Today, portability clauses in trust instruments are relatively common and for good reason. Individuals die and corporate fiduciaries merge, consolidate, acquire, and occasionally close. Likewise, some jurisdictions are simply more advantageous than others. But, we know that the inclusion of portability clauses in trust instruments hasn’t always been the norm. The Uniform Trust Code, however, contemplates situations where it may make sense to change trustees and many states that have not adopted the UTC have also come to the same realization through their own trust codes, statutes, or common law.
While the UTC and various jurisdictions have contemplated a number of situations that may call for a change in trustees absent a provision in the trust instrument permitting a change, in In re McKinney, the Superior Court of Pennsylvania for the first time interpreted that provision in Pennsylvania’s Probate, Estates, and Fiduciaries Code that allows a trustee to be changed or removed due to a “substantial change of circumstances.”
The scenario that sparked the litigation is an increasingly familiar one – the beneficiaries wanted to change the trustee of several trusts to a limited purpose Delaware trust company.
The trial court blocked the move, but the appellate court sent the case back to the trial court for further consideration. The appellate court recognized that there are multiple grounds upon which a trustee may be removed, with “failure to adequately administer the trust” as the “main basis for trustee removal.” The other potential basis for removal for the appellate court’s purposes was for the person seeking removal to show by clear and convincing evidence that (1) the removal serves the beneficiaries’ best interests; (2) the removal is not inconsistent with a material purpose of the trust; (3) a suitable successor trustee is available; and (4) a substantial change in circumstances has occurred. If all four elements are met, a trial court may remove the trustee.
The trial court impermissibly imposed another requirement – a showing that the current trustee administered the trust in a way that “undermined” or “harmed” the beneficiaries’ interests. Not so. To take advantage of the second path for trustee removal, no showing of fault is necessary.
Beneficiaries’ Best Interests
Setting aside that impermissible requirement imposed by the trial court, the appellate court went on to provide guidance on ascertaining the “beneficiaries’ best interests.” Pennsylvania courts should consider the following factors 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;
- personal relationship with beneficiaries;
- settlor’s intent as expressed in the trust document; and
- any other material circumstances.
None of these factors outweighs the others.
Material Purpose of Trust
The appellate court also considered whether the designation of a trustee is a material purpose of a trust. It determined that designation of an individual as a trustee is more “material” than designation of a corporate fiduciary. Interestingly, the trial court determined that a material purpose of the trusts was that they be governed by a Pennsylvania institution. The appellate court determined that, had the settlors wanted the trusts to be administered by Pennsylvania banks, they would have stated so. Significant to the conclusion was that the settlors chose the law to govern the trusts (Pennsylvania), but did not then specifically require Pennsylvania trustees to administer the trusts.
Substantial Change in Circumstances
Finally, the appellate court addressed the “substantial change in circumstances” prong. It concluded that a merger or corporate reorganization does not alone constitute a change in circumstances. However, the court determined that a string of mergers over several years, resulting in the loss of trusted bank personnel, coupled with movement of a family between states, constitutes a substantial change in circumstances.
There are some fascinating subpoints in this opinion which highlight potential difficulties in convincing a trial court to permit the growing trend of moving trusts to other states, such as Delaware. For example, although the Pennsylvania trial court declined to find that the successor was not suitable, it expressed reservations regarding the successor’s experience with Pennsylvania trust law. The appellate court expressed skepticism on this point because “Pennsylvania trust law now poses no distinct peculiarities setting it apart from that of other states, and requiring highly specialized and localized knowledge.” On remand, the trial court was expressly required to determine whether the proposed successor is suitable.
Another fascinating aside by the appellate court is a recommendation to practitioners that a “prudent drafter” of a trust should “specifically define the beneficiaries’ best interests as the settlor sees them in the event of a petition for a no-fault trustee removal.” What might that look like?