Published in NH Bar News (3/20/2017)
Testamentary in terrorem provisions, which compel forfeiture by a legatee upon unsuccessful challenge to the validity of an estate plan and/or its administration, have a rich history with antecedents in the ancient world and English and American case law as far back as 1674 and 1898 respectively. See Beyer, The Fine Art of Intimidating Disgruntled Beneficiaries With In Terrorem Clauses, 51 SMU Law Review 225, 230 – 35 (1998)(“Perhaps the earliest record of a testamentary in terrorem provision is found in the will of a Mesopotamian man written in the thirteenth century, B.C.”); Gordon, Forfeiting Trust, 57 William & Mary Law Review 455, 459 (2015).
In New Hampshire, “[t]he general rule is well established that a beneficiary who contests the will will forfeit his share in accordance with a provision in the will therefor.” Burtman v. Butman, 97 N.H. 254, 257 (1952). In often identical language, RSA 564-B:10-1014 for trusts and RSA 551:22 for wills mandate the enforcement of the intent “as reflected in a no-contest provision… to the greatest extent possible,” RSA 564-B:10-1014(d) and RSA 551:22, IV, and “without regard to the presence or absence of probable cause for, or the beneficiary’s good or bad faith,” RSA 564-B:10-1014(b) and RSA 551:22, II. The statutes exempt from enforcement: “[a]ny action to determine whether a proposed or pending motion, petition, or other proceeding constitutes a contest within the meaning of a no-contest provision,” RSA 564-B:10-1014(c)(3) and RSA 551:22, III(c), and “[a]ny action brought by a beneficiary or on behalf of any such beneficiary for a construction or interpretation of the terms of the trust [or will],” RSA 564-B:10-1014(c)(4) and RSA 551:22, III(d). In the case of an action contesting the validity of a will or trust, “[a] no-contest provision shall be unenforceable to the extent that the [instrument] is [determined to be] invalid… [and] [i]n the case of an action… to challenge the acts of the [fiduciary]…, a no-contest provision shall be unenforceable to the extent that the [fiduciary]… has committed a breach of fiduciary duties or breach of trust.” RSA 564-B:10-1014(b) and RSA 551:22, II.
Counsel representing a beneficiary contemplating an action to contest the validity or the fiduciary’s administration of a trust or will needs to advise carefully the client about in terrorem risks. The decisions of Judge Gary Cassavechia in Hallett v. Hallett (copies of relevant pleadings and Orders) provide important guidance on:
- The extent to which the Court will provide instruction as to whether an action constitutes a “contest” under an in terrorem clause;
- Whether the Court will provide guidance as to the risks forfeiture if the beneficiary succeeds on less than all claims; and
- Whether conducting discovery irrevocably commits a beneficiary to having engaged in a contest.
In Hallett, children of the settlor as beneficiaries of family and marital sub-trusts (the “Beneficiaries”) contended that the two trustees (the settlor’s surviving spouse and settlor’s former counsel)(the “Trustees”) committed various breaches in the administration of the trusts. The trust contained the following broad in terrorem clause:
Contest of Will or Trust. It is the Grantor’s will and direction that if any beneficiary under this Trust . . . or any other person, shall, directly or indirectly institute, conduct or in any manner whatsoever take part in or aid in any proceeding to oppose the . . . administration of this Trust, or any amendment hereto, or impair, invalidate or set aside the same, or any of their provisions, then, in such event, the provision herein made for the benefit of such person or persons shall thereupon be revoked. Such person or persons shall thereafter be excluded from any participation in this Trust and shall, thenceforth, have no right, title or interest in the assets of this Trust. Any property, devise, bequest or distribution to such person or persons shall thereafter pass as if such person or persons did not survive the Grantor.
(Emphasis added.) Thus, the trust mandates forfeiture in the event a beneficiary “shall, directly or indirectly institute, conduct or in any manner whatsoever take part in or aid in any proceeding to oppose the… administration of this Trust.” As the Court stated in its January 15, 2014 order (the “First Safe Harbor Order”), “[t]his language manifests an intention of the settlor to discourage provocations impugning even mere acts of or, presumably inclusively, omissions in administration.” First Safe Harbor Order, p. 9.
