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Trustees: Fiduciary Duties, Removal, and Mechanisms to Prevent Calamity

Trustees: Fiduciary Duties, Removal, and Mechanisms to Prevent Calamity

Posted on January 16, 2024

Authors: Edward C. Spontak and Kenzie P. Ryback

Originally published in October 2023

This article has not been updated for current law since the date of its posting on the website. This article is not intended to provide any legal advice. Please seek advice of your professional council.

Any U.S. federal and state tax advice contained in this communication is not intended or written by the Knox Law Firm to be used, and cannot be used by you, for the purpose of: (i) avoiding penalties under the Internal Revenue Code that may be imposed upon you, or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.

Trustees: Duties and Powers Under the PEF Code

Summary of Duties

A trustee has many duties. The specific acts required of a trustee are spelled out in a few sections of the Pennsylvania’s Uniform Trust Act. However, most are derived from the broad language contained in the sections of Chapter 77 of Pennsylvania’s Uniform Trust Act and many more are created when a trustee exercises its powers. The Pennsylvania’s Uniform Trust Act imposes on a trustee the:

Duty of Loyalty (20 Pa. C.S. § 7772)
Duty to Administer (20 Pa. C.S. § 7771)
Duty of Impartiality (20 Pa. C.S. § 7773)
Duty of Prudent Administration (20 Pa. C.S. § 7774)
Duty to Use Special Skills (20 Pa. C.S. § 7776)
Duty to Control and Protect Trust Property (20 Pa. C.S. § 7779)
Duty to Keep Records and Identify Trust Property (20 Pa. C.S. § 7780)
Duty to Enforce and Defend Claims (20 Pa. C.S. § 7780.1)
Duty to Inform and Report (20 Pa. C.S. § 7780.3)
Duty to Exercise Discretionary Powers in Good Faith (20 Pa. C.S. § 7780.4)

Origin of Duties

A trustee’s duties originate from the statutory laws. In Pennsylvania, the law is found in Title 20, Chapter 77, Subchapter H.

Uniform Trust Code (“UTC”). The UTC is a codification of all of the states’ common law dealing with trusts and consists substantially of default rules.

Pennsylvania Uniform Trust Act (“UTA”). Pennsylvania enacted the UTA on July 7, 2006. The UTA incorporates most of the UTC provisions.

Modifying Duties by Agreement

The UTA provides that, with exception to a few sections of the UTA, all provisions of the UTA may be modified by the trust instrument. Neither the trustee’s duty to act in good faith and in accordance with the purposes of the trust (Duty to Administer) nor the trustee’s duty to inform and report to beneficiaries can be modified.

Enforcement of Duties

The beneficiaries, including the Attorney General for charitable beneficiaries, have the standing to hold the trustee accountable to meet the standard of each respective duty. Claims against a trustee by beneficiaries for breach of a duty are most appropriately brought in the Orphans’ Court (See 20 Pa. C.S.A. § 711, Mandatory Exercise of Jurisdiction Through Orphans’ Court Division in General). Trustees may have to resort to legal proceedings to fulfill their obligations. Claims by a trustee necessary to carry out its duties are brought in the appropriate court (e.g. bankruptcy, criminal, state, federal) depending on the underlying claim and parties involved.

Duty of Loyalty

Scope of Duty - A Trustee shall administer the trust solely in the interests of the beneficiaries. A transfer of property between the trust and the trustee (or an affiliate of the trustee) is voidable by a court unless the instrument permits, the court approved, the beneficiaries consented, or did not timely object to the transfer. A transaction between a trustee and a beneficiary regarding non-trust property is also voidable by a court unless the trustee can prove that such transaction was fair. A trustee cannot usurp an opportunity and must act in the beneficiary’s best interest when exercising control over business interests (20 Pa. C.S.A. § 7772).

Exculpatory Provision - A provision relieving a trustee of liability for breach of trust is enforceable unless, it relieves breaches committed in bad faith or reckless indifference to the purposes of the trust or the interest of the beneficiaries, or was improperly inserted by the trustee (20 Pa. C.S.A. § 7788).

Case Studies

No. 1. The Clever Nephew: Settlor appoints her nephew trustee of a substantial trust. Settlor also has nephew as a co-executor of her estate. Settlor remains the principal income beneficiary of her trust while she is living. Upon her death, three of her grandchildren and two of her nephews (including the trustee) become beneficiaries. Settlor has left all of her estate to the Nephew. Transfers to Aunt, out of the trust, during her life, can be analyzed as self-dealing.

No. 2. The Interested Institution. A bank has a long standing relationship with Settlor. He appoints bank as the sole trustee of his trust. Bank also has outstanding lines of credit and term notes to several of Settlor’s businesses. Trust’s beneficiaries, after Settlor’s death, are his 3 adult children, one of whom is part of the businesses. Illustrates investment decisions that could benefit corporate trustees.

Duty to Administer

Scope of Duty - A trustee shall administer the trust as a prudent person would, by consideration of the purposes, provisions, distributional requirements and other circumstances of the trust and by exercising reasonable care, skill and caution (20 Pa. C.S.A. § 7774).

This is considered a fundamental duty of a trustee. It does not depend on whether the trustee is receiving compensation.

The standard employed is meant to give due consideration to the purpose of the trust, which is a deviation from the previous standard contained in the Restatement (Second) of Trusts (20 Pa. C.S.A. § 7774, comment).

The trustee shall exercise any discretionary powers in good faith and in accordance with the provisions and purposes of the trust and the interest of the beneficiaries, notwithstanding the breadth of discretion granted to a trustee in the trust instrument, including the use of such terms as “absolute,” “sole,” or “uncontrolled" (20 Pa. C.S.A. § 7780.4).

This duty can be modified by the settlor, but the settlor cannot exculpate a trustee from liability for actions committed in bad faith or in reckless indifference to the purposes of the trust or to the interests of the beneficiaries (20 Pa. C.S.A. § 7774, comment).

The trustee must keep adequate records of the administration of the trust, and must keep trust property separate from the trustee’s own property (20 Pa. C.S.A. § 7780 – Recordkeeping and Identification of Trust Property).

This standard also requires that a fiduciary who holds itself out as having special investment skills (e.g. a corporate trustee) shall exercise those skills (20 Pa. C.S.A. § 7776 – Trustee’s Skills).

Relationship to Prudent Investor Rule - The standard used for trustees is intentionally similar to the prudent investor rule, which requires a fiduciary to exercise reasonable care, skill and caution in implementing investment and management decisions (20 Pa. C.S.A. § 7212).

Case Studies

No. 3. The Opportunistic Beneficiary. A family trust was being administered during the stock market crisis of 2008. As a result of the corporate trustee’s investment decisions, the trust’s corpus suffered $9,500,000 in losses. The beneficiaries sought to surcharge the corporate trustee. Because the language of the trust granted the trustee significant discretion, and because the trustee did not abuse that discretion or act in dereliction of its duties, there was no surcharge.

