Pennsylvania Supreme Court Weighs Benefits and Burdens of Maintaining Charitable Trust, Affirming Trial Court’s Decision Denying Termination of Same
In re Tr. B Under Agreement of Richard H. Wells Dated September 28, 1956, 311 A.3d 1057 (Pa. 2024)
In September 1956, Richard H. Wells (“Wells”), President of First Seneca Bank and Trust Company (“First Seneca”), established the Richard H. Wells Revocable Trust Agreement (the “Trust”), naming First Seneca as corporate trustee.
Prior to his death in 1968, Wells amended the Trust four times. Originally, the trust agreement provided for his wife and children following his death. Upon his wife’s death, the balance of the Trust was to be divided into separate trusts for his children, with each child’s share passing to the child’s descendants at the child’s death. In the event there were no descendants then living, the trust agreement gave a contingent charitable remainder interest to Wells’s alma mater, the Virginia Military Institute(“VMI”), with the direction that such remainder, if any, be distributed outright to VMI and added to its general endowment fund.
In 1960, Wells revoked the outright distribution to VMI and instead opted to direct any remaining principal into a separate perpetual charitable trust. In that same amendment, Wells also vested a committee of First Seneca’s officers with the discretion to identify charitable beneficiaries, but directed the trustee to afford “favorable consideration” to VMI in the allocation of the trust’s income.
Wells amended the Trust again in 1961 and 1963. In each instance, he retained the provisions directing the trustee to favorably consider VMI as to the distribution of trust income from a contingent charitable remainder.
In 1965, Wells amended the Trust one last time. In particular, he removed all references to his descendants and provided that two individuals would receive lump sum distributions following his wife’s death. The remaining balance would then pass into a perpetual charitable trust, with the VMI Foundation (the “Foundation”) — an entity that manages VMI’s endowment fund — as the sole remainder beneficiary and the recipient of all of the trust’s net income at least annually.
Wells passed away in 1968. A year later, the Tax Reform Act of 1969 was enacted, which imposed private foundation rules on trusts like the Trust, including mandatory distributions of 5% of the net investment asset value each year and an annual excise tax on investment income.
Since its establishment, the Trust was managed by an independent corporate trustee. After a series of mergers, First Seneca became part of PNC Bank, N.A. (“PNC”), in 2009. Under the terms of the Trust, Wells provided that the corporate trustee was entitled to compensation commensurate with its duties, including a commission based on income and corpus in accordance with the trustee’s schedule of compensation in effect from time to time.
During PNC’s tenure as trustee from 2010 to 2020, the value of the Trust grew from $1.5 million to over $2.1 million and the Foundation received $639,314 in total distributions. During that same timespan, PNC received roughly $18,500 in annual fees for its services as trustee, and the Trust paid approximately $750 annually in tax return preparation fees and roughly $4,325 each year in investment income tax.
In May 2019, the Foundation filed a petition to terminate the Trust under Section 7740.3(e) of Pennsylvania’s Uniform Trust Act (the “UTA”), which allows a court to terminate a charitable trust if the separate existence of the trust “results or will result in administrative expense or other burdens unreasonably out of proportion to the charitable benefits.” According to the Foundation, the trustee’s fees, at 28% of trust income, as well as the other administrative burdens of maintaining the Trust, justified its termination. The Foundation further argued that by terminating the Trust and receiving the trust assets outright, the Foundation could manage the funds more efficiently and avoid certain income tax liabilities associated with the Trust’s classification as a private foundation. In support of its argument, the Foundation alleged that it would save approximately $13,450 per year, or approximately one-half of an in-state cadet’s annual tuition fees, if it were able to directly manage the trust assets as part of its endowment fund.
PNC opposed the termination on the basis that it was fulfilling Wells’s intent. PNC argued that Wells desired to maintain a perpetual trust benefitting VMI and to have a third-party financial institution act as corporate trustee, as evidenced by each of his four amendments. PNC also maintained there were no facts to support the Foundation’s claim that there were any burdens out of proportion to the charitable benefits the trust provided. The Commonwealth of Pennsylvania, through the Attorney General, intervened and sided with PNC, raising similar arguments.
