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HomeMy WebLinkAbout05-06-08IN RE: IN THE COURT OF COMMON PLEAS OF ESTATE OF LOY T. HEMPT CUMBERLAND COUNTY, PENNSYLVANIA ORPHANS' COURT DIVISION n N c~ ~ ~; ., -~, .~ NO.21-77-231 ~ z ~ -~'~ ~~ _;_s~~ rn .. ,.., GERALD L. HEMPT' S EXCEPTIONS ; ~ ~ _ _ -; TO THE APRIL 16, 2008 OPINION AND ORDER ~~-+ w '^ ~ ~' ru 0 Pursuant to Orphan's Court Rule 7.1, Gerald L. Hempt asserts exceptions to the Opi nion and Order of Court dated April 16, 2008. Request for Oral Argument Gerald L. Hempt hereby requests oral argument on these exceptions. Exception No. 1 The Court Erred in Removing Gerald L. Hempt as the Trustee The Court's Opinion and Order state that Gerald L. Hempt must be removed as the Trustee of the Loy C. Hempt Residuary Trust (the "Trust") under the general rule that a court has the power to remove a trustee with a conflict of interest, even where there is no showing of bad faith or fraudulent intent. (Opinion and Order, p. 9-10.) The Court specifically found that Gerald's personal interests as an heir of Jean Doris Hempt's guardianship estate and Gerald's personal business interests in Hempt Brothers, Inc., Valley Land, Inc., and C.A. Hempt Estate, lnc. conflicted with his position as trustee. It is respectfully submitted that the Court was in error when it declined to apply Pennsylvania law which acknowledges a relevant exception to the conflict of interest rule. That exception provides that where the person creating a trust sets up a situation of conflicting interests, the person creating the trust is deemed to waive those conflicts of interest. Flagg's Estate, 73 A.2d 411, 414 (Pa. 1950)("[t]he testator, having the power to do so, created the conflict which becomes a fact or condition in the administration and devolution of his property"); Steele Estate, 103 A.2d 409, 413 (Pa. 1954)("the doctrine ofself-dealing does not apply where the testator knowingly places his trustee or a trust beneficiary in a position which he knew might conflict with the interest of the Trust or beneficiaries thereof, and gave her power to act in a dual capacity."). Where the exception applies, all that is required of the trustee is that he must act in good faith and as a reasonable person. See, Flagg's Estate, 73 A.2d at 415 and Steele Estate, 103 A.2d at 413-14. Notably, the Court found that Gerald Hempt has not acted in bad faith in his dealings with the Trust. (Opinion and Order, p. 14.) In the present case, the Court acknowledged that this exception would apply to Max C. Hempt and Dorothy H. Mark, trustees named by Loy T. Hempt in his Will and Codicil, but the Court refused to apply the exception to Gerald on the basis that he is not one of the original trustees, but is acourt-appointed successor trustee. (Opinion and Order, p. 9-10.) There is no basis in the case law for so limiting the application of the exception. None of the cases discussing the exception states that it is only available to the original trustee. See, e.g., Steele Estate, 103 A.2d 409; Pincus Estate, 105 A.2d 82 (Pa. 1954); Flagg's Estate, 73 A.2d 411. Furthermore, Pennsylvania law provides that a successor trustee "shall have all of the powers, duties and liabilities of the original trustee." 20 Pa. C.S.A. § 7135. This statutory rule is consistent with the generally-recognized principal of trust law that a successor trustee has the ' This statutory provision was in effect at the time of the actions addressed in this matter and at the time the Account was filed. 2 same power to act as the original trustee and the same broad discretion, unless the settlor manifested an intention that the powers granted to a trustee were limited to only the originally named trustee. Scott on Trusts, 4t" ed. § 196. Therefore, there is no basis to refuse to apply the exception to a successor trustee who has identical conflicts of interests to the original trustee. Refusing to apply the exception to asimilarly-situated successor trustee eliminates his power to act as trustee and increases his liability for discretionary actions taken as trustee. Such a result is contrary to Pennsylvania law. 20 Pa. C.S. § 7135. Loy T. Hempt's Will makes clear that he understood the conflicts of interest arising from the Trust and trustee owning stock in the same company, and that he recognized and validated this "positional" conflict when he appointed the trustees named in his Will. The Will specifically provided that the Trustee could purchase Hempt Brothers, Inc. stock from the Trust "without liability for self-dealing" and that the Trustee had the authority to sell or buy that stock from trustees. (Kalbach Ex. 1.) Moreover, Loy's Will and