Pennsylvania Act 1998-141 — ASSOCIATIONS CODE (15 PA.C.S.) AND PROBATE, ESTATES AND FIDUCIARIES CODE (20 PA.C.S.) - AMEND

Act text

ASSOCIATIONS CODE (15 PA.C.S.) AND PROBATE, ESTATES AND FIDUCIARIES CODE
                           (20 PA.C.S.) - AMEND
                 Act of Dec. 21, 1998, P.L. 1067, No. 141             Cl. 15
                             Session of 1998
                               No. 1998-141

     SB 1205

                                  AN ACT

     Amending Titles 15 (Corporations and Unincorporated
        Associations) and 20 (Decedents, Estates and Fiduciaries) of
        the Pennsylvania Consolidated Statutes, further providing for
        investment of trust funds, for transfer of trust or other
        assets to institutional trustee and for establishment or use
        of common trust funds authorized; imposing limits on the
        exercise of certain trustee powers and the ability of
        beneficiaries to appoint trustees under certain
        circumstances; and making editorial changes.

        The General Assembly of the Commonwealth of Pennsylvania
     hereby enacts as follows:

        Section 1.  Sections 5548(b), (c) and (e), 5549(c) and
     5585(a) of Title 15 of the Pennsylvania Consolidated Statutes
     are amended to read:
      § 5548.  Investment of trust funds.
        * * *
        (b)  Use and management.--Except as otherwise permitted under
     [the Estates Act of 1947] 20 Pa.C.S. Ch. 61 (relating to
     estates), the board of directors or other body shall apply all
     assets thus received to the purposes specified in the trust
     instrument. The directors or other body shall keep accurate
     accounts of all trust funds, separate and apart from the
     accounts of other assets of the corporation.
        (c)  Determination of income.--
            [(1)  With respect to any assets thus received (including
        any participation in any common trust fund) so much of the
        net realized capital gains as of the end of any fiscal year
        of the corporation as the directors or other body shall,
        within four months after the end of such year, in their sole
        discretion, allocate to income for such fiscal year shall be
        deemed income.
            (2)  The amount allocated under paragraph (1) of this
        subsection, when added to all other income derived by the
        corporation from the same assets or participation in a common
        trust fund for such fiscal year, shall not exceed 9% of the
        market value (as of the end of such fiscal year) of the
        principal remaining with respect to such assets or
        participation after allocation of such gain to income.
            (3)  Allocation to income of realized capital gains in a
        common trust fund may be made in accordance with the
        provisions of paragraphs (1) and (2) of this subsection
        without regard to whether the capital gains in question were
        realized before or after any particular trust or fund became
        a part of such common trust fund and without regard to
        whether the separate records maintained with respect to such
        particular trust or fund reflect the existence of a capital
        gain in such trust or fund.]
            (1)  Unless otherwise specifically directed in the trust
        instrument, the board of directors or other body may elect to
        be governed by this subsection with respect to assets thus
        received, including any participation in any common trust
        fund.
            (2)  To make an election under this subsection, the board
        of directors or other body shall adopt and follow an
        investment policy seeking a total return for the assets held
        by the corporation or in the name of a nominee of the
        corporation or by an institutional trustee pursuant to
        section 5549 (relating to transfer of trust or other assets
        to institutional trustee), whether the return is to be
        derived from capital appreciation, earnings or distributions
        with respect to the capital or both. The policy constituting
        the election shall be in writing, shall be maintained as part
        of the permanent records of the corporation and shall recite
        that it constitutes an election to be governed by this
        subsection.
            (3)  If an election is made to be governed by this
        subsection, the term "income" shall mean a percentage of the
        value of the assets so held by or for the corporation. The
        board of directors or other body shall in a writing
        maintained as part of the permanent records of the
        corporation annually select a percentage and determine that
        it is consistent with the long-term preservation of the real
        value of the assets, but in no event shall the percentage be
        less than 2% nor more than 7% per year.
            (4)  The board of directors or other body may revoke an
        election to be governed by this subsection if the revocation
