Charitable Trust Termination; Settlor’s Intent
In Re: Trust B of Wells, 282 A.3d 1149 (Pa. Super. 2022), allocatur granted Mar. 7, 2023, appeal docket 5 WAP 2023
In this case of first impression, Appellant VMI Foundation Inc. (the Foundation), the sole beneficiary of the Wells Trust (the Trust), seeks termination of the Trust and payment of its assets to the Foundation pursuant to subsection (e) of Pennsylvania’s Charitable Trust Termination Statute, which allows for such remedies where the administrative expense of operating the trust is disproportionate to the charitable benefits bestowed by the trust:
(e) Judicial termination of charitable trusts.–If the separate existence of a trust, whenever created, solely for charitable purposes results or will result in administrative expense or other burdens unreasonably out of proportion to the charitable benefits, the court may, upon application of the trustee or any interested person and after notice to the Attorney General, terminate the trust, either at its inception or at any time thereafter, and award the assets outright, free of the trust, to the charitable organizations, if any, designated in the trust instrument or, if none, to charitable organizations selected by the court, in either case for the purposes and on the terms that the court may direct to fulfill as nearly as possible the settlor’s intentions other than any intent to continue the trust, if the court is satisfied that the charitable organizations will properly use or administer the assets.
20 Pa.C.S. § 7740.3(e).
Superior Court summarized the relevant facts as follows:
Appellant [the VMI Foundation] is the sole beneficiary of the Trust, and a charitable organization pursuant to Section 501(c)(3) of the United States Internal Revenue Code. See 26 U.S.C.A. § 501(c)(3). Appellant “holds and oversees Virginia Military Institute’s (hereinafter referred to as “VMI”) endowment assets.” Petition to Show Cause, 5/6/19, at 6. VMI is a public university in Lexington, Virginia. PNC is the Trustee.
The orphans’ court described the evolution of the Trust as follows:
Richard H. Wells (“Wells”) for much of his life was a resident of Oil City, Venango County, Pennsylvania. Wells was a 1924 graduate of Virginia Military Institute (“VMI”). In 1952, Wells became president of and was appointed to the Board of Directors of the Oil City Trust Company. Wells aggressively led his bank to expand and acquired additional banks and in 1954, the Oil City Trust Company changed its name to First Seneca Bank and Trust Company following the purchase of two other local banks. Mr. Wells continued the expansion of the bank by merger with two other banks and was continually reelected as president of the bank until his retirement on December 31, 1963. It was stated in his obituary that during the 12 years for which he served as president, the bank “quintupled in size.” See (Brief of Trustee, p.3). In 1956, Wells created the Richard H. Wells Revocable Trust Agreement dated September 28, 1956. The agreement established First Seneca Bank and Trust Company of Oil City, Pennsylvania as the Trustee. Mr. Wells died on March 30, 1968, whereupon the trust agreement became irrevocable. During his lifetime, Wells amended the trust agreement four times, in 1960, in 1961, in 1963, and in 1965. Originally the trust agreement provided that Wells’ wife or his children would receive the net income of the trust for life, with the power to invade principal in the trustee’s discretion for the benefit of his wife or children. Upon the death of his wife, the trust would be divided into new trusts for each of his children and then upon their death it would be distributed under the terms of their wills or to their issue free of the trust. If there was no issue then the assets of the trust would be distributed to various individuals with the residue, if any, to VMI to be added to its general endowment fund and identified as a memorial to Richard H. Wells and the class of 1924. The amendment in 1960 changed the terms of the agreement so that VMI was to receive “favorable consideration” in the allocation of trust income, instead of a gift of the residue to VMI to be added to its general endowment fund. In 1961 and in 1963, the gift to VMI continued to be “favorable consideration” for the distribution of the trust income of a contingent charitable remainder. Then in 1965, Wells amended the trust for the final time. In this amendment he removed all references to his son and provided that upon his wife’s death, two other individuals would receive lump sum payments instead of money in trust, and then the remaining principal would form a perpetual charitable trust. VMI as the sole remainder beneficiary was to receive the income at least annually, which would be credited to the class of 1924.
Orphans’ Court Opinion and Order, 10/5/21, at 1-2 (emphasis added).
Mr. Wells died on March 30, 1968. His wife died on August 14, 2004. Mr. Wells’ fourth and final amendment to the Trust, in Paragraph B.5., states that upon Mrs. Wells’ death,
the Trustee shall add any accumulated and undistributed income in the trust to the principal thereof, and shall hold the thus augmented principal in trust, in perpetuity, and the Trustee shall pay and distribute the net income of the Trust, in perpetuity, at least annually, to [Appellant], Virginia Military Institute, of Lexington, Virginia, which distributions shall by [Appellant], Virginia Military Institute, be credited to the Class of 1924, and which distributions shall be unrestricted, to be applied for such purposes as the governing board of [Appellant] may from time to time determine.
