Press-Enterprise - December 28, 2014
The inherent problem with safeguarding your wishes after death is that you are not here to defend them. To discourage litigation and protect your requests, most trusts contain a “no-contest” clause. The clause typically states that if a beneficiary challenges the trust in court, the gift to that beneficiary is revoked. The goal is to make beneficiaries think twice before suing.
A trustee, faced with defending a lawsuit by a beneficiary, often wants to look to the no-contest clause as the first line of defense. However, it is not as powerful or as effective as it seems. Regardless of what the trust says, California limits the enforceability of a no-contest provision.
The Probate Code states that a no-contest clause is only enforceable against a “direct contest” brought without “probable cause.” A “direct contest” is a contest that challenges the validity of the trust on the grounds of forgery, lack of due execution, lack of capacity, menace, duress, fraud, or undue influence, improper revocation, or disqualification of an interested beneficiary. “Probable cause” means that there is a reasonable likelihood that the contest will be successful.
The purpose is to permit a challenger to file a contest without triggering the no-contest clause if there is a reasonable likelihood that something improper occurred.
The downside is that the “reasonable likelihood” standard is uncertain. It opens the door to expensive and time-consuming litigation. There is a risk that a beneficiary will challenge your wishes when you are not there to defend them.
A no-contest clause is still effective, but its limitations are substantial. Challenges occur for many different reasons, such as litigious children, blended families that do not get along and unequal gifts. What can you do now to bolster that no-contest provision and discourage a fight after your death?
Communication: Expectations and disappointment often create conflict. Discussing your plan with your beneficiaries as a group helps eliminate surprises. Keep your beneficiaries informed of any changes. Communicating your wishes early, clearly and often helps manage expectations.
Videotape: Many trust challenges are to invalidate the trust for undue influence or lack of capacity. These challenges typically arise when there is an unequal distribution by an elderly parent. A video recording of mentally competent parents rationalizing their decision may significantly reduce the risk of a challenge. With the ease of smartphones and digital media, a video recording is easy to make, and may eliminate any suggestion of “probable cause” to challenge the trust.
Distribution: The no-contest clause only works if the challenging party has something to lose. If an heir gets nothing under the trust, there is nothing to lose by challenging. Therefore, if you know you have a litigious heir(s), it may be beneficial to consider giving them a small amount through your trust that would make them think twice.
*This article first appeared in The Press-Enterprise on Dec. 28, 2014. Republished with permission