Forfeiting trust.

• Author: Gordon, Deborah S.
• Position: Trust forfeiture clauses problems and solutions - III. Trusts and Forfeiture Clauses through Conclusion, with footnotes, p. 484-512

3. TRUSTS AND FORFEITURE CLAUSES

   A significant number of appellate courts recently have had to decide whether to disinherit a trust beneficiary who questioned a trustee's decision making when the trust in question contained an expansive forfeiture clause that directed such a result. (129) Some jurisdictions have refused to enforce forfeiture clauses that are broad enough to apply to actions against fiduciaries, notwithstanding clear settlor intent to the contrary, citing "public policy." (130) Several other jurisdictions have deprived litigious beneficiaries of their rights to multi-million dollar trusts, finding that the beneficiaries forfeited those rights by challenging their trustees' decision making. (131) Still other courts have skirted the issue, not yet clarified their approach to it, or allowed it to become intertwined with other doctrines governing fiduciary conduct. (132) The Uniform Trust Code has no provision addressing trust forfeiture clauses, and the Restatement (Third) of Trusts has a provision that remains in draft form. (133) In other words, this topic is ripe for scrutiny. The balance of this Part describes the various approaches courts have taken, none of which seem particularly aware of countervailing views.

   1. Public Policy and Fiduciary Duties: The California Approach

      Several jurisdictions have refused to apply trust forfeiture clauses to beneficiaries who contested issues involving fiduciary conduct, regardless of how broadly and clearly those clauses were worded. (134) The courts that have taken this approach cite public policy as the basis for not enforcing clauses that "immunize fiduciaries from [state] law governing the actions of such fiduciaries." (135) Most have extracted this idea from precedent involving traditional will forfeiture clauses and have not specifically considered how, if at all, trusts differ. (136)

      California courts have had a particularly robust opportunity to consider forfeiture clauses that apply to fiduciary conduct, (137) and for that reason Bradley v. Gilbert provides both a thorough discussion of the public policy approach and a compelling example of why a settlor would choose to include a clause that conditions a beneficiary's continuing receipt of trust funds on her acquiescence to a trustee's decision making. (138) Bradley arose out of a distressing but not unfamiliar series of events. Parents, who were married for more than fifty years, created an estate plan in 1992 essentially leaving everything to the survivor and then to the couple's two adult children. (139) They achieved this result by executing a joint trust agreement, which, on the first death, divided the couple's property among three subtrusts: a marital trust, a family trust, and a survivor's trust. (140) Although the trust agreement did not give the surviving spouse power to change the beneficial interests in the marital or family trusts, it did permit the survivor, as trustee, to defer allocating assets among the subtrusts and to amend the survivor's trust. (141) The original trust instrument creating this plan contained a simple and typical forfeiture clause disinheriting anyone who "contest[ed] or attack[ed] [the] instrument or any of its provisions." (142) The surviving spouse was named as trustee of all three subtrusts, and the couple's son, Chris, was named successor trustee. (143) The total net worth of the couple at the time that they executed their joint estate plan was approximately $7.84 million. (144) Two years after signing those documents, the mother died. (145) Soon thereafter, the father, then in his seventies, "became romantically involved with one Flora Ibarra, a married woman, who became his live-in companion and caregiver." (146)

      Increasingly set apart from their father over the ensuing decade, the children learned of his death only upon receipt of a probate petition. (147) At that time, the children also learned that the value of the marital and family trusts, which became irrevocable on their mother's death and for which Chris was to succeed his father as trustee, had dropped to $177,000. (148) Not surprisingly, the children began to question their father's conduct as fiduciary vis-a-vis their mother's estate and the trusts that the parents created together. (149) From 1995, when the father's relationship with Ibarra began, until 2006, when the father died, he amended the "survivor's trust" nine times, reducing shares for his children, increasing shares for Ibarra and her family, and naming his office assistant (rather than his son) as successor trustee. (150) The father also significantly rewrote--and expanded--the forfeiture clause in the survivor's trust to discourage any challenges to his new estate plan. (151) The revised forfeiture clause applied not only to anyone who contested the validity of the testamentary documents but also to anyone who challenged appointment of and actions by fiduciaries, property designations and allocations among the trust and other assets owned by the decedent at death, and transactions affecting Ibarra or her family. (152) Nearly two pages in length, the forfeiture clause provided that any beneficiaries who engaged in prohibited behaviors listed in thirteen separate sections would be "specifically disinherit[ed]" and all interests otherwise given to that person, his spouse, and his issue "forfeited" as if the person were predeceased. (153) Specific triggers for depriving a beneficiary of rights under the trust included, among other things:

