States need to consider more competitive trust legislation.
A majority of states have adopted some version of the model Uniform Trust Code (UTC). Drafted by the Uniform Law Commission in 2000, the UTC was touted as a way to standardize trust law throughout the country.
In reality, less than uniform state adoption and application of the UTC have resulted in more and more inconsistent—and sometimes wildly divergent—outcomes in trust litigation.
At least 31 states and the District of Columbia have adopted versions of the UTC. Each jurisdiction has the option of deviating from the model code—that’s 32 (and counting) potentially different versions of “uniform” trust law. Recent court decisions indicate that these state-specific modifications have created internal conflicts among provisions of the UTC—conflicts that neither the comments nor the legislative history may adequately address.
Years—in some cases, more than a decade—after the adoption of the UTC, state courts around the country are now grappling with issues their legislatures perhaps didn’t anticipate when drafting their states’ versions of the UTC, charting new territory in interpreting trust law and resulting in different outcomes on almost (but not quite) identical law.
For practitioners, these outcomes at best require them to make careful choice of situs and governing law decisions and at worst create heightened uncertainty for both lawyer and client. And, for states, an unfavorable outcome may mean that practitioners will consider a particular state as a poor choice for situs and governing law of trusts, which should be of great concern to state legislatures that seek to attract trusts and not discourage business in their states.
Two recent cases—one from Pennsylvania and one from Kansas—demonstrate just how wildly divergent state court decisions can be on very similar issues under the UTC and show the need for state legislatures to take notice of these divergences and perhaps clarify intent.
Taylor
In Trust Under Agreement of Edward Winslow Taylor Appeal of Wells Fargo Bank,1 the Pennsylvania Supreme Court addressed the issue of trust modification in a dispute between three beneficiaries (the grandchildren of Edward Winslow Taylor) and Wells Fargo, the corporate trustee for the irrevocable trust Edward established in 1928. Wells Fargo asked the Philadelphia County Court of Common Pleas Orphans’ Court Division to divide the trust into four equal trusts, one for each of four grandchildren. The Orphans’ Court agreed, naming each grandchild the co-trustee of an individual trust, with Wells Fargo as corporate trustee. Three of the grandchildren later petitioned the Orphans’ Court to modify the trust under Section 7740.1 of Pennsylvania’s Uniform Trust Act (UTA) to add a portability clause giving the beneficiaries the ability to remove and replace the corporate trustee without court approval.
The Orphans’ Court determined that despite the provisions of the UTA’s Section 7740.1 specifically permitting modification of trusts, the beneficiaries first had to satisfy the requirements of Section 7766 governing the removal of a trustee. The Superior Court disagreed and reversed, setting the stage for review by the state high court.
On appeal, Wells Fargo argued that permitting modification to add a portability clause to an existing trust circumvents court oversight of trustee removal under Section 7766. The grandchildren countered that Section 7766 doesn’t limit trust modification under Section 7740.1 and that adding a portability clause isn’t equivalent to a trustee removal—the beneficiaries might never exercise the power to remove and replace.
In its July 2017 opinion, the Supreme Court examined the two provisions of the Pennsylvania UTA and determined that beneficiaries have very different obligations when proceeding under each provision. Under Section 7766, only a court has the power to remove a trustee, and only in certain situations—when the trustee has committed a serious breach of trust, exhibits unfitness or unwillingness to administer the trust or lacks cooperation with co-trustees or if there’s been a substantial change of circumstances. The party seeking removal has the burden of proving that removal is in the best interests of the beneficiaries and isn’t inconsistent with a material purpose of the trust and that a suitable successor trustee is available. In contrast, Section 7740.1 allows a noncharitable irrevocable trust to be modified on the consent of all beneficiaries, but only if the court concludes that the modification isn’t inconsistent with a material purpose of the trust. As the grandchildren argued, Section 7740.1 doesn’t specifically limit modification to or for any particular purpose.
The Supreme Court agreed with Wells Fargo that the provisions of the UTA should be read together, ambiguities in the interpretation of both provisions existed and the Superior Court erred by not considering an unambiguous notation on Section 7740.1 made by the drafters (the Pennsylvania Advisory Committee on Decedents’ Estates Laws of the Joint State Government Commission) that Section 7766 is the “exclusive provision on removal of trustees.”
The legislative intent with respect to the interplay between Sections 7740.1 and 7766 is clear—the scope of permissible amendments under Section 7740.1 doesn’t extend to modifications to add a portability clause permitting beneficiaries to remove and replace a trustee at their discretion; instead, removal and replacement of a trustee is to be governed exclusively by Section 7766.2
Hildebrandt
Following the decision in Taylor, the Kansas Court of Appeals in In re: The Trust of Clarence Hildebrandt3 reached a surprisingly different conclusion on a similar issue involving trust modification. With the agreement of the beneficiaries, the court granted a petition to modify an irrevocable trust to substitute a different successor trustee for Clarence’s brother, Wayne, the trustee initially designated in the trust instrument. In its January 2017 decision, despite the objection of the successor trustee actually designated in the trust instrument, the Kansas court found that the settlor’s appointment of a successor trustee didn’t constitute a material purpose of the trust under the state statute. Unlike the Pennsylvania courts in Taylor, the Kansas court didn’t even consider Kansas’ trustee removal statute for purposes of determining whether the parties could proceed on the issue through modification, though Kansas’ trustee removal statute is nearly identical to Pennsylvania’s removal statute.