Mindful of this prohibition, the Beneficiaries in count I of their eleven count petition and a “Motion for a Ruling on the Safe Harbor Provision of NH RSA 564-B:10-1014” sought a ruling that the filing of their action did not constitute a contest in violation of the in terrorem clause. In a supplemental filing, the Beneficiaries sought “additional court orders that the no-contest provision… is unenforceable: (1) ‘to the extent[ ] the trust is invalid because of fraud [or] violates public policy;’ [and] (2)‘because the fundamentals of [their] action solely challenge the acts of the Trustees as… breach[es] of [their] fiduciary duties….’” First Safe Harbor Order, p. 3. “Given that the Co-Trustees have seasonably objected and indicated an intent to disprove the allegations,” the Court held that it could give guidance under RSA 564-B:10-1014c)(3) as to which claims in the petition were contests within the meaning of the in terrorem provision, but could not give guidance until after a trial as to whether forfeiture would be imposed if the contests were pursued. “Put another way, the Hallett Beneficiaries may only find statutory sanctuary from the no-contest provision after they successfully prove, to the measure needed, what they have alleged.” Id. “The Court recognizes that the journey to these safe harbors is necessarily fraught with risk for a litigant, as actual invalidity of the trust, or breach of duty by a trustee cannot be determined in advance of completed litigation.” Id., p. 7.
Reviewing the petition, the Court held that all of the counts other than the request for the advisory order in count I amounted to in terrorem contests, including those which were wholly remedial and sought modification of the trust, enforcement of the no-contest provision against the surviving spouse as beneficiary, and an award of attorneys’ fees and costs, reasoning that to the extent that these claims sought limitations on the Trustees’ discretion, they sought to interfere with the administration of the trust and were contests under the in terrorem clause. The Court granted the Beneficiaries leave to amend their petition in light of the Court’s rulings.
As set forth in the Court’s March 31, 2015 Order (the “Second Safe Harbor Order”), the Beneficiaries filed an Amended Petition and a motion asking the Court to rule: “(a) that successful prosecution of one ‘contest’… makes the no-contest clause unenforceable against the entire action; (b) the no-contest clause [does not apply]… because [the] an action seek[s] construction of the terms of the… Trust…; and (c) none of the allegations contained in the Amended Petition constitutes a ‘contest’ within the terms of [the in terrorem clause].” Second Safe Harbor Order, p. 2. Noting that “the Court has [not] been able to find case law on point” with regard to whether a single favorable ruling on the beneficiaries’ breach of fiduciary claims would be enough to protect them from forfeiture if they lost on their other claims, Judge Cassavechia considered the purpose of the statute and the reasonable expectations of the settlor and ruled that this determination may be made only after a trial.
Construction of RSA 564-B:10-1014(b) to allow one successful claim, even a minor technical breach, to render a no-contest clause unenforceable could conceivably thwart the clear intent of the settlor and render a no-contest provision meaningless unless a trustee carries out his or her duties to perfection. Under this scenario, statutory interpretation would act to “immunize legal proceedings, plainly intended to frustrate [the settlor’s] unequivocally expressed intent from the reach of the no-contest clause.”
Consequently, the Court must answer the Hallett Beneficiaries’ inquiry with the, likely unsatisfying, response “it depends.” If after trial on the merits, it appears that the balance of proven breach, or breaches, or trust brought to trial outweigh those without merit, safe harbor arrival may be achieved. The Court, at this juncture, however cannot discern, in the absence of proof offered and tested at trial, whether the proposed Amended Petition Proposed, advances claims of such merit as to offer safe haven from the destructive waters fomented by determinations of the lack of merit in regard to others.
Second Safe Harbor Order, p. 10 (quoting Estate of Strader, 132 Cal.Rprtr.2d 649, 654 (2003)) (emphasis added).
The Court rejected the Beneficiaries’ attempt to characterize their action as falling under RSA 564-B:10-1014(c)(4), which exempts from in terrorem enforcement “[a]ny action brought by a beneficiary… for a construction or interpretation of the terms of the trust,” reasoning that trust interpretation was not in fact the purpose of their claims.
The Court has reviewed the claims set forth in the proposed Amended Petition Proposed and concludes that these claims do not constitute an action for interpretation or construction of trust terms. It may be undeniable that these claims may ultimately require the Court to construe trust terms as a subsidiary determination whether there has been a breach of duty, however, the claims do not, in a pure sense, request a determinative ruling on the meaning of a provision. Rather, Counts I-IV allege specific acts or failure to act by the Co-trustee[s] in violation of the terms of the trust or their duties as fiduciaries under the trust code.
Second Safe Harbor Order, p. 11-12 (emphasis added). Consistent with its rulings on the original petition, the Court found that all claims in the amended petition were contests, including a remedial claim for attorneys’ fees.
