Estate Planning Legal Topics

No-Contest Clauses May Not Be the Deterrent You Think

ThinkstockPhotos-148073606State law changes enacted in 2010 have restricted the enforceability of no-contest clauses. Under Prob C §§21310–21311, a typical no-contest clause providing that an unsuccessful contestant gets nothing from an estate or trust is enforceable only against a “direct contest” brought without probable cause on specified grounds. And even if it is enforceable, a no-contest clause may not be an effective deterrent if the beneficiary thinks the amount at stake is outweighed by the benefit of a successful contest.

A couple of recent cases show how little of a deterrent no-contest clauses can be:

In Doolittle v Exchange Bank (2015) 241 CA4th 529, the court found that a provision authorizing the trustee to defend against a trust contest wasn’t a no-contest clause because it didn’t impose a forfeiture on a beneficiary bringing a contest and was therefore enforceable. So far, so good. But the presence of that provision along with a conventional no-contest clause didn’t prevent a challenge by the decedent’s daughter who had expected to receive a one-half share of an $8.5 million trust estate but only received a $500,000 gift. Evidently, the possible loss of this fairly substantial gift wasn’t enough to deter the contest given the much larger potential gain.

In Gregge v Hugill (2016) 1 CA5th 561, a no-contest clause cleared the field of primary beneficiaries but didn’t deter a related secondary beneficiary. The settlor had eliminated a child’s one-fourth share of a $3.3 million children’s trust and his child’s one-seventh share of a $450,000 grandchildren’s trust. The settlor then restored those shares (and the child’s one-fourth share of a second $450,000 trust) in a trust amendment that contained a no-contest clause and made that child the successor trustee.

The child’s siblings didn’t challenge the trust amendment, but another grandchild did. The probate court dismissed the action after the grandchild whose share was restored offered to disclaim his share, but the court of appeal reversed, noting that the proposed disclaimer would have protected his father’s $825,000 residuary interest in the children’s trust (25 percent of $3.3 million). The court held that the grandchild who filed the petition had standing because his share of the grandchildren’s trust was reduced by $10,700 as a result of the amendment.

On the stated facts, the petitioner’s mother stands to gain $330,000 if the children’s trust amendment is also invalidated. Conversely, the grandchild who filed the petition could lose $64,300 if the trial court determines that his contest was brought without probable cause. Evidently, the potential loss to the grandchild personally wasn’t enough to overcome whatever motivations he may have had to bring the action.

Although citable for different holdings, these cases illustrate a basic truth: Even an enforceable no-contest clause is only as effective as the potential (and relative) subjective loss to the contestant of an unsuccessful contest. Someone who has little or nothing to lose (or has much more to gain) won’t be deterred. Practitioners should advise clients to plan disposition provisions with this truth in mind, even if it means giving someone more than you think they deserve.

For more on the form provision approved in Doolittle (based on a CEB form), see Drafting California Revocable Trusts §§19.1-19.5A. Also check out CEB’s California Will Drafting §§35.9–35.10.

Other CEBblog™ posts you may find useful:

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