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A Pennsylvania Appellate Decision Discussing Trust Termination

Richard Wells created a revocable trust (“Trust”) which he amended four times prior to his death. The first version of the Trust identified his wife, then his children, as income beneficiaries, with the principal of the Trust then distributing to his children’s heirs.  The final iteration of this Trust, the version in place at the time of his death in 1968, identified his wife as an income beneficiary.  At his wife’s death, the Trust would provide a lump sum payment to two of his friends and the remaining principal would be the corpus of a perpetual charitable trust that would provide annual income distributions to the Virginia Military Institute Foundation, Richard’s alma mater. 

Richard’s wife died in 2004.  During her life, she received income distributions from the Trust.  After, the Trust made the two lump sum distributions to Richard’s friends, the remaining principal was invested for the benefit of the VMI Foundation.  At all times relevant to the litigation discussed herein, PNC was the corporate trustee of the Trust. 

In 2020, the principal of the trust was approximately $2.1 million.  The VMI Foundation thought it could manage the Trust better than PNC by keeping expenses lower and getting a higher rate of return on the investment of the Trust’s principal.  The VMI Foundation wanted to terminate the Trust and have the Trust’s assets added to its endowment.  The VMI Foundation filed a Petition to Terminate the Trust in the Court of Common Pleas of Allegheny County, Orphans’ Court Division.  The VMI Foundation argued that PNC’s fee of approximately $18,500 annually which was about 28% of income, along with other fees, were unreasonably out of proportion to the charitable benefit of the Trust. The VMI Foundation also argued that if corpus of the Trust was added to the VMI Foundation’s endowment it would save about $13,000 a year in fees--equivalent to half the tuition for an in-state student.  

PNC and the Pennsylvania Attorney General (in its role as parens patriae) opposed the termination of the Trust. PNC and the Attorney General argued that the VMI Foundation did not prove that the Trust could or should be terminated in accordance with the applicable law and that termination of the Trust would be completely contrary to Richard’s intent.  In other words,  Richard made several changes to the Trust.  If he wanted the principal of the Trust to eventually be distributed directly to the VMI Foundation, he would have made that change himself. 

The Orphans' Court managed the matter through to hearing and ultimately found that the VMI Foundation did not meet the statutory criteria as set forth in 20 Pa.C.S. Section 7740.3(e), the relevant and applicable law.  The Orphans' Court found that PNC’s fees were market rate and that Richard’s  intent was for the Trust to maintain the principal and to distribute the income annually to the VMI Foundation, not to terminate at the death of his wife and distribute the principal to the VMI Foundation.  On appeal, the Pennsylvania Superior Court agreed.  The Superior Court noted a scarcity of case law in Pennsylvania as well as other jurisdictions, addressing termination of charitable trust."  The Superior Court, applying the limited law, said the burden needed to be met to terminate a trust failed in this case because a savings of $13,000 a year, as alleged by the VMI Foundation, did not prove the existence of "administrative expense or other burdens unreasonably out of proportion to charitable benefits" as required by statue for termination.

The Pennsylvania Supreme Court agreed to hear the matter as a case as matter of first impression.  The Supreme Court defined the issue to address as:

"Whether, in a matter of first impression, the Pennsylvania Superior Court erred in its analysis and application of Section 7740.3(e) in holding that the Foundation is not entitled to the remedies sought in it Motion for Summary Judgment, specifically to include the termination of the Wells Trust with an award of the trust's assets to the Foundation to be held on the conditions nearly identical to the terms and conditions set forth in the Wells Trust"

The VMI Foundation argued on appeal that 20 Pa.C.S. Section 7740.3(e), does not contemplate settlor's intent.  In other words, in deciding whether a court should allow for a trust to be terminated, it should not take into account what the settlor (Richard) intended.  The VMI Foundation argued that if the settlor’s intent is a factor or an element that must be met, then there will never be a basis to allow for termination under the statue.   The VMI Foundation argued that the only test a court should consider in determining whether to allow for the termination of a trust is a test of benefits versus burdens. 

The VMI Foundation argued that it can keep the costs/expenses to manage the corpus of the Trust lower than that being currently incurred under PNC’s management and that if the VMI Foundation endowment held the corpus of the Trust it would provide greater flexibility of investment and distribution.  The VMI Foundation further argued that if Richard knew of the benefit to the corpus if the VMI Foundation managed the assets, as opposed to them being held in the Trust, he would have preferred trust termination.  The VMI Foundation conceded that PNC’s fees were market, but the VMI Foundation argued that if it managed the corpus it could still save $13,000 annually.  

PNC opposed the argument by the VMI Foundation that the settlor’s intent is not a factor.  PNC argued that the standard to terminate a trust is a heightened burden and that any court looking to terminate a Trust should always consider settlor's intent.  PNC argued that "every person has a right to dispose of his or her own property as he or she sees fit."

The Supreme Court affirmed the lower courts’ decision. The Supreme Court held that the VMI Foundation failed to satisfy the statutory standard under Section 7740.3(e).  The court’s analysis focused on several key points:

Intent of the Settlor:

The Supreme Court considered Richard’s intent in creating the trust. Although the VMI Foundation argued that Richard’s intent was not relevant under the statute, the Supreme Court opined that the intent of the settlor is a critical factor in trust law and must be considered when evaluating whether to terminate a trust.

Administrative Expenses and Burdens:

The Supreme Court examined the administrative expenses and other burdens associated with the trust. The Supreme Court concluded that the expenses and burdens were not unreasonably out of proportion to the trust’s charitable benefits.

Charitable Benefits:

The Supreme Court evaluated the charitable benefits provided by the Trust. It found that the Trust continued to provide significant benefits to VMI, consistent with Richard’s intent. The Supreme Court noted that the VMI Foundation’s desire to manage the Trust assets directly did not outweigh the importance of adhering to the settlor’s original intent.

Trusts are legal instruments designed to fulfill the specific wishes of their creators, and those wishes must be honored unless there is a compelling reason to deviate from them.

If you have questions about wills, trusts, estate planning, estate administration, or estate litigation, the attorneys at Houston Harbaugh can assist. Contact Matthew J. Lautman at 412-288-5017 lautmanmj@hh-law.com or Rebecca A. Winge at 412-288-2257 wingera@hh-law.com for more information.