This is a continuation of the series on everything you ever wanted to know about estate planning trusts. For an intro and index to this series, please click here. The linked article will have a series index that gets updated periodically as well, so please bookmark it.
Table of Contents
The Issue
In the land of hopes and dreams lies an outcome where, at the very least, nobody contests the estate plan we put in place and instead respects our wishes. The problem is that the primary source of our wishes are the written documents left behind. It does not matter what was verbally promised (or even promised in writing outside of estate planning documents). All that usually matters are the four corners of the document, unless there is some sort of ambiguity allowing for extrinsic evidence of what was promised – and even then, rules of evidence may limit the utility of such evidence.
This often lends itself to a mismatch of expectations and outcomes between a decedent and their heirs. This mismatch becomes exacerbated when beneficiaries, such as our children, are not treated equally. Both we, and they, keep scorecards of need. It is no surprise that these scorecards tend to differ.
Is there a solution?
One solution, that is permitted in many but not all states, is the no-contest clause. The proper legal term is the in terrorem clause. This clause, when permitted and properly implemented, can reduce (but not eliminate) the risk of contests to the estate plan itself. But, when not properly implemented, this type of clause can actually lead to more litigation – including litigation over the enforceability of the clause itself.
Before exploring what can go wrong, let’s examine the base use case and result.
Operation of the Clause
A no-contest clause is a clause included in, and relating to, what we will call a “governing instrument” – which is often a will, revocable trust, and/or an inter vivos irrevocable trust. There are other governing instruments, such as beneficiary designations, which may not contain a no-contest clause themselves, but the no-contest clause in a governing instrument could incorporate other governing instruments such as beneficiary designations.
The no-contest clause usually applies to the inheritance to be received by a beneficiary under the governing instrument containing the clause. It operates to cause the beneficiary, and sometimes the beneficiary’s entire family line (descendants, etc.), to lose their inheritance under that governing instrument if they take any sort of prohibited conduct after the death of the person who created the governing instrument (testator of will, or settlor of trust).
Often, the prohibited conduct is commencing any court action to contest, invalidate, or even question the validity of the governing instrument itself (and sometimes the validity of outside governing instruments like beneficiary designations). In some cases, it could even include joining in on another beneficiary’s court action, or defending a court action. While the scope of prohibited conduct can be extended to other governing instruments (like beneficiary designations), the beneficiary can only lose their inheritance under the governing instrument containing the no-contest clause itself. Other prohibited conduct might include interfering with the administration of the estate or trust itself.
These clauses, while useful, are not completely respected in all states. Some states, such as Florida and Indiana, do not enforce no-contest clauses. Other states may limit their application in situations where a beneficiary can show reasonable or probable cause to bring an action contesting a governing instrument. But, there are still some states where these clauses are completely enforceable regardless of the circumstances surrounding them.
Because these clauses result in a forfeiture of an inheritance, courts tend to look at them more critically than other provisions of a will or trust as a matter of public policy. In many states, the standard is that no-contest clauses are strictly construed to make sure they are not over-applied. In fact, much of the litigation around no-contest clauses relates to exactly this scenario – what exact conduct leads to a forfeiture of one’s inheritance?
Given the significant roles played by facts and circumstances, along with the wide variances state-to-state of how laws might be applied to facts and circumstances, it is difficult (if not impossible) to provide a complete and prescriptive how-to guide on the drafting and implementation of no-contest clauses. However, there are some considerations at the top of the bell curve that create a helpful framework of principles.
You Need a Carrot
If no-contest clauses are considered a stick, they are only useful if there is a carrot. Let’s take a situation where a testator of a will has three children, and wishes to completely disinherit one of them – leaving the other two with a 50/50 split of the testator’s estate. In that situation, the hoped-for outcome might be avoiding a contest of the will by the disinherited child. However, that child has nothing to lose by doing so because they are already disinherited.
This means a carrot must be created – whether in the will itself, or in other governing instruments. For example, perhaps the estate could be split 10/45/45, with the 10% to the child who would otherwise be completely disinherited perhaps serving as a sufficient “carrot” to discourage the risk of losing that 10% by challenging the will under the no-contest clause. Or, perhaps, a challenge to the will could result in the child’s loss of an inheritance under an irrevocable trust created by the testator of the will during life (assuming the irrevocable trust itself incorporates a no-contest clause from the will).
On that note, incorporation by reference becomes an issue where no-contest clauses are included in multiple instruments – including amendments or codicils to the same instrument. As a refresher, incorporation by reference allows a will or trust to incorporate some or all terms of another outside governing instrument so long as the instrument exists at the time the incorporating instrument is executed. The classic example is that a pourover will incorporates, by reference, an outside revocable trust in the residuary clause. Since no-contest clauses are strictly construed, this tends to magnify incorporation by reference issues.
