Monday, December 7, 2015
Exculpatory Clause Does Not Apply To The Trustee’s Decision On Whether Beneficiaries Violated A No Contest Clause
The settlor’s revocable trust made his spouse the sole beneficiary for her life after his death and postponed any distributions to his descendants of his first marriage until the spouse’s death. After he died, his children sent a letter to his attorney requesting that the attorney preserve all documents related to the trust and also sent a letter to their stepmother suggesting that they agree to terminate the trust and divide the trust property equally among them. Unbeknownst to the children, their father had amended and restated the trust shortly before his death to include a no contest clause and language making the trustee’s decision that a beneficiary had violated the clause final absent “proof of fraud, dishonesty, or bad faith.” The trustee determined that children’s letters had violated the clause and in subsequent litigation the children prevailed. A divided Virginia Supreme Court in Rafalko v. Georgiadis, No. 141533, 2015 WL 6746821 (Va. Nov. 5, 2015), held that the exculpatory type clause did not prevent a court from deciding whether a decision by the trustee with regard to violation of the no contest clause was consistent with the purposes of the trust or arbitrary, that there was sufficient evidence for the lower court’s finding that the trustee’s decision that the children had violated the no contest clause was made in bad faith, and that the children’s letters were not an attempt to interfere with the administration of the trust.
Special thanks to William LaPiana (Professor of Law, New York Law School) for bringing this case to my attention.