Griff’s Notes, January 24, 2022: Terrors of In Terrorem Clauses
Tax, trusts and estates updates from around the country
No-contest clauses, also known as in terrorem clauses, are a common feature of wills and trusts. While their benefit is limited depending on the testamentary disposition pattern, their purpose is to prevent heirs from fighting. Typically, a no-contest clause will state that an heir or beneficiary forfeits their share of the estate or trust if they take any action to contest the will or trust.
However, the use of such clauses can actually backfire. In many cases, boilerplate language is used which is either too broad or too narrow to capture the types of “contests” that a settlor or testator wishes to discourage. I have previously written about the confusion of defining a “contest,” both in the clause itself and under applicable law. Many states have also recognized the dark side of in terrorem clauses, and courts in such states may refuse to strictly enforce such a clause when the “contest” is in good faith, where probable cause exists, or where enforcement would be against public policy.
In a number of cases, we are also starting to see the in terrorem clause used as a “gotcha” type of mechanism. In other words, a problem heir or beneficiary can sit back and wait for another heir or beneficiary to make a minor misstep in the form of a claim which violates the in terrorem clause. If the problem heir has little to lose, and much to gain, such a clause can have the opposite of the intended effect. And, even if the clause is well-written, it does not prevent the time, expense, and delay of defending such a claim at the trial court level and appellate level.
Such was the case in today’s opinion.
Salce v. Cardello, Conn. App., January 18, 2022
Central Issue: Enforceability of no-contest clause
Value Added Score: 6.5
Rule: Even when a strict reading of an in terrorem clause reveals a violation of the clause by a beneficiary, public policy may limit enforcement when doing so would frustrate correction of obvious errors by a fiduciary
Facts:
In this case, the defendant received a parcel of land under a revocable trust. If the defendant predeceased the settlor, such land would go to the defendant’s issue, or if the defendant had no living issue, the land would go to the plaintiff.
Settlor died, and an attorney was appointed as executor. The attorney included one of the defendant’s accounts on the Connecticut Estate and Gift Tax Return (CT-706), and omitted some loans against the land in question which would have reduced its value. The defendant sought a hearing in the probate court for correction of these mistakes, as the executor had requested a probate court order to do so.
But, the plaintiff hopped in the fray and alleged that the action of contesting the executor’s mistakes in the probate court violated the no-contest clauses in the decedent’s will and revocable trust. Since the plaintiff was the default beneficiary, and since the no-contest clause (if enforced) would forfeit the distribution of land to the defendant and the defendant’s issue, there was an economic incentive to do so. Of course, the defendant also counterclaimed that the plaintiff’s challenge in and of itself was also a violation of the no-contest clause.
The probate court and Superior Court both held that there was no violation of the no-contest clauses, and the plaintiff appealed to the Connecticut Court of Appeals.
Analysis
Reviewing the conclusions of law de novo¸ the Court also held that there was no violation as the defendant’s actions met Connecticut’s exceptions to no-contest clauses. These exceptions permit a challenge to a will or trust, or the administration thereof, where the challenge is in good faith, where probable cause exists, or where enforcing the clause would violate public policy.
At issue was the specific, unclear wording – that the grounds for enforcing the no-contest clause were (1) objecting to any action taken by an executor or trustee, or (2) filing a creditor’s claim. The plaintiff-appellant alleged that the defendant-appellee had done both.
The Court concluded that the defendant had, indeed, technically violated the no-contest clauses in question. While there wasn’t a creditor’s claim, in that the defendant never requested reimbursement for the loans against the land by the executor, the defendant did object to the filing of the CT estate tax return. But, the Court refused to enforce them on public policy grounds. Why? Because to do so would punish the defendant for seeking to simply correct an error.
In other words, a no-contest clause (at least in Connecticut) can only go so far. If it firmly entrenches a fiduciary, and frustrates any policing of mistakes or bad faith conduct by the fiduciary, enforcement of such a clause would violate public policy. The Court recognized that the State of Connecticut has a vested interest in the proper collection of estate taxes and accurate reporting thereof, and that refusing to permit a beneficiary to further this objective would harm both the private interests of the beneficiaries (plaintiff and defendant) and the public’s interest in proper tax administration.
In another vein, the Court concluded that completely denying an aggrieved heir or beneficiary’s access to the judicial system would also be against public policy. This is the reason for the good faith and probable cause exceptions to the strict enforcement of a no-contest clause.
Takeaways
Estate planners tend to operate with a certain set of default rules, one of which is to consider a no-contest clause when beneficiaries are not treated equally (at least compared to an intestate distribution scheme). But, cases like Salce make it obvious that more thought is required beyond checking a box on the questionnaire or document assembly software.
When overly broad, the no-contest clause can backfire. It can cause an imbalance of power between fiduciaries and heirs, or it can unintentionally shift power to the heir or beneficiary who receives less. And, when power is shifted, this power can be abused and used to punish others. It can be used to settle scores, and project family disputes onto the administration of an estate or trust.
So, when a no-contest clause is viewed in a binary way, it leads to incomplete planning, and in the worst case may create additional litigation. This is contrary to the goal of avoiding litigation to begin with.
While there is no defined rubric we can create here, great listening can go a long way when you introduce the no-contest concept to a client. Digging deeper to discover the types of disputes which the client wishes to discourage can go a long way, and of course the no-contest clause should be drafted with these types of disputes in mind. It is also important to set client expectations as to the types of disputes that can actually be discouraged by a no-contest clause, versus the types of disputes which may be protected under a probable cause, good faith, or public policy exception.
You must also be mindful of who is protected by the no-contest clause. As we saw in Ely v. Pivar, the drafting attorney can have some blowback when it appears that a no-contest clause is being used to cover up or conceal past or ongoing fiduciary breaches. As an estate planner, wealth advisor, or trustee, you would not want to be on the receiving end of such an accusation.