No-Contest Clauses: Food for Thought
The enforceability of no-contest clauses in wills and trusts, also known as in terrorem clauses, varies from state to state. But, enforceablity may also be specific to the instrument or proceeding.
To preface, I am not a California attorney, so I may butcher these cases. But, I created this newsletter to provide guidance on drafting and review of estate planning documents, and the Golden State has some interesting cases which shed light on one of the estate planning client’s most versatile tools - the revocable trust.
California’s onerous probate procedures tend to make the revocable trust extremely valuable for clients who may be subject to California’s Probate Code, whether due to residency or property ownership. But, as those who have drafted revocable trusts can attest, the revocable trust’s appeal (outside of the probate avoidance goal) lies in the ability to amend the trust in full or in part. In my career, I have encountered a number of clients with 10+ amendments and/or restatements to their own revocable trusts.
Typically, when you amend a revocable trust in part, you also affirm and ratify the provisions of the underlying trust (including prior amendments) which were not expressly changed or deleted. Thus, if a prior trust instrument or amendment contained a no-contest clause, also known as an in terrorem clause, such clause should be covered by this statement of ratification. But, what happens if a particular amendment to the revocable trust is being challenged? A couple of California case opinions illustrate some pitfalls for the unwary.
Challenge to an Amendment
The no-contest clause typically kicks in when there is a challenge to the trust itself. California has specific statutes setting forth the types of challenges which may be covered by a no-contest clause. This article is not about those statutory guidelines, nor do I intend to cover the question of whether probable cause for the challenge is a factor. Instead, I am looking really just to the existence of the challenge itself. In this case, we are looking from the perspective of a plaintiff or petitioner.
The California Court of Appeal’s opinion in Aviles v. Swearingen (2017) involved a situtation where a prior trust amendment contained a no-contest clause, which (along with other unamended trust provisions) was subject to blanket ratification in a later trust amendment which was successfully challenged, and invalidated, as the product of undue influence. However, another beneficiary sought to enforce the no-contest clause against the challenging beneficiary, as the simple act of challenging any trust amendment would seem to invoke the no-contest clause.
Intuitively, it seems as if the no-contest clause should have been enforceable under the (now invalidated) trust amendment based on blanket ratification. But, since the challenge was to the trust amendment itself, the Court did not enforce the no-contest clause against the beneficiary who successfully challenged the subsequent amendment. Why? Because the challenged amendment itself did not expressly refer to, or repeat verbatim, the no-contest clause from the prior effective amendment.
The Drafting and Review Lesson: Based on this holding, a good drafting rule of thumb would be to consider whether a no-contest clause should apply to any subsequent amendment to a revocable trust. If so, then the Aviles guidance would suggest expressly restating the no-contest clause itself in each subsequent amendment, or at least expressly referring to the no-contest clause and incorporating it by reference in each subsequent amendment. Going a step further, an express statement in the original no-contest clause that it should apply not only to the revocable trust, but to all subsequent amendments to the trust, could have some added utility.
Defense of an Amendment
While this next holding occurred in a separate opinion which was later decided, it added a wrinkle to our focus on trust amendments themselves.
Once again, we are looking at a scenario where the most recent trust amendment (in a series of trust amendments) was invalidated on undue influence grounds. However, in this case, the beneficiary who successfully challenged the trust amendment wished to apply the no-contest clause (contained in the base, unamended trust document) against another beneficiary who defended the invalid trust amendment.
Ultimately, the California Court of Appeal, this time in Key v. Tyler (2019), rendered a fascinating opinion (which even included an anti-SLAPP motion) finding that the act of defending the invalid trust amendment fell within the actions covered by the no-contest clause. This holding was based on the express terms of the no-contest clause itself (which included any “impairment” of another beneficiary’s interest as grounds for forfeiture) and California law (which included the filing of any pleading as an action involved in contesting a trust, instead of just requiring the initiation of a challenge).
The Drafting and Review Lesson: A number of form no-contest clauses I have seen allow for forfeiture not just for a direct challenge, but for assisting another beneficiary in their own challenge. Once again, this is a conversation for the client as to whether they intend to include a subclause addressing beneficiaries who gang up on one or more other beneficiaries. If so, this language could be beefed up to address what level of challenge, or defense, rises to the level of forfeiture. If not, then the no-contest clause should be explicit in stating that only a direct challenge itself, initiated by the beneficiary, would lead to forfeiture of the beneficiary’s interest.