The Superior Court of Pennsylvania, an intermediate appellate court, has affirmed a trial court decision and denied a request of the Virginia Military Institute to terminate a $2 million trust for its benefit and transfer the assets to its affiliated foundation outright. In what it called a case of first impression, the Court upheld the position of the trustee bank and the state attorney general that the donor had intended to keep the assets separate from the institution and a difference in cost was not sufficient to deviate from that intent.
Richard H. Wells, a graduate of VMI in the class of 1924, became president of the Oil City Trust Company in Pennsylvania in 1952 and significantly expanded the bank’s operations over his 12 years in charge. In 1956, he created a revocable trust for his estate plan, which was amended several times before his death in 1968. In his fourth and final amendment, he provided that upon the death of his wife, the trustee should hold the remaining assets in a charitable trust and pay the income perpetually to the VMI Foundation for VMI’s unrestricted use.
The current assets held by PNC Bank as trustee pay out about $67,000 a year (a 3.35% return), with trustee’s fees of approximately $18,500 a year (about 28% of income). VMI argued that its foundation could administer the assets for less cost, including avoidance of the private foundation excise tax of 1.39% on net investment income. Pennsylvania law permits a court to terminate a charitable trust if “administrative expense or other burdens [are] unreasonably out of proportion to the charitable benefits.”
The Court recognized the statute but said, with respect to trust interpretation, “the intent of the settlor is paramount, and if that intent is not contrary to law, it must prevail.” The trial court had found, particularly from the series of amendments that Wells made to the trust, that the intent of the settlor to keep the money in a separately administered trust was clear. The Superior Court has affirmed and agreed the trust should not be terminated.
The Court said it found no case in state law authorizing the termination of a charitable trusts in the situation claimed by VMI. The only case it found authorizing the termination of a charitable trust in closely similar circumstances involved the termination by a county court of a trust to pay medical costs of correcting physical deformities of children. In that case, the trustee asked to terminate the trust and transfer the assets to the local community foundation, not only to save the administrative costs of a separate private foundation but also because the community foundation could do a better job than the bank trustee could do in publicizing the availability of the money and making grants to appropriate grantees. The county court noted that the community foundation did not exist when the trust was originally written and that the state Attorney General did not object. After considering “all the circumstances,” the county court agreed to the termination.
In this case, the Court said that the county court had reached the opposite conclusion and it found “no error” in the decision. The Court noted that Wells had asked that the trustee hold the assets separately and give the income to the VMI Foundation in perpetuity. It also found that VMI had not proven the existence of administrative expense or other burdens unreasonably out of proportion to the charitable benefits envisioned by the settlor. (In Re: Trust B Under Agreement of Richard H. Wells, Appeal of VMI Foundation, Superior Ct., PA, No 1269 WDA 2021, 9/7/22.)
YOU NEED TO KNOW
This is a strict reading of the state statute and makes clear that this Court will not terminate a private foundation merely because the costs are marginally higher than the costs of a charity holding the money itself if there is clear intent that the settlor wanted a separate trust. It appears that it will take more than a small cost savings to provide the basis for termination.