Late-Filed Revocable Trust Contests and No-Contest Clauses – A Probable Outcome?

Procedural vs. substantive outcomes in determining probable cause for a will or trust contest

Executive Summary:  In California, when a beneficiary receives 120-day statutory notice to challenge a revocable trust, a failure to timely file their challenge can be treated as a direct contest without probable cause under California Probate Code Section 21311(a)(1). 

Introduction

Some of you may recall this adage from law school: “The law abhors a forfeiture.”  This is apparent in the continuously-evolving case law and legislative changes regarding no-contest clauses, or in terrorem clauses.  Since the strict application of these clauses can lead to forfeiture of inheritances or beneficial interests, many states have placed bounds around the enforceability of these clauses. 

California is one such state.  Many states refuse to enforce a no-contest clause to forfeit an heir’s or beneficiary’s interest when the heir or beneficiary can show probable cause for the contest.  California has taken this a step further, by clarifying that forfeiture is only enforced when there is direct contest with a lack of probable cause.  This issue reared its ugly head in a recent opinion from the California Court of Appeals.

Meiri v. Shamtoubi, California Court of Appeals, July 25, 2022

This case involved procedural wrangling in the background, which distracted from a confluence of very clear issues – a no-contest clause under an amended and restated revocable trust, and a late-filed direct contest to the trust. 

California requires statutory notice to beneficiaries of a revocable trust after a settlor’s death, which limits the period for challenging the validity of a revocable trust to 120 days.  In this case, a beneficiary received this notice, but waited until 230 days had elapsed to challenge the revocable trust based on undue influence.  Her mother was trustee, who after failed settlement attempts petitioned the trial court for instructions regarding the enforcement of the no-contest clause. 

The trial court determined that the late-filed contest was, indeed, a direct contest.  The trial court also concluded that the mere existence of a late filing meant that the probable cause exception could not apply.  The appellant-beneficiary appealed, arguing that untimeliness did not automatically create a direct contest without probable cause.  

Analysis

The Court of Appeals affirmed the trial court’s determination. 

To understand the lay of the land here, it is important to note that the existence of probable cause is a defense to the enforcement of a no-contest clause in this context - a direct contest of the revocable trust on the basis of undue influence. But, there is a secondary defense if you can establish that there was no direct contest, because the California statute only recognizes a no-contest clause when there is a direct contest.

(As an aside, this is an important distinction, because a number of no-contest clause cases involve indirect contests. While the facts here could not support an argument of an indirect contest, much of the gray area in this type of case comes from this distinction. California has statutorily eliminated the enforcement of a no-contest clause where there is an indirect contest. This was an issue I discussed in this article, where the filing of a pleading in defense of a trust amendment in California rose to the level of a “direct contest.”)

First, the appellant conceded that a challenge to a revocable trust based on undue influence was precisely defined as a direct contest under California Probate Code Section 21311.  However, the appellant unsuccessfully argued that untimeliness caused the action to no longer be treated as either a “contest” or “direct contest.”  This argument failed because, as the Court noted, this would allow any litigant to circumvent the statute (and the no-contest clause) simply by filing a late claim or grievance. 

Second, the appellant argued that untimeliness did not automatically result in a lack of probable cause.  In essence, the appellant’s argument forced a reading of the statutory definition of probable cause which focuses solely on the substance of the claim while completely disregarding procedure.  However, the Court again disagreed, refusing to use such a narrow reading to circumvent the legislative intent behind the statute. 

In other words, California’s definition of probable cause in this context determines whether a reasonable person could conclude that the relief requested could be granted “after an opportunity for further investigation or discovery.” However, this opinion shows that probable cause requires a threshold that there is even an opportunity for further investigation or discovery to begin with, based on procedural rules under the California Probate Code. If you do not file a contest on time, there is no chance of success on the merits because the court is not required to make this determination. The appellant unsuccessfully tried to argue otherwise - that the probable cause defense focuses solely on the substantive, and not procedural, likelihood of success.

Takeaways

For successor trustees of a revocable trust, this case emphasizes the importance of timely providing statutory notice of the revocable trust to beneficiaries in order to start the limitations period on a contest.  The existence of a no-contest clause may not act as an effective deterrent by itself. 

While the appellant’s arguments in this case appeared both aggravating and clever, they also highlighted the importance of not sitting on a potential claim.  If this undue influence claim had been timely filed, there could have been a defense of probable cause, even if the appellant was not successful on the merits of this claim.  If that were the case, the appellant’s trust interest may not have been forfeited.  But, this is a situation where procrastination (even if strategic) backfired.

And, even though there was no failure of drafting in this clause, special attention should be paid to the California statute around which this case revolved.  The statute creates three contests under which a no-contest clause will be enforced, one of which was cited here – a direct contest without probable cause, which does a thorough job of statutorily defining direct contests without the need for drafting a definition of “contest” that correlates to the statutory definition.  But, the other two exceptions – a creditor claim, and an assertion that the transferee was not the owner of transferred property – both require that the no-contest clause expressly define that type of challenge as a contest. 

Thus, the drafting attorney must be cognizant that a failure to include either of these express contests in the definition of “contest” may allow a beneficiary to circumvent the no-contest clause, perhaps by making a claim as a creditor of the estate or trust.  The drafting attorney should also be careful to set client expectations around a direct versus indirect contest, the latter of which may not be grounds to enforce a no-contest clause in states like California.