Codicil named Jean's potential heirs, Max and Dorothy, to serve as trustees of the Trust, so it is clear that Loy had no objection to the Trust having trustees who are also Jean's heirs. Nothing in Loy's Will indicates that Loy intended for these provisions to apply only to the original trustees, and due to the nature of the trust, the possibility that successor trustees would be needed was foreseeable. (Kalbach Ex. 1.) Because Loy waived the duty of undivided loyalty by allowing the trustee to have these multiple roles, and because Gerald's roles are identical to those of the original trustee, the waiver of the conflicts of interest should extend to Gerald, who should have the same power to act as the original trustee. 20 Pa. C.S.A. § 7135; Cf., Estate ofHalas, 568 N.E.2d 170 (Ill. App. 1991)(citing Flagg's Estate, and acknowledging that trustee can occupy conflicting positions where the trust contemplates or sanctions the conflict). It is also important that Max C. Hempt petitioned for Gerald's appointment as co-trustee on the grounds that, aside from Max himself, Gerald was the most knowledgeable individual about Jean's welfare and because he was a shareholder and officer of Hempt Brothers, Inc., the company whose stock was a major Trust asset. (Kalbach Ex. 3.) Thus, Gerald's trusteeship was: (1) requested by Loy's appointed trustee, as an exercise of his fiduciary duty to the Trust; and (2) granted by this Court with full knowledge of Gerald's conflicting roles.2 In fact, it is clear that Gerald's appointment was made, in part because of (not in spite of) Gerald's interest in the Hempt Brothers business. (See, Kalbach Ex. 3.) As the Halas court noted, "It is a common situation, for a testator who owns what he deems to be a good business, to include it in a trust and to appoint as one of the trustee, an officer or employee who is familiar with the business." 568 N.E.2d at 178 (citing Pincus' Estate). Under the circumstances presented in this case, Gerald's positional conflicts of interest should not preclude his service as trustee. He should not be removed as trustee absent a showing of bad faith. See, Flagg's Estate, 73 A.2d at 415 and Steele Estate, 103 A.2d at 413-14. In the present case, the Court has specifically found that Gerald did not act in bad faith. Therefore, the Court erred in concluding that Gerald must be removed as trustee of the Trust pursuant to 20 Pa. C.S.A. § 3182(5). z The statute under which the petition was reviewed did not require notice to all parties in interest; rather, the statute required that notice be given as directed by the Court. 20 Pa. C.S. § 7101. The Court did not require notice to be given to the remainder beneficiaries. 4 Exception No. 2 The Court Erred in Appointing Orrstown Bank as the Successor Trustee After declaring that Gerald Hempt should be removed as the Trustee, the Court stated that Orrstown Bank would be appointed as the successor trustee. The appointment of a successor trustee is inappropriate because, for the reasons set forth in Exception No. 1, Gerald should not be removed as the trustee of the Trust. Additionally, arguendo, if a successor trustee is to be appointed, Gerald Hempt objects to the appointment of Orrstown Bank as the successor trustee because it has business interests that conflict with the interests of some of the remainder beneficiaries of the Trust and the Trust's own business interests, in ways not contemplated by Loy T. Hempt. Orrstown Bank leases property from C.A. Hempt, and C.A. Hempt has accounts on deposit at Orrstown Bank. Furthermore, Max J. Hempt (the grandson of Max C. Hempt and nephew of Gerald Hempt) serves on an advisory board to Orrstown Bank, and both Gerald and Max J. own shares in Orrstown Bank. Due to these business relationships, Orrstown Bank should not be permitted to serve as trustee of the Trust. If Gerald Hempt is to be replaced as trustee, then it is respectfully suggested that Hershey Trust Company, a trust management company with 100 years' experience in managing large trusts and without any conflicting business interests, should be appointed as trustee. Exception No. 3 The Court Erred in Surcharging Gerald Hempt for the Trust Distributions Made to Jean Aempt Having correctly found that Gerald Hempt had not acted in bad faith in making distributions, as trustee, to Jean Hempt, the current income beneficiary of the Trust, the Court erred in surcharging Gerald for making those distributions. In this case, Loy T. Hempt created the Trust to provide for the care, support and welfare of Jean during. her life. He granted the trustees of the Trust sole and absolute discretion to distribute principal and income for