No. 4. Know Your Beneficiaries. A trust was originally funded with certificates of deposit and a significant number of shares of one publically traded company. After the Settlor died, her spouse became the life tenant of the trust, with the trust terminating upon the spouse’s death, and the assets being liquidated to be distributed to the couple’s children. A corporate trust officer took over the management of the trust, which then had an investment strategy objective of safety and income. The corporate trust officer immediately changed that investment strategy objective to balanced. This change resulted in the trust officer converting dividend producing assets, and assets with significant cash value, to investments with a longer term horizon. The trust officer was not aware that, shortly before he took on management responsibilities, the life tenant experienced a severe decline in his health. Shortly after the trust officer made the changes, the life tenant died. His changes resulted in a material reduction in the present value of the trust, which, per its terms, had to be liquidated. The corporate trustee was surcharged for this action.

Duty of Impartiality

Scope of the Duty - The trustee shall act impartially in investing, managing and distributing the trust property, giving due regard to the beneficiaries’ respective interests in light of the purposes of the trust. A trustee does not have to treat the beneficiaries equal, but rather equitably in light of the purposes of the trust (20 Pa. C.S.A. § 7773).

This duty applies to all aspects of trust administration and to decisions by a trustee with respect to distributions. An identical duty is included in the Prudent Investor Act but only with respect to the investment and management of trust property. “The differing beneficial interests for which the trustee must act impartially include those of the current beneficiaries versus those of beneficiaries holding interests in the remainder; and among those currently eligible to receive distributions. In fulfilling the duty to act impartially, the trustee should be particularly sensitive to allocation of receipts and disbursements between income and principal and should consider, in an appropriate case, a reallocation of income to the principal account and vice versa, if allowable under local law” (20 Pa. C.S.A. § 7773, comment).

Courts will not disturb a trustee’s exercise of discretionary powers unless the trustee abuses that discretion through dishonesty, improper motive, failing to use his judgment, or acting beyond the bounds of reasonable judgment (In re Estate of Feinstein, 527 A.2d 1034, 1037 (Pa. Super. Ct. 1987) quoting Restatement (Second) of Trusts § 187 comment e (1957)).

Settlor Intent and Other Factors Affecting the Trustee’s Duty.

Settlor’s Intent Undetermined: Absent any indication to the settlor’s intent, trust assets are to be used before the beneficiary’s resources.

In Richey’s Estate (In re Richey's Estate, 251 Pa. 324 (Pa. 1916), Pennsylvania’s Supreme Court upheld the trial court’s decision to reimburse the deceased lifetime beneficiary’s estate from the trust created by her deceased husband for costs of her “comfortable maintenance and support” not paid by the trust over the 37 years of its existence; despite the fact that she was able to provide for her own maintenance and support.

Settlor’s Intent Interpreted: In re Trust under agreement of John H. Ware (In re Trust Under Agreement of John H. Ware, 814 A.2d 725 (Pa. Super. Ct. 2002), John Ware IV (“Ware”) was the beneficiary of seven different trusts by his parents and grandparents. Three trusts required that all income be paid to Ware and that principal may be distributed at the trustee’s discretion for the welfare, comfort, support and education of Ware or Ware’s children. The other four trust’s provided that income and principal may be distributed at the trustee’s discretion for the welfare, comfort, support and education of Ware or Ware’s children. Ware’s children were the remainder beneficiaries of all seven trusts. All seven trusts contained identical spendthrift provisions.

The trustees historically distributed all of the income from all seven trusts to Ware; approximately $600,000 quarterly.

Ware and his wife divorced and entered into a property settlement agreement in which Ware agreed to pay his wife $3,440,000 in full settlement. Ware requested the trustees distribute income and principal from the trusts to satisfy this obligation. The trustee declined this request and ceased all distributions except mandatory income distributions required by the three trust. The trustee further insisted that Ware submit invoices for payment for all future requests for distributions. Ware quickly defaulted on his obligations and was subsequently held to be in contempt for such default.

The trustee argued that the spendthrift provision prevented the distributions of income because the distributions would not be in Ware’s “welfare” because the property settlement agreement was an alienation of the trust’s income and Ware’s contempt could not result in incarceration (as Ware alleged). The Superior Court held that this was a misinterpretation of the spendthrift rule and that the trustee acted beyond the bounds of reasonable judgment (Id. at 733). The spendthrift clause protects the income and principal from creditors only until delivered to the beneficiary; and Ware could absolutely go to jail for contempt.

The Superior Court, however, further held that the trustee acted properly and within reasonable judgment in not distributing, for the identical purposes, the principal of the trusts. The trustee’s interpretation of the settlors’ intent of all seven trusts – based on the “general scheme which is assumed in these kinds of trusts” (Id. at 735) – was that Ware receive the income and his children receive the principal; and that distributions of principal to Ware, even though permitted, would compromise the remainder beneficiaries (Id. at 734).

Thus, a settlor’s intent can be gleaned from the “general scheme” of a trust and control distributions of income and principal. A Settlor’s intent being paramount to almost all other factors a trustee must consider, leads to the conclusion that principal distributions to prevent potential incarceration of a beneficiary are outweighed by the harm to remainder beneficiaries due to the reduction in principal available for the remainder beneficiaries.

This is not to say that this is the rule in every case with similar facts. It is consistent with the rule that the courts will not interfere with the trustee’s discretion if its judgment is within the bounds of reasonable judgment, and not driven by dishonesty or improper motive. In fact, a different trustee could conclude principal distributions are appropriate and still be within the bounds of reasonable judgment.

Case Studies

No. 5. The Traditional Trust. Husband and wife die leaving three minor children. A single trust is created upon the last to die of husband and wife. The single trust is to pay principal and income for the health, education, maintenance, and support of their descendants and the trustee has discretion to distribute income and principal for any purpose. When the youngest child turns twenty-three, the trust splits into separate trusts for each child. Each separate trust is to pay principal and income for the health, maintenance, support, and education of the child and the child’s descendants and the trustee may distribute principal and income to one or more of the child and child’s descendants. Each separate trust lasts for the lifetime of the child.

The needy child:

Child A wants the single trust to pay for her private schooling (secondary and post-secondary).
Child B wants separate trusts for pay for his children’s living expenses.
Child C is disabled and cannot find employment.

Costs of Administration

Scope of Duty – In administering a trust, the trustee may incur only costs that are reasonable in relation to the trust property, the purposes of the trust and the skills of the trustee (20 Pa. C.S.A. § 7775). Also, a trustee is entitled to reimbursement for i) expenses incurred in the proper administration of the trust and ii) expenses not properly incurred, if necessary to prevent the unjust enrichment of the trust. Payment by the trustee of such costs creates a lien on trust property to secure reimbursement to the trustee (20 Pa. C.S.A. § 7769).

