Taxation & Estate Planning

In Terrorem Clauses - An Important Distinction

By Michael D. Bonasera, Esq.

In Terrorem clauses are often used by estate planner’s to coerce someone (usually a beneficiary, or someone who thought they should have been a beneficiary) to not sue the trust or estate. They can be useful but as this post by Professor Berry illustrates, they don’t prevent all actions against Trustees.

In Lesikar v. Moon, 237 S.W.3d 361 (Tex. App.?Houston [14th Dist.] 2007, pet. filed), a Beneficiary sued their Trustee for an alleged breach of fiduciary duty. There was a in terrorem clause in the trust and so the Trustee claimed that Beneficiary forfeited her share of the trust. The appellate court determined that the trial court was correct in not reaching the issue because Trustee?s motion for an interlocutory summary judgment was not timely filed.

In what is most likely dicta, the court concluded that even if the Trustee?s motion had been timely filed, Beneficiary?s conduct would not have triggered a forfeiture. The court explained that the right to challenge a fiduciary?s actions is an inherent part of a trust relationship and thus such conduct is insufficient to trigger a forfeiture.

Moral: A no contest clause will not prevent a beneficiary from bringing a breach of fiduciary claim against the trustee. It would be against public policy to permit the settlor to trigger a forfeiture when a beneficiary merely seeks to enforce the trust as written and assure that the trustee obeys the trustee?s fiduciary duties.

Thanks Professor. You don’t see these cases too often but they’re usually interesting when you do.

Full post as published by The Ohio Trust & Estate Blog on February 16, 2008 (boomark / email).