March 25, 2016

No-Contest Clause

When a beneficiary or heir notifies the trustee that they intend to take legal action regarding the trust, this does not always trigger the no-contest clause found in the trust (assuming there is one). For reference, 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 and lose. 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 relates to the validity of the trust itself. For example, a beneficiary or heir could challenge the validity of a trust on the basis that it was the product of undue influence, mental incapacity, etc. However, a no-contest clause does not relate to the actions of a trustee. Bradley v. Gilbert (2009) 172 Cal.App.4th 1058, 1071. Thus, if a beneficiary filed a petition to invalidate a trust on the grounds that the trustee unduly influenced the settlor, a no-contest clause would be applicable there. However, if a beneficiary brought a challenge to remove a trustee, a no-contest clause would be inapplicable there. Therefore, a no-contest clause cannot be used as a shield by an unscrupulous trustee to absolve them of liability for breaching their fiduciary duties. 

The following case illustrates this point.

Albert Affluent is a wealthy industrialist who lost his wife in a tragic hot air balloon accident. While still in mourning, Mr. Affluent is seduced by a much younger woman who works at the country club he frequents, Gwen Golddigger. She is a law school graduate but never dedicated herself to passing the bar exam (she partied too much). Ms. Golddigger tricks Mr. Affluent into amending his a trust principally for her benefit. However, Ms. Golddigger tells Mr. Affluent to leave the old beneficiaries minor amounts and to include a no-contest clause to dissuade them from challenging the trust. Ms. Golddigger also has Mr. Affluent make her the successor trustee. She then proceeds to purchase with trust funds a fancy sports car, diamond necklace and expensive watch.

The old beneficiaries, not surprisingly, bring a petition to invalidate the trust on the grounds of undue influence. The petition also includes a request to remove the trustee for breach of trust. In the case of the former, the no-contest clause would be applicable. In the case of the latter, the no-contest clause would not be applicable.