Incorporation By Reference
While references to outside documents, powers, and restrictions may not always have to be specific, this same approach cannot be used with no-contest clauses. Instead, one must be intentional and specific when it comes to the scope of such clauses.
A common example is in a pourover will and revocable trust. If a pourover will contains a no-contest clause, but a revocable trust does not, it may not be possible to extend the application of the no-contest clause under the pourover will to a contest of the revocable trust itself (and vice versa). Ideally, the no-contest clause should be included, or at least intentionally referenced, in each instrument.
Another example might be where a will or trust is amended in part. In such a case, a trust amendment or codicil often contains a blanket ratification clarifying that all other terms and provisions of the prior, underlying instrument that are not expressly changed in the amendment continue to be of full force and effect. Such a blanket ratification, however, may not be good enough for a no-contest clause. At a minimum, an amendment or codicil may have to expressly reference and incorporate the no-contest clause from the base instrument itself. Or, in some cases, the no-contest clause may need to be expressly restated in the amendment or codicil.
Taking this a step further, many states restrict the prospective application of a no-contest clause to future amendments or codicils. This is because future amendments or codicils could, themselves, be the product of undue influence, duress, or incapacity. So, while courts may be willing to apply a no-contest clause to the immediate governing instrument itself, they are often reluctant (even when a testator or settlor expresses this intent) to apply the clause to future instruments.
Finally, this raises the question of when a no-contest clause can be avoided. As noted above, some states and courts want to discourage the use of no-contest clauses to entrench bad behavior. For that reason, the door is often left open to avoid application of a no-contest clause to claims of undue influence, duress, breach of fiduciary duty, etc. This is where a reasonable cause exception comes in. Regardless of outcome, if a beneficiary bringing a challenge to a governing instrument can show that they believed there were valid grounds for the challenge, they may avoid forfeiture.
On the other hand, if the beneficiary was the one exerting undue influence, they may lack probable or reasonable cause – even if their intentions were altruistic. Likewise, if a beneficiary is late in initiating a contest to an instrument (perhaps after a statute of limitations period), they may procedurally lack probable cause even if the substantive facts and circumstances were otherwise in their favor.
Scope of Prohibited Conduct
The other common issue with no-contest clauses is determining what sorts of court and non-court actions might be covered by the forfeiture element. For example, could interfering with the administration of an estate or trust be prohibited? Again, this is where public policy dictates that the state has an interest in sound administration of estates and correction of errors by fiduciaries. So, courts may refuse to enforce no-contest clauses for meaningful challenges to administrative or ministerial functions (like filing accurate accountings and tax returns). But, challenges to discretionary authority, like making distributions, may be prohibited and enforceable under a no-contest clause.
Likewise, some states (like California) limit the types of prohibited conduct to include only direct contests to a governing instrument. But, this does not mean that a beneficiary is the one initiating the court proceeding. Sometimes, simply filing a responsive pleading can be interpreted as a “direct” contest. Likewise, joining an action to defend the actions of a fiduciary or beneficiary could rise to that level. On the other hand, enforcement of one’s rights as other than a beneficiary (such as rights or obligations as a creditor or fiduciary) may not fall within the scope of a no-contest clause.
In this vein, beneficiaries may sometimes use no-contest clauses as a weapon against other beneficiaries. Let’s take, for example, a situation where a beneficiary seeks to have a trustee or executor removed. If this outcome is successful, another beneficiary may be able to claim that the removal of a testator’s or settlor’s appointed fiduciaries is itself a challenge to the will or trust – thus invoking the no-contest clause. Many reported cases deal with this sort of outcome, sometimes with mixed results.
Conclusion
Given these concerns, the inclusion of a no-contest clause in a will or trust is not a subject to be approached lightly. These clauses are not always appropriate, and the issues these clauses seek to solve may be better approached through use of a trustee’s discretionary distribution powers, advancement clauses, or other planning structures that perhaps draw the distinction between equal and equitable benefits.
Where no-contest clauses will be included, drafters should pay special attention to the scope and incorporation of the no-contest clause. Given the strict construction of these clauses, use of boilerplate terms may not be appropriate. Special attention should also be paid to unanticipated outcomes, such as weaponization of the no-contest clause against each other by beneficiaries. Likewise, prospective application of a no-contest clause to future amendments or codicils should be discouraged.
Finally, for an attorney, strategist, or advisor who is reviewing a will or trust, paying special attention to the scope of a no-contest clause can be a value-add for clients. Given how frequently these clauses are litigated (an ironic outcome given their purpose), an objective second or third set of eyes can sometimes spot issues that might not otherwise have been anticipated by the client or drafter. Stress-testing for best and worst cases can be extremely valuable where no-contest clauses are concerned.
Want to Read More?
The following are some cases and materials on no-contest clauses I have previously written. If this is a subject of interest, I am also happy to speak on this topic - feel free to reach out if you believe this could be a good subject for your programming needs.
