In 2010, the McKinney Family sought removal of the Corporate Trustee (PNC Bank) of two trusts that had been created by the family. On their behalf, the author of the article filed in Crawford County a Petition to Remove Trustee under Section 7766 of the Probate Estates and Fiduciaries Code claiming that there had been a substantial change of circumstances. After losing the case in the Lower Court, counsel took an appeal to the Superior Court and in an Opinion by Justice David N. Wecht, the Superior Court reversed the Lower Court, directing that the bank be removed as the Trustee and remanding for the Lower Court to determine the suitability of the proposed Successor Trustee. See In re McKinney 67 A3d 824 (Pa. Super, 2013). After remand, the Lower Court approved the proposed Successor Trustee and the McKinney family has a new Corporate Fiduciary in place.
When Pennsylvania adopted the Uniform Trust Code (“UTC”) in 2006, many changes were made to trust law in Pennsylvania. Previously, the removal of a trustee was governed by 20 PA, C.S.A. §7121 which incorporated the grounds for removal of the personal representative found at 20 PA C.S.A. §3182. That section of the Probate Code, which had been law for decades, essentially required a determination of fault or misdeed on the part of the trustee in order for the trustee to be removed. When Pennsylvania adopted the Uniform Trust Code, it provided for fault bases to remove trustee – a serious breach of trust, lack of cooperation among co-trustees that substantially impairs the administration of the trust or the trustee being unable to effectively administer the trust because of unfitness, unwillingness or persistent failures. These fault based provisions, although not identical with prior law, certainly are substantially similar and did not remarkably change the requirements for the removal of a trustee. However, through §7766 b(4) the Legislature added a new ground not previously found in Pennsylvania law – that there has been a substantial change in circumstances.
In additional to needing to establish a substantial change in circumstance (or any of the fault provisions described above), in order to remove a trustee under the UTC as adopted by Pennsylvania at §7766, a party seeking removal must also establish that removal of the trustee:
- Best serves the interest of the beneficiaries of the trust
- It is not inconsistent with the material purpose of the trust
- A suitable successor trustee is available
In its McKinney Decision, the Superior Court provided guidance not only as to what constitutes a “substantial change of circumstances” but also explained what “best serves the interest of the beneficiaries” and what is “not inconsistent with a material purpose of a trust”. The Lower Court did not made a determination of the suitability of the proposed Successor Trustee because it found that the other requirements for removal under §7766 had not been met. Therefore, the Superior Court did not make any pronouncements with regard to the requirements for the suitability of a successor trustee. That issue alone was remanded to the Lower Court for determination so the McKinney Appellate Decision does not provide any guidance on that subject.
THE FACTS OF McKINNEY
As the case began, the McKinney family had eight substantial accounts with PNC. These accounts were either custodial or trust accounts. Six of the accounts were governed by documents which contained portability clauses that permitted the beneficiaries to terminate the relationship with PNC and appoint a successor. As the result of that circumstance, the McKinney family exercised their rights under the portability clauses and had the six accounts transferred to SunTrust Delaware for further administration pursuant to the terms of the applicable Agreements. Contemporaneously, the McKinney Family asked PNC to voluntarily resign as Trustee of the two remaining trusts. PNC refused.
The first trust that was left with PNC was a testamentary trust created under the Will of Donald L. McKinney, Jane McKinney’s father. The initial Trustee of this trust was the Pennsylvania Bank and Trust Company. Through a series of mergers, Pennsylvania Bank and Trust became Penn Bank which then became Integra National Bank North, then Integra Bank, then National City Bank of Pennsylvania, then National City Bank, then PNC Bank.
The second trust at issue was the Jane McKinney Descendants’ Trust which was created by Jane McKinney’s mother on October 17, 1989. The Trustee designated in the Trust Agreement was Penn Bank and then pursuant to the mergers described above, ultimately became PNC Bank.
Although Jane McKinney’s family had been among the founders of the Pennsylvania Bank and Trust Company and had lived for many generations in Northwestern Pennsylvania, Jane had moved from Pennsylvania in 1964, returning for visits but never again living there. At the time of the hearing, she was living in the Hampton Roads area of Virginia and all four of her children, who all joined in the Petitions for Removal, similarly lived there and none of them had ever lived in Northwest Pennsylvania.
Before the Lower Court, Jane McKinney argued for the removal of PNC and the appointment of SunTrust for the following reasons:
- The family no longer had ties to Northwestern Pennsylvania but rather resided in the Hampton Roads area of Virginia
- Because of an inheritance Jane had received from her recently deceased mother, her financial planning and estate planning needs had substantially changed
- There had been a turnover of staff within PNC such that the bank representatives handling the accounts with whom she had had long standing relationships all no longer worked with the Bank
- It was beneficial for there to be one entity coordinating all of her investments and planning, rather than having the six accounts held at one institution and the remaining two accounts continuing to be held by PNC
SUPERIOR COURT DECISION
In its Decision, the Superior Court provides analysis of the meaning of best interests of the beneficiaries, the material purpose of the trust and substantial change of circumstances. These terms have not been previously interpreted by an appellate court in Pennsylvania and therefore the Superior Court’s Decision provides great guidance to practitioners going forward.
