Resulting Trusts and No-Contest Clauses: How Deep is the Rabbit Hole?
Tax, trusts and estates updates from around the country
Often, clients who include no-contest clauses in a will or trust intend to impose a ripple effect - in other words, the client intends that the no-contest clause will apply to their estate plan in general. It may be the case that prior trusts have been established, which may be irrevocable and may lack a no-contest clause. While these prior trusts (which may lack no-contest clauses) create apparent vulnerabilities, today’s case shows that the ripple effects may extend from the client’s estate plan to trusts which may have been established by children or descendants.
The opinion of In re B.C. Fox Trust was published by the Minnesota Court of Appeals on April 11, 2022, but is nonprecedential. Regardless of its precedential value, as with many cases, there are valuable lessons.
The father, B.C. Fox, had three children, whom he provided for under a revocable trust. This revocable trust was amended many times, primarily to change the co-trustee and successor trustees, but one amendment added a basic no-contest clause which stated:
In the event any beneficiary directly or indirectly contests the validity of this trust or the distributions thereof in any manner, then any bequest herein made in favor of such contesting person shall be void and of no effect and such bequest will ratably augment the shares of the other beneficiaries entitled to distributive shares of the trust estate.
B.C. Fox died in March 2017, and one of his children, Richard, became the sole successor trustee. Richard had also been a caretaker for another of B.C. Fox’s children, Gerald, who had limited cognitive abilities and other physical health problems necessitating care.
B.C. Fox’s revocable trust provided for unequal gifts among his three children, and Richard felt that the distribution was unfair given his long-time care for Gerald. Gerald’s share was designated to go to another separate inter vivos trust that Gerald had established (the Gerald Trust). While Gerald was hospitalized, Richard purported to have Gerald sign an amendment to the Gerald Trust which left a significant portion of the trust to Richard. Gerald likely did not have the capacity to execute this amendment, and nonetheless a witness testified that Gerald had not actually signed it. Gerald died in October 2017.
A California court later determined that this amendment to the Gerald Trust was invalid, and alsofound that the amendment was the product of financial elder abuse. So, Richard did not get a share of the Gerald Trust, but nonetheless was still designated as a remainder beneficiary of the B.C. Fox Revocable Trust. B.C.’s other son, David, and a foundation (which was a beneficiary of Gerald’s Trust but later dissolved) brought an action to enforce the no-contest clause against Richard, as a result of his actions in bringing about the supposedly forged amendment to the Gerald Trust.
Once again, as a reminder, the B.C. Fox Revocable Trust contained the no-contest clause, and the Gerald Trust was designated thereunder as beneficiary to receive Gerald’s share (in lieu of naming Gerald individually).
The trial court granted Richard’s motion for summary judgment, holding that Richard’s actions in executing the amendment to the Gerald Trust did not rise to the level of a contest to the B.C. Fox Revocable Trust. David appealed.
Analysis
At issue was whether a challenge not to the parent trust itself, but to a pre-existing, resulting trust referred to in the parent trust, rose to the level of a “contest” under the no-contest clause in question. The Court of Appeals concluded that it did, and reversed and remanded.
The no-contest clause quoted above applies to both a direct and indirect contest, which is fairly common among these types of clauses. However, Richard asserted that the plain meaning of an “indirect” contest required collusion between beneficiaries, whereby he instigates or assists another beneficiary in making a direct contest. The Court did not agree, noting that the authority relied upon by Richard (a comment to Section 8.5. of the Restatement (Third) of Property: Wills & Other Donative Transfers) was merely an example and was not intended to limit the definition of “indirect.”
Turning to the outcome, the Court concluded that although Richard did not directly contest the B.C. Fox Revocable Trust, his invalid amendment to the Gerald Trust had the intended effect of altering the distribution of the B.C. Fox Revocable Trust by increasing the share of the latter trust received by Richard. This was, in essence, the same outcome that would be achieved by a direct challenge to the B.C. Fox Revocable Trust itself. Note that the definition of a contest, as contemplated in the quoted no-contest clause, includes contesting the “distributions thereof in any manner… .”
My Two Cents
I believe the Court got it right here. This is no different from a situation where, for example, a challenge to a revocable trust might rise to the level of a challenge to the pourover will. See, for example, Sandstead-Corona v. Sandstead, 415 P.3d 310 (Colo. 2018). The difference, however, is that in this case, we do not know if the resulting trust (the Gerald Trust) was expressly incorporated by reference in the B.C. Fox Trust. It is this “incorporation by reference” which typically creates the derivative situation which could extend a no-contest clause to multiple instruments. There was an express reference to this trust obviously, but express reference is not the same as incorporation by reference.
Nonetheless, I think what hurt Richard in this case was his bad-faith conduct both before and after the ineffective amendment to the Gerald Trust. The case opinion notes that Richard repeatedly complained to Gerald’s attorney about not receiving enough from either the Gerald Trust or the B.C. Fox Revocable Trust, with the intent of coercing more as “compensation” for his caretaking activities. And, while the Court did not expressly cite fiduciary conduct as a factor, it did acknowledge that Richard was the trustee of the B.C. Fox Revocable Trust and did delay distribution of this trust until after the ineffective amendment to the Gerald Trust had been “executed.” He was obviously operating from a position of bad faith as trustee, fiduciary, and caretaker to Gerald, which makes up for any technical deficiencies in the linking of the two trusts.
Of course, this raises another rabbit hole - the extent to which the exercise of fiduciary duties by an interested trustee could rise to the level of a “contest” of the trust itself. I am sure this has been addressed somewhere, but I bring this up because it serves as a great drafting point. Many attorneys rely on traditional remedies for breaches of fiduciary duties, but I wonder how often the no-contest clause could be asserted either offensively or defensively in such a case.
In terms of best practices, I think it helps to expand the scope of the no-contest clause at the time of drafting if the ripple effect is intended. The clause can expressly apply not only to the parent trust itself, but also to any separate trusts created or funded under this instrument. Of course, for clients with other existing trusts (whether or not the client is the settlor), the effect of the clause could be extended to include contests to any other instruments created by settlor or referred to by settlor in the instrument which contains the clause, whether or not such trusts are funded by the base instrument.