June 8, 2018
Having worked a lifetime to build your personal wealth, at some point you make the decision to plan for the transfer of your property to the next generation. To avoid leaving it to a court to determine who will receive the benefits of your life’s work, you decide to create a trust so you can designate a trustee who will help transfer your estate to the beneficiaries you select. Over time, you amend your trust to reflect changing personal and financial circumstances and you might add beneficiaries as your extended family grows. Ideally, the trustee and the beneficiaries will all share in your understanding about how your estate should be distributed upon your passing. But what if a beneficiary of your original trust, in an attempt to obtain a larger share of your estate, files a lawsuit claiming you were manipulated into creating trust amendments that benefitted others? Is there anything you can do to prevent disputes like this from arising?
A “no contest clause,” also known as an “in terrorem clause,” is a provision one may use to penalize a beneficiary from seeking to invalidate a trust instrument, whether it be the original trust itself or a later amendment. The penalty for contesting the trust instrument is that the contesting beneficiary loses the right to their expected inheritance. No contest clauses are generally valid in California, and support the public policy of discouraging litigation and permitting the person creating a trust (the “settlor”), to control how beneficiaries behave after the settlor dies. However, public policy also disfavors interpreting such forfeiture provisions beyond the clear intent of the settlor.
Addressing a matter of first impression, the Court of Appeal in Aviles v. Swearingen (2017) 16 Cal.App.5th 485, 491 held that a “no contest clause is not enforceable [with respect to a trust amendment] unless it is set forth verbatim in [that trust amendment] or the [trust amendment] expressly refers to the no contest clause in [a prior trust instrument].” In Aviles, the settlor created a trust in 2010 and thereafter amended the trust three times. The second amendment contained a no contest clause. Although the third amendment incorporated all unchanged provisions in the second amendment, it did not explicitly prohibit a beneficiary from contesting the third amendment. After the settlor died, a beneficiary brought a petition contesting the validity of the third amendment, alleging another beneficiary unduly influenced the settlor to sign the third amendment in an attempt to acquire a greater share of the estate.
The Aviles Court explained, “We cannot say that [the settlor] unequivocally expressed her intent to apply the no contest clause to petitions contesting trust amendments that are the product of fraud or undue influence. Application of the clause here would defy common sense. ‘An instrument that is the product of menace, duress, fraud, or undue influence is not an expression of the transferor’s free will and should not be enforced.’” Accordingly, the Court of Appeal upheld the trial court’s order denying the petition to disinherit the beneficiary who contested the validity of the third amendment. Thus, in the aftermath of Aviles, settlors wishing to avoid similar scenarios must take care to specifically state, in their trust and in any subsequent amendment, whether they intend to restrict a beneficiary’s ability to contest their estate plan.
Drafting a highly enforceable, no contest provision is a very technical process and we recommend seeking the services of an experienced trust attorney, if you would like to include such a clause in your trust.
Author: Eric G. Salbert, Enterprise Counsel Group, Associate