Articles & Blog

Removal of Trustee

A well-written opinion from the Philadelphia Court of Common Pleas, Orphans Court Division was issued August 18, 2014, regarding removal of trustee (Edward Winslow Taylor, Inter vivos Trust, O.C. 3563 IV of 1939). The governing instrument provided that if the trustee resigned the settlor, if alive and able, may appoint a new trustee, and in the alternative the beneficiary may appoint the trustee.

The beneficiaries proposed to change that section of the governing instrument to allow the income beneficiaries, from time to time and without cause, to remove the corporate trustee and substitute another. The beneficiaries invoked section 7740.1 (general provisions for modification) of the Pennsylvania Estates and Fiduciaries Code (PEF) which provides that if not all the beneficiaries consent to a proposed modification of the trust that the modification may be approved by the court if the court is satisfied that if all the beneficiaries had consented the trust could be modified, and the interest of the beneficiary that did not consent will be adequately protected. The beneficiaries also cited the McKinney trust case (as discussed in our blog a couple weeks ago), but did not raise section 7766 of the PEF Code (specific provisions for removal of a trustee). The corporate trustee argued that section 7766 of the PEF Code was the proper statute to utilize as it specifically deals with the removal of trustee and provides that a beneficiary may request the court to remove the trustee under certain conditions.

The court reviewed the numerous factors that the Superior Court in the case of McKinney outlined for a court to analyze under section 7766, and concluded that the beneficiaries proposed none of those factors for review. The court further concluded that whenever a general provision in a statute is in conflict with a specific provision in a statute, then the specific statute shall prevail and be construed as an exception to the general provision (1 Pennsylvania, CSA, 1933).

The court denied the proposed modification of the beneficiaries.


On September 4 of last week, FCC Chairman Tom Wheeler expressed his concern that there is a lack of high-speed connections for most of rural America. He stated that “three quarters of American homes have no competitive choice for essential infrastructure for 21st century economics and democracy included in that is almost 20% will have no service at all.” He further stated the lack of competition “forced imposition of strict government regulations in telecommunications.” He prefers a competitive market with less regulation rather than the heavy regulation of monopolies which stifles competition. Tom Wheeler went on to say that his goal is not to criticize, but “to recognize that meaningful competition for high-speed wired broadband is lacking and Americans need more competitive choices for faster, better Internet connections, both to take advantage of today’s new services and to incentivize the development of tomorrow’s innovations”. Attorney Virginia Metallo, formerly of Clarks Summit, Pa., works on some of these matters at the FCC.

Removal of Trustee

The Superior Court of Pennsylvania decided the McKinney case regarding a removal of a corporate trustee (67 A3d 824, May 2013). The facts were that the family members moved to another state and the original corporate trustee changed six times through bank mergers. There existed the same personnel throughout the bank mergers except upon the last merger there was a change in personnel and the new individuals were “ineffective and unresponsive.”. Also, the family moved to another state and the newest merger only had a trust office in a different part of the state. Also, the proposed new corporate trustee served four other family trusts. The Court reviewed the facts in conjunction with section 7766 of the Pennsylvania Uniform Trust Code, which provides that a court may remove a trustee if it finds that it is in the best interest of the beneficiaries and not inconsistent with the material purpose of the trust, and that there is a suitable new trustee available and that there has been a substantial change of circumstances. The statute also provides that a corporate reorganization, including a merger is not itself a substantial change in circumstances. However, the Court found that the removal of the trustee was in the best interest of the beneficiaries and the removal was not inconsistent with the material purposes of the trust and there was a suitable new trustee and there existed a substantial change in circumstances as described above.

