Fight Between Husband and Wife Settlors Over Irrevocable Trust Could Have Large Impact on Pennsylvania Trusts and Estates Law
The Pennsylvania Supreme Court has granted allocatur in In re Passarelli Trust, a case in which the Superior Court en banc had reversed a ruling of the Chester County Orphans Court. The case involves an irrevocable trust where a husband and wife are the settlors. The husband, wife and their two children are the beneficiaries. The husband purchased two properties through corporations. The husband then included the corporations as assets being placed into the irrevocable trust, but did not disclose to the wife the purchase of the properties or that the corporations owned the properties. The wife did not read the trust document before signing, nor did she ask questions about the inventory of assets being placed in the trust. What seemed to have angered the wife was her discovery that the husband was having an extra-marital affair and that the husband’s girlfriend was living in one of the properties.
In her divorce action against her husband, the wife petitioned for special relief to prevent dissipation of marital assets, and as a result, the divorce court froze 50 percent of certain accounts included in the trust corpus.
Then, the wife petitioned in Orphans Court to terminate the trust on the grounds that the husband had concealed his use of marital assets to purchase the properties and that he had failed to disclose this fact at the time the parties executed the trust. The Orphans Court held that the wife would not have agreed to execute the trust had she known of the existence of these properties, and therefore, the wife had met her burden to prove fraudulent conduct by the husband and ordered the trust dissolved.
The husband appealed to Superior Court, and a divided three-judge panel reversed. The wife requested a reargument en banc, which was granted.
The Orphans Court had relied on the fraud definition in In re Estate of Glover, 669 A.2d 1011 (Pa.Super. 1996), a case concerning fraudulent inducement of a testator to make a will. Glover set out a two-part test: 1) that the testator had no knowledge of the concealed or misstated fact; and 2) that the testator would not have made the bequest had the testator known the truth.
The Superior Court en banc here noted that Glover relied upon the PA Supreme Court decision, In re Paul’s Estate, 180 A.2d 254 (1962). The Superior Court here noted that the Glover Court omitted a third requirement in the Paul case – that there be “fraud and misrepresentation” in the concealment of a material fact from the testator.
The Superior Court here also distinguishes this case from those earlier ones in that this case involves an irrevocable trust, not a will. The Superior Court opinion noted that a will does not “speak” until the testator dies, and the will is probated and it can be amended or revoked by the testator at any time, but an irrevocable trust is irrevocable as soon as it is signed (leaving aside the various procedures by which an irrevocable trust can be terminated that are not at issue here). Therefore, the en banc Superior Court held that regarding an irrevocable trust, the common law test for fraud found in case law and the Restatement of Trusts. The en banc court cited the six elements of fraud in the inducement under Pennsylvania law as stated in Eigen v. Textron Lycoming Reciprocating Engine Div., 874 A.2d 1179 (1985) – a representation; which is material to the transaction; made falsely, with knowledge of its falsity or reckless disregard of whether true or false; with intent of misleading another into relying on it; justifiable reliance on the misrepresentation; and the resulting injury proximately caused by the reliance.
Here, the en banc court, which was unanimous, found that the husband disclosed the existence of the corporations and their aggregate value that were placed into the trust, but did not find that the husband had a duty to disclose each asset that was owned by the corporations that were being placed into the irrevocable trust.
The Pennsylvania Supreme Court is expected to answer two questions:
- Does the failure of one settlor of a trust to disclose to another each and every asset of a corporate entity being contributed to the trust constitute fraud?
- Should irrevocable trusts be subject to a stricter standard than wills for finding that fraud occurred?
If you have any questions, or would like additional information, please contact Stephen Asbel, Partner in Reger Rizzo & Darnall’s Estates & Trusts Group, at 215.495.6523, or via email at firstname.lastname@example.org.
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