A trustee must not incur unreasonable costs when considering which, if any, administrative functions to delegate or incur costs of professional advisors. This would include legal, accounting, and investment management. The trustee must balance the costs against the potential benefits of having another perform the given task. If necessary, the trustee’s compensation should reflect the level of assistance or delegation of administrative functions (20 Pa. C.S.A. § 7775, comment).

Trustees have always been permitted to incur only costs that are necessary to fulfill the administration of the trust in accordance with the trust agreement and the law. Due to the trustee’s duties to administer and inform, the trustee must secure and invest the trust assets, account for the activity of the trust, and navigate legal requirements. Often, one or more of these functions are performed by agents on behalf of the trustee, and common acceptable costs include legal, tax and accounting, and investment fees.

Costs Payable from Trust Assets

Legal fees incurred by trustees to protect and defend trust assets are normally acceptable costs. However, a trustee is not ordinarily entitled to attorney’s fees and expenses if it is determined that the trustee beached the trust (Id.).

In Thaw’s Estate (In re Thaw’s Estate, 252 Pa. 99, 106-07 (Pa. 1916)), fees incurred to examine the mental condition of a beneficiary to assess the beneficiary’s ability to handle large sums of money were acceptable, even though the beneficiary was entitled to the income. Pennsylvania’s Supreme Court concluded that the trustee proceeded with the assessment in good faith and at the cooperation and consent of the beneficiary.

In Estate of Frank F. Landis (Account of First Nat. Bank & Trust Co. in Waynesboro, 382 Pa. 482 (Pa. 1955)), the trustee (a bank and trust company in Waynesboro) was the creditor of a trust prior to becoming trustee of the trust. During its administration, the trustee (i) paid unsecured promissory notes of a closely held company owned partially by a beneficiary of the trust and by the trust itself and for which the trust had no obligation to pay and received no benefit of the payment, (ii) applied payment of another note by an unrelated party to a commercial loan from the bank to a trust beneficiary, (iii) acting as the bank, received dividends on stock held as collateral for loans to the trust, deposited the dividends in its commercial department for loans to customers, and did not apply the dividends toward the loans or interest, and (iv) at the conclusion of the administration, the trustee sold the last parcel of real property, but then refused to transfer the property and refused to distribute the proceeds to the beneficiaries. The Pennsylvania Supreme Court held that the trustee is at fault and surcharged the trustee for the payments (i and ii) for the accrued interest on the loan (iii) and for the costs incurred by the trustee and beneficiary for not transferring the property or distributing the proceeds (iv) (Id. at 496-97, 499-501).

The bank (acting as the bank) caused the sale of the trust’s primary holdings (Landis Machine Company) to pay down outstanding loans from the bank instead of using other assets. The stock appreciated in value by 50% at the time of the trust’s termination. The Supreme Court affirmed the holding that the bank acted appropriately and in response to the banking regulations, and did not order the trustee be surcharged (Id. at 498).

The beneficiaries also claimed “that the derelictions of the … trustee were such as … to disentitle it to compensation, pointing out the surcharges made against it; they claim that it administered the trust primarily for its own benefit and only cursorily for the benefit of the [beneficiaries]” and asked the court to further surcharge the trustee for the commissions the trustee was paid. The court acknowledged the bank’s self-interest concern, it stated that the “trustee had not been guilty of any fraud or bad faith in its management of the trust, but only of the mistakes, errors of judgment, and misinterpretations of the agreements for which it was surcharged” and is entitled to commissions (Id. at 507).

Finally, the beneficiaries requested that the trustee’s attorney’s fees for the matters at hand be paid by the trustee and not from the trust funds. The court permitted the payment from the trust funds relying on the same rational as the approval of commissions (Id. at 509).

Cost Not Payable from Trust Assets

Accounting fees of a second accountant to audit the trust account were denied as unnecessary when trustees failed to keep accurate and timely records (In re Hahl’s Estate, 89 Pa. D. & C. 380, 387 (Orph. 1954)).

Trustee is entitled to reimbursement for successful defense of beneficiary’s attempt to surcharge the trustee (In re Estate of Browarsky, 437 Pa. 282, 285 (Pa. 1970)). However, the trustee in Lessig (Lessig v. National Iron Bank, 342 Pa. 209 (Pa. 1941)) could not pay from trust assets, the costs of defending a usury claim by a third party, even though the defense was solely for the preservation of trust assets. The Supreme Court would not permit use of trust funds to pay counsel fees for the trustee’s violation of the National Banking Act. Had the trustee been successful in defending the usury claim, such fees would likely have been payable from the trust.

Legal fees incurred by a trustee who violated her duty of loyalty and impartiality to certain beneficiaries was denied reimbursement of legal fees she paid to defend her actions. In re Thomas G. Goodwin Revocable Living Trust (In re Thomas G. Goodwin Revocable Living Trust, No. 1124 WDA 2015, 2016 WL 6243320 (Pa. Super Ct. 2016)), trustee was found liable for costs and damages incurred for unreasonably, incorrectly interpreting a trust document and deed. The trustee’s position was that because the deed referred to the Thomas “A.” Goodwin Revocable Living Trust, the deed was invalid, and the property transferred by operation of law to Mr. Goodwin’s surviving spouse (who was also the trustee). Because the trustee’s actions were determined to completely disregard the reasonable interpretation of the documents and her actions benefited herself, the court denied use of trust property to reimburse the trustee for her legal fees in defending her actions.

Trustee's Duty Regarding Claims

Scope of Duty - A trustee shall take reasonable steps to enforce claims of the trust and to defend claims against the trust. When one of several trustees is individually liable to the trust, the other trustee or trustees shall take any legal action against that trustee necessary to protect the trust (20 Pa.C.S.A. § 7780.1).

Standard - The standard of determining whether to enforce a claim is the reasonableness of the likelihood of recovery, the cost of the suit and enforcement of the judgment (20 Pa.C.S.A. § 7780.1, comment).

Case Study No. 6. Trust is the owner and operator of several residential apartments. Settlor’s intent is to hold and carry on the settlor’s residential rental real estate business until his children reach a certain age, then distribute the business in kind. Local developers want to rezone nearby properties to allow for businesses. The trustee believes that the developers want to create a late-night district. The trustee is also aware that local officials are proposing apartment taxes and additional fees for apartment owners. The trustee believes that both of these will harm the trust’s assets. Quite the predicament.

Claims against Trustees - There are no “trust police”. The beneficiaries (and the Attorney General for charitable beneficiaries), are the only parties with standing to protect their interests and ensure the trustee carries out its duties.

Trustee's Duty to Inform and Report

20 Pa. C.S.A. § 7780.3

The trustee shall promptly respond to a reasonable request by the settlor of a trust or by a beneficiary of an irrevocable trust for information related to the trust’s administration.

To whom notice is required largely depends on the type of trust (revocable or irrevocable) and whether the settlor is adjudicated incapacitated or dies. Notice generally provides information to the guardian or beneficiary regarding the trust’s existence, identification of the settlor and trustee, and the recipient’s right to receive a copy of the trust.