        is made as part of an alternative investment policy seeking
        the long-term preservation of the real value of the assets
        thus received. The revocation and alternative investment
        policy shall be in writing and maintained as part of the
        permanent records of the corporation.
            (5)  For purposes of applying this subsection, the value
        of the assets of the corporation shall be the fair market
        value of the assets so held by or for the corporation,
        determined at least annually and averaged over a period of
        three or more preceding years. However, if the assets have
        been held for less than three years, the average shall be
        determined over the period during which the assets have been
        held.
        * * *
        [(e)  Definition.--As used in subsection (c) of this section
     "net realized capital gains as of the end of any fiscal year"
     means the balance accumulated as of such date, since the
     inception of the trust or fund or common trust fund, as the case
     may be, of all realized gains less realized losses, computed in
     the manner provided in sections 1001 et seq. of the Internal
     Revenue Code of 1954 on the basis of actual cost, or in the case
     of property transferred to the fund or trust, on the basis of
     fair market value on the date of transfer.]
      § 5549.  Transfer of trust or other assets to institutional
                trustee.
        * * *
        (c)  Amount and frequency of payment.--Such corporate trustee
     shall pay, at least semi-annually or at more frequent intervals
     if so agreed, the net income from such assets, which income may
     [include so much of the realized appreciation of principal as
     the board of directors or other body of the corporation may deem
     prudent] be determined under section 5548(c) (relating to
     investment of trust funds) if such election is properly made by
     the board of directors or other body of the corporation, to the
     corporation for use and application to the purpose or purposes
     for which the assets were received by the corporation.
      § 5585.  Establishment or use of common trust funds authorized.
        (a)  General rule.--Every nonprofit corporation may establish
     and maintain one or more common trust funds, the assets of which
     shall be held, invested and reinvested by the corporation itself
     or by a corporate trustee to which the assets have been
     transferred pursuant to section 5549 (relating to transfer of
     trust or other assets to institutional trustee). Upon the
     payment by the corporate trustee to the nonprofit corporation of
     the net income from such assets, which income may be determined
     under section 5548(c) (relating to investment of trust funds) if
     such election is properly made by the board of directors or
     other body of the corporation, for use and application to the
     several participating interests in such common trust fund, the
     proportionate participation of each interest in such net income
     shall be designated by the corporate trustee. The nonprofit
     corporation may, at any time, withdraw the whole or part of any
     participating interest in such common trust fund for
     distribution by it as provided in this subchapter.
        * * *
        Section 2.  Title 20 is amended by adding a chapter to read:
                                CHAPTER 75
                LIMITATIONS ON EXERCISE OF TRUSTEE POWERS
             AND POWERS OF BENEFICIARIES TO APPOINT TRUSTEES
     Sec.
     7501.  Legislative intent.
     7502.  Definitions.
     7503.  Application of chapter.
     7504.  Certain trustee powers not exercisable.
     7505.  Joint powers and appointment of nondisqualified
            substituted trustees.
     7506.  Certain powers of beneficiaries not exercisable.
      § 7501.  Legislative intent.
        This chapter is enacted to codify, clarify and confirm
     certain existing common law principles of fiduciary and trust
     law relating to conflicts of interest on the part of trustees.
      § 7502.  Definitions.
        The following words and phrases when used in this chapter
     shall have the meanings given to them in this section unless the
     context clearly indicates otherwise:
        "Interested party."  Each trustee then serving and each
     person having an interest in income or principal whom it would
     be necessary to join as a party in a proceeding for the judicial
     settlement of a trustee's account. The term "interested party"
     does not include a person who has not attained majority or is
     otherwise incapacitated unless a court has appointed a guardian
     for the person for some purpose other than acting under section
     7503 (relating to application of chapter) or an agent has been
     appointed under a durable power of attorney that is sufficient
     to grant authority to act under section 7503.
      § 7503.  Application of chapter.
        (a)  General rule.--This chapter shall apply to:
            (1)  Any trust created under a governing instrument