Minimize taxation of trusts

During 2014 a trust with taxable income above $12,150 will incur capital gains rate at 20 percent (15 percent plus a 5 percent surtax), whereas an individual will not pay the surtax until he or she acquires taxable income of $400,000. Also a trust will pay the Medicare tax of 3.8 percent on taxable income above $12,150, whereas an individual will pay that tax when their adjusted gross income exceeds $200,000. Therefore, a trust pays on capital gains on income above $12,150 at 23.8 percent, whereas if an individual has income under $200,000 then his or her rate on capital gains is 15 percent. Distributing capital gains from a trust (which has taxable income above $12,150) to an individual- beneficiary with AGI under $200,000 will obviously save tax dollars. In the right circumstances a certain amount of capital gains could be included as part of distributable net income and deducted at the trust level and be included in the beneficiary’s tax return with the use of certain provisions of the Pennsylvania Uniform Trust Act, the Pennsylvania Prudent Investor Act, and the Pennsylvania Uniform Principal and Income Act, in conjunction with US Treasury Regulations 1.643.


Approximately 29 states, including Pennsylvania, have laws making adult children financially responsible for the care and maintenance of their parents if their parents can’t afford to take care of themselves.  These laws have taken on new significance in law suits by third parties such as nursing homes and other health care providers.

Pennsylvania’s filial support law can be found at 23 Pa.C.S.A. § 4603. It provides that all of the following individuals have the responsibility to care for and maintain or financially assist an indigent person, regardless of whether the indigent person is a public charge: (i) The spouse of the indigent person; (ii) A child of the indigent person; and (iii) A parent of the indigent person.  There is no responsibility for financial support: (i) If an individual does not have sufficient financial ability to support the indigent person; or (ii) A child shall not be liable for the support of a parent who abandoned the child and persisted in the abandonment for a period of ten years during the child’s minority.

This law was enforced by the Pennsylvania courts in the case of Health Care & Ret. Corp. of Am. v. Pittas, 2012 PA Super 96, 46 A.3d 719, 721 (Pa. Super. Ct. 2012), reargument denied (July 18, 2012), appeal denied, 619 Pa. 706, 63 A.3d 1248 (2013).  In Pittas a son was held liable for his mother’s $93,000 nursing home bill.  Following treatment in a rehabilitation facility the mother moved overseas leaving a large portion of her medical bills unpaid. The nursing home sued the son who was one of three adult children. Both the trial court and an appeals court found the son responsible for his mother’s unpaid nursing home bill, rejecting his arguments that the courts should have considered alternate forms of payment, such as Medicaid, his mother’s husband or her two other adult children.

United States Supreme Court-Affordable Health Care Act

The recent opinion of United States Supreme Court held that closely held corporations enjoy religious freedom under the Religious Freedom Restoration Act of 1993 and such closely held corporations do not need to insure certain methods of contraception that would violate the sincere religious beliefs of the company’s owners. The Court stated that this religious freedom under the Religious Freedom Restoration Act extends to closely held corporations and not just proprietorships or partnerships, and the mandate imposed under the Affordable Health Care Act (Obamacare) for noncoverage of certain methods of contraception is in violation of the Religious Freedom Restoration Act of 1993. As a result, the Supreme Court did not need review the constitutionality issue under the First Amendment. The Conestoga case in our Third Circuit was reversed (as the Third Circuit found that the company was in violation of the Affordable Held Care Act), and the Hobby Lobby case in the Tenth Circuit was affirmed (as the Tenth Circuit found that the company was not in violation of the Affordable Held Care Act) . The Court stated that there are other ways in which Congress or the Department of Health and Human Services could equally ensure that every woman has cost-free access to all FDA approved contraceptives.


Recently, the Tax Court issued an interesting case in the Estate of Richmond, T C Memo 2014 – 26, regarding valuation. The decedent owned 23.4% of a C Corporation that had been in existence for a very long time and held mostly marketable securities.

The Court found that the prevailing approach would be to value the shares under the net asset value theory, which was also the IRS’s position; rather than the taxpayer’s (the Estate) position of capitalizing the actual one year dividend.

