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Discourage an Inheritance Fight With a No-Contest Clause -- Part II

Applicability of the New Law

No-contest clauses shall be strictly construed in determining the intent of the transferor. No-contest clauses must be drafted to strictly comply with the law and the intent of the transferor. The new law is specifically not intended to be a complete codification of the law governing enforcement of no-contest clauses. The “common law" governs enforcement of no-contest clauses to the extent that the new law does not apply. Because the Legislature wanted to limit the unpredictability, inconsistency and chaos of the existing law, the new law cannot be circumvented in the will or trust or other instrument.

Beware of the Surprise

A no-contest clause designed to prevent a particular dispute, for example between a spouse and the children from a previous marriage, may inadvertently create a dispute among the rivalrous siblings. Consider the client with adult children whose trust includes a no-contest clause applicable to property disputes. The trustee of the trust owns the client’s rental property and, Jane, the client’s adult daughter lives there. The client transfers title to the rental property to himself and Jane as joint tenants years after creating the trust. The client then dies and his son Bob, who is hostile to Jane, becomes trustee. Bob petitions the court to order Jane to reconvey the rental property to the trust, claiming that the joint tenancy transfer was for convenience only, and that the rental property should be distributed to the trust beneficiaries as part of the trust residue.

Jane risks forfeiting her interest in the rental property if she opposes Bob’s petition in court. Her position is that the rental property passed to her by joint tenancy at the moment of her father’s death and that it was not a part of his trust. Such a claim is arguably within the new no contest law. Even though Jane would make her claim defensively, a contest is a pleading, and a pleading includes an answer or response. It would make no difference if the evidence was overwhelmingly in Jane’s favor that her father truly intended Jane to take ownership by joint tenancy because probable cause does not apply to property ownership claims.

Jane could argue that her responsive pleading does not violate the trust because the trust was revocable during her father’s lifetime and that he revoked the trust with respect to the rental property when he signed the deed from the trust to himself and Jane as joint tenants. The problem is that it is impossible to know what the judge will do in this common situation, and the consequences of being wrong are that Jane will be forced to forgo her legitimate interest, defeating her father’s true intent.

Accordingly, we estate planners are reluctant to draft broad no-contest clauses that expressly provide that they apply to a transfer of property on the grounds that it was not the transferor’s property at the time of the transfer. This is because our clients frequently transfer trust property without consulting us. We will instead draft carefully tailored no-contest clauses to be sure that the intent of our clients becomes reality.

Practical Considerations

There may be no need for a no-contest clause when it is unlikely that the dispositive provisions of a will or trust will be challenged in court. The old, broad, one-size-fits-all no-contest clauses can frustrate your intentions in that you may be preventing your loved ones from holding the executor accountable in court. Some clients like to disinherit all their children in their no-contest clause if one child challenges the will or trust in court. Feeling that this approach is not fair, others disinherit only the contesting child and his or her offspring in the no-contest clause.

Note that a no-contest clause is only effective against the beneficiaries named in the instrument. Beware that “non-beneficiaries" have nothing to lose by contesting the instrument, and the presence of a no-contest clause could limit the ability of the named beneficiaries to defend an attack!

A no-contest clause is intended to deter litigation. An effective no-contest clause must be coupled with a gift of sufficient size to the disgruntled beneficiary to prevent a challenge. In other words, the potential challenger must have something to lose. Often the same factors that cause a client concern about a combative potential challenger also make it difficult for the client to make a gift to that potential challenger large enough to make the no-contest clause effective.

Alternatives to a No-contest Clause

A conditional gift is an important alternative to a no-contest clause. For example, the trust directs the trustee to distribute Rental Property A to the spouse if spouse transfers Rental Property B to the children from the deceased’s prior marriage. Survivor’s refusal to transfer Property B is not a contest because no papers are filed in court. Survivor will lose the gift of Property A, and won’t forfeit any other gift under the trust. Such conditional gifts can be a simple and powerful alternative to a no-contest clause.

The will or trust can also provide the executor or trustee with the discretion to charge against the beneficiary’s gift all legal fees and costs of any unsuccessful legal action brought by that beneficiary.

The information contained in this article is general in nature and should not be relied upon for any specific situation. Consult a qualified attorney for any specific legal advice.

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