Potential Limits on Beneficiaries’ Rights to Remove a Corporate Trustee
There are several reasons why the settlor of a trust may choose to require that a “corporate” trustee always be involved with the trust’s administration of a trust, whether by itself, or along with an individual co-trustee who may also be a beneficiary of the trust. One reason is to ensure continuity in trust administration in the event the individual trustee dies or becomes incapacitated or otherwise fails to fulfill his or her duties. Corporate trustees also bring valuable skills and resources that individuals may otherwise lack and that might be important for the administration of the trust, such as appropriate investment strategies or familiarity with tax law. Finally, a settlor may feel more comfortable that a disinterested and unrelated corporate entity will faithfully follow the terms of the trust, particularly regarding distributions, and act as a check against beneficiaries whose requests may prematurely deplete trust resources.
It is this last reason that may prove to be a source of friction between trust beneficiaries and a corporate trustee that, in the beneficiaries’ view, is acting contrary to the trust’s purpose or is simply being stingy in denying requested distributions. In this case, the beneficiaries may want to pursue removal of the corporate trustee. The easiest way to accomplish this is through the exercise of a “portability clause,” which permits beneficiaries to change the corporate trustee without court approval.
But removal is more involved and court approval is required, when the trust does not contain a portability clause. A recent Pennsylvania case provided some insight into whether beneficiaries can modify a trust to add a portability clause; or, put another way, whether beneficiaries can agree to “modify” a trust by removing the trustee. Analyzing the issue under Uniform Trust Code provisions that are similar to New Jersey law, the court answered in the negative, ruling that beneficiaries must demonstrate that the statutory requirements for trustee removal, as opposed to trust modification, are met.
The case highlights the important distinction between the requirements for modification of a trust and for removal of a trustee. Under New Jersey law, if all beneficiaries consent, a court can modify a trust as long as the modification is not inconsistent with a material purpose of the trust. If fewer than all beneficiaries consent, the court would also have to find that the interests of the beneficiaries who withhold consent will be adequately protected. Compared to removal of a trustee, the requirements for modification of a trust are relatively easily met. To remove a trustee, the beneficiaries essentially must show that the trustee violated a court order or, in the language of the statute, “embezzled, wasted or misapplied” trust assets or “abused the trust and confidence reposed in” the trustee. This is a high burden that requires compelling proof.
Interestingly, in the Pennsylvania case, the lower courts were split as to whether the beneficiaries could perform an end-run around the higher requirements for trustee removal by permitting the beneficiaries to modify the trust by adding a portability clause. We are not aware of a New Jersey case directly addressing the issue. Until there is clearer guidance from New Jersey courts, it is likely that trustees will rely on the Pennsylvania case and the high burden traditionally required for removal. For beneficiaries unhappy with the performance or conduct of a corporate trustee, the best course of action may be limited to attempting to convince the trustee to agree to resign or finding a way consensually to resolve any disputes.
If you have any questions about this post or any other related matters, please contact one of our estate planning and administration attorneys.