After the close of discovery, all three parties moved for summary judgment. Notably, during the motion hearing, the Foundation conceded PNC’s fees were reasonable and at market rate for the services the bank had provided.
After argument, the Orphans’ Court denied the Foundation’s motion and granted PNC’s and the Commonwealth’s motions. The Orphans’ Court found that PNC’s fees were reasonable. It also found that the trust documents were clear and unambiguous in that Wells unequivocally wanted the charitable trust to continue in perpetuity rather than make an outright gift to VMI.
The Foundation appealed to the Superior Court, which affirmed the Orphans’ Court decision.
The Pennsylvania Supreme Court granted the Foundation’s petition for allowance of appeal.
The Supreme Court also affirmed. In reaching its decision, the Court noted that beneficiaries of a trust generally had no right to obtain assets outright through a judicial termination at common law, save for those instances where the purpose of the trust was either no longer legal or practical, in which case a court could attempt to approximate a settlor’s intentions through the doctrines of cy pres or equitable deviation. The Court observed, however, that the common law was altered by the UTA, including Section 7740.3(e).
The Court said Section 7740.3(e) leaves no room for consideration of the settlor’s intent in the context of a judicial termination. Instead, it requires a court to consider only a trust’s separate existence, expense and burdens, unreasonable disproportionality, and charitable benefits. Through the application of these factors, the Court opined that the Pennsylvania legislature had imposed a “heightened standard that must be met” in order to set aside a settlor’s intent to continue a trust. Id. at 1076.
As the party seeking to terminate the Trust, the Foundation bore the burden of establishing that the Orphans’ Court had abused its discretion in denying termination. The Foundation made two principal arguments: (1) that it could avoid the 1.39% investment income tax if the trust assets were distributed to it as a public charity; and (2) that the 5% minimum distribution requirement under the private foundation rules prohibited the trust from utilizing a total returns investment policy under Pennsylvania statutes, which impeded investment flexibility.
The Court said it was “not clear” that the latter argument was true based upon the Court’s reading of the applicable statute and gave little weight to the expense of the investment income tax. The Court further observed that the Foundation could not argue that PNC’s fees were disproportionate to the charitable benefits of the Trust, given that the Foundation had already conceded such fees were reasonable.
The Court then weighed the charitable benefits of the Trust and found that such benefits were “substantial.” The Court explained that, by maintaining the Trust, the cy pres doctrine could be invoked if the Foundation were to later become defunct — a protection that would be lost if the trust assets were transferred to the beneficiary. The Court also highlighted the growth of the Trust under PNC’s watch between 2010 and 2020 and noted that from 2017 to 2019, the Foundation had received an average annual distribution of $71,500 — an amount that was nearly six times what the Trust paid in annual fees and taxes. Furthermore, the Court concluded that the Trust ought to be “self-sustaining and productive for many years to come” based upon the size of the principal.
Even if the Foundation had successfully demonstrated that the burdens of the Trust were unreasonably out of proportion to its charitable benefits, the Court said the statute vested the trial court with the discretion not to terminate the trust. Under an abuse of discretion standard, this required the Foundation to show the Orphans’ Court decision was the “result of manifest unreasonableness, or partiality, prejudice, bias, or ill-will, or such lack of support so as to be clearly erroneous.” The Supreme Court said, “The record demonstrates compellingly that the costs are not unreasonably out of proportion to the benefits.”
Finally, the Court also emphasized that terminating a trust solely for convenience or because it might be more advantageous for the beneficiary was not appropriate under Section 7740.3(e). The Foundation had failed to provide any precedential support from Pennsylvania or elsewhere in support of its request to obtain the Trust’s assets outright over the objections of the Attorney General and an interested party. The lack of such support indicated that the circumstances surrounding the Foundation’s request were “unusual” and not contemplated by the statute. In fact, the Court concluded, “The Foundation’s request is, quite literally, unprecedented.” Id. at 1083.