        executed on or after March 21, 1999, unless the governing
        instrument expressly provides that this chapter does not
        apply.
            (2)  Any trust created under a governing instrument
        executed before March 21, 1999, unless all interested parties
        affirmatively elect on or before December 21, 2001, by a
        written declaration signed by or on behalf of each interested
        party and delivered to the trustee, not to be subject to the
        application of this chapter. In the case of a testamentary
        trust, the declarations shall be filed with the register in
        the county in which the will was admitted to probate.
        (b)  Exclusion.--This chapter shall not apply to:
            (1)  Any trust during the time that the trust is
        revocable or amendable by its settlor.
            (2)  A spouse of a decedent or settlor where the spouse
        is the trustee of a testamentary or inter vivos trust for
        which a marital deduction has been allowed.
            (3)  A trustee who possesses in his individual capacity
        an unlimited right to withdraw the entire principal of the
        trust or has a general testamentary power of appointment over
        the entire principal of the trust.
            (4)  A trust under a governing instrument that by
        specific reference expressly rejects the application of this
        chapter.
            (5)  A trust created under a governing instrument
        executed on or before March 21, 1999, if no part of the
        principal of the trust would be included in the gross estate
        of the trustee for Federal estate tax purposes if the trustee
        had died on March 21, 1999, without having exercised the
        power under the governing instrument to make discretionary
        distributions of principal or income to or for the benefit of
        the trustee, the trustee's estate or the creditors of either.
      § 7504.  Certain trustee powers not exercisable.
        (a)  General rule.--The following powers conferred by a
     governing instrument upon a trustee in his or her capacity as a
     trustee shall not be exercised by that trustee:
            (1)  The power to make discretionary distributions of
        either principal or income to or for the benefit of the
        trustee, the trustee's estate or the creditors of either
        unless the power is either:
                (i)  limited by an ascertainable standard relating to
            the trustee's health, education, support or maintenance
            within the meaning of 26 U.S.C. §§ 2041 (relating to
            powers of appointment) and 2514 (relating to powers of
            appointment); or
                (ii)  exercisable by the trustee only in conjunction
            with another person having a substantial interest in the
            property subject to the power which is adverse to the
            interest of the trustee within the meaning of 26 U.S.C. §
            2041(b)(1)(C)(ii).
            (2)  The power to make discretionary distributions of
        either principal or income to satisfy any of the trustee's
        personal legal obligations for support or other purposes.
            (3)  The power to make discretionary allocations in the
        trustee's personal favor of receipts or expenses as between
        income and principal unless the trustee has no power to
        enlarge or shift any beneficial interest except as an
        incidental consequence of the discharge of the trustee's
        fiduciary duties.
            (4)  The power to exercise any of the powers proscribed
        in this subsection with regard to an individual other than
        the trustee to the extent that the individual could exercise
        a similar prohibited power in connection with a trust that
        benefits the trustee.
        (b)  Limited exercise of prohibited power.--
            (1)  If a trustee is prohibited by subsection (a)(1) from
        exercising a power conferred upon the trustee, the trustee
        nevertheless may exercise that power but shall be limited to
        distributions for the trustee's health, education, support or
        maintenance to the extent otherwise permitted by the terms of
        the trust.
            (2)  Unless otherwise prohibited by the provisions of
        this section, a trustee may exercise a power described herein
        in favor of someone other than the trustee, the trustee's
        estate or the creditors of either.
      § 7505.  Joint powers and appointment of nondisqualified
                substituted trustees.
        If a governing instrument contains a power proscribed under
     section 7504 (relating to certain trustee powers not
     exercisable), the following shall apply:
            (1)  If the power is conferred on two or more trustees,
        it may be exercised by the trustee or trustees who are not so
        prohibited as if they were the only trustee or trustees.
            (2)  If there is no trustee in office who can exercise