With respect to the built-in capital gains discount, the Court agreed with the IRS and followed the precedent of the Tax Court and Second and Sixth Circuits and based the discount on the present value of the tax liabilities that the Corporation would recognize. The Court rejected the Estate’s argument that the Court should base the discount in accordance with the view of the the Fifth and Eleventh Circuits which calculates the discount on the tax liability as if the tax was immediately due and payable in full on the valuation date. The Court noted that the executors resided in Pennsylvania and New Jersey and the will was probated in Pennsylvania, thus an appeal would be to the Third Circuit. It would be interesting if the facts of the case resulted in a potential appeal to the Fifth or Eleventh Circuit; would the outcome of the Tax Court be different on the issue of the built in capital gains?

Also, the Company accountant prepared the valuations and the Court imposed the valuation misstatement penalty of 20% due to the fact that the accountant did not have appraiser certifications and the accountant did not explain the basis for their conclusions.

Federal Estate Tax Return for Spouses in 2011, 2012 and 2013

Last month the IRS opened a window to correct what could be a potentially costly error to families whom you serve. This pertains to a married individuals who died in 2011, 2012 and 2013, owning a business interest, gas lease (whether or not in production) or any other appreciable asset.  Undoubtedly,  business interests and tangible assets have value.  However, a recent gift tax audit involving one of our clients has confirmed absolutely that the IRS considers gas leases as having substantial value whether or not they are in production. If an individual who owns such appreciable assets  passes away leaving a surviving spouse, it is a common misconception that nothing needs to be done from an estate standpoint.  (This is especially prevalent in the context of non-producing gas leases since they have no value for Pennsylvania Inheritance Tax purposes.) The IRS takes a different view.

Even if the deceased spouse’s assets do not have a value which exceeds the federal estate tax threshold, this fact may change during the life of the surviving spouse. Assume that the deceased first spouse’s assets have a value of $3 million on the date of death. Obviously, no Federal Estate Tax or Pennsylvania Inheritance Tax is due. The misconception is that no action needs to be taken, including the filing of a form 706 Federal Estate Tax Return. However, if on the death of the surviving spouse the same assets have  a value of $7 million due to appreciation, there will be approximately $1.3 million of assets exposed to Federal Estate Tax (which is roughly 40%). This could have been avoided if the 706 was timely filed on the death of the first spouse and portability elected. If that were the case, the second spouse to die would have exemptions of approximately $10.6 million and no federal estate tax would be due. As you can see, there is a significant savings to the family.

A procedure is currently available to correct this error for individuals who passed away in 2011, 2012 and 2013. However, this opportunity will expire on December 31, 2014.

Pennsylvania Inheritance Tax Business Family Exemption

Effective July 9 of this year Pennsylvania allows an exemption from inheritance tax on transfers at death of a “qualified family-owned business interests” provided that it is transferred to a “qualified transferee”. A “qualified transferee” is a decedent’s spouse, lineal descendants, siblings and siblings’ lineal descendants, ancestors and ancestors’ siblings. The qualified transferee must continue to own the business for seven years after the decedent’s date of death. If the business ceases to be owned by a qualified transferee within such seven-year period, the inheritance tax will be due from the due date of the decedent’s death and interest shall be applied from that date. The qualified transferee must certify to the Department of Revenue, every year for seven years, that he or she continues to own the qualified business. A “qualified family-owned business interest” is a proprietorship or entity that has fewer than 50 full-time employees; a book value of less than $5 million; has been in existence at least five years prior to the date of death of decedent; and wholly owned by the decedent or by the decedent and his family who meet the definition of a qualified transferee. An entity may also be a “qualified family-owned business interests” provided that it must be engaged in a business which is not the management of investments or income-producing assets owned by the entity.

Older Adults Protective Services Act

There is an excellent case that discusses the workings of our Older Adults Protective Services Act under our Pennsylvania statutes. It is the case of “In the Interest of A. M. an Older Adult” from Chester County; Fiduciary Reporter, Vol. 3, Third Series 129. It discusses the statute, the spirit of the law and procedures to follow. If interested it is worth reading.