When Ruth Soper died in 1973, she left a will directing her bank trustee to pay annuities to three individuals for their lifetime and then hold the remainder in trust to pay the income to the Episcopal Diocese of Washington, D.C. Following the death of the last income beneficiary, the Diocese petitioned to terminate the trust and transfer the assets to it outright. Over the bank’s objection, the federal District Court in Maryland has said the trust should be terminated. (Convention of Protestant Episcopal Church of the Diocese of Washington, v. PNC Bank, No. 10-2793, 6/7/11.)
Mrs. Soper’s will was originally drafted in 1967 and, because of the tax law changes in 1969 requiring specific provisions to qualify charitable remainder trusts for favorable tax treatment, had to be reformed after her death to obtain the charitable estate tax deduction. The new provisions included a provision that the trustee should distribute to an alternate charitable beneficiary if the Diocese ever lost its tax-exempt status, and a “spendthrift” clause to protect the beneficiaries from claims of creditors.
The value of the trust had grown to about $23 million and PNC Bank took trustee fees, including fees for outside investment managers, of $143,000 in 2008 and $98,000 in 2009.
The Diocese argued (1) that it was the sole beneficiary and therefore had the consent of all beneficiaries for the termination, (2) termination would not be inconsistent with the settlor’s intent, (3) the continued payment of fees burdened the trust, and (4) the spendthrift provision did not prevent termination.
The Bank argued (1) the Diocese did not have the consent of all contingent beneficiaries or the Attorney General, (2) the Diocese failed to join the Attorney General, and (3) the spendthrift clause prevented termination.
The Court recognized the role of the Attorney General, but said the issue was moot because, in a letter received from the AG following oral argument of the case, the AG had said he “does not regard himself as a necessary party … and does not intend to participate as a party.”
The Court noted that the Diocese was the only beneficiary mentioned in Mrs. Soper’s will and that the provision about a possible successor was executed solely for tax purposes after her death. “Moreover, the possibility that the Protestant Episcopal Church, which the Court judicially notices dates back to pre-Revolutionary War times in America and previously as part of the Church of England to centuries before that, might cease its existence or lose its eligibility as a charity is unlikely in the extreme.”
On the spendthrift clause, the Court said the standard for determining whether the presence of a spendthrift clause would preclude the termination of the trust depended on whether the settlor had “a material purpose that would be inconsistent with allowing the beneficiaries to terminate the trust.” In this case, the clause was added only after Mrs. Soper’s death as part of the reformation and “does not suffice to establish that terminating the trust would be inconsistent with a material purpose of the trust.”
YOU NEED TO KNOW
The bank trustee is fighting a losing battle in a case like this, especially where the trust has lost classification as a supporting organization and has become classified as a private foundation, which requires to pay the excise taxes on investment income in addition to the administration costs of a separate entity. We can expect to see more cases such as this in the future, particularly since many trusts will lost their supporting organization status under the new rules of the Pension Protection Act of 2006 and will become private foundations, with the attendant higher costs. (See Ready Reference Page: "Supporting Organizations Qualify as Public Charities")