        the power as provided in paragraph (1), the court, upon
        petition and hearing after such notice as it may direct,
        shall appoint a trustee who is not disqualified and whose
        term in office shall be as the court directs for the sole
        purpose of exercising the powers that the other trustees
        cannot exercise.
      § 7506.  Certain powers of beneficiaries not exercisable.
        (a)  General rule.--No beneficiary of a trust in an
     individual, trustee or other capacity may appoint or remove and
     appoint a trustee who is related or subordinate to the
     beneficiary within the meaning of 26 U.S.C. § 672(c) (relating
     to definitions and rules) unless:
            (1)  the trustee's discretionary power to make
        distributions to or for the beneficiary is limited by an
        ascertainable standard relating to the beneficiary's health,
        education, support or maintenance within the meaning of 26
        U.S.C. §§ 2041 (relating to powers of appointment) and 2514
        (relating to powers of appointment);
            (2)  the trustee's discretionary power may not be
        exercised to satisfy any of the beneficiary's legal
        obligations for support or other purposes; and
            (3)  the trustee's discretionary power may not be
        exercised to grant to the beneficiary a general power to
        appoint property of the trust to the beneficiary, the
        beneficiary's estate or the creditors thereof within the
        meaning of 26 U.S.C. § 2041.
        (b)  Exception.--This section shall not apply if the
     appointment of the trustee by the beneficiary may be made only
     in conjunction with another person having a substantial interest
     in the property of the trust subject to the power which is
     adverse to the exercise of the power in favor of the beneficiary
     within the meaning of 26 U.S.C. § 2041(b)(1)(C)(ii) or the
     appointment is in conformity with a procedure governing
     appointments approved by the court before December 21, 1998.
        Section 3.  Title 20 is amended by adding a section to read:
      § 8113.  Charitable trusts.
        (a)  Election.--Notwithstanding the foregoing provisions of
     this chapter, the trustee of a trust held exclusively for
     charitable purposes may elect to be governed by this section
     unless the governing instrument expressly provides that the
     election provided by this section shall not be available.
        (b)  Eligibility for election.--To make an election under
     this section, the trustee shall adopt and follow an investment
     policy seeking a total return for the investments held by the
     trust, whether the return is to be derived from appreciation of
     capital or earnings and distributions with respect to capital or
     both. The policy constituting the election shall be in writing,
     shall be maintained as part of the permanent records of the
     trust and shall recite that it constitutes an election to be
     governed by this section.
        (c)  Effect of election.--If an election is made to be
     governed by this section, the term "income" shall mean a
     percentage of the value of the trust. The trustee shall in a
     writing maintained as part of the permanent records of the trust
     annually select the percentage and determine that it is
     consistent with the long-term preservation of the real value of
     the principal of the trust, but in no event shall the percentage
     be less than 2% nor more than 7% per year. The term "principal"
     shall mean all other assets held by the trustee with respect to
     the trust.
        (d)  Revocation of election.--The trustee may revoke an
     election to be governed by this section if the revocation is
     made as part of an alternative investment policy seeking the
     long-term preservation of the real value of the principal of the
     trust. The revocation and alternative investment policy shall be
     in writing and maintained as part of the permanent records of
     the trust.
        (e)  Value determination.--For purposes of applying this
     section, the value of the trust shall be the fair market value
     of the cash and other assets held by the trustee with respect to
     the trust, whether such assets would be considered "income" or
     "principal" under the other provisions of this chapter,
     determined at least annually and averaged over a period of three
     or more preceding years. However, if the trust has been in
     existence less than three years, the average shall be determined
     over the period during which the trust has been in existence.
        Section 4.  The amendment or addition of the following
     provisions shall apply to all trusts, whether created before, on
     or after the effective date of this act:
            (1)  15 Pa.C.S. §§ 5548(b), (c) and (e), 5549(c) and
        5585(a).
            (2)  20 Pa.C.S. § 8113.
        Section 5.  This act shall take effect immediately.

     APPROVED--The 21st day of December, A. D. 1998.

     THOMAS J. RIDGE