JANUARY 19, 2015 VOLUME 22 NUMBER 3
When we prepare wills and/or trusts for our clients, they often ask if they should include a “no-contest” provision. Typically, they want us to add language that would penalize anyone who challenges the validity of their estate planning documents.
Are such provisions effective, or even permitted? We explain to our clients that no-contest clauses can be effective — but they presume that the possible contestant has something to lose. There is no point in writing a will or trust that says something like “I hereby leave nothing to my son Barry, and if he contests this he will be disinherited.”
That aside, no-contest provisions can be a way of avoiding legal complications among beneficiaries and the person in charge of handling an estate. We have written before about the difficulty in interpreting and applying such provisions, but there is no doubt that there are circumstances in which such a clause (also sometimes called an “in terrorem” provision) can be beneficial.
A no-contest provision can sometimes be worded more broadly, and become a much more powerful, if blunt, instrument. Take, for instance, the circumstances behind a recent Arizona Court of Appeals decision.
Details of the family relationships are sketchy in the reported court decision, but they involve a 1994 trust, apparently signed by Terry Simmons (not her real name) and her then-living husband, that included this language:
“If any beneficiary under this Trust, in any manner, directly or indirectly, contests or attacks the validity of … this Trust or any disposition … by filing suit against … Trustee … then any share or interest given to that beneficiary under the provisions of this Trust is hereby revoked and shall be disposed of in the same manner as if that contesting beneficiary and all descendants of that beneficiary had predeceased the Surviving Settlor.”
Fifteen years later, two of the remainder beneficiaries did file suit against Terry, who was serving as the trustee of the trust. They alleged that she had violated her fiduciary duty in a number of ways. The court ultimately distilled their objections down to nine different challenges to Terry’s administration of the trust.
Terry responded, and litigation ensued. The probate judge denied all of the objections to the administration of the trust. That left one question: had the remainder beneficiaries been disinherited by their trust contest?
Arizona has a statute governing the validity of no-contest provisions in wills, but there is no statute expressly covering similar provisions in trusts. The statute governing wills says that a no-contest provision is “unenforceable if probable cause exists” for the contestant to have filed their action. In other words, if the case had involved a will rather than a trust, the test would have been whether the contesting beneficiaries had “probable cause” to file their objections.
The probate judge applied the same standard to determine the validity of the no-contest provision in Terry’s trust. The judge found that, though the contestants were not successful, they had at least probable cause to file their contest and therefore would not be disinherited.
The Court of Appeals agreed that the same standard should apply (though they got there by a slightly different route), but disagreed on the outcome. Because the beneficiaries had made nine different complaints about the trust’s administration, ruled the appellate court, they had to have probable cause for every one of the nine challenges. It was as if, the appellate judges reasoned, the beneficiaries had filed nine separate lawsuits; each one would have to have been based on probable cause, and the mere fact that they combined all nine into a single complaint made no difference.
With that different reading of the requirement, the appellate court reversed the holding of the probate judge and ordered that the beneficiaries had been disinherited by their filing. One of the complaints they made had insisted that Terry, though she was entitled to the annual income of the trust, should have distributed it to herself only once per year, and not on a monthly basis. That was simply not the law and not required by the trust document, said the appellate court; because there was no basis for that single allegation, the no-contest provision was triggered. The court did not even have to review the other eight allegations to determine whether there was any basis for filing a contest. In Re Shaheen Trust, January 16, 2015.
What does Terry’s trust tell us about writing trusts, administering them or challenging the administration? Several things, at a minimum:
- In Arizona, at least, no-contest provisions are as effective in trusts as they are in wills, and clients may want to consider including them — especially in contentious families, second marriages, or other cases where everyone might not be (or stay) on the same page about what should happen.
- People who genuinely think that they should file a challenge need to be very cautious, and first look for any no-contest provision. If there is such a provision, any contest should start small, with only the most flagrant misbehavior included — rather than a scatter-shot challenge to a variety of actions.
- It may also be appropriate to include alternative dispute resolution provisions in one’s will or trust — mandating, for example, that contestants first submit to arbitration, or perhaps mediation, before filing formal challenges. This might help reduce the cost and the antagonism that occasionally appears in inheritance contests.
- If one beneficiary is intended to be given more latitude than others (if, for example, a surviving spouse is to be given more deference than the children — or the reverse), the trust ought to say so, and make clear that the trustee is to favor that beneficiary, and include provisions giving the other beneficiaries only those powers to inquire or object that the trust settlor wants to give them. That would help the legal system analyze the purpose and meaning of no-contest provisions if and when contests do arise.
- Another idea we have written about before, the concept of a “trust protector“, might be a way to allow the trust to be modified to deal with changing circumstances — like deteriorating relationships among the beneficiaries and trustees.