Jean's support, and to consider Jean's resources to such extent as the Trustee deems proper. (Opinion and Order, p. 2.) Under Pennsylvania law, this grant of discretion means that there is no breach of duty unless the trustee's actions constitute an abuse of discretion. See, Geron v. Kennedy, 112 A.2d 181, 183 (Pa. 1955) (citing Restatement (Second) of Trusts § 187). Even in cases where a trustee with discretionary power has invaded trust principal to pay for the support of a life beneficiary, the existence of an independent estate of that beneficiary is not a sufficient reason for the trustee not to pay principal for the beneficiary's support. See, In re Demitz' Estate, 208 A.2d 280 (Pa. 1965). Here, Gerald made distributions of income, but not principal, for Jean's support. As reflected in the Trust Accounting, Gerald distributed approximately 2/3 of the annual Trust income to Jean; the remaining 1/3 accumulated in the Trust. The income distributions from the Trust were used to cover most of Jean's care expenses. (Opinion and Order, p. 4). As the Court acknowledged, Gerald's distributions to Jean were consistent with the practice employed by the predecessor trustees. (Opinion and Order, p. 4). Gerald's distributions to Jean from the Trust were well within the discretion granted by the Testator, and in keeping with the Testator's intent 6 that the Trust be used for Jean's support. (Kalbach, Ex. 1). The fact that the income dollars distributed to Jean worked to the detriment of Robert Kalbach is of no consequence. The nature of a residuary interest in a trust means that distributions to the life beneficiary will necessarily diminish the amount of the trust assets that will be distributed to the remainder beneficiaries, but that does not make distributions to the life beneficiary improper. Thus, Gerald's distributions to Jean were clearly appropriate. As noted above, under the exception to the conflict of interest rule, the relevant inquiry for the Court is whether or not Gerald acted in bad faith. See, Flagg's Estate, 73 A.2d at 415 and Steele Estate, 103 A.2d at 413-14. Even if the Court declines to apply the conflict of interest exception to Gerald generally, see Exception No. 1., supra, that exception should be applied to Gerald at least as to those actions that are consistent with the actions taken by the predecessor trustees that were specifically named by Loy T. Hempt. Here, the pattern of distributing income to Jean from the Trust did not change when Gerald became a co-trustee or when Max died and Gerald continued as the sole trustee. (Opinion and Order, p. 4). The Court has found that Gerald did not act in bad faith in making the income distributions to Jean. Under these circumstances, Gerald should not be surcharged for continuing the established practice of making partial income distributions from the Trust to pay for Jean's care. The Court imposed the surcharge on Gerald on the basis that the income distributions to Jean constituted "self-dealing" by Gerald, because it found that Gerald, as one of Jean's heirs, 7 would receive a portion of each dollar distributed to Jean from the Trust.3 What the court has characterized as "self-dealing", however, is nothing more than a recognition of the positional conflict of interest that exists from Gerald's dual roles as trustee and potential heir of Jean's guardianship estate. The Court apparently overlooked the fact that Gerald would also receive a portion of each dollar of Trust income that was not distributed to Jean because he is a remainder beneficiary under the Trust. Therefore, whether or not income distributions were made to Jean's guardianship estate from the Trust, Gerald, if he survived Jean, would receive a portion of each dollar of Trust. income.4 Under these circumstances, it is inaccurate to characterize the distributions to Jean as self-dealing. Additionally, the Court's order surcharging Gerald the entire amount of the distributions he made to Jean essentially nullifies the intent of the Trust to the extent that it specifically confers on the trustee the discretion to make income distributions to provide for Jean's support, ' Gerald's interest in Jean's guardianship estate is contingent. He will inherit from Jean's guardianship estate only if he survives her. If he does not, his heirs will succeed to his interest in Jean's guardianship estate. Under trust law, self-dealing occurs when a trustee takes actions by which he profits at the expense of the trust estate or trust beneficiaries. Estate of Comerford, 130 A.2d 458 (Pa. 1957)(citing F'lagg's Estate). It is not accurate to assume that Gerald would benefit from the dollars distributed to