When notice is provided is important, because a beneficiary of a trust has one year from date of the notice to challenge the trust’s validity (20 Pa. C.S.A. § 7754), so the notice required by this statute, triggers the statute of limitations.

Resignation and Removal of Trustees

Resignation of Trustee

Section 7765 of the PEF Code states that the general rule is that a trustee may resign (1) with court approval; (2) without court approval if authorized to resign by the trust instrument; or (3) pursuant to a nonjudicial settlement agreement described in section 7710.1 of the PEF Code.

Going to Court costs money, in both filing fees and attorney fees to get the proper documentation in place to be filed with the Court. Our instruments provide that a Trustee may resign by giving written notice to the Trustee Appointer (See Section V.A.4 below).

Other variations of trustee resignation provisions allow for resignation by written instrument to be delivered to any other then acting fiduciary (for example, a trustee protector, co-trustee, etc.), or if none, to the Settlor’s eldest and competent descendant who is also a beneficiary of the Trust.

Nonjudicial Settlement Agreements (NJSA) under Pennsylvania Probate, Estates and Fiduciaries Code (PEF Code) Section 7710.1

General Rule - All beneficiaries and trustees of a trust may enter into a binding nonjudicial settlement agreement with respect to any matter involving the trust.

CAUTION: make sure to correctly identify all beneficiaries and note that the rules set forth in Subchapter C of the PEF Code relating to representation, apply to nonjudicial settlement agreements (20 Pa. C. A. § 7710.1(e) provides that any beneficiary or trustee of a trust may request the court to approve a nonjudicial settlement agreement to determine whether the representation as provided in Subchapter C was adequate or whether the agreement contains terms and conditions the court could have properly approved).

Exception to the General Rule - A nonjudicial settlement agreement is valid only to the extent it is not inconsistent with a material purpose of the trust and includes terms and conditions that could be properly approved by the court under this chapter or other applicable law (Id.).

NJSA’s Help Resolve Issues in a Hope to Avoid Trustee Turnover. Some of the matters that may be resolved by a NJSA, and this is not an exhaustive list (In addition to the thirteen matters listed in 20 Pa. C.S.A. § 7710.1(d), see comment), include:

The interpretation or construction of the provisions of a trust instrument.
The approval of a trustee's report or accounting or waiver of the preparation of a trustee's report or accounting.
Direction to a trustee to perform or refrain from performing a particular act.
The resignation or appointment of a trustee and the determination of a trustee's compensation.
Liability or release from liability of a trustee for an action relating to the trust.
An action or proposed action by or against a trust or trustee.
An investment decision, policy, plan or program of a trustee.
Any other matter concerning the administration of a trust.

Uniform Law Comment: “While the Uniform Trust Code recognizes that a court may intervene in the administration of a trust to the extent its jurisdiction is invoked by interested persons or otherwise provided by law (see Section 201(a)), resolution of disputes by nonjudicial means is encouraged. This section facilitates the making of such agreements by giving them the same effect as if approved by the court. To achieve such certainty, however, subsection (c) requires that the nonjudicial settlement must contain terms and conditions that a court could properly approve. Under this section, a nonjudicial settlement cannot be used to produce a result not authorized by law, such as to terminate a trust in an impermissible manner.”

Removal by the Court (PEF Code 7766, Removal of Trustee)

Prior to enactment in 2010, Pennsylvania had a long history of strictly limiting the removal and replacement of a trustee to circumstances in which an Orphans’ Court determines that good cause exists to do so (See Trust Under Agreement of Taylor, 164 A.3d 1147 (Pa. 2017)).

Section 7766 is the exclusive method of removal of a trustee (Id. at 1159-61. See also 20 Pa. C.S.A. § 7740.1, comment).

The removal of a trustee is a drastic action and should not be undertaken at the mere whim of a beneficiary (See The Vincent J. Fumo Irrevocable Children’s Trust, 104 A.3d 535 (Pa. Super. Ct. 2014) (Panzella, J. dissenting) citing In re White, 484 A.2d 763, 765 (Pa. 1984)).

Because of the discretion normally granted to a trustee, the settlor’s confidence in the judgment of the particular person whom the settlor selected to act as trustee is entitled to considerable weight (See Fumo, at 554 (Panzella, J. dissenting), citing In re McKinney, 67 A.3d 824, 835 (Pa. Super. Ct. 2013)).

Section 7766 retained the requirement of judicial approval, and three of its four provisions still demand a showing of fault or negligence by the current trustee. Even the no-fault removal provision of Section 7766(b)(4) requires “a substantial change in circumstances” and precludes corporate reorganizations, mergers, or consolidations from qualifying as such a substantial change; thus, the no-fault provision does not reflect any generalized legislative intent to permit beneficiaries to exercise control over the removal and replacement of trustees (In re Taylor, at 1159).

The Orphans’ Court decision to appoint or remove a trustee is subject to review for abuse of discretion (See The Vincent J. Fumo Irrevocable Children’s Trust, 104 A.3d 535 (Pa. Super. Ct. 2014)).

20 Pa.C.S.A. § 7766, Removal of Trustee

(a) Request to remove trustee; court authority.--The settlor, a co-trustee or a beneficiary may request the court to remove a trustee or a trustee may be removed by the court on its own initiative.

(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 co-trustee or successor trustee is available and:

the trustee has committed a serious breach of trust;
lack of cooperation among co-trustees substantially impairs the administration of the trust;
the trustee has not effectively administered the trust because of the trustee's unfitness, unwillingness or persistent failures; or
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.

(c) Court remedies.--Pending a final decision on a request to remove a trustee, or in lieu of or in addition to removing a trustee, the court may order appropriate relief under section 7781(b) (relating to remedies for breach of trust - UTC 1001) as may be necessary to protect the trust property or the interests of the beneficiaries.

(d) Procedure.--The procedure for removal and discharge of a trustee and the effect of removal and discharge shall be the same as that set forth in sections 3183 (relating to procedure for and effect of removal) and 3184 (relating to discharge of personal representative and surety).

(e) Cross reference.--See section 1608 of the act of November 30, 1965 (P.L. 847, No. 356),1 known as the Banking Code of 1965.Co-Trustees (PEF Code 7763).

The only “no fault” removal provision is 7766(b)(4). It must be shown by clear and convincing evidence that: (1) the removal serves the beneficiary's 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. While the trust beneficiary has the option to submit evidence that the current trustee has administered the trust in a way that “undermined” or “harmed” the beneficiaries' interests, such proof is not mandatory (In re McKinney, 67 A.3d at 830).

Recent Case Law

In re: Amended and Restated Deed of Trust of Margaret M. Holdship, 288 A.3d 919 (Pa. Super. Ct. 2023). PNC Bank as co-trustee of the trust was vested with the sole discretionary power to disburse principal and income. Beneficiaries were dissatisfied with PNC’s 2020 decision to discontinue set, quarterly distributions and instead make distributions only upon request for HEMS and when supported by documentation. Beneficiary petitioners sought to remove PNC as co-trustee alleging serious breach of the trust, failure to cooperate with co-trustee, ineffective administration of the trust, and changes in circumstances. The Orphans’ Court dismissed the Amended Complaint on PNC’s preliminary objections and the appeal followed. The Superior Court affirmed finding that the petition failed to set forth adequate grounds for removal.

