Pennsylvania Fiduciary Litigation : Pennsylvania Trusts and Estates Lawyer & Expert Witness : Patti Spencer Law Firm : Fiduciary Litigation, Planning : Lancaster, Harrisburg, Philadelphia, Pennsylvania

Both Attorney's fees and Executor's commissions were reduced in Janiga Estate (O.C. Div. Phila.) 28 Fiduc. Rep. 2d 219, opinion by Judge Herron.

Decedent left an estate valued at $1,024,425.21 and a  will that devised two parcels of real estate to the Executrix, made some specific bequests, and divided the residue between two charities.

The Attorney General of the Commonwealth of Pennsylvania, as parens patriae, filed ten objections to the account and a hearing was scheduled. At that hearing, the Attorney General stated that various objections had been resolved, except for the objections that the executrix commission of $34,000, the attorney fee of $45,000( the Account incorrectly listed attorney fees as $40,000, but during the hearing it was disclosed that attorney fees had actually totaled $45,000) and the accountant fee of $31,000 were  unreasonable and excessive based on the nature of this estate.

(Here is the math:  That's a total of $110,000 in fees -  a whopping 10.73% in an estate whose assets apparently consisted of a house, tangible personal property and bonds.)

The Attorney General claimed that the bulk of estate administration was completed by October 2004 (which consisted of the Executrix distributing property to herself and family members)  but due to the neglect of the executrix and estate counsel, distribution was not made to the charities until 2006.

The AG also asserted the the executrix failed to monitor the legal and accounting fees billed to the estate.

The court said:  "While a schedule for computing fiduciary and attorney fees was set forth in Johnson Estate, 4 Fid. Rep. 2d 6 (Mont. City. 1983) based on percentages related to the size and nature of estate assets, the Pennsylvania Superior Court has more recently emphasized that “[e]gregious error is committed when a court awards commissions and fees simply on a percentage basis without inquiry into the reasonableness of the compensation.” In re Preston, 385 Pa. Super. 48, 57, 560 A.2d 160, 165 (1985). A methodology for determining attorney fees has been set forth by the Pennsylvania Supreme Court in LaRocca Estate, 431 Pa. 541, 546, 246 A.2d 337, 339 1968).

Held:  "On this record, therefore, the payment of $45,000 in attorney fees was unreasonable. It will
therefore be reduced by half to $22,500. The executrix will therefore be surcharged in the amount
of $22,500 for that excessive payment and her claimed commission of $34,000 will likewise be
reduced by half to $ 17,000. Consequently, the surcharge that she must return to the estate is
$39,500. A crucial factual consideration in reducing these fees and surcharging the executrix is that the beneficiaries whose interests were neglected were charities. . . ."

Thank you to the July 2008 edition of Fiduciary Review which reported on the Janiga Estate.  Fiduciary Review is edited by J. Brooke Aker, Richard L. Grossman, James L. Hollinger and Frances A. Thomson, 60 East Penn Street, Norristown PA 19404

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The goings on at Hershey Company are always of great local interest here in Central Pennsylvania. But of more than local interest is the litigation surrounding the management of the Milton Hershey School Trust and the attempt to sell the company.

Jonathan Klick of Florida State University College of Law and Robert H. Sitkoff of Harvard Law School have published  Agency Costs, Charitable Trusts, and Corporate Control: Evidence from Hershey's Kiss-Off in 108 Colum. L. Rev. 749 (2008). Here is the abstract:

"In July 2002 the trustees of the Milton Hershey School Trust announced a plan to diversify the Trust’s investment portfolio by selling the Trust’s controlling interest in the Hershey Company. The Company’s stock jumped from $62.50 to $78.30 on news of the proposed sale. But the Pennsylvania Attorney General, who was then running for governor, opposed the sale on the ground that it would harm the local community. Shortly after the Attorney General obtained a preliminary injunction, the trustees abandoned the sale and the Company’s stock dropped to $65.00. Using standard event study methodology, we find that the sale announcement was associated with a positive abnormal return of over 25% and that canceling the sale was followed by a negative abnormal return of nearly 12%. Our findings imply that instead of improving the welfare of the needy children who are the Trust’s main beneficiaries, the Attorney General’s intervention preserved charitable trust agency costs of roughly $850 million and foreclosed salutary portfolio diversification. Furthermore, blocking the sale destroyed roughly $2.7 billion in shareholder wealth, reducing aggregate social welfare by preserving a suboptimal ownership structure of the Company. Our analysis contributes to the literature of trust law by supplying the first empirical analysis of agency costs in the charitable trust form and by highlighting shortcomings in supervision of charities by the state attorneys general. We also contribute to the literature of corporate governance by measuring the change in the Company’s market value when the Trust exposed the Company to the market for corporate control. "

The authors are critical of the PA Attorney General's role:

 "Regarding trust law, our findings imply agency costs arising from the Trust’s charitable trust form on the order of $850 million, about 15% of the 2002 value of the Trust. Although the trustees controlled more than three-quarters of the shareholder votes in the Company, they failed
to impose a value-maximizing strategy on the Company’s managers. As we have seen, the market judged the Company as being $2.7 billion (or 25.5%) more valuable when the Company’s managers were expected to be subject to the market for corporate control instead of supervision by the trustees.

