One of the most dramatic areas of California trust and estate litigation is no contest clauses. No contest clauses bring a made-for-tv excitement to the practice of trust and estate law because of the risk of disinheritance. Yet such clauses are widely misunderstood, even among attorneys.
What is a no contest clause?
A no contest clause is a warning to named beneficiaries to dissuade them from challenging the estate plan. If the beneficiary seeks more than what is provided for him or her, and the clause is enforced, the challenging party will forfeit what he or she would otherwise receive under the plan. The $64,000 question is whether to accept such a gift made in an estate plan or gamble it away in the hopes of receiving more.
The purpose of inserting a no contest clause is to try to protect the estate plan from challenge and to discourage beneficiaries from suing one another after a loved one’s death. The danger of no contest clauses is that they can discourage a beneficiary from raising a serious concern with an estate plan (e.g., fraud) for fear of being disinherited.
Are they enforceable?
Yes. In California, no contest clauses are enforceable and a beneficiary who imprudently challenges an estate plan in court could be stripped of his or her share of the estate or trust.
Since most contests are settled without a trial, judges are rarely called upon to enforce no contest clauses and it is difficult to predict before trial whether judges will enforce them.
A Little History Lesson
The story of no contest clauses in California is laid out in great detail in Donkin v. Donkin (2013) 58 Cal.4th 412, a decision of the California Supreme Court. In Donkin, the court traces the history of no contests clauses from their origin in common law up to the current state of the law.
Prior to 1989, no contest clauses were entirely rooted in common law, i.e., based upon prior court decisions not statutes.
In 1989, the Legislature partially codified no contest clauses and created a scheme for enforcing them. Included among the scheme was a “safe harbor” provision that allowed someone thinking of bringing a lawsuit to get an advance ruling on whether the proposed lawsuit would trigger the no contest clause. Today, safe harbor petitions are no longer permitted, except for trusts that became irrevocable prior to January 1, 2001.
After 1989, the Legislature made a series of tweaks and additions to the no contest scheme. As the statutory scheme evolved, it became more complex.
The Law Revision Commission stated in 2008: “The complexity of the statutory scheme actually promoted further uncertainty as to the scope of application of a no contest clause, which in turn led to widespread use of the safe harbor declaratory relief procedure. The frequent use of the safe harbor procedure added an additional layer of litigation to probate matters, which undermined the goal of a no contest clause in reducing litigation by beneficiaries.”
To resolve the uncertainty, the Law Revision Commission recommended a simplified statutory scheme. The result of the Law Revision Commission’s efforts has been codified at California Probate Code sections 21310 to 21315.
Current State of the Law
(1) Direct Contests
Direct contests are lawsuits that allege an estate plan is invalid because of forgery, lack of signature, lack of capacity of the decedent, menace, duress, fraud, undue influence, revocation of the document, or a disqualified beneficiary. For example, if you challenge a trust containing a no contest clause because you believe that the decedent was tricked into signing the trust (i.e., fraud) and you lose, then the no contest clause may be enforced against you.
There is an exception to this punishment if you had “probable cause” to bring the lawsuit. California Probate Code section 21311(b) defines probable cause as “facts known to the contestant [that] would cause a reasonable person to believe that there is a reasonable likelihood that the requested relief will be granted after an opportunity for further investigation or discovery.”
There are no published cases in California that interpret “probable cause” in the context of a no contest clause. For example, if you know that the decedent had been diagnosed with dementia at the time she signed an amendment to her trust unequally favoring your brother to your detriment, do you have probable cause of undue influence that would exempt your lawsuit from the enforcement of the no contest clause? At this point in the history of California jurisprudence the answer is “maybe,” depending on the totality of the facts and the subjective view of the judge who ultimately decides whether to enforce the no contest clause.
A newly published article in California Trusts and Estate Quarterly recounts a recent trial court decision concerning the Irene M. Lieberman Revocable Trust, where the court enforced a no contest clause to strip gifts of $10 million away from two of Irene Lieberman’s children after they filed a direct contest to her trust on the grounds of undue influence. The San Francisco County Superior Court found that the petitioners’ lawsuit did not have probable cause. The primary takeaway from the article is that no contest clauses still have teeth in California, even if those teeth are currently poorly defined.
(2) Property Challenges
An example of the second form of enforceable no contest clause, i.e., a challenge to property ownership, would be a lawsuit challenging whether a piece of real property held in the trust was really a trust asset. A lawsuit by a son claiming that the residence held in the trust is actually owned by him, personally, could invalidate other gifts the son was due to receive under the trust.
(3) Creditor Claims
The third form of enforceable no contest clause involves creditor claims. If a will beneficiary files a creditor claim against the decedent’s estate to recover on a loan that the beneficiary made to the decedent year’s earlier, the beneficiary may trigger the no contest clause and be prohibited from taking under the will.
With the second and third triggers there is not a probable clause exception. If you bring a challenge to the character of property held in trust or you assert a creditor claim, then the no contest clause could be enforced against you even if you are right and you win the underlying lawsuit. You could receive the house and lose the trust. However, the second and third no contest triggers are only enforced “if the no contest clause expressly provides for that application.” Many trusts we have seen do not specifically authorize these applications of the no contest clause.
No contest clauses are enforceable in California, as described at Probate Code sections 21310-21315, and if you run afoul of a no contest clause then you could be removed from the estate plan as a beneficiary.
The scope of no contest clauses is limited to those areas of the law specified in Probate Code section 21311 and there are exceptions (i.e., probable cause for direct contests and only if specifically called for in relation to challenges to property and creditor claims).
The appellate courts are likely to have more to say in the coming years concerning no contest clauses as the reach of the statutory language is explored and as estate planners try inventive means of chilling litigation between siblings without overstepping the strict construction of no contest clauses in the Probate Code.