Lee Allman, J.D., CFP®, LL.M.
Attorneys, trust companies, banks and beneficiaries have been anxiously waiting for the Commonwealth of Pennsylvania Supreme Court’s ruling in the Edward Winslow Taylor (“EWT”), slip op., No: 15 EAP 2016, (Pa. Supreme Ct. 7-19-2017) matter. Now the wait is over and the Court has spoken: beneficiaries cannot modify a trust adding corporate trustee removal provisions.
The issue in EWT was whether beneficiaries of a trust could modify its terms to add a “portability clause” permitting them to replace a corporate trustee at any time, at their discretion, without cause or judicial sign off. A “portability clause” permits a settlor or beneficiary to change the corporate fiduciary named in a trust, at any time without judicial intervention, causing the trust to be “portable” from one trustee to another. The Supreme Court of Pennsylvania ruled no reversing the Superior Court’s decision and siding with the trial court’s (a.k.a. Orphans’ Court) decision.
The problem arises because some trusts were written long ago when corporations – namely banks – were smaller and delivered more personalized customer service. The grantor/settlor likely knew the small bank staff and entrusted them to take good care of his or her beneficiaries; therefore, he or she would not see the need to include a modification clause. As banks have become major corporations and gobbled up small banks, beneficiaries find themselves frustrated by procedure and lack of attention. “Giant Bank” does not know nor care if a beneficiary needs to draw funds to cover cancer treatments. Calls go unanswered and frustrations mount. Without being able to remove irresponsible or indifferent trustees, the trust is essentially held at ransom by the trustee.
To add insult to injury, beneficiaries who fight and lose, do so at their own expense. In addition to trustees being able to assess outrageous fees as they see fit, trustees can and do tap the resources of the trust itself to pay for legal fees they incur while beneficiaries fight for their own money. It’s a vicious cycle – not unlike the reasoning for this recent court decision.
The Court focused on the interplay of two different but related statutes: 20 Pa. C.S.A.7740.1 -Modification or Termination of Noncharitable Irrevocable Trust by Consent - UTC 411; and 20 Pa. C.S.A. 7766 – Removal of a Trustee. Specifically, Section 7740.1 permits modification of trust if the modification is not inconsistent with a material purpose of the trust, while its cousin, Section 7766 provides the framework for removal of a trustee. The Court found the two provisions to be in conflict by looking at the intent behind the entire Uniform Trust Code (which includes both statutes) along with some comments by the drafters of the UTC.
Siding with the corporate fiduciary, the Court agreed that permitting such a modification of a trust would circumvent the purpose of section 7766, hence making 7766 useless. The Court rejected the beneficiaries’ argument that the provisions were not in conflict because they each addressed two distinct issues: (1) flexibility in replacing a corporate trustee at a future time (7740.1); or (2) allowing a court to replace a trustee immediately based upon certain facts and circumstances (7766). As the Court found the sections at odds and unclear when read together, the rules of statutory construction applied.
After further discussion on the statutes, legislative history and comments and review of similar statutes from other jurisdictions, the Court held that scope of 7740.1 does not allow the modifications of a trust to permit removal and replacements of a trustee. And get this, even if all of the parties including the trustee agree to do so, a modification is not permitted.
The Court in EWT did not address process of removal and replacement under a Nonjudicial Settlement Agreement under section 7710.1, so if all the parties agree, then an NJSA would still be appropriate to change trustees. The parties just cannot modify the trust to provide this mechanism without court approval, so says EWT. Unhappy beneficiaries are not entirely out of options; this ruling just makes those options fewer.
There you have it. As to trustee removal when the trustee refuses to walk away, the remedy for unhappy beneficiaries and co-trustees in Pennsylvania is section 7766 and the leading case In Re: Estate of McKinney, 67 A.3d 824 (Pa. Super. 2013) provides the framework for trustee removal. For beneficiaries contemplating a change, 7740.1 does not provide the answer, but sections 7710.1 and 7766 can continue to be utilized to warrant a trustee change under the right circumstances. Please feel free to contact me if you have any questions concerning your rights as beneficiaries.