In re: Trust Under Deed of Walter R. Garrison, 288 A.3d 866 (Pa. Super. Ct. 2023). Settlor and beneficiaries sought to modify the noncharitable irrevocable trust by consent pursuant to Section 7740.1, to allow a majority of sui juris income beneficiaries to remove, with our without cause, and appoint another independent trustee following settlor’s death or incapacity. The Supreme Court held that trusts can be modified to allow for the replacement of trustees. Importantly, Section 7740.1(a) allows for modification or termination of an irrevocable trust by consent of settlor and all beneficiaries without court approval. Section 7740.1(b) allows for such modification by request of the beneficiaries only with Court approval, similar to Section 7766. The Court noted that the primary interests of the settlor and beneficiaries guide a court’s interpretation of a trust, and that the trustee’s interest in the trust is merely derivative.

Crafting Trust Instruments to Avoid Calamity

Ways to Understand How to Solve Issues that May Arise During the Trust Administration

Trustee Appointer

In our instruments, the trustee appointer is the person who has the power to appoint AND remove trustees (See Section below).

Keep it flexible. Currently, in Pennsylvania, trusts can be in existence for 360 years, and by the time that trusts drafted today, reach 360 years, who knows if the rules against perpetuity will even be relevant. However, as the years go by, circumstances change, that may require a trustee to be removed and a new trustee appointed. So you want to keep the trust terms flexible enough to allow a trustee to be removed and a new one appointed to meet the continuing expectations of beneficiaries.

Some Trustees don’t realize they should be removed, often because of health reasons, allowing the trustee appointer to remove a trustee without court involvement allows for swift action to preserve the integrity of the trust.

The Trustee Appointer is a fiduciary position (See Section below). Meaning that removing the trustee should not be done at a whim, and removing the trustee has to be in the best interests of the beneficiaries.

If there is any concern about a particular person being “to quick to fire” a trustee, the trust instrument can be drafted disqualify that person as a potential trustee appointer.

Trust Protector

Defining Trust Protector: The person who has the power to amend an Irrevocable Trust based on guidelines set forth in a trust instruments (usually an independent person who is not related or subordinate to the Grantor or a trust beneficiary).

We are all different. Trustees sometimes forget this simple truth and treat the trust beneficiaries alike without paying due attention to their needs. Also, the hopes and visions held by a grantor at the time of setting up a trust may not hold true after the grantor’s death. If the trust document provides for a Trust Protector, this is the most flexible way to address these concerns.

The concept of a “Trust Protector” provision adds flexibility to the trust design. Remember that the type of trust that we are discussing is, by its terms, irrevocable; and therefore once the trust is created, the grantor cannot “take back” the trust property or alter the terms of the trust agreement. The Trust Protector provision attempts to address this particular limitation associated with the use of irrevocable trusts. The intent behind a Trust Protector provision is to incorporate flexibility into the trust agreement in order to address changed circumstances that may not have been foreseeable at the time that the trust was initially drafted. Although, as just noted, it is not possible to allow the grantor to alter the terms of the trust agreement, it is, however, possible to give an independent third party (defined as someone who has no interest in the trust and who is also not “related or subordinate” to the grantor, or to a person having the power to remove the trustee, or to any trust beneficiary) the power to change the terms of the Trust. The Trust Protector therefore cannot be a family member nor can the Trust Protector be someone “subordinate” to the grantor (e.g., an employee). The Trust Protector is instead an independent third party who is given broad powers to reform the trust provisions in the event that it becomes necessary to do so. Although the Trust Protector must be an independent third party, some trusts provide for each of the grantor’s children to allow the child (in his or her capacity as trustee of their respective trusts) to choose who can act as the Trust Protector.

As already noted, the need for a Trust Protector is triggered by an unknown fact or an event that was not foreseen at the time the trust agreement was drafted. Such unforeseen events could occur in any number of ways. For example, if the tax laws were re-written to revise the criteria for a particular benefit of the trust, then the trust document could be reformed (in the future by the Trust Protector) to conform with such future legislative enactments. A Trust Protector provision may also be helpful in the event that a trust beneficiary becomes disabled or develops a substance abuse problem. In such a situation, if the trust beneficiary has an unalterable right to request income or principal, then the trustee may be required by the Department of Public Welfare of the state where the beneficiary resides to pay for all of the costs of the disabled beneficiary's treatment, even though many of such costs may otherwise be subsidized through public assistance. In such a situation, we would recommend the use of a “supplemental needs” trust, i.e., a trust that is designed to exclude the trust income and principal from the disabled beneficiary's “resources” for the purpose of qualifying for medical assistance or other forms of public assistance. In such a case, the Trust Protector provision provides an additional tool to make the appropriate adjustment to accommodate such changed circumstances.

Such a provision, at a minimum, provides an opportunity for greater flexibility in administering the trust. Some states, including Alaska lawmakers, passed the statute expressly addressing the powers that may be granted to a trust protector and a trust protector's liability for its actions. Thus, while there are no absolute guarantees in life, we believe that the Trust Protector provision is potentially a very useful tool and that it makes the trust as flexible as one can make it, based on the state of the law as it exists today.

Trustee Selection, Defining Qualified Trustees

Trustee Selection

Interested v. Independent Trustees or both?

Keys to the Jailhouse: Naming the initial beneficiary the trustee, gives the beneficiary the keys to the jailhouse. Creditors can’t get in, but that doesn’t protect the trustee/beneficiary from himself/herself. Meaning, depending on the age or the existence of other then living beneficiaries, there is potential for the beneficiary/trustee to destroy the trust from within. However, if the benefits of the trust are properly explained to the trustee/beneficiary we don’t see this as a recurring problem, but it could happen.

We like to say that when a beneficiary is named the trustee of the trust, and assets are funded in trust rather than outright, it will look, taste and feel like the beneficiary of the trust had those assets in his/her bank account, but there is the added layer of the protection with the trust wrapper.

Distributions and Estate Tax Inclusion for Beneficiary/Trustee: In order keep the assets of the trust outside of the beneficiary’s estate, an interested trustee can only make discretionary distributions for health, education, maintenance and support. This separates the beneficiary/trustee from being considered the “owner” of the trust. 26 U.S.C.A. § 2041(b)(1)(A) provides that the federal gross taxable estate includes all property over which a decedent had a general power of appointment or a power to invade except for a power that is limited by an ascertainable standard.

Health, education, maintenance and support is actually a rather broad standard, that covers most everything that a beneficiary would need to maintain his/her standard of living. If, however, the trustee is unsure, or there is a need for a distribution outside the ascertainable standard, an independent trustee can usually be appointed to make principal distributions for any reason or purpose.