Jean. The assets passing intestate from Jean will be reduced by state and federal death taxes, while distributions from the Trust at Jean's death will pass tax-free. Under the currently applicable tax laws, more of each dollar would pass to Gerald through the Trust than would pass to him as an heir of Jean. Absent some dramatic change to tax law or to the value of Jean's assets, Gerald would likely receive less than seven cents of each dollar distributed through Jean's estate, instead of the ten cents that he would receive of each dollar remaining in the Trust. A chart showing the relevant calculations under current tax law is provided at Appendix 1. (It also should be noted that when Gerald, as Jean's guardian, proposed making gifts form her estate, he first sought the Court's express permission.) 8 health and maintenance. By nullifying this intent, the Court is effectively elevating the remainder interest of Robert Kalbach above that of Jean Hempt, the current income beneficiary. Doing so is at odds with Loy's intent in creating the Trust to benefit Jean and violates the principal that trust beneficiaries are to be treated impartially. See, Scott and Ascher on Trusts, S`h ed., § 17.15. As explained more fully above, Gerald Hempt faithfully performed his duties as the trustee. In fact, as the Trust Accounting reflects, during his years of service as the trustee, Gerald Hempt: did not even take a trustee fee for his service as trustee. He did not engage in self- dealing, and he did not have an impermissible conflict of interest. Gerald did not abuse his unlimited discretion in making income distributions to Jean Hempt. Instead, he acted within the discretion and. fiduciary responsibilities imposed upon him as a trustee of the Trust, and he made distributions that were consistent with the actions of his predecessor trustees. Under these circumstances, there is no basis to impose a surcharge upon him for the distributions made to Jean Hempt, and it is notable that the auditor did not surcharge Gerald Hempt. Even if, arguendo, the Court were correct in finding that part or all of the distributions of income made by Gerald to Jean were improper, surcharging Gerald is not the proper remedy to redress such an error. A surcharge is the appropriate remedy for occasions where a trustee has breached his fiduciary duties. Estate of Stephenson, 364 A.3d 1301 (Pa. 1975). However, the purpose of a surcharge is to restore to a trust what it has lost due to the breach of the duty, and it should not operate to enrich unduly the beneficiaries of the trust. In this case, surcharging Gerald for the distributions made to Jean would cause some Trust beneficiaries to receive a double benefit from the Trust and from Jean's guardianship estate. For example, if Gerald must 9 personally reimburse the Trust for the amount of the distributions he made to Jean, at Jean's death, the Mark beneficiaries will receive 40% of the amount reimbursed to the Trust and will also inherit, through Jean's estate, a portion of the distributions that the Court has declared were improper. A chart detailing the double benefits that will result from surcharging Gerald for the distributions to Jean is provided at Appendix 2. Thus, the appropriate remedy in this case, assuming argtcendo that Gerald's actions fell short of the applicable standard, would be to compel the trustee to recover the improperly paid amounts from Jean's guardianship estate, the beneficiary to whom the alleged overpayments were made. Scott and Ascher, S`h ed., § 25.2.4; see also, Union Trust Co. v. Gilpin, 84 A. 448 (Pa. 1912)(funds paid out of a trust in error could be recovered from the person who received them). Further, any payback of the amounts distributed to Jean's guardianship estate should take into account any tax paid by Jean's guardianship estate and correspondingly not paid by the Trust. Accordingly, even if the Court concludes that Gerald acted improperly by making the income distributions to Jean, the Court should not impose a surcharge upon him for making those payments. Exception No. 4 The Court Erred in Surcharging Gerald Hempt for the Attorneys Fees Paid for Legal Services to Divide the Trust The Court further erred in surcharging Gerald Hempt for the attorneys' fees incurred in dividing the Trust into three separate trusts. As noted above, any conflict of interest between Gerald Hempt:'s role as trustee and his interests in the family businesses were waived because Loy T. Hempt: appointed a trustee who had identical conflicting positions. Accordingly, Gerald Hempt's actions as a trustee must be judged by whether he acted in good faith and as a reasonable person would. See, Flagg's Estate, 73 A.2d at 415 and Steele Estate, 103 A.2d at 10 413-14. The (:ourt acknowledged that Gerald had not acted in bad faith by dividing the Trust, but the Court, in error, surcharged Gerald for the attorneys' fees incurred in dividing the Trust. There is no doubt that Gerald acted reasonably in dividing the Trust. As the Court noted, he acted pursuant to advice of counsel. In fact, the decision to divide the Trust was made upon the advice of counsel, as were the decisions about how and when to divide the Trust. (Transcript, p. 279-283). Further, Pennsylvania statute granted Gerald, as trustee, the authority to divide the 'T'rust without court approval. 