It is getting easier for beneficiaries to change the trustee of that trust Mom or Dad created for them. In May a Pennsylvania appeals court reversed a lower court and allowed beneficiaries to replace a trustee who had done no wrong. In Re McKinney, 2013 PA Super 123; 2013 Pa. Super. LEXIS 736 (May 21, 2013).
Over the years Donald McKinney and his wife Katherine created trusts for their daughter, Jane McKinney, and Jane’s four children. By virtue of various bank mergers and acquisitions PNC Bank eventually became trustee of the trusts.
Jane McKinney wanted to remove PNC Bank as trustee and appoint SunTrust Delaware Trust Company (SunTrust), but PNC refused to agree to the change. So Jane went to Court.
Jane argued that SunTrust was a better choice for the beneficiaries of the trust. Jane and her four children all reside in Virginia and use Sun Trust for other financial matters. She notes that PNC was never named as trustee in any of the trusts – it just became trustee as a result of 40 years of bank mergers. Jane argued the changed circumstances authorized the beneficiaries to appoint a new trustee.
Pennsylvania law has also changed since the trusts were established. Prior to 2006, unless the trust agreement provided otherwise, a person seeking removal of a trustee was required to show fault or negligence on the part of the trustee. But in 2006 Pennsylvania enacted a version of the Uniform Trust Code (UTC).
Pennsylvania law now includes Section 7766 (20 Pa.C.S.A. § 7766 – based on Section 706 of the UTC), which provides for a “no-fault” removal of a trustee in the best interests of the beneficiaries where there has been a substantial change in circumstances. The section says:
(b) When court may remove trustee. – The court may remove a trustee if it finds that removal of the trustee best serves the interests of the beneficiaries of the trust and is not inconsistent with a material purpose of the trust, a suitable cotrustee or successor trustee is available and . . .
(4) there has been a substantial change of circumstances. A corporate reorganization of an institutional trustee, including a plan of merger or consolidation, is not itself a substantial change of circumstances.
The McKinney trust agreements did not have “portability clauses” which would allow the beneficiaries to change the trustee. So, Jane and her children had to rely on the Pennsylvania statute.
All the beneficiaries of the trusts were in agreement that PNC should be replaced. But PNC had done nothing wrong. The Bank objected to being removed as trustee, and asked to be awarded its attorney’s fees in defending Jane’s suit.
The lower court decision was in favor of the Bank. It denied Jane’s suit and awarded attorney’s fees to PNC. Jane then appealed to the Superior Court.
The Decision: Trustee is Ordered Removed:
This was the first time a Pennsylvania appeals court had been called upon to interpret and apply the no-fault trustee removal statute. Prior to the enactment of the new law, a person seeking a trustee’s removal was required to show fault or negligence on the part of the trustee.
Fault can still be grounds for removal, but is no longer required. Under Section 7766(b)(4) a person seeking removal must provide 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. Based on that evidence a court has discretion to order removal.
The Superior Court listed a number of factors that should be considered to determine whether a 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. No one factor is controlling and other factors may be considered on a case-by-case basis.
Ultimately, the Pennsylvania Superior Court ruled in favor of Jane and found that under the evidence presented in this case, the beneficiaries have the right to change the trustee. It reversed the ruling of the trial court including the award of attorney’s fees to PNC.
Implications of the Case:
In re McKinney shows that Section 7766(b)(4) is a game changer that makes it much easier for beneficiaries to fire their trustee and hire an new one. Changing trustees is even easier in states that follow the more complete version of UTC Section 706 which permits removal of a trustee where there has been either a substantial change in circumstances or when all of the beneficiaries request removal. (Pennsylvania deleted the unanimous agreement of the beneficiaries ground in enacting its law.)
Trustees can now be more easily replaced in Pennsylvania and other states with laws based on the UTC. Trustees will likely become more willing to agree to the appointment of a successor trustee. It can be anticipated that some beneficiaries will use the threat of removal in negotiations over trustee fees. It is becoming a more beneficiary friendly world. Still, Pennsylvania remains a little safer haven for trustees than states that have adopted the complete UTC Section 706.