Guide to Preventing Inheritance Feuds With a No-Contest Clause

 

“No-contest” clauses are designed to discourage contests of wills and trusts by providing that any beneficiary who contests the will or trust forfeits what he or she would have received under the will or trust. A great example involves Frank Sinatra who died in 1993. A corporation he controlled owned his most valuable asset...the right to his name and likeness. He was well aware of the bitterness between his second wife, Barbara, and his kids from prior marriage to Nancy. This awareness did not stop him from leaving the valuable corporation to Barbara even though it was managed by his daughter, Christina Sinatra. Worried that his wishes might provoke a fight in probate court upon his death, Frank included a "no-contest" clause in his will. It spelled out that any family member who took adverse legal action upon his death would be completely disinherited, specifying thirteen different legal actions that would invoke this "no-contest" clause.

While Sinatra’s "no-contest" clause may have disappointed his children, it seems to have spared his family from an expensive, emotional and public court battle! Aside from this well done instance, there has been a steady increase in trust and estate litigation over real estate in the past 20 years as property values, and the number of lawyers, have increased. Consequently, statewide litigation regarding the scope and application of “no-contest clauses” has also been on the rise.

Inconsistency in the decisions of California courts made it difficult for California lawyers to advise clients and prepare wills and trusts. This uncertainty also created needless delay and expense in administering wills and trusts post-death, and made it difficult to determine a course of action when a trustee or executor did not carry out the decedent’s wishes or failed to honor the terms of the will or trust. Another concern was that elder abusers could use no-contest clauses to shield their undue influence or fraud.

Finally, the California Legislature determined that the existing no-contest law was so complex and unpredictable that it was unworkable, and a major new law became effective January 1, 2010.  The new law applies to any instrument (a legal document such as a contract, a will or a trust), whenever executed, that became irrevocable on or after January 1, 2001.

As I describe the new provisions concerning these no-contest clauses, the reasons for them and the challenges they present, you will see that while the new law is a big improvement over existing law, it fails to resolve some problems and even  creates a few new ones.  

Enforceability

The new law, Probate Code Section 21311, limits the enforcement of no-contest clauses to “protected instruments.” A "protected instrument" includes only the instrument that contains the no-contest clause and “any instrument that is in existence on the date that the instrument containing the no-contest clause is executed and is expressly identified in the no-contest clause, either individually or as part of an identifiable class of instruments, as being governed by the no-contest clause.”

One concern with the new law is the question of how specifically the instrument needs to be identified. For example, will a no-contest clause be enforceable if it is drafted to provide that it applies to all “my beneficiary designations”? Until the courts resolve this question, the safer course of action is to draft the no-contest clause to more specifically identify a “class of instruments,” such as “all beneficiary designations in my retirement accounts.”

Note that under the new law, no-contest clauses do not and cannot apply to instruments not yet in existence. This means that a no-contest clause will not apply to trust amendments, will codicils, beneficiary designations or other instruments signed after the date of the instrument containing the no-contest clause.

Which Contests Can be Protected by a No-Contest Clause?

No-contest clauses are enforceable for a protected instrument for only three types of contests: a direct contest that is brought without probable cause; a pleading to challenge a transfer of property on the grounds that it was not the transferor's property at the time of the transfer; and the filing of a creditor's claim or prosecution of an action based on it.

A “direct contest” is one that alleges that a protected instrument or one or more of its terms is invalid based on at least one of the following: forgery, lack of execution, lack of capacity, menace, duress, fraud, or undue influence; revocation of a will or trust; revocation of certain other instruments; and disqualification of the beneficiary.

“Probable cause” exists if, at the time of filing a contest, the facts known to the contestant would cause a reasonable person to believe that there is a reasonable likelihood that the requested relief will be granted after an opportunity for further investigation or discovery.

Property Ownership Disputes

No-contest clauses apply to any pleading to challenge a transfer of property on the grounds that it was not the transferor's property at the time of the transfer only if the no-contest clause specifically and expressly so provides. This means that most no-contest clauses will now clearly provide that they apply to post-death ownership litigation.

A. Post-Death Litigation By Spouses and Domestic Partners

For the purposes of this general discussion, I will use the word “spouse” to include domestic partners. Post-death trust and estate litigation concerning property ownership most commonly involves the surviving spouse and the decedent’s trustee. The decedent’s will and trust often include no-contest clauses designed to prevent disputes between the surviving spouse and the children.

The deceased spouse often accomplishes this objective by forcing the surviving spouse to decide between taking the distribution called for in the will and trust, or taking against the will and trust pursuant to his or her independent legal rights. This means that the surviving spouse is forced to either 1) accept the inheritance as stated in the will or trust; or 2) initiate a court proceeding to enforce his or her marital property rights.

That the surviving spouse may have probable cause for his or her claim is entirely irrelevant because the probable-cause limitation applicable to direct contests does not apply to property ownership claims. This presents a minefield for the lawyer advising both spouses in the preparation of an estate plan. Which spouse will gain or lose by the inclusion of such a forced spousal election? Should the drafting lawyer include a probable-cause limitation in the forced spousal election provision? What should the drafting lawyer do when the spouses have no property agreement and there is no way to determine the separate and community property rights of the spouses? The answers to these questions will be clarified as the law in this area continues to develop.

