trust and is, therefore, entitled to having its fees paid from trust assets. Henning Estate, 9 Fiduc. Rep. 2d 286 (Allegheny 1989)(citing Martin Estate, 36 A.2d 786, 349 Pa. 255 (1944) and Ryan Trust, 2 Fiduc. Rep. 61 (Delaware 1979).
This case was remanded back to Crawford County for a definitive finding as to the suitability of the proposed successor to serve as successor trustee.
Until our Pennsylvania Supreme Court passes upon 20 Pa.C.S.A. 7766(b)(4), there are some areas of concern for the fiduciary and the practitioner. Greatest among those concerns is the degradation of the supremacy of settlor's intent and a lack of appreciation for the role and risk undertaken by the fiduciary. This case seemingly shifts the power to the beneficiary who, dare we say it, is often quick to look for a more favorably inclined trustee.
The Superior Court mentioned that it wanted to address the contemporary landscape of trust law, but to do so, we need to explore the contemporary landscape of trust administration as well. Every day in this Commonwealth, in a society who worships at the feet of "more", the corporate fiduciary faces down countless requests for discretionary distributions and must deny beneficiaries (who the settlor denied, typically with good reason) unfettered access to trust funds. Now those requests will be accompanied by the subtle, and sometimes not so subtle, threat of removal. Is that what a settlor wanted when he or she established a trust? Has that threat just been made more plausible? When the money runs out, will the trustee face surcharge because it didn't save us from ourselves?
Those are questions for another day. For now, when analyzing possible removal options, the factors enumerated in McKinney should be reviewed and addressed. If a client wants his or her trust to stay in Pennsylvania and be handled by a Pennsylvania fiduciary, it had better be expressly stated in the document.