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United Bank, Inc. v. Blosser

West Virginia Supreme Court
624 S.E.2d 815, 218 W. Va. 378 (2005)
ELI5:

Rule of Law:

Under West Virginia law, a trustee of a charitable trust is statutorily required to administer the trust in compliance with federal tax laws, which includes removing a provision that gives scholarship preference to the grantor's relatives, unless the trust's governing instrument expressly directs otherwise.


Facts:

  • In 1957, Dr. Albert M. Price established a revocable trust to eventually provide college scholarships, naming Kanawha Banking and Trust (KB&T) as trustee.
  • In 1969, Dr. Price amended the trust to require that in awarding scholarships, 'first priority and consideration shall be given to qualified blood relatives of the Grantor.'
  • Dr. Price died in 1976, leaving a will that directed the bulk of his estate to pour into the amended trust.
  • The family preference provision added in 1969 conflicted with the Tax Reform Act of 1969, jeopardizing the trust's qualification for a federal estate tax charitable deduction.
  • In 1986, United Bank, Inc. acquired KB&T, becoming the successor trustee.
  • After Dr. Price's last surviving sister died in 1988, triggering the scholarship phase, United Bank removed the preference for blood relatives to ensure the trust complied with tax laws and qualified as a charitable trust.
  • In 2003, Kenneth N. Dickens and Richard R. Lambert, Jr., distant relatives of Dr. Price, questioned United Bank's authority to remove the family preference.

Procedural Posture:

  • In 1977, the original trustee, KB&T, filed a declaratory judgment action in the Circuit Court of Boone County, which approved the creation of a second, tax-compliant trust to receive estate assets.
  • In July 2003, United Bank filed a Petition for Declaratory Judgment in the Circuit Court of Wood County, seeking a declaration that its administration of the trust was proper.
  • Dickens and Lambert filed a motion to dismiss the Wood County action for improper venue.
  • Dickens and Lambert then filed a separate complaint against United Bank in the Circuit Court of Boone County, alleging breach of fiduciary duty.
  • The Circuit Court of Wood County denied the motion to dismiss and ordered the Boone County action transferred and consolidated as a counterclaim.
  • The Circuit Court of Wood County granted summary judgment in favor of United Bank, ruling that the bank had acted properly.
  • Dickens and Lambert (appellants) appealed the Wood County Circuit Court's rulings to the Supreme Court of Appeals of West Virginia.

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Issue:

Does a West Virginia statute requiring charitable trusts to comply with federal tax law authorize a trustee to remove a scholarship preference for the grantor's relatives when that preference would constitute a prohibited 'taxable expenditure' under the Internal Revenue Code?


Opinions:

Majority - Justice Davis

Yes. A West Virginia statute requires a trustee of a charitable trust to remove a scholarship preference for the grantor's relatives to comply with federal tax law. The court reasoned that although a trust with a family preference is a valid charitable trust under state law and exempt from the Rule Against Perpetuities, it is still subject to W. Va. Code § 35-2-9(a). This statute mandates that charitable trusts must not make any 'taxable expenditures' as defined by the Internal Revenue Code, unless the trust instrument expressly opts out. Dr. Price's trust expressed an intent to qualify for tax exemptions and did not opt out. Under IRC § 4945, scholarship grants are considered 'taxable expenditures' unless awarded on an 'objective and non-discriminatory basis,' and an IRS Revenue Ruling clarifies that giving preference to a grantor's relatives is not objective or nondiscriminatory. Therefore, United Bank was not only authorized but statutorily required to remove the family preference to avoid violating state and federal law.



Analysis:

This decision solidifies the principle that statutory requirements for maintaining a trust's charitable tax status can override a grantor's specific instructions. It prioritizes the overarching charitable purpose and tax compliance over a specific directive that would frustrate that purpose. The ruling provides trustees with clear authority and, in fact, a legal duty to reform a trust to align with tax law, even without a court order, when the trust instrument does not explicitly forbid it. This case serves as a crucial precedent for trust administration, highlighting the powerful interplay between state trust law and federal tax regulations.

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