Trusts’ Forfeiture Clauses Do Not Immunize Breaches of Fiduciary Duty and Breaches of Trust

by Dan Conlisk

With the Baby Boom generation reaching mature adulthood, more assets are being held in trusts than ever before. Trustees charged with administration of these trusts and their assets range from large financial institutions, to attorneys and accountants, to friends and family members of the trust’s creator (the “settlor”). All trustees owe trust beneficiaries fiduciary duties – the highest imposed by law on any individual or entity – which include good faith, integrity and loyalty; candor, full disclosure and accounting; avoidance of self-interest and conflicts of interest in all forms; prudence and reasonable care; compliance with the trust instrument: and receipt of reasonable fees.

These duties are exacting and, too often, breached. A trustee with sudden access to financial assets may invest them in his/her own business ventures. She may decide that beneficiaries need not be kept apprised of the manner in which the trust is being administered. He may naïvely believe that his obligation to invest trust assets is fulfilled if he treats them “as though they were his own,” regardless of whether his personal strategies are appropriate for the prudent investment of assets held for the benefit of others. She may take trustees fees in excess of the reasonable value of the work performed. Explaining breaches of trust, and defending them in litigation, is difficult. The highest duty known to law is not easily ignored.

In creating their trusts, settlors may include “no contest,” “forfeiture” or “in terrorem” clauses in the trust documents (collectively, a “forfeiture clauses”). Although they vary, these clauses typically provide that if any beneficiary challenges the validity of the trust or any of its provisions, she forfeitures her interest. Among other things, forfeiture clauses seek to prohibit lawsuits by beneficiaries who feel jilted by a trust’s terms.

As a defense strategy, some trustees faced with lawsuits over their administration of trusts contend that forfeiture clauses bar such lawsuits. The essence of their argument is that, by filing suit, the beneficiary has forfeited her interest in the trust and, as a result, no longer is entitled to pursue litigation regarding it. Two recent Missouri Court of Appeals decisions make clear that forfeiture clauses do not provide a defenses or counterclaims for trustees who breach their fiduciary duties. See Winston v. Winston, 449 S.W.3d 1 (Mo. Ct. App. September 2, 2014) transfer denied December 23, 2014.; Labantschnig v. Bohlmann, 439 S.W.3d 269 (Mo. Ct. App. August 26, 2014).

Breach of fiduciary duty cases often arise from complicated facts. Simplifying for purposes here, in Winston, a Grandfather established various trusts for the benefit of his Son and his Son’s twin daughters (the “Twins”). 449 S.W.3d 3-4. When the Grandfather died, a Bank became the trustee. Id. at 4. The Trusts allowed distributions to the Son and the Twins for health, maintenance and support, as well as requiring that the Twins receive distributions to purchase a car and for living expenses while they were students. Id. at 3-4. While the Bank could recommend such distributions, under the terms of the trusts, the Son had veto power. Id. The Son and the Twins became estranged, and the Son vetoed all distributions to them. Id. at

The Son also became dissatisfied with the Bank’s services. He sued the Bank for breach of fiduciary duty and sought an accounting and turnover of trust property (the “Lawsuit”). As a general rule, all trust beneficiaries must be parties to a lawsuit involving their trusts. Accordingly, the Bank added the twins to the Lawsuit. The Bank requested that the court approve its resignation as trustee, appoint a successor trustee, approve its final accounting and provide a release.

Once parties to the lawsuit, the Twins asserted counterclaims against the Son for breach of fiduciary and requested that the Court remove of the Son as trustee; remove his veto power; reform, modify or terminate the trust; and sever the trusts in three separate trust, one for each beneficiary. Id. at 5. They alleged that circumstances fundamentally had changed since the Grandfather created the Trusts. Id. at 8, 12.

The Trusts’ forfeiture clause provided:

If any person who has been given an interest in a trust estate under this Trust Agreement institutes or joins in (except as a party defendant) any proceeding to contest the validity of this Trust Agreement or any of its provisions, all benefits provided for that person shall be revoked[.]

  1. at 7. The Son contended that, by asserting counterclaims against him, the Twins triggered the clause and forfeited their interests in the Trusts. Id. at 7.

