46 Pages Posted: 22 Feb 2015 Last revised: 21 Mar 2015
Date Written: February 20, 2015
Over the past two years, a significant number of appellate courts in jurisdictions throughout the country have been faced with trust provisions that purport to disinherit any beneficiaries who challenge a trustee’s decision-making. Such provisions to “secure compliance...with dispositions of property” — known as “forfeiture,” “no-contest,” “anti-contest,” or “penalty” clauses — have appeared in wills for well more than a century. But the trust clauses differ from their testamentary counterparts and thus deserve serious scrutiny in their own right, especially because the abundance of recent cases has led to increasingly inconsistent and haphazard approaches. This Article exposes the problems that trust forfeiture clauses pose, in comparison to will forfeiture clauses, and proposes some solutions.
Trusts, rather than wills, have become the primary vehicle for property owners to distribute their valuables at death. While courts and legislatures profess to treat trust and will forfeiture clauses identically, doing so has resulted in significant confusion because this approach ignores that the two donative vehicles, and the most common challenges to them, differ in fundamental ways. Indeed, wills are most frequently contested by beneficiaries who claim the document itself is invalid, either because it was executed without the requisite formalities or because the testator lacked capacity, was induced to sign the instrument against her free will, or revoked it in favor of some alternative disposition. Typical testamentary forfeiture clauses seeking to prevent these types of claims therefore provide that anyone who challenges the will forfeits any interests received under it; if the contestant is successful, the will (including the clause) is invalidated. In contrast, the majority of trust litigation arises from disagreements between the beneficiaries and the trustees over how property is being invested, managed, and distributed. Seeking to incentivize beneficiaries to go along with trustee decision-making, some settlors and their advisors have purposely broadened the scope of forfeiture clauses so that they apply not only to contests that challenge the validity of the trust agreement but also to claims of fiduciary misconduct or mismanagement. But a provision that discourages breach of duty claims against trustees by dictating that anyone who files such a claim forfeits her beneficial interest allows fiduciaries to escape oversight, thereby forfeiting the very qualities that define trust law in the first place.
This Article exposes the conflicting ways that courts and legislatures have been grappling with these clauses that pit settlor intent not against a general distaste for forfeiture but instead against fiduciary accountability. After examining the roots of this confusion, the Article proposes a more coherent approach to trust forfeiture clauses that recognizes property owners’ interests in facilitating smooth relationships between their trustees and beneficiaries without forfeiting the precious oversight that allows trusts and the parties to a trust relationship to function properly.
Keywords: inheritance, trusts, estates, wills, testamentary documents, probate, elder law, legacy, succession, death, fiduciary duties, trustees, inter vivos trusts, no-contest clauses, forfeiture clauses, in terrorem clauses, penalty clauses
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