Beneficiary is Not Qualified to Act as Trustee

Unless a very unique circumstance exists, we usually do not limit the trustee role to only an independent trustee, again for flexibility reasons.

However, at the time of drafting the trust, an independent trustee may be the best option. There are several reasons to name an independent trustee as the trustee, including but not limited to: (i) the trust is set up as a supplemental needs trust; (ii) the beneficiary has a substance abuse disorder, (iii) the beneficiary has a gambling addiction; (iv) the beneficiary is a spendthrift and is not financially savvy, or (v) the beneficiary is a minor and there is no one else that the Settlor trusts to act as a trustee.

Solutions to Some Concerns:

Appoint co-trustees – acts as a checks and balance and can offer guidance to the person that may be a concern.

Unless the trust agreement states otherwise, when two or more co-trustees are then acting, they must act by a majority decision. So if two trustees are acting, there must be unanimous consent. If two trustees cannot agree, the Court, in its discretion, and upon filing of a petition by any trustee or an interested party, may direct the exercise or nonexercise of a power (20 Pa. C.S.A. § 7763).

Peace is a great thing to have, especially if it is peace within a family. It also applies to the situations when there is more than one trustee. As a general rule, a majority rule dictates how the decisions need to be made. However, it is always important to check the trust document for specifics. It may provide (to the surprise of the trustees), that unanimous consents may be required. Or, alternatively, a consent of a third party (e.g. a close family member, an advisor, etc.) is needed to carry out a decision. The best way to approach this is to check the trust document for specifics. And, of course, do not forget to obtain an errors and omissions insurance that may be available to the trustee. States differ in their treatment of trustee’s errors and omissions. Some states are quite generous in holding trustees exonerated from liability, while others will impose harsher thresholds to meet. Insurance is one of the practical ways a trustee can protect himself/herself from disgruntled beneficiaries.

CAUTION: Having a family member, like a sibling, acting as co-trustee with a beneficiary can often cause family rift.

As an alternative, unlike our restriction (discussed below) that two banks or trust companies cannot act at one time, we do not restrict the ability for a bank and an individual to act as co-trustees.

Generally, our instruments provide that as among the Trustees, any corporate Trustee which may be serving shall perform all ministerial and administrative duties, including the keeping of the books and records, acting as custodian of the trust property and preparing all necessary tax returns.

Always the Trustee Appointer, Never the Trustee

Being the trustee appointer allows the beneficiary a sense of control over the ability to determine who will be trustee, and remove those who do not match the beneficiary’s objectives.

Depending on the circumstances, it may be useful to appoint the beneficiary and someone else as a co-trustee appointer, if there are concerns over the beneficiary’s judgement.

Similar to appointing co-trustees, there is some caution to appointing a family member to act as co-trustee appointer.

If it does make sense to appoint a family member as a co-trustee, we usually recommend that the two interview trustees together, and allow the beneficiary to make the decision, knowing that the family member holds the veto power.

Power of Delegation

If the concern is that the beneficiary doesn’t have the “investment knowledge” or that the Settlor believes that the beneficiary would be overwhelmed by the duties and responsibilities of being trustee, no need to be too concerned, the power of delegation is a wonderful thing.

Both our instrument and the PEF Code (Section 7777) allow the trustee to delegate duties and powers. The delegation is fully revocable too.

In addition, the trustees are allowed to hire advisors, including investment advisors.

See comment above regarding appointment of co-trustees – one corporate trustee, one beneficiary trustee.

Who is a Qualified Trustee?

The PEF Code – The same person cannot be the sole trustee and the sole beneficiary (of all beneficial interests) of the trust (20 Pa.C.S. 7732(a)(5)). Otherwise, a Trust is not created.

Our Instruments:

Individual Over the Age of Thirty-Five (35): This is our default age. This age is often adjusted up or down and depends on the specific situation and family dynamic of each client. It is not a statutory requirement. The minimum age requirement is eighteen (18), the trustee has to have the legal authority and capacity to enter into contracts and agreements.

Why 35, why go older, why go younger? The decision comes down to client facts. If the Settlor is establishing a trust, that is meant to be funded on the Settlor’s death, and their child is only 3 years old at the time of execution of the trust, 35 is a good middle ground, while the Settlor is able to get a sense of whether the child will be financially mature enough to handle the trust affairs and administration. On the other hand, the client’s 20 year old son may be hitting the ball out of the park, and the client has no concerns over the son being the Trustee of the trust created for his benefit.

Including the Trustee Appointer: Another layer of flexibility. A beneficiary will be restricted from appointing himself/herself as trustee if other provisions of the Trust instrument do not allow for the beneficiary to act. For example, if the beneficiary is deemed a “disabled beneficiary” for public benefit purposes, the beneficiary would not be able to act as the trustee.

Or Any Bank or Trust Company (but only one). Two would unnecessarily increase costs of administration. Competing policies and procedures, investment strategies, etc.

Inside or Outside the Commonwealth of Pennsylvania. Adds flexibility for choice of bank or trust company. CAUTION: Not all Trust Companies are able to do business in Pennsylvania, if the intent is that the situs of the trust is Pennsylvania, this will need addressed with the Trust Company to ensure that it can act in Pennsylvania.

Whether or not the Settlor is a qualified appointee depends on the terms of the trust and the objectives that the trust is trying to achieve.

Scenario 1: If the Settlor is the Trustee of an irrevocable life insurance trust (ILIT), that would defeat the whole purpose of the ILIT because the Settlor would be able to exert control over the life insurance policies in the trust and bring the life insurance back into the Settlor’s estate for federal estate tax purposes. This would be treated as an “incident of ownership” (See 26 CFR § 20.2042-1(c)).

Scenario 2: When creating a Medicaid Trust (a/k/a Income Only Trust) the Settlor, at least in Pennsylvania, can act as the Trustee during his or her lifetime, because the intent of the trust is not to remove assets from his or her federal estate, but rather to move assets outside of his or her probate estate to help protect assets from Medicaid estate recovery.

Sample Trustee Provisions - For Discussion Purposes Only

Trustees

The Settlors hereby designate TRUSTEE 1, if not disabled, as the initial Trustee of the trusts created under this Agreement.

The Trustee Appointer at any time may remove an incumbent trustee, including a successor trustee, for cause or no cause, and appoint one or more Qualified Appointees as additional or successor trustees. Any removal of an incumbent trustee or appointment of an additional or successor trustee hereunder shall be in writing, may be made to become effective at any time or upon any event, may be for a specified period or indefinitely, may be for limited or general purposes and responsibilities, and may be single, joint or successive, all as specified in the instrument of appointment. The Trustee Appointer shall act only in a fiduciary capacity in the best interests of all trust beneficiaries.