Amendment to Revocable Trust Agreement, 7/7/65, at 4.
Presently, Appellant asserts “the approximate annual income is $67,000 per year (a 3.35% return), and with fees of approximately $18,500 per year, the Trustee’s fees represent approximately twenty-eight percent (28%) of the income of the Trust in 2017, which is out of proportion to the intended benefits of the Trust to its beneficiary.” Petition to Show Cause, 5/6/19, at 7, ¶ 38.
Slip op. at 2-4 (footnote omitted).
The Foundation filed a petition with orphan’s court to terminate the Trust pursuant to subsection (e) of the Charitable Trust Termination Statute, averring that:
- Currently, the Trust has assets of approximately $2,000,000 and generates income of approximately $67,000 per year (a 3.35% return) while incurring fees of approximately $18,500 per year and other expenses of $750 for tax return preparation (or approximately 0.96% of the trust corpus), which excludes any fees which the Trustee or its holding company may have realized from the mutual or commingled investments funds sponsored by PNC Bank and not rebated back to the Trust.
- The Trustee’s fees represent approximately twenty-eight percent (28%) of the income of the Trust in 2017, leaving [Appellant] approximately $47,750.
Petition to Show Cause, 5/6/19, at 4.
Appellant argued “the Trust should be terminated, as the administrative expenses and other burdens are unreasonably out of proportion to the charitable benefits and [Appellant] will properly use and administer the assets in accordance with [Mr. Wells’] intentions.” Id. at 5. Appellant averred:
- [Appellant] also incurs additional management and audit expense in accounting for the Trust in the preparation of its audited financial statements, which likewise reduces its net aid to VMI.
- Terminating the Trust will also eliminate the costs of the tax and reporting expense incurred by the Trust and realize the economies of scale in the investment of its assets.
- [Appellant] is a charitable institution under Section 501(c)(3) of the Internal Revenue Code and is subject to the oversight of the Attorney General of Virginia under Va. Code § 2.2-507.1.
- Pursuant to Virginia [state law], [Appellant] manages its endowments in a manner similar to 15 Pa.C.S.A. § 5548(c) [“Investment of trust funds”,] and 20 Pa.C.S.A. § 8113 [“Charitable trusts”].
- Given the clear intent of [Mr. Wells] to benefit VMI in perpetuity, even small annual savings in these fees and expenses can become substantial over time and can be more properly used for the benefit of VMI.
- As set forth above, the approximate annual income is $67,000 per year (a 3.35% return) and with fees of approximately $18,500 per year, the Trustee’s fees represent approximately twenty-eight percent (28%) of the income of the Trust in 2017, which is out of proportion to the intended benefits of the Trust to [Appellant].
- [Appellant] has been in existence since 1936 and VMI since 1839. There is no reason to believe that they will not continue to provide educational benefits for the foreseeable future.
- Additionally, [Appellant] has a long track record of managing sizeable assets with professional managers and Virginia’s oversight of charitable institutions further assures satisfaction of [Mr. Wells’] intent.
Petition to Show Cause, 5/6/19, at 7-8.
Slip op. at 4-6. PNC opposed the petition, arguing that PNC “serves in a fiduciary capacity and is bound by the terms of the Trust” and that “termination of the Trust would violate not only [Mr. Wells’] intent, but also the explicit terms of the Trust[.]” Slip op. at 6. Thereafter, the Commonwealth of Pennsylvania, through the Office of the Attorney General and acting as parens patriae, intervened. Following discovery, the Foundation filed a motion for summary judgment seeking an order that PNC “transfer the assets of the Wells Trust to [Appellant] to be held in perpetuity as a permanently endowed fund (the “Wells Fund”) with the annual distributions therefrom in accordance with Mr. Wells’ specific instructions[.]” Slip op. at 6-7. PNC and the Commonwealth also filed motions for summary judgement seeking dismissal of the petition.
The orphans’ court denied the Foundation’s motion for summary judgment and granted summary judgement in favor of PNC and the Commonwealth, reasoning that “Mr. Wells ‘wanted a charitable trust to go on in perpetuity rather than an outright gift’” therefore because Mr. Wells’ intent was clear, there was no other issue to consider. Slip op. at 8. Appellant appealed to Superior Court.
