Beneficiaries who want to change a trust’s corporate trustee may have a much harder time under a recent Pennsylvania Supreme Court decision.
The state high court held in July that the beneficiaries of a trust need court approval to remove a trustee under the Uniform Trust Act (UTA), reversing a lower court ruling that beneficiaries could modify a trust’s terms to allow them to remove and replace the corporate trustee at any time, at their discretion, without cause or judicial approval.
At issue in litigation filed by three grandchildren of the creator of a family trust was whether a trust agreement could be modified under the UTA’s Section 7740.1 such that it would give the trust beneficiaries the power to remove the trustee without court approval. This power to remove and replace is commonly referred to as a “portability clause” because it permits the trust to be “portable” from one trustee to another.
Edward Winslow Taylor established a trust in 1928 to benefit his daughter and her children. His daughter, Anna Taylor Wallace, served as co-trustee with a corporate trustee that, after a series of mergers, became Wells Fargo. Wells Fargo asked the Philadelphia County Court of Common Pleas Orphans’ Court to divide the trust into four separate and equal trusts, one for each of Wallace’s surviving grandchildren. The Orphans’ Court agreed and appointed each of the four grandchildren as the co-trustee of his or her individual trust, with Wells Fargo as corporate trustee for each.
Apparently that did not sit well with three of the grandchildren. In 2013, they asked the Orphans’ Court to modify the trust to add a “portability clause” under Section 7740.1 to give them the option to remove the corporate trustee and appoint a new one without court approval. The grandchildren did not actually seek to remove Wells Fargo as the corporate trustee at that time. Wells Fargo objected to the modification.
The Orphans’ Court sided with Wells Fargo, saying the beneficiaries first had to satisfy the rigorous grounds for the removal of a trustee under a separate section of the UTA, Section 7766, if the trust didn’t already include a trust-removal or portability provision. In 2015, the Superior Court disagreed with the Orphans’ Court and reversed that decision, concluding that Section 7740.1 clearly “contains no language excluding from its ambit the modification of trustee-removal provisions.”
On appeal to the Pennsylvania Supreme Court, Wells Fargo argued that Pennsylvania has always shown great deference to the settlor’s selection of the trustee and has never allowed trust beneficiaries to amend a trust to add a portability clause. The grandchildren countered that Section 7766 does not limit modifications to a trust agreement pursuant to Section 7740.1, including the addition of a portability clause if requested.
In reversing the Superior Court decision, the state high court pointed out that neither section contains any explicit language addressing the issue raised in this case.
Unlike Pennsylvania, other states including Iowa and Ohio have enacted modified versions of the Unified Trust Code that specifically state general modification provisions may not be used to remove or replace a trustee, noted the state supreme court. Instead, the removal and replacement of a trustee by the beneficiaries must be accomplished pursuant to more specific “removal of trustee” provisions elsewhere in those states’ statutes.
The supreme court said, under Section 7766, beneficiaries have to show the Orphans’ Court, that:
- removal serves the best interests of the beneficiaries of the trust,
- removal is not inconsistent with a material purpose of the trust, and
- the beneficiaries have identified a suitable successor trustee.
Beneficiaries also have to show that the current trustee:
- has committed a serious breach of trust,
- has demonstrated a lack of cooperation among co-trustees substantially impairing the administration of the trust,
- has not effectively administered the trust as a result of unfitness, unwillingness or persistent failures, or
- there has been a substantial change of circumstances (not including a corporate reorganization).
Any remaining doubt as to whether the power to modify terms under section 7740.1 may be used to bypass the more onerous requirements for trustee removal in section 7766 is resolved by the Uniform Law Comment related to section 7740.1, which addresses the specific issue raised in this appeal, added the Supreme Court.
Further, the UTA is Pennsylvania’s modified enactment of the UTC, which was approved and recommended by the National Conference of Commissioners on Uniform State Laws. A comment contained in the UTC states that Section 706, which corresponds to Section 7766 of the UTA, is the “exclusive provision on removal of trustees,” the state supreme court added.
By enacting Section 7740.1 of the UTA in light of this comment, “[t]he legislative intent with respect to the interplay between sections 7740.1 and 7766 is clear—the scope of permissible amendments under section 7740.1 does not extend to modifications to add a portability clause permitting beneficiaries to remove and replace a trustee at their discretion; instead, removal and replacement of a trustee is to be governed exclusively by section 7766,” it concluded.
The take away from this decision is that unless and until the Pennsylvania legislature decides to change the existing law on trustee removal, the bar for trustee removal in Pennsylvania will remain high, which makes it all the more important that scriveners adequately address the inclusion of portability provisions in trusts prior to the date upon which they become irrevocable.