No-Contest Clause

One method used to deter litigation amongst trust beneficiaries is to insert a no-contest clause in the trust. A no-contest clause provides that a beneficiary will forfeit their inheritance if they challenge the trust's validity and lose. Probate Code §21310(b). Essentially then, a beneficiary must balance the risk of challenging the trust’s validity, an uncertainty, against the assurance of an inheritance, a certainty. Of note, undue influence is probably the most common reason to challenge a trust's validity.

Occasionally I read trusts which state that a beneficiary will forfeit their inheritance, $1, if they contest the trust’s validity. Since $1 will hardly dissuade a litigant, the no-contest clause is rendered effectively useless. Rather the better approach is to increase the size of the inheritance, e.g. $75,000, whereby the litigant will have to seriously ponder the possibility of forfeiting a sizable sum of money should they contest the trust’s validity and lose.

Since January 1, 2010, California has greatly curtailed the impact of no-contest clauses. Now a contestant can challenge a trust’s validity and lose, but still receive their inheritance provided the contestant had “probable cause” when they filed their contest. 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.” Probate Code §21311(b). A recent unpublished appellate opinion provides an example of this.

In the trial court, the contestant (Randi) lost her contest. The respondent (Fred) appealed the trial court’s decision that the contest had been filed with probable cause. If filed without probable cause, Randi would be disinherited per the trust’s no-contest clause.

“Taken together, the evidence proffered by Randi in her declaration and the declarations from others would cause a reasonable person to believe there was a reasonable likelihood Randi would prevail on the undue influence claim. Marcia was unwell and seemed feeble at the time. Fred had taken her into his home and the evidence supports an inference that he isolated her from her other family and friends. Marcia signed trust documents prepared by an attorney she previously stated she did not want to work with further, and aspects of the Trust seemed inconsistent with Marcia's previously stated practices or desires. Additionally, though Fred did not "unduly" profit from the Trust in the sense that his share of the estate exceeded that of Randi and Julie, a reasonable person could nonetheless consider his receipt of an equal portion an undue benefit given his limited presence in Marcia's life prior to the months leading up to her death. So, too, could one consider his appointment as trustee, a position that gave him both authority and compensation, as an undue benefit under the circumstances."

This part of the opinion was particularly elucidating

“The court also found the evidence pointed to Fred having a virtually non-existent role in Marcia's life until shortly before she passed, and thus, it was not unreasonable to infer that he feared he might be disinherited or only left a small portion of the estate, with a greater portion going to "his apparent nemesis," Randi, who spent a substantial time with Marcia during her lifetime.”

Estate of Sherman, Los Angeles County Superior Court case no. 19STPB10622

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.    

Doolittle v. Exchange Bank

California has watered down the application of no-contest clauses through recent legislation. Still, there are alternative methods to  dissuade a beneficiary from challenging a trust. For example, shifting the burden of cost as reflected in the recent appellate decision.

Doolittle v. Exchange Bank, __ Cal.App.4th __ (2015)

In Doolittle, the settlor, a very wealthy individual, was concerned about her children challenging an amendment to her trust. The trust amendment provided for a substantial distribution to her gardener.  On the same day she amended her trust, she executed a document entitled "Instructions to Successor Trustee and to Agent." This document provided, in pertinent part:

"I, Constance Doolittle, as the Trustor of the Constance Doolittle Trust UTD November 5, 1999 ('Trust'), as amended, and on behalf of myself as an individual, hereby instruct the successor trustee of the Trust and my agent under a durable power of attorney, that in the event any one or more of my attorney, my accountant, my investment counsel, my trustee, my agent, any doctor or psychologist, or any other representative of mine . . . is called upon to testify on my behalf as to my intentions or my circumstances with respect to my inter vivos gifts and estate planning documents, I hereby instruct my said successor trustee and my agent to compensate such representative at his or her regular, usual and customary rate for all time expended by such representatives with regard to such testimony."

The consequence of this document is that associated parties with Ms. Doolittle would be compensated for their time if they became involved in litigation. As anticipated by Ms. Doolittle, her children challenged the trust and objected to the validity of this cost-shifting provision. The rationale for the objection was to preserve trust funds. If the trustee had to compensate highly-paid professionals such as an attorney, accountant and doctor for their involvement in the case, their naturally would be less trust funds available for the beneficiaries. Ultimately, the appellate court found the document to be a valid trust amendment.

Naturally the attorneys for each side viewed the decision differently. 

The bank's attorney said "if a parent truly wants to leave something to someone who is not their natural heir, they can provide for the defense of that gift in the event the heirs attack it." Payne, Paul. "Battle over Marin County woman's inheritance spills into Sonoma County court." Press Democrat. Santa Rosa, CA. October 22, 2015.

Conversely, the children's attorney said the ruling was the "Full Employment Act for counsel.” Id. 

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.

No-Contest Clause

A no-contest clause is verbiage found in a testamentary instrument that discourages a beneficiary from challenging the validity of the instrument by causing forfeiture if an unsuccessful challenge is brought. For example, a father writes in his will that his son is to receive only $25,000 from his estate even though his estate is worth millions and the son's siblings, a brother and sister, each receive $250,000. If the disfavored son legally challenges the validity of the will and loses, he may be disinherited completely as a result of the no-contest clause. 

California law has significantly altered the landscape of no-contest clauses. Whereas before the no-contest clause law was expansive, i.e. a beneficiary's unsuccessful attempt to invalidate a will or trust usually resulted in them losing their inheritance. Operative January 1, 2010, California law took a much narrower approach in defining what constituted a "direct challenge" to a no-contest clause. The result is that a beneficiary has more leeway to challenge a no-contest clause.

The California Probate Code Section 21311 states that a no-contest clause shall only be enforced against the following types of contests:

"(1) A direct contest that is brought without probable cause.

(2) 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. A no contest clause shall only be enforced under this paragraph if the no contest clause expressly provides for that application.

(3) The filing of a creditor’s claim or prosecution of an action based on it. A no contest clause shall only be enforced under this paragraph if the no contest clause expressly provides for that application."

A key change to the no-contest clause law is that the contestant will not be penalized if they had probable cause to bring a challenge. 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 § 2131(b).

From the example above, disfavored son knew that his dad was frail and vulnerable. He was a widower who lived in a large house by himself. He recently had met a much younger and attractive woman at the country club one day. The woman had a reputation as a gold digger amongst club members. The other brother and daughter were largely absent from their father's life. When the disfavored son approached the jezebel, she became infuriated that he had the audacity to wreck her malevolent plans. The woman then told the father of disfavored son's behavior and the father essentially cut said son from his estate since he had been brainwashed by her. When the father passed away, his will provided the woman with millions, the absentee children with $250,000 each and disfavored son with $25,000. Determined that his father was the victim of undue influence, disfavored son challenged the will despite the no-contest clause. Since there was probable cause, disfavored son's inheritance would remain intact even if the lawsuit proved unsuccessful.