September 25, 2015

No-Contest Clause

A no-contest clause in a trust is a provision that seeks to discourage a beneficiary from attempting to invalidate the trust. The clause will state that the beneficiary will receive $0.00 if they challenge the trust's validity. If the beneficiary does not challenge the trust's validity, they will receive what is provided for them in the trust, e.g. $10,000.

A no-contest clause is only meant to discourage a person who has a beneficial interest in the trust. It serves no purpose if the person has no beneficial interest. For example, if a child is disinherited by a parent, a no-contest clause will definitely not deter them from challenging the trust's validity. If they do so, they have everything to gain and nothing to lose. That is, there is no potential inheritance forfeiture because they did not stand to inherit in the first place.

California law does not look upon no-contest clauses favorably. Generally speaking, California will not enforce a no-contest clause in an instrument that became irrevocable on or after January 1, 2001 unless it involved a "direct contest" brought without "probable cause." Prob C § 21311(a)(1). 

Under Prob C § 21310(b), a "direct contest" means "a contest that alleges the invalidity of a protected instrument or one or more of its terms, based on one or more of the following grounds:
  1. Forgery. 
  2. Lack of due execution. 
  3. Lack of capacity. 
  4. Menace, duress, fraud, or undue influence. 
  5. Revocation of a will pursuant to Section 6120, revocation of a trust pursuant to Section 15401, or revocation of an instrument other than a will or trust pursuant to the procedure for revocation that is provided by statute or by the instrument. 
  6. Disqualification of a beneficiary under Section 6112, 21350, or 21380."
"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." Prob C § 21311(b). 

The result of California's no-contest clause law is that a beneficiary can challenge the validity of a trust, the beneficiary can lose at trial and still receive their inheritance despite the no-contest clause provided they had probable cause to bring suit. Therefore, the discouragement that a no-contest clause is originally meant to instill in the mind of a beneficiary who is contemplating litigation has been definitely muted. Even defeat does not automatically render forfeiture of a beneficiary's inheritance.