A Qualified Appointee means any individual over the age of thirty‑five (35) years, including the Trustee Appointer (other than the Settlors) or any bank or trust company, within or outside the Commonwealth of Pennsylvania; provided, however, that only one bank or trust company shall act as a trustee of any trust at one time. It is the Settlors’ express intent that the Trustee Appointer may appoint himself or herself, as the case may be, so long as such appointment does not conflict with any other provision in this Agreement.

Any Trustee, including an Independent Trustee, serving under this Agreement may resign at any time by giving a written notice to the Trustee Appointer.

Notwithstanding any provision to the contrary in this Agreement, at no time may the Settlors act as Trustee hereunder.

If any corporate Trustee should be a party to a merger or consolidation, the resultant company shall become the successor corporate Trustee hereunder without notice to any other person. An additional or successor Trustee shall not be liable for the acts or omissions of any individual Trustee previously serving.

The Independent Tax Trustee may only be appointed or removed at any time by any of the following persons, acting individually and not requiring joint approval, the Initial Beneficiary, if not disabled, or any individuals whom the Initial Beneficiary may designate, or if none of those persons just named is available to act or has designated anyone to act as the Independent Tax Trustee, then the Independent Tax Trustee shall be appointed by the acting chairman of the Estate Department of the law firm of Knox McLaughlin Gornall & Sennett, P.C.

Trustee Appointers

IF INITIAL BENEFICIARY IS A MINOR: Until the Initial Beneficiary reaches the age of thirty‑five (35), the Trustee Appointer means TRUSTEE 1, if not disabled; otherwise any one or more individuals, who are not disabled, designated in a writing signed by TRUSTEE 1, if not disabled; otherwise a majority of the Settlors’ then living children, who are over the age of thirty‑five (35) and are not disabled; otherwise any one or more individuals, who are not disabled, designated in a writing signed by a majority of Settlors’ children, who are over the age of thirty‑five (35) and are not disabled; otherwise Trust Counsel (as such term is defined in this Agreement). Upon reaching the age of thirty‑five (35), the Initial Beneficiary, if not disabled, will become the sole Trustee Appointer and will have the power to appoint himself/herself as sole Trustee; otherwise the Trustee Appointer means any one or more individuals, who are not disabled, designated in a writing signed by the Initial Beneficiary, if not disabled; otherwise a majority of the Initial Beneficiary’s then living children, who are over the age of thirty‑five (35) and are not disabled; otherwise any one or more individuals, who are not disabled, designated in a writing signed by a majority of the Initial Beneficiary’s children, who are over the age of thirty‑five (35) and are not disabled; otherwise a majority of the Settlors’ then living children who are over the age of thirty‑five (35) and are not disabled; otherwise Trust Counsel (as such term is defined in this Agreement). Any person or persons appointed as successor Trustee Appointer(s) by the then acting Trustee Appointer may be removed by the Trustee Appointer who appointed such successor Trustee Appointer; and

IF THE INITIAL BENEFICIARY IS NOT A MINOR: The Trustee Appointer means the Initial Beneficiary, if not disabled; otherwise any one or more individuals, who are not disabled, designated in a writing signed by the Initial Beneficiary, who is not disabled; otherwise a majority of the Initial Beneficiary’s then living children, who are over the age of thirty‑five (35) and are not disabled; otherwise any one or more individuals, who are not disabled, designated in a writing signed by a majority of the Initial Beneficiary’s then living children, who are over the age of thirty‑five (35) and are not disabled; otherwise a majority of the Settlors’ then living children who are over the age of thirty‑five (35) and are not disabled; otherwise Trust Counsel (as such term is defined in this Agreement). Any person or persons appointed as successor Trustee Appointer(s) by the then acting Trustee Appointer may be removed by the Trustee Appointer who appointed such successor Trustee Appointer; and

The Independent Trustee Appointer means the Trustee Appointer or an individual or a committee of persons so designated in writing by the Trustee Appointer to appoint Independent Trustees. If the Trustee Appointer is acting as the Independent Trustee Appointer, and has not appointed an individual or committee of persons to act as Independent Trustee Appointer and the persons indicated below who can appoint a successor Trustee Appointer suspect that a Trustee or Trustee Appointer is “disabled” (as such term is defined in this Agreement) or a “Substance Affected Person” (as such term is defined in this Agreement), then the Independent Trustee Appointer shall be any one or more individuals appointed by a majority of the Initial Beneficiary’s then living children who are over the age of thirty‑five (35) and are not disabled, otherwise, an individual appointed by a majority of the Settlors’ then living children who are over the age of thirty‑five (35) (and except any child of the Settlors’ who is then acting Trustee or Trustee Appointer who is suspected to be disabled, or a Substance Affected Person, as described above) and are not disabled, otherwise the beneficiaries to whom the current trust income may or must then be distributed who are over the age of thirty‑five (35) (except any beneficiary who is then acting Trustee or Trustee Appointer who is suspected to be disabled, or a Substance Affected Person, as described above) and are not disabled, otherwise the Trust Counsel (as defined in this Agreement); and

The Independent Trustee Appointer may appoint an Independent Trustee at any time, including, but not limited to, when the Independent Trustee Appointer suspects that a trustee of a trust created under this Agreement is a “disabled beneficiary” (as such term is defined in this Agreement), or a “Substance Affected Person” (as such term is defined in this Agreement). An Independent Trustee may be appointed for the purposes as set forth in this Agreement.

The Trustee Appointer may at any time and for any reason appoint or remove, for cause or no cause, an acting Independent Trustee Appointer by delivering written notice of such appointment or removal to the Independent Trustee Appointer.

Any individual authorized to appoint and remove Trustees shall only act in a fiduciary capacity in the best interests of the trust beneficiaries. The individuals authorized to remove and appoint trustees shall have no duty to keep informed as to the acts and omissions of others or to take action to prevent or minimize loss, and shall not be liable for the acts or omissions of any other fiduciary or beneficiary hereunder absent bad faith.

The Settlors hereby, to the full extent permitted by law, waive any provisions of law otherwise requiring the Trustees to notify any beneficiary (i) of existence of this Trust, (ii) of acceptance and identification of a Trustee, (iii) of any change in the method or rate of determining the Trustee’s compensation, and (iv) of any right to receive or request the trustee’s reports. The Settlors, also to the full extent permitted by law, waive any provisions of law otherwise requiring the Trustees to furnish to any beneficiary (i) a copy of the trust instrument on request and (ii) trust reports and other information periodically or on request.

No individual who is the beneficiary of a trust to which the Supplemental Needs Trust provisions apply shall act as Trustee or Trustee Appointer or as a fiduciary of such trust. Notwithstanding any other provision of this Agreement, no disqualified person shall ever make, vote on or otherwise participate in any discretionary distribution of income or principal from any trust under this Agreement as long as such person is disqualified.

In the event that the sole Trustee of a trust is a beneficiary of the trust, the Trustee Appointer may appoint, but shall not be required to appoint, a Co-Trustee as provided herein. A beneficiary’s interest shall not be merged or converted into a legal life estate or estate for years because the beneficiary is the sole Trustee. If this would still happen under the applicable law, then a Co-Trustee shall be appointed in preference to such merger or conversion.