Superior Court noted “a scarcity of case law, in Pennsylvania as well as other jurisdictions, addressing judicial termination of charitable trusts” and that it could find “no factually analogous cases.” However, the court noted one case from the Lancaster County Court of Common Pleas, was similar in that it involved § 7740.3(e). Superior Court explained:
In In re Schlegel, No. 36-1990-0184, 2003 WL 26100147 (Pa.Com.Pl. Feb. 04, 2003), the settlor, Clara M. Schlegel, created a charitable trust known as the Arthur O. and Clara M. Schlegel Memorial Fund for Deformed Children of Berks County. The trust was established in 1984, and provided that upon Ms. Schlegel’s death, the trustee was to
hold, manage, invest and reinvest and apply the net income therefrom each year, together with an additional sum when needed, not to exceed five percent (5%) of the principal of said Trust in any one year (which sum shall not cumulate from year to year), to assist in defraying the medical and hospital costs of treating and correcting physical deformities in children residing in Berks County who are either without parents or whose parents are unable financially to meet such expenses. In administering this Trust, the Trustee shall establish and utilize the recommendation of a duly constituted panel of representatives from local social service agencies in Berks County whose activities place such agencies in direct personal contact with persons in need of such services, in selecting (in the sole and uncontrolled discretion of Trustee) the persons who are to be the recipients of such assistance.
Id. (quoting Trust Agreement, 6/4/84, at ¶ 9.(Q)).
Ms. Schlegel died in 1988. The trustee, Susquehanna Trust & Investment Company, thereafter presented to the orphans’ court a petition for adjudication which contained “averments appropriate to a petition for relief under Section 6110(c),” which was the judicial termination statute in effect at the time, and the predecessor to § 7740.3(e). See id. The trustee asked the orphans’ court to terminate the trust and award the assets to the Berks County Community Foundation. Like Appellant, the trustee averred that termination of the trust and transfer of the assets,
would accomplish significant tax savings. At the present time the trust is recognized as a private foundation by the Internal Revenue Service. This status subjects the trust to an annual excise tax, detailed reporting requirements and limits on its operations. As a part of the Foundation the trust would have the status of a public charity and be relieved of these burdens.
However, the trustee also averred it had
experienced some difficulty in organizing an advisory board of Berks County residents and promoting community awareness of the availability of the fund within the geographical limits provided by the settlor. In August of 2000, the advisory board included the president of the Berks County Community Foundation as a member. Thereafter a successful collaboration between the trustee and the Foundation developed. An increase in the level of success enjoyed by the trustee in making funds available to appropriate recipients coincided with the involvement of the Foundation. The Foundation, which did not exist at the time of the death of Clara M. Schlegel, apparently was established in 1994. It now administers funds in excess of $25,000,000.00. The members of the board of the Foundation are prominent members of the Berks County community. Their familiarity with that community should facilitate the use of the Memorial Fund as intended by the settlor.
The orphans’ court, noting the Attorney General had “expressed no objection to the granting of the relief requested in the petition,” granted the trustee’s request. Id. The court “directed the distribution of the balance herein to the Berks County Community Foundation for administration for the identical purposes contained in the trust agreement.” Id. The orphans’ court stated it considered “all [of] the circumstances” in concluding “the pursuit of the settlor’s goals and objectives by the present trustee results in expenses and burdens which are unreasonably disproportionate to the charitable benefits.” Id.
Slip op. at 12-14. Applying the reasoning in In re Schlegel, Superior Court held that the beneficiary failed to prove that the trustee’s administrative fees constituted a burden unreasonably out of proportion to trust’s charitable benefits, reasoning that:
Instantly, the orphans’ court concluded termination of the Trust was not warranted. The court explained:
We have studied the trust documents. We have studied the amendments to the trust. The documents are clear and easily understood. There are no issues of contradictory language. As to whether Wells wanted a charitable trust to go on in perpetuity rather than an outright gift to VMI, we have the answer. In the first version of the Trust in 1956, Wells provided that the residue, after specific gifts, would go to VMI, to be added to its general endowment funds and identified as a memorial to the class of 1924. In every subsequent version of the Trust he shied away from the outright gift and in each version made a provision for a charitable trust. This was a man who clearly knew what he was doing. He was the President of a Bank and Trust Company. Wells wanted to make a gift in trust to his alma mater and he did. There is really nothing else to be considered. Since the language and circumstances surrounding the establishment of the trust leave no doubt as to his intent there is nothing further to analyze.
Orphans’ Court Opinion, 10/5/21, at 7.
We discern no error. There are important differences between this case and In re Schlegel, where the parties — notably the trustee and Commonwealth — were proponents of termination, and the trustee made the request. In In re Schlegel, the trustee advanced an argument regarding beneficial tax treatment if the trust assets were converted from their status as a private foundation to part of a public charity. However, the trustee also averred it faced challenges fulfilling the settlor’s charitable intent, having “experienced some difficulty in organizing an advisory board … and promoting community awareness of the availability of the fund within the geographical limits provided by the settlor.” In re Schlegel, supra. Further, the trustee had developed “a successful collaboration … with the Foundation,” which resulted in an “increase in the level of success enjoyed by the trustee in making funds available to appropriate recipients.” Id. The orphans’ court considered “all the circumstances” in concluding “pursuit of the settlor’s goals and objectives by the present trustee results in expenses and burdens which are unreasonably disproportionate to the charitable benefits.” Id. Accordingly, the court granted the trustee’s request to terminate the trust and transfer assets to the Foundation.