20 Pa. C.S. § 7191. Moreover, the evidence reflects that the trust division was undertaken to preserve the value of the companies whose stock was held by the Trust and that Gerald consulted with appraisers to obtain valuations of the family businesses. While the Court may disagree with the way the Trust was divided or with the values assigned to the family businesses, such a disagreement does not mean the Gerald acted unreasonably. Additionally, Gerald Hempt, with counsel's advice, made the Trust division at a time when it could be considered as part of an Accounting of the Trust. (Transcript, p. 283). Gerald brought the division before the Court, and he sought Court approval of it, although it was not required by the statute in effect at that time. The Petition filed with the Trust Accounting specifically explained how the Trust had been divided, and that, due to hostility among the family members, no stock in the family businesses had been allocated to the trust that would benefit the Kalbachs. Moreover, the Petition noted that there maybe disputes about the propriety of the Trust division and the valuation of the family businesses. Thus, rather than hiding the facts of the division, Gerald Hempt put these matters squarely before the Court, in 11 order to avoid a protracted legal dispute after the Trust terminates. These are not the actions of a trustee acting dishonestly or unreasonably. Gerald Hempt did not act dishonestly, with improper motive, or beyond the bounds of a reasonable judgment. He acted pursuant to the advice of counsel and pursuant to Pennsylvania statue. Under these circumstances, there is no basis to surcharge him for the attorneys' fees incurred in dividing the Trust. Exception No. 5 The Court Erred in Setting Aside the Division of the Trust The Court also concluded, in error, that the Trust division should be set aside for the reasons set forth by the auditor and because Gerald, in accomplishing the division, breached fiduciary duties "to avoid a conflict of interest, not to engage in self dealing, and to act primarily for the benefit. of the beneficiaries...." (Opinion and Order, p. 15 and 13). Again, the Court applied the wrong standard in reviewing Gerald Hempt's actions as trustee. Because the Court found that Gerald did not act in bad faith in dividing the Trust, it should not have set aside the Trust division. See, Flagg's Estate, 73 A.2d at 415 and Steele Estate, 103 A.2d at 413-14. Even if the Court declines to apply the deferential standard set forth in Flagg's Estate and Steel's Estate, the division of the Trust should be reviewed under the abuse of discretion standard because 20 Pa. C.S. § 7191 ("Section 7191") explicitly gave Gerald the discretion to divide the Trust.5 "Where discretion is conferred upon the trustee with respect to the exercise of a power, At the time of the Trust division, Section 7191 provided: A trustee may, without court approval, divide a trust into separate trusts, allocating to each separate trust either a fractional share of each asset and each liability held by the original trust or assets having an appropriate aggregate fair (cont'd footnote) 12 its exercise is not subject to control by the court, except to prevent an abuse by the trustee of his discretion." Geron v. Kennedy, 1112 A.2d 181, 183, (Pa. 1955). In this case, the Trust division was effected for good and proper reasons, and was not an abuse of the trustee's discretion. The Trust division facilitates the efficient administration of the Trust and the businesses whose stock is owned by the Trust. Gerald anticipated that at the time of the eventual distribution of the Trust there likely would be disputes among the beneficiaries regarding the division of the assets. If there were any such disputes at Jean's death, the distribution of~the Trust assets would be delayed because of the need for court proceedings. Such a delay may affect the value of the family businesses, in turn negatively affecting the value of the Trust assets. In