Forfeiting trust.

• Author: Gordon, Deborah S.
• Position: Trust forfeiture clauses problems and solutions - Abstract through II. Inter Vivos Trusts and Modern Estate Planning, p. 455-484

ABSTRACT

Over the past two years, a significant number of appellate courts in jurisdictions throughout the country have faced 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. Courts and legislatures profess to treat trust and will forfeiture clauses identically, but 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 court invalidates both the will and the forfeiture clause. In contrast, the majority of trust litigation arises from disagreements between the beneficiaries and the trustees over how the latter invest, manage, and distribute property. 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.

TABLE OF CONTENTS INTRODUCTION I. WILLS AND FORFEITURE CLAUSES A. Background, and Purposes B. Enforceability of Testamentary Forfeiture Clauses: Jurisdictional Variations II. INTER VIVOS TRUSTS AND MODERN ESTATE PLANNING A. The Inter Vivos Trust in Modern Estate Planning: Benefits B. The Inter Vivos Trust in Modern Estate Planning: Challenges C. How Trusts' Structures and Uses Have Affected Trust Forfeiture Clauses III. TRUSTS AND FORFEITURE CLAUSES A. Public Policy and Fiduciary Duties: The California Approach B. Settlor Intent and Trustee Expertise: Enforcing Forfeiture Clauses C. The Uniform Trust Code and the Restatement (Third) of Trusts IV. MUST TRUST FORFEITURE CLAUSES FORFEIT TRUST? A. Drafting Considerations B. A Proposal for Enforcing Trust Forfeiture Clauses: Using Exculpatory Clause Law as a Model CONCLUSION "Experience has shown that often, after the death of a [property owner] ... contests are commenced wherein not infrequently are brought to light matters of private life that ought never to be made public, and in respect to which the voice of the [property owner] cannot be heard either in explanation or denial; and, as a result, the manifest intention of the [property owner] is thwarted. It is not strange, in view of this, that [property owners] have desired to secure compliance with their dispositions of property, and have sought to incorporate provisions which should operate most powerfully to accomplish that result." (1)

INTRODUCTION

Imagine a mother who has three adult children, two of whom she sees regularly to celebrate daily triumphs and periodic disappointments and one of whom has moved far away and maintains only erratic contact with the family. These significantly different relationships may prompt the mother to bequeath her property to the three children in unequal shares. Whether the mother's decision is whimsical or justified is legally unimportant, (2) because a person's ability to dictate how and to whom her property flows at death is "[t]he dominant substantive principle of the law of gratuitous transfers." (3) This ability is also the source of significant personal disarray that may result when loved ones feel slighted. Indeed, of all the legacies that a property owner can leave behind, the most valuable is not her ancestral home, unfinished manuscript, or diamond jewelry, but rather a smooth and harmonious transition of ownership, without resentment, challenge, or contest. (4) It is therefore not surprising that most United States jurisdictions respect a decedent's written direction that any beneficiary who "contests" that decedent's will forfeits the right to inherit under it. (5) 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, as the 1898 Supreme Court case quoted above indicates. (6) By coupling such a clause with a gift of some significance, a property owner can incentivize a disgruntled beneficiary to accept what she has received and walk away, thereby serving the "compelling" (7) goals of preventing litigation, maintaining privacy, and encouraging family harmony. (8)

Over the past two years, a significant number of appellate courts in jurisdictions throughout the country have confronted forfeiture clauses in trusts rather than in wills. (9) But because trust forfeiture clauses purport to disinherit beneficiaries who challenge trustee decision making, they differ significantly from their testamentary counterparts and thus deserve serious scrutiny in their own right. To date, however, this case law trend has gone virtually unnoticed, (10) leading to an increasingly inconsistent and haphazard approach in the courts. This inconsistency results because each of the jurisdictions to confront the analytic underpinnings of a trust forfeiture clause has searched for guidance linearly, looking back to its law on testamentary forfeiture clauses, rather than more comprehensively. The purpose of this Article is to expose the problems that trust forfeiture clauses present, in comparison to will forfeiture clauses, and to propose some solutions.

Trusts, (11) rather than wills, have become the primary vehicle for property owners--known as settlors--to distribute their valuables at death. (12) Although courts and legislatures profess to treat trust and will forfeiture clauses identically, (13) 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. (14) Wills are most...