Creators of Wills or Trusts are almost universally concerned that the provisions of their instruments not be contested in court. This desire to avoid post-mortem litigation among family members gave rise to the inclusion of a “no-contest” clause in the instrument. The No-Contest clause provides, essentially, that if a beneficiary contests the instrument and loses, that he or she loses not only what he or she was seeking, but also what was actually given to him or her as well.
Historically, many types of actions have become the subject of no-contest clauses. For example, suppose that a trust provides that the estate is to be divided 50% to child 1 and 25% to child 2 and 25% to child 3. Suppose child 3 believes that the estate should have been divided in equal thirds and that the existing instrument favoring child 1 was the result of fraud by child 1. Child 1 challenges the existing instrument in court. If child 1 loses the challenge, then not only does he or she not get 1/3 of the estate, he or she also forfeits the 25% that was given to him or her. This is so, even if child 1 dismisses the court challenge immediately after filing it.
Other types of challenges have arisen as well. For example, suppose that a husband and wife in a community property state do a joint living trust. Suppose further that the trust provides that the deceased spouse’s separate property goes to his or her children from a prior marriage, but the community property goes to their common child. Suppose that the spouse with the children from the prior marriage dies and the common child believes that a property in the estate which is characterized in the trust as separate property is really community property. While not directly challenging the terms of the trust itself, the net effect is the same as if he or she had. If the court recharacterizes the property as community property, then the common child benefits to the detriment of the children of the prior marriage. California courts have held that this type of challenge does in fact violate the no-contest clause.
California courts have also held that some types of challenges do not violate the no-contest clause. For example, suppose a beneficiary believes that the trustee is misappropriating trust funds for his or her own benefit. The beneficiary asks the trustee to do an accounting. The beneficiary then files an objection to the accounting claiming that certain expenditures do in fact constitute misappropriation. Has the beneficiary violated the no-contest clause? The courts have answered this in the negative for a rather simple reason. If the beneficiary could not object to the accounting, he or she is caught between the proverbial rock and hard place: if an objection to the accounting violates the no-contest clause then the beneficiary loses his or her inheritance; yet, if the beneficiary does not object to the accounting the beneficiary also loses because the trustee is able to misappropriate trust funds.
As a result of a multitude of litigation over no-contest clauses, several years ago the California legislature attempted to provide some clarity. Provisions of the Probate Code were enacted which provided that certain types of actions did not violate the no-contest clause unless the clause itself expressly so provided; and other types of actions did not violate the no-contest clause as a matter of public policy. The law also provided a “declaratory relief” remedy whereby a person could ask the court to determine whether or not a particular action (if subsequently filed) would or would not violate the no-contest clause. The court would not rule on the merits of the claim itself; only on whether or not the claim, if filed with the court, would violate the no-contest clause. The legislature thought this would provide clarity. Unfortunately, it only served to increase the volume of litigation as more and more persons had to first litigate the declaratory relief action before moving on to the actual substantive claim.
On January 1, 2010, a new statutory scheme came into effect. This scheme sets forth only the types of actions that do trigger the no-contest clause. Basically, there are three types of actions that violate the clause. First, a “direct contest” alleges the invalidity of the instrument based on things such as forgery, lack of due execution, lack of capacity, menace, duress, fraud or undue influence and only if filed without “probable cause.” Probable cause exists (and therefore there is no violation of the no-contest clause) if “at the time of filing the action, 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.”
Second, a no-contest clause will be enforced if a pleading challenges a transfer of property on the grounds that it was not the transferor’s property at the time of the transfer and only if the no-contest clause expressly provides for that application. The effect of this is that the contestant will be put to an election: either take the property he or she claims does not belong to the transferor and lose whatever he or she was given under the instrument; or forfeit his or her claim to the property and take what was given to him or her under the instrument.
Third, a no-contest clause will be enforced if a beneficiary files a creditor claim or prosecutes an action based on it and only if the no-contest clause expressly provides for that application. The effect of this is that the contestant will also be put to an election: either enforce the debt he or she claims the decedent owes to him or her and forfeit whatever he or she was given under the instrument; or forfeit his or her creditor claim and take what was given to him or her under the instrument.
Sometimes, a no-contest clause in one instrument purports to be violated if a person contests another instrument. For example, a trust may contain a no-contest clause which states that if there is a challenge to an amendment to the trust the no-contest clause is violated. The new law provides that a no-contest clause in one instrument will be enforced in connection with a challenge to another instrument only if the other instrument (or class of instruments) were in existence at the time the instrument containing the no-contest clause was signed. For example, suppose a person has a life insurance policy designating a particular person as a beneficiary and later does a trust containing a no-contest clause. If a beneficiary of the trust challenges the validity of the pre-existing life insurance policy beneficiary designation, he or she has violated the trust no-contest clause. On the other hand, if the life insurance policy beneficiary designation form was signed after the trust, then a challenge of the beneficiary designation form does not violate the pre-existing trust no-contest clause.
The new law became effective on January 1, 2010. However, it applies retroactively to all instruments which became irrevocable on or after January 1, 2001.