The court rejected his argument. It emphasized that forfeiture clauses are disfavored and should be enforced only where it is clear that the settlor intended that “the conduct in question should forfeit a beneficiary’s interest . . .” Id. at 7-8, quoting Chaney v. Cooper, 954 S.W.2d 510, 519 (Mo. Ct. App. 1997). It reasoned the forfeiture clause’s use of “contest the validity,” under the ordinary meaning of those words, meant “call into question the legal sufficiency.” Winston, 449 S.W.3d at 7-8. Against this background, the Court held that the Twins’ claims did not implicate the forfeiture clause. Id.

The Court observed that the Twins had alleged that the Grandfather would have never granted the Son veto power over distributions if he (the Grandfather) had foreseen the abuse that the Son would inflict on the Twins. Id. at 8, 12. It reasoned that such a claim did not challenge the legal sufficiency of the Trust. Instead, it “implicitly acknowledged that the trusts were valid, but alleged circumstances that purportedly warranted some form of modification because those circumstances were not foreseen by the settlor when the trust was validly created, and were presently frustrating the settlor’s intent as expressed in the trusts.” Id. at 8. It concluded that, by seeking modification, reformation or termination based on changed circumstances “outside the trust instruments,” the Twins had not triggered the forfeiture clause. Id.

In Labantschnig, the court similarly rejected a trustee’s attempt to use a forfeiture clause in defending a breach of fiduciary duty lawsuit. 439 S.W.3d 269. There, the Trust contained a more extensive forfeiture clause than that in Winston. It provided:

If, at any time, either before or after Grantor’s death, either of Grantor’s said sons shall, either directly or indirectly, contest the validity of this Trust Agreement, or shall attempt to vacate or change the same, or to alter or change any of the provisions hereof, then such son shall be thereby deprived of any interest hereunder and of any share of the trust estate, and the share of such son shall go to the other of Grantor’s said sons.

  1. at 271. The beneficiary sued the trustee for, among other things, failing properly to appraise certain trust property as the trust required. Id. at 272. The beneficiary requested an accounting, the preparation of a proposed schedule for distribution, removal of the trustee and other relief. Id. The trustee counterclaimed that, under the forfeiture clause, the beneficiary had forfeited his interest by filing suit. Id.

After finding that the trustee had committed multiple fiduciary breaches, the trial court held that the beneficiary had not triggered the forfeiture clause by filing suit to remedy them. Id. at 272-73. It reasoned that the beneficiaries “efforts to force the Trustee to comply with the terms of the Trust, challenging appraisals, and refusing to execute a release did not constitute an attempt to challenge the validity of the Trust or alter or change the terms of the Trust to otherwise violate the [forfeiture clause].” Id. at 273.

The court of appeals affirmed. Again emphasizing that forfeiture clauses are disfavored, the court explained that the beneficiary’s “‘challenge’ was to the Trustee’s appraisals, not a challenge to the Trust itself or its terms.” Id. at 275. Instead, the lawsuit “was an attempt to ensure that the Trust was executed according to its terms.” Id. The court reasoned that “the plain language of [the forfeiture clause] does not prohibit a beneficiary from questioning a Trustee’s execution of the Trust, seeking an accounting or a review of the Trustee’s actions, questioning appraisals, or seeking to force action by the Trustee.” Id. Instead, such clauses “only prohibits an attempt to vacate, change or alter the Trust itself.” Id.

Accordingly, when the beneficiary sought independent appraisals, questioned the trustee’s appraisals, and raised the trustee’s approach to appraisals as a fiduciary breach, he was seeking only to enforce the terms of the trust. Id. He was not seeking to contest, vacate or change the trust and thus had not triggered the forfeiture clause. Id.

Fiduciary breach/breach of trust disputes are fact-specific and involve varied trust language. Nonetheless, as Winston and Labantschnig make clear, forfeiture clauses are not a panacea for trustees who breach their fiduciary duties. Even where a trust contains a forfeiture clause, trustees must scrupulously honor their fiduciary obligations. Forfeiture clauses’ admonition that disappointed beneficiaries sue to invalidate or alter trusts at their peril does not deprive beneficiaries of their rights to enforce their trusts and hold their trustees accountable. They do counsel, however, that such fiduciary and trust disputes be handled with competence and care.