B. Post-Death Litigation By Children and Unregistered Domestic Partners

The no-contest clause may apply to a challenge that the gift was “not the transferor’s property at the time of the transfer.”  This means that the children forfeit their rights when they litigate their parents’ characterization of property.  Unregistered domestic partners likewise forfeit their rights when they litigate the characterization of the deceased’s property. 

Creditor Claims

Similarly, no-contest clauses apply to the filing of a creditor's claim, or prosecution of an action based on it, only if the no-contest clause specifically and expressly so provides.  This is important because family members often claim that the deceased owed them money for caregiving and other services rendered during the lifetime of the deceased.  As with other property ownership claims, probable cause is not a defense.  The fact that the creditors’ claim arises after the instrument containing the no-contest clause is signed is no defense to forfeiture.  Without careful drafting, a no contest clause may inadvertently disinherit a child who advances funds to pay the parent’s medical bills or funeral expenses

Applicability of the New Law

No-contest clauses shall be strictly construed in determining the intent of the transferor.  No-contest clauses must be drafted to strictly comply with the law and the intent of the transferor.  The new law is specifically not intended to be a complete codification of the law governing enforcement of no-contest clauses. The “common law” governs enforcement of no-contest clauses to the extent that the new law does not apply.  Because the Legislature wanted to limit the unpredictability, inconsistency and chaos of the existing law, the new law cannot be circumvented in the will or trust or other instrument. 

Beware of the Surprise

A no-contest clause designed to prevent a particular dispute, for example between a spouse and the children from a previous marriage, may inadvertently create a dispute among the rivalrous siblings.  Consider the client with adult children whose trust includes a no-contest clause applicable to property disputes.  The trustee of the trust owns the client’s rental property and, Jane, the client’s adult daughter lives there.  The client transfers title to the rental property to himself and Jane as joint tenants years after creating the trust.  The client then dies and his son Bob, who is hostile to Jane, becomes trustee.  Bob petitions the court to order Jane to reconvey the rental property to the trust, claiming that the joint tenancy transfer was for convenience only, and that the rental property should be distributed to the trust beneficiaries as part of the trust residue.


Jane risks forfeiting her interest in the rental property if she opposes Bob’s petition in court.  Her position is that the rental property passed to her by joint tenancy at the moment of her father’s death and that it was not a part of his trust.   Such a claim is arguably within the new no contest law.  Even though Jane would make her claim defensively, a contest is a pleading, and a pleading includes an answer or response.  It would make no difference if the evidence was overwhelmingly in Jane’s favor that her father truly intended Jane to take ownership by joint tenancy because probable cause does not apply to property ownership claims.

Jane could argue that her responsive pleading does not violate the trust because the trust was revocable during her father’s lifetime and that he revoked the trust with respect to the rental property when he signed the deed from the trust to himself and Jane as joint tenants.  The problem is that it is impossible to know what the judge will do in this common situation, and the consequences of being wrong are that Jane will be forced to forgo her legitimate interest, defeating her father’s true intent.

Accordingly, we estate planners are reluctant to draft broad no-contest clauses that expressly provide that they apply to a transfer of property on the grounds that it was not the transferor’s property at the time of the transfer.  This is because our clients frequently transfer trust property without consulting us.  We will instead draft carefully tailored no-contest clauses to be sure that the intent of our clients becomes reality.

Practical Considerations

There may be no need for a no-contest clause when it is unlikely that the dispositive provisions of a will or trust will be challenged in court.  The old, broad, one-size-fits-all no-contest clauses can frustrate your intentions in that you may be preventing your loved ones from holding the executor accountable in court.  Some clients like to disinherit all their children in their no-contest clause if one child challenges the will or trust in court.  Feeling that this approach is not fair, others disinherit only the contesting child and his or her offspring in the no-contest clause.

Note that a no-contest clause is only effective against the beneficiaries named in the instrument.  Beware that “non-beneficiaries” have nothing to lose by contesting the instrument, and the presence of a no-contest clause could limit the ability of the named beneficiaries to defend an attack!

A no-contest clause is intended to deter litigation.  An effective no-contest clause must be coupled with a gift of sufficient size to the disgruntled beneficiary to prevent a challenge.  In other words, the potential challenger must have something to lose.  Often the same factors that cause a client concern about a combative potential challenger also make it difficult for the client to make a gift to that potential challenger large enough to make the no-contest clause effective. 

Alternatives to a No-contest Clause

A conditional gift is an important alternative to a no-contest clause.  For example, the trust directs the trustee to distribute Rental Property A to the spouse if spouse transfers Rental Property B to the children from the deceased’s prior marriage.  Survivor’s refusal to transfer Property B is not a contest because no papers are filed in court.  Survivor will lose the gift of Property A, and won’t forfeit any other gift under the trust.  Such conditional gifts can be a simple and powerful alternative to a no-contest clause.

The will or trust can also provide the executor or trustee with the discretion to charge against the beneficiary’s gift all legal fees and costs of any unsuccessful legal action brought by that beneficiary. 

© 2010 John E. O’Grady

The information contained in this article is general in nature and should not be relied upon for any specific situation. Consult a qualified attorney for any specific legal advice.

 
 
 

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