The term “best interests of a beneficiary” is defined at §7703 of the Fiduciary Code. That section defines interests of the beneficiary to be “the beneficial interest provided in the trust instrument”. The UTC commentary goes on to state that beneficial interest is not defined by the beneficiaries. The Superior Court explains that this means the best interests are defined pursuant to the provisions of the trust agreement not the subjective determinations of the beneficiaries. After examining the cases from other jurisdictions that addressed the issue, the Superior Court found that the following factors shall be considered in determining whether a current trustee or proposed successor trustee best serves the interest the beneficiaries:
- Personalization of service
- Costs of administration
- Convenience to the beneficiaries
- Efficiency of Service
- Personal Knowledge of trusts and beneficiaries’ financial situation
- Location of Trustee as it affects trust income tax
- Personal Relationship with beneficiaries
- Settlor’s intent as expressed in trust document
After compiling this list of factors, the Superior Court also states that the Courts should also consider “any other material circumstances”. This clearly indicates that the listing is not all inclusive and practitioners are free to present and the Courts are free to consider any other circumstances which would seem to reflect upon what serves the best interests of the beneficiaries.
Next the Superior Court interpreted the “material purpose of a trust”. Important to the Superior Court’s analysis is the fact that PNC Bank was not the chosen Trustee for either trust. When the creator of the trust has chosen the trustee whose removal is sought, some deference must be given to the Settlor’s choice. However, in McKinney, because of the numerous mergers that had occurred, the institutions selected by the Settlors had long ago ceased to exist. The Trial Court believed that a material purpose of the Trust was that they be governed by a Pennsylvania institution. However, that analysis was rejected by the Superior Court and it held that the material purpose of the Trust is that the Trustee be able to effectively administer it. Therefore, where the former Trustee and proposed Successor Trustee both appear capable of effectively administering the trusts, the removal will not be found to violate a material purpose of the trust. It is important here to note that the statute does not require the new trustee enhance the material purpose of the trust. Rather, the statutory requirement is that the appointment of the new Trustee is not inconsistent with the material purpose of the trust.
The final issue analyzed by the Superior Court was whether a substantial change in circumstances had occurred such that PNC could be removed. First, the Superior Court notes that it could find no case law in this or any other jurisdiction that was helpful in its analysis. Also, the Superior Court noted that in 2010 §7766 was supplemented to include language that “a corporate reorganization of an institutional trustee, included a plan of merger or consolidation, is not itself a substantial change in circumstances”. Obviously, the banking lobby was very instrumental in obtaining this amendment. However, the Superior Court found the string of mergers over the years which resulted in the loss of the bank personnel who had historically handled the account, coupled with the movement of the family to Virginia was sufficient to establish a substantial change in circumstances. The Superior Court noted that the change in personnel caused a change in the character of the services provided. It should be noted, as discussed above, that the change in circumstances does not need to be caused by some failure on the part of the corporate fiduciary. The Superior Court is clear that this portion of the removal statute is a “no fault” statute.
There are two other considerations addressed in the McKinney case which bear mentioning. First, the model statute of the Uniform Trust Code included as an additional basis for the removal of a fiduciary when all the beneficiaries agree to the removal. That provision, although law in other jurisdictions, is not the law in Pennsylvania. It was not included in the legislature’s adoption of the UTC. Certainly if this was the law of Pennsylvania, Trustees would need to be more accommodating to the beneficiaries. Others can decide whether this assists or detracts proper trust administration.
Finally, the “price of poker” in trustee removal is always effected by the payment of legal fees. The law of Pennsylvania clearly provides that if a trustee successfully defends an effort for its removal that the trustee’s legal fees are to be paid by the trust. In McKinney, the Lower Court’s decision held that the costs of defense incurred by PNC were to be paid from the Trust and that determination was reversed by the Superior Court. Unfortunately for beneficiaries, in many cases the risk that those costs of defense will be assessed against the trust, by itself, provides ample reason for beneficiaries to not seek the removal of the trustee. Although some fiduciaries acquiesce to voluntary resignation when faced with beneficiaries who seek removal, other fiduciaries vigorously defend with costs of defense becoming a substantial impediment to seeking the relief. Perhaps the McKinney Decision, although fact specific to its circumstances which are somewhat unusual, can provide beneficiaries an avenue to escape when the current trustee is no longer favored.
When Pennsylvania adopted the Uniform Trust Code, the law of trusts changed dramatically. Although it retained some that had previously been found in Pennsylvania common law or Chapter 71 of the Probate Estates and Fiduciaries Code, it added many new concepts – representation of parties of interest, modification of irrevocable trusts, and an entire section devoted to revocable trusts, among many others. There is very little appellate case law interpreting many of the “new” parts of the Uniform Trust Code. McKinney provides guidance to how a trustee, having fallen out of favor, may be replaced. Corporate fiduciaries have two schools of thought when faced with unhappy beneficiaries who seek to replace the trustee. The first school of thought is that the trustee will voluntarily resign, wanting to avoid the conflict that likely will ensue when the trustee/beneficiary relationship has soured. The other school of thought is that the trustee’s job is not a popularity contest and the selection by the settlor imbues the trustee with the duty to serve as directed by the trust document. It is not the trustee’s job to make all beneficiaries happy. In the competitive corporate fiduciary world, McKinney will surely be utilized not just by beneficiaries, but also by corporate fiduciaries seeking to develop new business, thus holding corporate fiduciaries to a higher service standard. Also, it makes an employment move by a trust officer, favored by the beneficiaries, an opportunity to seek a change of trustee to the new employer. The “balance of power” is changed in the corporate trustee world, and only time will tell how far the pendulum will go.
Published by the Section on Probate and Trust Law of the Philadelphia Bar Association in the Probate and Trust Law Section Newsletter, February 2013 | NO. 132