order to resolve such issues before Jean's death and avoid having these problems later, the Trustee divided the Trust into three trusts. This was a reasonable exercise of the trustee's discretion conferred by Section 1791. Moreover, the Trust division was in accordance with the provision of Loy Hempt's Will authorizing the Trustee to deal with Hempt Brothers Inc. stock "with the same freedom of action I now have." (Kalbach Ex. 1). The Court's finding that "the values attached to the family businesses by the trustee were significantly less than their actual value" is not supported by the evidence. The auditor made no finding that the valuation of the family businesses was incorrect; in fact, the auditor stated only (conrinued footnote) market value and fairly representing the appreciation or depreciation in the assets of the original trust as a whole. If the division reflects disclaimers or different tax elections, the division shall relate back to the date to which the disclaimer or tax election relates. 13 that "the assets comprising the Trust are not subject to easily ascertainable fair market values." To the extent that the Court makes findings of fact that are not made by the auditor, it must state its reasons for doing so. In re Mallory's Estate, 145 A. 577 (Pa. 1929)("If the court is not satisfied with the auditor's findings of fact, it should reverse them, and state its own findings, briefly giving the reasons for so doing"); Pa. Stand. Pract. § 45.15. Here, the Court provided no reason for finding that the Trust assets had been incorrectly valued by Gerald Hempt, and the record does not support that finding. The record contains no evidence rebutting the valuation of C.A. Hempt at $104 per share. (Tr. p. 266). As to valuation of Valley Land, there was no testimony to rebut the real estate appraisal, and the Objectors' expert conceded, under cross examination, that the 45% reduction to the value was appropriate in light of tax effects and transaction costs. (Tr. p. 227-230). Finally, although Objector's expert conceded that the valuation of Hempt Brothers, Inc. stock must take into account the 1964 shareholders buy-sell agreement, Objector's expert failed to do so in his valuation. Therefore, the only proper valuation of that stock was the valuation given by Gerald Hempt's expert. Given this testimony, there is no support for the finding that the family businesses were undervalued by Gerald Hempt in the division of the Trust. The reasons given by the auditor for setting aside the division of the Trust (with which the Court agreed) are also insufficient. First, the auditor reasoned that the division should be set aside because the stock of the closely held businesses in the Trust was incapable of precise evaluation. Contrary to the auditor's reasoning, Section 7191 expressly permits a trustee to allocate trust assets based upon their fair market value, and Gerald did so, after obtaining expert valuations of the assets. Second, the auditor's reasoning that the Trust Division served no 14 purpose for Trust administration and did not benefit the Trust itself, is an error of fact. As set forth above, the Trust Division resolved issues of asset allocation which, if left until the death of the lifetime beneficiary Jean Hempt, very likely would affect the value of the assets in the Trust. Third, the auditor also erred in reasoning that the Trust division might hinder trust administration because of the illiquidity of the assets allocated to the Hempt Trust. There was no evidence to support the speculation that there might be disproportionate distributions, and such a concern is ill-founded because the Trustee can pay Jean's living expenses from the divided trusts proportionately (40/40/20). Further, the trustee of the Hempt Trust has the authority to borrow money and could borrow money to pay the Hempt Trust's share of Jean's expenses, so, the fact that the Hempt Trust contains primarily illiquid assets is irrelevant. Finally, the auditor's concern that a premature division could be fundamentally unfair to some or all of the parties due to the varying value of the assets in the future is contrary to the express authority of Section 7191. Section 7191 explicitly permits a trust division allocating assets to separate trusts (either on a pro rata or fair market value basis) at some point in time prior to trust termination. The fact that the values of those assets may change after an appropriate trust division is not a reason to set aside such division. Indeed, if such were the case, Section 7191 would not permit a non pro rata division of trust assets. Neither the auditor nor the Court identified an appropriate basis