Suit To Modify Trusts Did Not Violate No Contest Clause

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Texas courts narrowly construe no-contest clauses.  In Di Portanova v. Monroe, grandparents set up eight trusts for a grandchild that had a mental disability. No. 01-20-01019-CV, 2012 Tex. App. LEXIS 9859 (Tex. App.—Houston [1st Dist.], November 30, 2012, no pet.). The grandchild's guardians filed suit to modify the terms of the trusts to consolidate them into one trust, which would have resulted in a savings of over $300,000 a year in trustees’ fees and other related expenses. Other members of the family argued that by seeking the consolidation of the trusts, the guardians had caused a forfeiture of the ward's interest under the will pursuant to a no-contest or in terrorem clause. The grandparent's will contained the following no-contest clause:

Should any beneficiary hereunder, or anyone duly authorized to act for such beneficiary, institute or direct, or assist in the institution or prosecution of, any action or proceeding of any kind in any court, at any time, for the purpose of modifying, varying, setting aside or nullifying any provision hereof relating to my Louisiana estate on any ground whatsoever, all interest of such beneficiary, and the issue of such beneficiary, to my Louisiana estate shall cease, and the interest of such beneficiary, and such beneficiary's issue, in and to my Louisiana estate shall be paid, assigned, transferred, conveyed, and delivered to, or for the benefit of, those persons who would take such beneficiary's interest in my Louisiana estate if such beneficiary died intestate, unmarried, and without issue on the date of the institution of the above described action or proceeding.

The trial court found that the guardians’ suit to modify the trusts did not violate the no-contest clause, and the other family members appealed.

The court of appeals stated that a no-contest clause in a will or a trust typically makes the gifts in the instrument conditional on the beneficiary not challenging or disputing the validity of the instrument. No-contest clauses are designed to dissuade beneficiaries from filing vexatious litigation, particularly as among family members, that may thwart the intent of the grantor. No-contest clauses allow the intent of the testator to be given full effect. If the intention of the suit is to thwart the settlor's intent, the no-contest clause should be enforced. A violation of a no-contest clause will be found only when the acts of the parties clearly fall within the express terms. Thus, courts construe no-contest clauses to avoid forfeiture, while also fulfilling the settlor's intent.

The guardians filed suit to modify the trust under the Texas Property Code, which provides that trustees and beneficiaries have the right to seek traditional modification of a trust and that a trust can be changed, the terms of the trust can be modified, the trustee can be allowed to do acts that are not authorized and/or forbidden by the terms of the trust, and the trustee can be prohibited from performing acts required by the terms of the trust, and the trust can be terminated in whole or in part if, because of circumstances not known or anticipated by the settlor, the order will further the purposes of the trust, or the modification of administrative, non-dispositive terms of a trust are necessary to prevent waste or avoid impairment of the trust's administration.

The trial court found that consolidating the trust was appropriate because of circumstances not known or anticipated by the settlor as the original terms of the trusts would substantially impair the accomplishment of the purposes of the trusts in ways that the settlors could not have anticipated. The settlors could not have anticipated the expense and professional fees needed to care for the beneficiary and to manage assets placed in trusts for his benefit. The other relatives agreed that the trial court had discretion to consolidate the trusts; they argued, however, that by doing so the guardians violated the no-contest clause in the will.

The court of appeals disagreed. It stated that Texas courts have addressed a myriad of different types of lawsuits with similarly expansive no-contest clauses to determine whether the purpose of the suit was to thwart the settlor's intent. Those courts concluded that the following suits do not trigger forfeitures: (1) to recover an interest in devised property; (2) to compel an executor to perform duties; (3) to ascertain a beneficiary's interest under a will; (4) to compel the probate of a will; (5) to recover damages for conversion of estate assets; (6) to construe a will's provisions; (7) to request an estate accounting or distribution; (8) to contest a deed conveying a beneficiary's interest; (9) to determine the effect of a settlement; (10) to challenge an executor appointment; (11) to seek redress from executors who breach fiduciary duties; and (12) presenting testimony in a will contest brought by other beneficiaries.

The court agreed with this line of authority and held that filing the suit for judicial modification of the administrative terms of the trusts was not an action that was intended to thwart the settlor's intent. The court noted that no provision in the wills, or in the trusts they created, forbid consolidation of the trusts. The court also noted that to hold otherwise would deprive the beneficiary of his statutory right to modify the trusts provided by the Probate Code, and that the wills did not express and intent to deprive anyone of that right. The court agreed that the no-contest clause did not deprive a beneficiary of a right afforded by statute related to trust administration when such administrative changes are not prohibited by the settlor in the will and no party is challenging the changes as one that defeats settlor's intent. The court finally noted that the overarching purpose of all of these trusts is to provide for the needs of the current income beneficiary and that the suit for modification furthered that purpose. The court affirmed the trial court's order.

It should be noted that there is a recent statute that protects beneficiaries from no-contest clauses. Section 64 of the Texas Probate Code states: “A provision in a will that would cause a forfeiture of or void a devise or provision in favor of a person for bringing any court action, including contesting a will, is unenforceable if: (1) just cause exists for bringing the action; and (2) the action was brought and maintained in good faith.” TEX. PROB. CODE ANN. § 64. The Legislature will soon amend this provision to clarify that it is the beneficiary’s duty to prove just cause and good faith. This will be recodified in the new Estate’s Code.

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