Sample Trust Protector Provisions for an Intentionally Defective Grantor Trust - For Discussion Purposes Only

Appointment of Trust Protector

The Trustee Appointer may, but need not, appoint a Trust Protector. Any appointment of a Trust Protector or a successor Trust Protector hereunder shall be in writing, may be made to become effective at any time or upon any event, all as specified in the instrument of appointment. Notwithstanding any provision herein to the contrary, neither of the Settlors nor any person who would fail to qualify as an Independent Trustee (as such term is defined hereinafter), or who is “related or subordinate” (as such terms are defined in Section 672(c) of the Code) to either of the Settlors or any beneficiary hereunder, may become the Trust Protector or a successor Trust Protector.

Removal / Resignation of Trust Protector

The Trustee Appointer may remove, for cause or no cause, the Trust Protector by executing and delivering a written notice of such removal to the Trust Protector at any time. If at any time a Trust Protector, becomes “related or subordinate” (as such terms are defined in Section 672(c) of the Code) to either of the Settlors or any beneficiary hereunder, or if a Trust Protector, fails to meet the definition of the Independent Trustee (as such term is defined hereinafter), he or she shall be deemed to have resigned and shall be discharged as the Trust Protector and shall no longer possess any powers or authority granted to the Trust Protector under this Article.

Any Trust Protector may resign from one or more trusts held hereunder by giving prior written notice of such resignation to the Trustee Appointer. All trusts created under this Agreement need not have or continue to have the same Trust Protector. The provisions of this Agreement that relate to the Trust Protector shall be separately applicable to each trust held hereunder.

Powers of Trust Protector

Subject to the limitations set forth below in this Article, the Trust Protector may, in his or her sole discretion, from time to time, by a written instrument delivered to the Trustees then serving:

modify, revise or restore any one or more of the administrative provisions of this Agreement, including the power to add charitable beneficiaries granted to the Trust Counsel under the Article dealing with the Trust for the Initial Beneficiary of this Agreement;
modify any one or more of the financial powers of the Trustee as enumerated in this Agreement;
modify or restore the distribution provisions set forth in this Agreement, dealing with the distributions to the Initial Beneficiary, the Initial Beneficiary’s issue, and the Spouses of the Initial Beneficiary’s issue, by reducing, eliminating, or restoring Income and principal distributions to the trust beneficiaries for any reason or purpose, including, but not limited to, the purpose of preserving Public Benefits (as defined herein) for trust beneficiaries, without creating a general power of appointment in such beneficiaries. Solely for the purpose of exercising the power set forth in this subsection, the Trust Protector shall act in his or her non‑fiduciary capacity; and
(i) modify the provisions of any power of appointment under such trust created under this instrument by either adding or removing the creditors of the powerholder’s estate to or from the group of permissible appointees of such power of appointment; (ii) modify the provisions of such trust to grant to any beneficiary of such trust a testamentary general power of appointment in favor of the creditors of such beneficiary’s estate; (iii) revoke any such modification previously executed, with or without executing a replacement instrument; or (iv) irrevocably relinquish the powers conferred under (i), or (ii), or (iii) under this paragraph. Without limiting the Trust Protector’s discretion, the Trust Protector may use the authority conferred by this paragraph to subject the trust property subject to the power of appointment in the beneficiary’s estate to obtain a basis adjustment under Section 1014 of the Code when it appears that it may reduce overall taxes to do so.

Limitation on Powers

The Trust Protector shall not exercise any power granted to him or her in any manner which shall violate any applicable rule against perpetuities or any similar law applicable to any trust hereunder, and the Trust Protector shall not exercise any such power in any manner which would cause a trust to continue beyond the period of the limitations of such rule or law, if any such rule or law is applicable.

Notwithstanding any provision in this Article to the contrary, no power granted to the Trust Protector herein shall be exercisable by the Trust Protector or shall be valid or deemed to exist to the extent that the exercise or the existence of such power would nullify, reduce, limit, or otherwise adversely affect: (i) the provisions of this Agreement dealing with an S corporation trust (as defined in this Agreement) to qualify as a Qualified Subchapter S Trust, or (ii) except as provided in this Article, any general power of appointment granted under this Agreement, it being the Settlors’ unequivocal intention that the assets of the Non‑Exempt Trust can be appointed by the Primary Beneficiary as he or she directs by exercising a general power of appointment granted under this Agreement solely for the purpose of avoiding the imposition of generation skipping transfer tax.

Except as otherwise provided in this Article, the rights and powers conferred on the Trust Protector under this Agreement shall be exercisable only in a fiduciary capacity. Notwithstanding any other provision of this Agreement (except as provided in the Section of this Article dealing with the Trust Protector having the authority to grant a trust beneficiary the power to appoint property of the Trust to creditors of the beneficiary’s estate to obtain a basis adjustment under Section 1014 of the Code), the Trust Protector shall not participate in the exercise of a power or discretion conferred under this Agreement that would cause any portion of the trust to be included in the gross estates of either of the Settlors, the trust beneficiaries, any of the fiduciaries, or the Trust Protector for federal or state death tax purposes or that would cause or result in the Settlors, trust beneficiaries, any of the fiduciaries, or the Trust Protector possessing a general power of appointment over any portion of the trust within the meaning of Sections 2041 and 2514 of the Code.

Exercise of Authority

As an inducement to the Trust Protector to exercise the powers granted in this Article, the Settlors direct that the Trust Protector’s decisions under this Article shall be absolutely binding on all persons interested in the Trust and their estates and that the Trust Protector shall not be liable for any exercise or failure to exercise any such power if the Trust Protector shows that he or she has acted in good faith, unless such action or omission is against the public policy as stated by the legislature.

Compensation of Trust Protector

The Trust Protector shall be entitled to receive reasonable compensation for his or her services hereunder and shall be reimbursed for any expenses incurred.

Discretionary Power

The Trust Protector, in that capacity, shall have no duty to monitor any trust created hereunder in order to determine whether any of the powers and discretions conferred under this Article should be exercised, and the Trust Protector is not required to exercise any power or discretion granted under this Article. Further, the Trust Protector, in that capacity, shall have no duty to keep informed as to the acts or omissions of others or to take any action to prevent or minimize loss. Absent bad faith, the Trust Protector, in that capacity, is hereby exonerated from any and all liability for the acts or omissions of any fiduciary or any beneficiary hereunder.

Scope of Authority

Subject to the limitations on the powers of the Trust Protector as set forth in this Article, the Trust Protector acting from time to time, if any, on his or her own behalf and on behalf of all successor Trust Protectors, may at any time irrevocably release, disclaim, renounce, suspend, or modify to a lesser extent any or all powers and discretions conferred under this Article by a written instrument delivered to the then acting Trustee.

Authors: Edward C. Spontak and Kenzie P. Ryback

Originally published in October 2023