Clarence Hildebrandt created a trust in 2002 to provide for the continuation of the farming operation he co-owned with his brother, Wayne. Clarence and his brother were named co-trustees of the trust. Clarence appointed his attorney, Edward Wiegers, as successor trustee of the trust. Clarence also directed that if Wiegers were unable to serve, “the two senior members of the firm Galloway, Wiegers & Henney, PA, or its successor firm who are actively engaged in the practice of law at 1114 Broadway, Marysville, Kansas, are appointed to serve as Trustees.”
Clarence died in 2004. In 2015, Wayne, with the agreement of the beneficiaries, petitioned the court to modify the trust to name Clarence’s niece as successor trustee because Clarence’s attorney was then deceased. Over the objections of the law firm that was appointed to serve as successor trustee in the trust instrument, the district court granted the petition. On appeal, the law firm argued that Clarence’s brother couldn’t modify the trust to bypass the law firm’s appointment as the successor trustee because the proposed modification violated a material purpose of the trust. The Kansas Court of Appeals disagreed.
Kansas’ modification provision, K.S.A. 58a-411, is nearly identical to Pennsylvania’s Section 7740.1, permitting modification “upon consent of all of the qualified beneficiaries if the court concludes that modification is not inconsistent with a material purpose of the trust.” Noting that the statute doesn’t define “material purpose” and no Kansas case law exists as to whether a change in the successor trustee constitutes a material purpose, the court looked to the Restatement (Third) of Trusts for guidance, which notes that:
[a] proposed modification might change the trustee or create a simple, inexpensive procedure for appointing successor trustees, or it might create or change procedures for removing and replacing trustees. Modifications of these types may well improve the administration of a trust and be more efficient and more satisfactory to the beneficiaries without interfering with a material purpose of the trust.4
The court concluded that no evidence existed, in the trust document or otherwise, to indicate that the settlor required that the successor trustee to Wayne be an independent third party as a material purpose of the trust.
Curiously, the Kansas court failed to mention or consider a key comment to K.S.A. 58a-411, which notes that while beneficiaries may modify any term of the trust as long as the modification isn’t inconsistent with a material purpose of the trust, “under the [UTC] Section 706 is the exclusive provision on removal of trustees.” While unanimous agreement of beneficiaries is a factor for the court to consider, “before removing the trustee the court must also find that such action best serves the interests of all the beneficiaries, that removal is not inconsistent with a material purpose of the trust, and that a suitable co-trustee or successor trustee is available.”5
That Kansas’ UTA includes a separate trustee removal provision didn’t stop the court from allowing the modification of the trust agreement to name a substitute successor trustee. In fact, the court didn’t even mention Section 58a-706, under which a court may remove a trustee if (1) the trustee has committed a breach of trust; (2) the trustee has failed to cooperate with co-trustees to the extent that the administration of the trust is substantially impaired; (3) the trustee has demonstrated unfitness, unwillingness or persistent failure to administer the trust effectively; or (4) there’s been a substantial change of circumstances—and the court finds that removal of the trustee best serves the interests of all of the beneficiaries, is consistent with the terms of the trust and isn’t inconsistent with a material purpose of the trust and a suitable co-trustee or successor trustee is available.
Wake-up Call
These divergent rulings might be attributed to a number of factors related to the specific facts of each case. Taylor involved the modification of an irrevocable trust to include a provision enabling the replacement of a trustee by the beneficiaries at any time without court approval, while Hildebrandt involved a court-approved modification to name a specific successor trustee other than the one initially named in the trust instrument—a one-time occurrence.
Regardless of the factual differences, however, it’s concerning that these two courts deviated quite dramatically on the same issue (modifying an irrevocable trust to accomplish some form of trustee change or removal that wasn’t initially contemplated by the settlor) under very similar modified versions of the UTC, given that the model UTC was intended to establish more uniformity in trust law among the states.
From a practical perspective, divergent outcomes like these should serve as a wake-up call for practitioners and state legislatures alike. Attorneys in states like Pennsylvania, in view of the aftermath of Taylor, may be forced to more carefully consider choice of situs and governing law that will best serve the needs of their clients for purposes of modifying trusts. In some cases, clients may be inclined to select a different trust situs or governing law, when possible, to provide maximum flexibility on modification issues. Of course, this analysis can’t account 100 percent for the potential for more—and perhaps more problematic—cases coming down in the future.
For states like Pennsylvania, in light of Taylor and Hildebrandt, perhaps it’s time for state legislators to revisit the UTA and consider their intentions with respect to certain portions, particularly on issues of trust modification. In some cases, legislators may find that their intent may need to be clarified or even reconsidered to avoid creating wildly divergent results in the future, which may make their states less attractive than others for choice of governing law and situs purposes. And, perhaps legislatures in states considering adopting modified versions of the UTC, including Colorado, Connecticut and Illinois, which have introduced bills to enact similar statutes so far in 2018, will take notice of Taylor and Hildebrandt and legislate with an eye toward clarifying legislative intent more carefully at the inception of their statutes. Perhaps they might consider enacting more competitive trust legislation in certain areas such as trust modification as a means of attracting more business to their respective states.
Endnotes
1. Trust Under Agreement of Edward Winslow Taylor Appeal of Wells Fargo Bank, 164 A.3d 1147 (Pa. 2017).
2. Ibid., at pp. 1160-1161.
3. In re: Trust of Clarence Hildebrandt, No. 115,530 (Ct. App. Kansas, Jan. 13, 2017).
4. Restatement (Third) of Trusts, Section 65, comment f, at p. 481 (2003).
5. K.S.A. 58a-411, comment to subsection (b).