Back in the early 1990s, when a real estate developer with holdings in New England and Florida told his family about the trust he had set up for them, he reportedly told them they could "like it or lump it." Now, one of his daughters has taken him up on it and, according to a New Hampshire probate court, must reimburse the trust and pay all legal fees associated with the case, a total that could come to as much as $17 million.

The court's decision turned on the "in terrorem" or "no contest" clause of the trust. A no contest clause states that a beneficiary forfeits all rights under the trust if he or she challenges the legality of the trust or disputes any of its provisions. (Clauses like these are more often included in wills than in trusts, according to the judge.) Under the terms of this trust, the daughter, B.T., who challenged at least one key provision will be treated as if she had died.

The developer and the family business had gone through some tough financial times at the time he created the trust. In order to protect his family and the business from creditors and taxes, he placed all his assets and holdings into the trust. This trust allowed him to protect and to grow the family business as well as to provide his family and future generations with income.

On his death, the man's trust went to his children in 12 equal shares. Each of the six children received a trust in his or her own name and a "generation-skipping trust" that would provide for his grandchildren. The problem with the arrangement, to B.T., was that the assets of the trust, which were made up entirely of shares in the family business, would be managed by two of her brothers.

B.T.'s attorney argued that the combination of the brothers' control and the no contest clause put her entirely at her brothers' mercy. The no contest clause gave them "too much power and too little accountability," he said, likening it to a sword of Damocles. When a trust includes such a clause, he continued, any time a beneficiary wants to enforce the duties of the trust, he or she risks being disinherited. A fiduciary should not have that kind of unchecked power.

The court disagreed -- at least, this court did. B.T. had also taken her claim to a Massachusetts court, and that judge came to a completely different conclusion. In our next post, we will discuss the reasoning behind both decisions and add more detail to the complicated affairs and litigation history of B.T. and her family. 

Resource: The Telegraph (Nashua, N.H.) "Temposi Battle Drags On With Millions at Stake" 9/26/10