Broad Discovery Triggers In Terrorem Clause In New York Trust Proceeding

In the Matter of the Neva M. Strom Irrevocable Trust III, a March 3, 2022 opinion, the New York appeals court strictly construed an in terrorem clause in a trust to determine that broad discovery resulted in forfeiture of a beneficiary’s interest under the trust.

The Facts of Matter of the Neva M. Strom Irrevocable Trust III

Neva M. Strom (grantor) created the Neva M. Strom Irrevocable Trust III, naming Paul E. Pontiff as the trustee and her daughters, Neva D. Strom (Strom) and respondent Dina F. Grant, as beneficiaries. Shortly before her death, the grantor transferred her house in New Jersey to the trust.  The house was sold and the proceeds from the sale were deposited into the trust.

The trust contains an in terrorem clause wherein any beneficiary who challenges any of the terms of the trust forfeits any dispositions therein and states:

As a condition of receiving any and all dispositions, bequests, devises, or other provisions under this Agreement (hereinafter referred to as ‘dispositions’), a beneficiary shall not, directly or indirectly, for any cause or reason whatever, institute, abet, take part or share, directly or indirectly, in any action or proceeding to impeach, impair, set aside or invalidate any of the terms of this Agreement (hereinafter referred to as ‘contest the terms of this Trust’), . . . and if any such beneficiary does contest the terms of this Trust, the Grantor directs that any dispositions to or for the benefit of such beneficiary shall be forfeited and pass under this Trust as if such beneficiary had predeceased me without leaving issue surviving me. It is the Grantor’s intent that the forfeiture provisions set forth in this Article shall be limited only by the specific provisions for discovery set forth in EPTL Section 3-3.5 and SCPA Section 1404 and any attempt to broaden the discovery beyond what is specifically authorized in those sections shall result in forfeiture.”

In separate proceedings regarding the grantor’s will, Strom, among other things, engaged in discovery to invalidate the trust.  The trustee filed an order to show cause in Surrogate’s Court seeking a determination that Strom violated the trust’s in terrorem clause based upon this activity.  Surrogate’s Court granted the trustee’s order to show cause in its entirety, finding that Strom violated the in terrorem clause in the trust. Strom appealed.

Are In Terrorem Clauses Valid In New York Trusts?

Yes.  In terrorem clauses, also known as no contest clauses, can be valid in New York Trusts.  We have written about in terrorem clauses in the context of New York wills here, and the Appeals Court drew on the case law pertaining to wills to guide their analysis in this case:

No statute governs in terrorem clauses with respect to trusts, as opposed to wills; nevertheless, statutes and case law pertaining to wills are instructive. In that context, “[d]espite the presence of an in terrorem clause in a will, EPTL 3-3.5 provides that certain conduct by a beneficiary will not result in forfeiture — specifically, as relevant here, ‘[t]he preliminary examination, under SCPA 1404, of a proponent’s witnesses, the person who prepared the will, the nominated executors and the proponents in a probate proceeding’ (EPTL 3-3.5 [b] [3] [D]). Under the SCPA, these individuals ‘may be examined as to all relevant matters which may be the basis of objections to the probate of the propounded instrument’ (SCPA 1404 [4])” (Matter of Singer, 13 NY3d at 451-452).

In Terrorem Clauses In New York Trusts Must Be Strictly Construed

In terrorem clauses in New York, although authorized, are not favored and must be strictly construed. The “paramount consideration” in construing in terrorem clauses under New York law is to effectuate the intent of the decedent or grantor and the purpose of the trust.

Here, the New York appeals court agreed with the Surrogate’s Court and determined that the in terrorem was triggered because Strom engaged in broad discovery challenging the validity of the trust, beyond the scope permitted by the trust:

The underlying purpose of SCPA 1404 and EPTL 3-3.5 is to further “the public policy of ensuring that wills are genuine and valid before they are admitted to probate” (Matter of Singer, 13 NY3d at 453). In proceedings seeking probate of a will executed by the grantor, Strom filed affidavits in which she questioned whether the grantor’s house had been lawfully and properly transferred to the trust and, therefore, whether the trust may fail due to being unfunded. She also sought and obtained discovery from and depositions of numerous individuals who were involved in the sale of the house, which had no connection to the probate of a will. This discovery went beyond what is authorized by those statutes, in violation of the grantor’s intent as explicitly expressed in the no contest clause (see Matter of Ellis, 252 AD2d at 132-133; see also Matter of Cohn, 72 AD3d 616, 616-617 [2010], lv denied 15 NY3d 706 [2010]). Strom’s submission of those affidavits and pursuit of that discovery constituted, at minimum, indirectly taking part in a proceeding seeking to impair or invalidate the terms of the trust. As noted by Surrogate’s Court, Strom consistently disputed the validity of the sale of the house, and contended that it should have been an asset of the grantor’s estate even though the house was possibly the trust’s only, or at least primary, asset (compare Matter of Peters, 132 AD3d 1250, 1252 [2015]).

Accordingly, the New York Surrogate’s Court correctly determined that Strom violated the in terrorem clause and concluded that she forfeited any disposition to her under the trust.  Therefore, an in terrorem clause is not always triggered by a will or trust contest challenging the validity of the document.  In this case, the in terrorem clause in the trust specifically stated that discovery beyond what was authorized by SCPA 1404 and EPTL 3-3.5 would result in forfeiture, and the New York court strictly construed the in terrorem clause to do just that.