Moreover, instead of reducing the agency costs associated with the Trust’s charitable trust form, the Attorney General’s intervention made those agency costs permanent. Without any offsetting financial benefit to the Trust, the Attorney General forced the Trust to retain an asset that was worth $850 million more on the open market than in the hands of the trustees. While the sale’s detractors argued that the sale would hurt other stakeholders, such as the residents of Hershey and the Company’s employees, one wonders whether their gain offsets the preservation of such enormous agency costs. The $850 million in Trust assets destroyed translates roughly into $67,000 per resident of Hershey, or $62,000 per employee of the Company—plus the Trust’s exposure to uncompensated risk was continued."   (108 Colum. L. Rev. 749 (2008) pp. 815-816) 

Juan Antunez gives these cites for more background information:

"[t]he Hershey Power Play in Trusts & Estates Magazine by Pennsylvania attorney Christopher H. Gadsden, and Daniel Gross's piece in Slate entitled Hershey Barred, whose subtitle says it all: How Pennsylvania officials screwed poor kids out of $1 billion by stopping the sale of the candy-maker. "

Blogging credit goes to Juan Antunez who writes the Florida Probate & Trust Litigation Blog as well as to Professor Gerry W. Beyer's  Wills, Trusts & Estates Prof Blog.

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Check out The Debate Room at BusinessWeek.com

Wealthy Colleges:  Ante Up

Colleges and universities should be required to spend 5% of their endowments every year or risk losing their tax-exempt status.  Pro or con?

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Taxing authorities are increasingly challenging the tax-exempt status of nonprofits. More and more nonprofits look like businsses. They charge fees and sell products and services to raise money. As state and local govenrments face declining tax revenues, exempting these institutions from taxation makes less and less sense.

James D. Miller, an Economics professor from Smith College wrote an article entitled "Massachusetts Should Tax Harvard.” He says:

“Some Massachusetts legislators want to tax rich colleges. Under their proposal, as reported on Inside Higher Ed, Massachusetts colleges would pay a 2.5 percent tax on all assets over $1 billion. (The idea is part of a broader push to question whether some colleges with hefty endowments are inappropriately hoarding wealth while continuing to raise their tuitions sharply.) Nine schools, including Harvard and Smith College (my employer), are wealthy enough to be subject to the tax”. Harvard’s endowment is over $35 billion.

The Senate Finance Committee has been looking at the idea of requiring colleges to pay out a minimum proportion of their endowment funds. The problem is that universities with huge endowments are not doing enough to help students afford college. Instead, they raise tuition at an alarming rate. One proposed solution is to force institutions to pay out at least 5% of the endowment annually, just like private foundations are currently required to do. After all, where is the public benefit in hoarding the money?

Universities, like other charities, are given tax exemptions because they provide a public benefit or reduce the burdens on governemnt. Is growing your endowment year after year while you raise tuition a public benefit?

Two Senators  wrote the presidents of 136 colleges wrote the presidents of 136 colleges in January 2008 asking for data and explanations about their admissions, financial aid and endowment spending policies and practices. “We would appreciate additional information about tuition costs and your institution’s endowment,” which receive “very generous tax breaks under the Internal Revenue Code,” the two senators wrote. “We want to better understand how these tax benefits for higher education endowments are improving education and making undergraduate studies more affordable for low and middle income families today.”

Lynne Munson, a research fellow at the American Enterprise Institute is coming out with a book tentatively titled Scrooge U. Munson says “decades of hoarding” have resulted in a situation whre “it would take a rainy day of biblical proportion to require significant tapping into these stockpiles.” When institutions face budget difficulties, she said, they are “far more likely to cut educational expenditures than to tap into endowments.”

Pressure works. In December, Harvard announced a decision to limit annual tuition and room and board costs to 10% of income for families earning $120,000 to $180,000. This puts a limit of $18,000 on expenses for these families. Below $120,000 the percent of income drops steadily until it reaches zero at $60,000. The full cost of a year at Harvard is $45,600. A number of other universities have jumped on the band wagon - University of Pennsylvania, Yale and Stanford, to name a few. Now that sounds more charitable, doesn’t it?

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