The orphans’ court’s decision in In re Schlegel is consistent with the language of the judicial termination statute. The statute in effect at the time, as well as the current version, effective November 6, 2006, are nearly identical. See 20 Pa.C.S.A. § 6110(c) (“If the … trust … results or will result in administrative expense or other burdens unreasonably out of proportion to the charitable benefits, the court may … terminate the trust … and award the assets outright … to the charitable organizations … designated in the conveyance, or if none, to charitable organizations selected by the court”); compare with 20 Pa.C.S.A. § 7740.3(e) (“If the … trust … results or will result in administrative expense or other burdens unreasonably out of proportion to the charitable benefits, the court may … terminate the trust … and award the assets outright … to the charitable organizations … designated in the trust instrument or, if none, to charitable organizations selected by the court”).
Here, unlike Schlegel, the trustee (PNC) and the Commonwealth oppose termination of the Trust. Appellant claims termination is statutorily warranted because the Trust’s “administrative expenses and other burdens are unreasonably out of proportion to the charitable benefits.” See Petition to Show Cause, 5/6/19, at 5, ¶ 25. Appellant bases this claim on the Trust’s “expenses and investment inflexibility,” which “would be completely avoided by a transfer of the Well’s Trust’s assets to [Appellant], which is not a Private Foundation.” Appellant’s Brief at 25. Appellant asserts that PNC “has refused to terminate the Trust only because it is putting its own financial interests (i.e. fees earned as Trustee) ahead of the best interests of the beneficiary of the Trust.” Petition to Show Cause, 5/6/19, at 5, ¶ 23. In support, Appellant details its wealth management prowess. See, e.g., id. at 6-7 (averring Appellant “holds and oversees … endowment assets, which are approximately $500,000,000, constituting one of the largest per student endowments of any public university”; the “endowment’s investment performance has ranked in the second quartile of similar colleges and universities at its level”; Appellant “uses a spending factor of approximately 4.75% of the endowment’s quarter average … allow[ing the] endowment to focus on its total return … in determining how much of the endowment can be properly appropriated”; Appellant “pays approximately 0.29% of the value of the endowment … for  investment management and custodial fees, which is significantly less than the .96% currently paid by the Trust”).
Slip op. at 15-17. Thus, Superior Court concluded:
… a settlor’s intent “is paramount, and if that intent is not contrary to law, it must prevail.” Estate of Nesbitt, 652 A.2d at 857. The facts of this case are not disputed. Appellant “has been in existence since 1936.” Petition for Rule to Show Cause, 5/6/19, at 8, ¶ 39. Mr. Wells was aware of Appellant’s existence when he created and amended the Trust between 1956 and 1965. Mr. Wells expressly identified Appellant in Paragraph B.5. of the final amendment, when he directed
the Trustee shall pay and distribute the net income of the Trust, in perpetuity, at least annually, to the VMI Foundation, … which distributions shall by the VMI Foundation, Virginia Military Institute, be credited to the Class of 1924, and which distributions shall … be applied for such purposes as the governing board of the VMI Foundation may from time to time determine.
Amendment to Revocable Trust Agreement, 7/7/65, at 4 (emphasis added).
Upon review, we agree that judicial termination of the Trust was not warranted. Appellant seeks termination of the Trust because it would be more cost effective. However, Appellant has not proven the existence of “administrative expense or other burdens unreasonably out of proportion to the charitable benefits,” as required by 20 Pa.C.S.A. § 7740.3(e). At argument, Appellant’s counsel stated, “We accept that the quid quo pro, the payment of those fees for [PNC’s] services rendered, are reasonable. They’re market.” N.T., 8/30/21, at 34. As there are no genuine issues of material fact, the orphans’ court did not err in granting summary judgment in favor of PNC and the Commonwealth, and against Appellant.
Slip op. at 18-19.
The Pennsylvania Supreme Court granted allocatur to consider:
Whether, in a matter of first impression, the Pennsylvania Superior Court erred in its analysis and application of 20 Pa.C.S. § 7740.3(e) (“The Charitable Trust Termination Statute”) in holding that the VMI Foundation, Inc. (hereinafter, “VMI Foundation”) is not entitled to the remedies sought by its Motion for Summary Judgment, specifically to include the termination of the Wells Trust with an award of the trust’s assets to the VMI Foundation to be held on the conditions nearly identical to the terms and conditions set forth in the Wells Trust?