for setting aside the division of the Trust. The Trust division was consistent with the requirements of Section 7191, which, at the tame of the division, required merely that the trust division be based upon an appropriate aggregate fair market value and properly account for the appreciation or depreciation 15 of assets. It was made upon the advice of counsel and was a proper exercise of Gerald's discretion. Therefore, the Court erred in setting aside the division of the Trust. Conclusion For the reasons set forth above, Gerald L. Hempt takes exceptions to the portions of the Court's Opinion and Order that (1) remove Gerald as the trustee of the Trust; (2) appoint Orrstown Barik as the successor trustee; (3) surcharge Gerald for the distributions made to Jean Hempt; (4) surcharge Gerald for the attorneys' fees paid for the legal services to divide the Trust; and (5) set aside the division of the Trust. Gerald L. Hempt requests that the Court reconsider and reverse those portions of its April 16, 2008 order. Respectfully submitted, McNEES WALLACE & NURICK LLC By Donald B. Kaufman I.D. No. 49674 Kimberly M. Colonna I.D. No. 80362 100 Pine Street P.O. Box 1166 Harrisburg, PA 17108-1166 (717) 232-8000 Attorneys for Gerald L. Hempt, Trustee of the Residuary Trust under the Will of Loy T. Hempt Date: May 6, 2008 16 ILLUSTRATION OF BENEFIT OR BURDEN TO GERALD L. HEMPT OF $1.00 DISTRIBUTED FROM LOY TRUST OR JEAN ESTATE A COMPARED TO B $1 distributed $1 distributed $1.00 from LTH Trust ;from JDH Estate 40% to Mark 40¢ (15.00¢) 15% PA siblings (3) inheritance tax 20% to Kalbach 20¢ 3( 8.25) 45% Federal siblings (2) estate tax (net of inheritance tax) (.45 x .85) 40% to Hempt 40¢ siblings (4) Each Hempt 10¢ ~ Net to each 6.68¢ Marks (3) sibling ~ intestate heir Hempts (4) (1/7th each) Gerald L. Hempt receives 3.32¢ (33.2%) less from JDH Estate than from LTH Trust The Trust provides that Gerald will receive one-tenth of each dollar remaining in the Trust at the time of Jean's death. Gerald is one of seven intestate heirs of Jean and will receive one-seventh of each dollar distributed through Jean's Estate. The assets passing intestate from Jean, however, will be reduced by state and federal death taxes, while distributions from the Trust at Jean's death will not. The assets of Jean's estate will be subject to a 15% state inheritance tax. 20 Pa. C.S. § 2104(2)). In December 2000, Jean had between $2.7 million and $7.1 million in assets. Therefore, the additional dollars distributed to Jean's guardianship estate from the Trust would be subject to federal estate tax, which, under current tax law is levied at the rate of 45%.' Therefore, under current tax laws, Gerald would likely receive approximately 6.68 cents of each dollar distributed through Jean's estate, instead of the ten cents that he would receive if the same dollar had been accumulated in the Trust. The Federal unified credit is currently $2 million. It is scheduled to increase to $3.5 million in 2009. The federal estate tax is scheduled to disappear in 2010 and then reappear in 2011 with a unified credit of $1 million and a tax rate of 55%. Appendix 1 ILLUSTRATION OF SURCHARGE VS. REFUND Gerald L. Hemet Surcharge Paid to LTH Trust: A PLUS B $1 surcharge ~ $1 in JDH Estate Balance net of paid by Gerald tax: to LTH Trust and distributed $1.00 from LTH Trust 40% to Mark 40¢ 15% for PA (15.00¢) siblings ;inheritance tax Less 85¢ x 45% 3( 8.250 Federal estate tax = 38.25¢ in tax 20% to 20¢ Kalbach siblin s 40% to Hemet 40¢ 1/7 of net proceeds 46.75¢ siblings ; (46.75¢) to each (6.68¢ each) ;intestate heir 3 Mark, 4 Hem t Total from trust and estate: JDH Estate Refunds to Trust: Total to Marks: Total to Hempts: Total to Kalbachs: 60.04¢2 66.72¢3 20.00¢4 $1 recovered from JDH Estate and distributed from LTH Trust 40% to Mark 40¢ siblin s 20% to Robert 20¢ Kalbach 40% to Hemet 40¢ siblin s Total to Marks: Total to Hempts: Total to Kalbachs: 40.00¢ 40.00 20.00¢ Excess (i.e., double dip) under 20.04¢ 26.72¢ 0 compared to II: (60.04¢ less 40¢) (66.72¢ less 40¢) (20.00¢ less 20.00¢) 40¢ plus 6.68¢ x 3 40¢ plus 6.68¢ x 4 20¢ plus 0 Appendix 2 CERTIFICATE OF SERVICE The undersigned hereby certifies that a true and correct copy of the foregoing document was served upon this date by first-class mail, postage prepaid, addressed as follows: Daniel L. Sullivan, Esquire METTE, EVANS & WOODSIDE 3401 North Front Street P.O. Box 5950 Harrisburg, PA 17110-0950 Joel Zullinger, Esquire ZULLINGER & DAMS 14 North Main Street, Suite 200 Chambersburg, PA 17201 Donald B. Kaufman Of Counsel for Gerald L. Hempt, Trustee of the Residuary Trust under the Will of Loy T. Hempt Dated: May ~5, 2008