Trusts

In Terrorem Provision

Conte v. Conte, 56 S.W.3d 830 (Tex. App.—Houston [1st Dist.] 2001, no pet.).

 

Husband and Wife established an inter vivos trust. Upon Husband’s death, Wife, Son, and Daughter became the trustees. Daughter wanted to remove Son as a co-trustee. Daughter sought a declaratory judgment to establish that her suit to remove Son would not violate the trust’s in terrorem clause which provided for forfeiture “[i]f any beneficiary or remainderman under this trust agreement in any manner, directly or indirectly, contests or challenges this trust or any of its provisions.” The trial court held that as a matter of law, an action by a co-trustee to remove another co-trustee would not violate the in terrorem provision.

The appellate court affirmed. The court explained that it must strictly construe the in terrorem provision and that by so doing, it did not apply to Daughter’s anticipated suit to remove Son as a co-trustee. First, the clause does not prohibit any action by a co-trustee; instead, it only addresses actions by beneficiaries. Second, the clause does not address the removal of a trustee; instead it applies only to actions to contest or challenge the trust.

Moral: In terrorem clauses must be carefully drafted if they are to apply to actions by a beneficiary or co-trustee to remove a co-trustee for breach of duty. Even if the clause is drafted to cover this situation, it is likely that a court would not enforce the provision because the right to challenge a trustee’s actions is inherent in the fiduciary relationship that arises when a trust is created.

 

Trusts

Attorney’s Fees

Conte v. Conte, 56 S.W.3d 830 (Tex. App.—Houston [1st Dist.] 2001, no pet.).

 

Husband and Wife established an inter vivos trust. Upon Husband’s death, Wife, Son, and Daughter became the trustees. Daughter wanted to remove Son as a co-trustee. Daughter sought a declaratory judgment to establish that her suit to remove Son would not violate the trust’s in terrorem clause. Son defended the suit and lost. The trial court refused to order the trust to reimburse him for his attorney’s fees.

The appellate court affirmed. The court rejected Son’s three arguments that he was entitled to attorney’s fees from the trust. First, an award of fees under the Declaratory Judgment Act is in the discretion of the trial court and there was no abuse in declining to award attorney fees to the losing party. Second, Son’s action was not brought under the Texas Trust Code and thus Son would not be entitled to attorney’s fees thereunder. Prop. Code § 114.064. Third, the trust itself did not permit attorney fee reimbursement because the trust required any action by a trustee in his or her capacity as such to have unanimous support of all co-trustees (Daughter did not consent to Son’s decision to hire an attorney).

Moral: A party seeking attorney’s fees must be certain to establish a legal basis for recovery. The possibility of recovering attorney’s fees should be examined carefully prior to initiating a lawsuit.



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