      (1) Contesting the trust agreement or will, or "in any manner" seeking "to impair or invalidate" any of their respective provisions;

      (2) Claiming "entitlement to any asset" owned by the decedent or his trust "whether or not such claim is successful";

      (3) Unsuccessfully challenging appointment of any fiduciary or unsuccessfully seeking that fiduciary's removal; and

      (4) Objecting "in any manner to any action taken or proposed to be taken in good faith" by any fiduciary ("including, without limitation, the good faith exercise or non-exercise of any discretion granted" to that fiduciary) regardless of how or when the action was taken and "whether or not such claim is successful." (154)

      Regardless of how an observer feels about the father changing his estate plan and allocating particular assets to and among the various subtrusts, either as trustee or as co-settlor, it is easy to see why the father included such an extensive forfeiture clause; it provided added insurance that his intent would be effectuated because beneficiaries who challenged his decision making would potentially forfeit their inheritances. In other words, anticipating animosity between his children and Ibarra, his companion, he seemed determined to make his children think carefully before contesting his plan and any decision making associated with it. The father's intent is not hard to discern.

      At the time of the father's death, California had in place a summary review procedure for determining whether an action would violate a forfeiture clause, (155) and the son therefore sought a ruling that a petition, by him as trustee, to marshal assets of the marital and family trusts would not violate the expansive forfeiture clause in the survivor trust. (156) The son first argued that a statutory exception to forfeiture clauses applied because he filed the suit as a trustee, rather than as a beneficiary, and was seeking to determine whether actions taken by his father, the previous trustee, were in contravention of any fiduciary duties. (157) In response, the successor trustee of the survivor trust argued that the settlor amended that trust to include the "draconian" forfeiture clause for the reason of prohibiting the settlor's children or anyone else from contesting actions taken by him as trustee, which was precisely what the son was doing. (158) Regardless of whether the son brought his claims as trustee or beneficiary, the trustee argued, the son's "petition would impermissibly thwart [the decedent's] intended estate plan," and therefore the petition should invoke the forfeiture clause. (159) In other words, the broad trust forfeiture clause's legality was directly at issue.

      Refusing to allow settlor intent to trump fiduciary accountability, both the trial and reviewing courts agreed that a petition to marshal assets, and any other challenge to fiduciary conduct, would not trigger a forfeiture clause even if the beneficiary (and not the trustee) filed the petition. (160) "Public policy," the appellate court explained, allows a beneficiary "to question the actions of a faithless fiduciary without being subject to the restrictions of such a clause" because detecting and deterring "errant fiduciaries" who are "engaged in misconduct" is an important purpose of a court's oversight and cannot be overwritten by a property owner. (161)

      This broad public policy rejection of trust forfeiture clauses is not really new, having appeared in an old New York case that considered the legality of a particularly "drastic" clause (162) conditioning trust beneficiaries' gifts on receipt of a written document "acquiesce[ing] in the administration of said trusts" and "approving], ratifying] and confirm[ing] all acts and things done by the respective Trustees thereunder ... with respect to the administration of the trust properties." (163) The settlor, who had created and funded two inter vivos trusts of $10 million apiece, explained in the trust instruments that he was including this condition because he had "been kept informed of such administration, and [was] completely satisfied therewith" and "desire[d] ... all which has been done and all the acts which have been taken by the Trustees." (164) The Westchester County Surrogate refused to enforce the clause, reasoning in a quite long and thoughtful opinion that the "attempted provision runs counter to the very fundamental principles of trust law" including the state's "real interest in having...