At the request of the Trustees, the Court ruled that it would not permit further amendments to the petition and that it would not entertain any further pre-trial requests for in terrorem guidance:
[T]he Court now concludes, and reaffirms its prior directive to the Hallett Beneficiaries, that although it offered appropriate guidance in the First Safe Harbor Order, and gave the Hallett Beneficiaries the option to file a motion to amend, it will not entertain serial and prolonged motions seeking Court advice regarding the implications of claims made and the matter to correct any improprieties. See First Safe Harbor Order at 13 (Index #39). To do otherwise would risk undue elongation of the litigation and thus frustrate the intent of the settlor to discourage challenges to the trust and violate statute’s directive that this intent be honored to the greatest extent possible. Serial advice could also potentially compromise the proper preeminent role of this Court as neutral arbiter of legal disputes should the Hallett Beneficiaries motions inspire an appearance of its unduly acting as a “super lawyer” rendering legal aid and guidance in charting the course to safe harbor for one of two litigants with a cause before it.
Second Safe Harbor Order, p. 16 (emphasis added).
Citing that the Beneficiaries had engaged in discovery, including interrogatories, document requests, and expert disclosures, the Trustees urged the Court to find that the Beneficiaries had pressed the litigation sufficiently to constitute an in terrorem contest, which the Beneficiaries could not escape by withdrawing the action. In evaluating the issue, the Court balanced the plain meaning of the trust in terrorem clause and RSA 564-B:10-104, which it noted “arguably” supported the Trustee’s request, against the fact that the underlying intent of the in terrorem clause would be furthered by encouraging the Beneficiaries to drop claims upon conducting discovery that reveals their lack of merit and New Hampshire’s public policy favoring “open and complete discovery.” Id., p. 20 (citing N.H. Ball Bearings v. Jackson, 158 N.H. 421, 429 (2009)). In light of these competing considerations, the Court adopted the approach of the New York Surrogate’s Court “allowing limited discovery, based on the facts of each case, that would provide a beneficiary with ‘information of potential value or relevance’ in order to make a determination that the trust is being administered in accordance with a settlor’s intent.” Id. (citing In re Baugher, 906 N.Y.S.2d 856, 859 (Surrogate’s Ct. Nassau Cty. 2010)). Finding that the “Hallet Beneficiaries’ discovery activities to date have remained, on balance, within the realm of acceptable inquiry consistent with determination whether the R.S. Hallett Trust had been administered in a manner intended by the Settlor,” the Court “decline[d] the Co-trustee’s invitation, at this time, to find the Hallett Beneficiaries in violation of Article 13 [of the Trust].” Id., p. 21.
After these extensive preliminary proceedings, the Beneficiaries proceeded with their claims and ultimately prevailed at trial before Judge Cassavechia as Referee whose June 16, 2016 Recommendation was approved by Judge Robert Foley by a June 17, 2016 Order (collectively, the “Trial Order”). The Court found that the Trustees breached their duty to timely fund sub-trusts, their duties of impartiality and loyalty by managing trust investments to favor the interests of the lifetime beneficiary (the widow Trustee) over the interests of the residuary beneficiaries, and the duty to segregate trust assets. Trial Order, pp. 19-34. While the petitioners successfully proved multiple breaches of duty and obtained removal of the Trustees, the monetary relief awarded was quite modest. The Court found that it could not reasonably ascertain fair compensable damages based on the evidence presented. Id., pp. 38-40. In view of the success on the merits of their claims, the Court found that the petitioners were entitled to safe harbor from enforcement of the trust’s in terrorem provision under RSA 564-B:10-1014(b). Id., p. 44.
In terrorem provisions are increasingly common in estate plans and pose a significant risk for any beneficiary contestant who is to receive interests of value under the estate plan. Although decided under RSA 564-B:10-1014, which governs trusts, Hallett is likely to be followed by the Probate Court in considering an in terrorem provision in a will. Hallett offers the following lessons:
- The Probate Court will give guidance as to whether a proposed action constitutes an in terrorem “contest,” but will likely decline to offer any guidance until after trial as to the extent to which a contestant’s claims must be proved in order to avoid forfeiture, including whether success on any single claim may be enough.
- While the Court is likely to permit at least one amendment of a proposed action in light of the Court’s preliminary guidance as to whether it constitutes a contest, the Court is unlikely to permit serial amendments.
- The mere fact that resolution of a claim may require the Court to construe the will or trust will not exempt the action from being a contest under RSA 564-B:10-1014(c)(4) or RSA 551:22, III(d); rather, the Court will look to the substance of the claim in light of the meaning of the in terrorem clause and the applicable statute.
- The Court is likely to permit some preliminary discovery before finding that an in terrorem contest has been irrevocably begun, but how much is too much discovery will depend on the facts of a given case.