Appeal from the Order of the Court of Common Pleas of Philadelphia County, Orphans' Court Division at No. 3207 of 1976. Before Klein, Pawllec and Takiff, JJ.
Lawrence Barth, Deputy Attorney General, Philadelphia, for appellant.
Cavanaugh, Olszewski and Montemuro, JJ.
[ 364 Pa. Super. Page 223]
The Attorney General, as parens patriae for charities, challenges an order in which the Court of Common Pleas of Philadelphia County, Orphans' Court Division, confirmed absolutely the first and final account of appellee trustees. Appellees administered a charitable remainder unitrust established under the Will of Rosaline B. Feinstein. The question before us is whether appellees unduly favored the interests of the interim beneficiaries over those of the remainderman charity by retaining tax-exempt municipal bonds as the primary asset of the trust. We conclude that appellees have not breached their duty of impartiality, and we therefore affirm.
Rosaline Feinstein died on November 20, 1972. In her Will, Ms. Feinstein appointed appellees, I. Jerome Stern and Saul J. Freedman, as co-executors of her estate. She directed appellees to hold $200,000 of the estate in trust for her
[ 364 Pa. Super. Page 224]
sister, Charlotte B. Orlick, and her brother-in-law, Ira P. Orlick. Charlotte and Ira were to receive from this trust a yearly income equal to five percent of the annual net fair market value of the trust assets. Upon the death of both, the Federation of Jewish Agencies of Greater Philadelphia would receive the balance of the assets, including any income that had accrued over the trust period in excess of those amounts which appellees had paid out to the Orlicks. Appellees funded the trust initially with tax-exempt municipal bonds directly from the holdings of Ms. Feinstein. These bonds at the time had a market value of $198,627.08.*fn1 Appellees, according to the testimony of I. Jerome Stern, regarded tax-exempt bonds as a stable investment that would yield a regular, tax-free income for Charlotte and Ira Orlick without compromising the remainder interest of the charity. Although taxable investments would have produced a greater return for the trust, Mr. Stern and his co-trustee believed that the resulting tax burden, which would have rested on the Orlicks alone, outweighed any potential gain. The Orlicks, moreover, had indicated to appellees at the outset that they hoped to receive $10,000 of tax-free income yearly from the trust. Federal tax law would treat the five percent "unitrust" payments as tax-exempt income to the Orlicks only to the extent that the trust itself generated tax-exempt income. See I.R.C. §§ 664(b)(1), 643(a)(5); 26 C.F.R. §§ 1.664-1(b), 1.643(a)-5.*fn2 The municipal bonds in the estate of Ms. Feinstein offered an investment that was both authorized under Pennsylvania law, see 20 Pa. C.S.A.
[ 364 Pa. Super. Page 225]
§§ 7303, 7305, and tax-exempt under federal law, see I.R.C. § 103(a). With these considerations in mind, appellees retained the bonds in the trust portfolio throughout the trust accounting period.
Unfortunately, inflation and high interest rates drove bond prices down during this period. As a result, the trust suffered a $46,607.40 net principal loss when terminated in 1985, upon the death of Ira Orlick. Mr. Stern testified that although he and his co-trustee were aware of the decline in market value during the late 1970s and 1980s, they anticipated a revival of the sagging bond market and continued to view municipal bonds as more stable than "any other form of investment" available at the time. Mr. Stern further testified that Ira Orlick, whose wife died in 1976, complained on numerous occasions about the decline in his trust income. Because the Orlicks received a fixed percentage of all trust assets, as opposed to income only, the depreciation of trust principal reduced the amounts payable to them.
Upon termination of the trust, appellees filed their first and final account as trustees. The account revealed that a principal balance of $139,953.91 and an undistributed income balance of $33,310.88 remained for distribution to the Federation of Jewish Agencies. The Attorney General interceded and objected.*fn3 Among other things, he argued that appellees had failed to administer the trust with the appropriate degree of prudence and that appellees had unduly favored the interests of the individual beneficiaries over those of the charitable beneficiary. He therefore sought to surcharge appellees for any resulting losses suffered by ...