Your client, Anna, is updating her estate plan in light of the recent passing of her husband. She has two adult children, Sarah and David. Sarah has a son, Michael, and David has a daughter, Kate. Anna wishes to leave her estate of $4 million to them.
Over the last few years, Anna has become more dependent on her daughter, Sarah. Sarah has been tremendously helpful to her by driving her to doctors’ appointments, doing her shopping and helping her to maintain her home. To show her gratitude, Anna would like to leave Sarah more than David. She would like to leave $2.5 million to Sarah, $1 million to David and $250,000 to each grandchild for their education.
However, she’s worried about how David will react when he learns Sarah is receiving more than him. David has expressed concern that Sarah can be controlling and demanding.
He’s also insinuated that Anna’s memory is worsening. Anna fears that when David learns Sarah is getting more than him, he may pursue litigation to invalidate Anna’s estate plan claiming Sarah unduly influenced Anna or that Anna didn’t have capacity when she made the changes. Anna strongly believes that with all of Sarah’s help, she should receive more money than David. Anna also doesn’t want the estate to be involved in costly, protracted litigation.
No-Contest Provisions
In the above example, Anna is concerned David will contest the validity of the trust. In situations like these, practitioners often employ an “in terrorem clause,” otherwise known as a “no-contest” clause. A no-contest clause provides that any beneficiary who contests a will or trust shall forfeit some or all of his interest under the applicable will or trust. A no-contest provision is meant to deter a beneficiary from contesting a will or trust (or corresponding accounting). Below is an example of a somewhat standard no-contest provision (alternatives to follow below):
No Contest. If any person beneficially interested in this Agreement shall enter into an agreement to, commence or, except as required by law, participate in any proceedings to: (a) contest the validity of this Agreement or any part thereof, (b) contest the validity of any other trust of which I am a grantor or any part thereof, (c) contest the validity of my will or any part thereof, (d) assert any claim based on an alleged agreement to make a will or trust agreement or otherwise dispose of my estate or any part thereof, or (e) request an accounting for any period prior to my death, said beneficiary shall forfeit whatever interest he would have taken under this Agreement and the Agreement shall be administered and distributed as though such beneficiary had predeceased me.
State Law Approaches
State courts and legislatures have taken varying approaches when it comes to enforcing no-contest provisions. Florida expressly prohibits the enforcement of no-contest clauses,1 while most states will enforce no-contest provisions on a limited basis. No-contest provisions are presumptively valid in a will or trust in Illinois.2 In determining the enforceability of no-contest provisions, states seek to balance the desire for testamentary freedom with public policy concerns regarding equity and protecting the property of estates.
Strict construction. As equity disfavors forfeiture, numerous states, including California, Georgia, Illinois, Nevada, New York and Texas, strictly construe no-contest provisions.3 For instance, in Illinois, when determining the scope of a no-contest provision and whether a beneficiary’s action falls within the scope of that provision, courts require that “a reasonable interpretation must be given in favor of the beneficiary.”4 Moreover, in California, Nevada and New York, a no-contest clause won’t be interpreted beyond that which was plainly the testator’s intent.5 As a result of strictly construing these provisions, courts frequently find a beneficiary’s actions didn’t trigger a no-contest clause.6
Probable cause and good faith. While states seek to effectuate a testator or settlor’s intent by enforcing a no-contest provision, states don’t want to discourage someone with a legitimate basis for challenging a will or trust from filing a lawsuit. The Uniform Probate Code (UPC) and Restatement (Third) of Property (Restatement Third) have addressed this concern by not enforcing a no-contest provision if probable cause exists to institute the proceedings.7 Twenty states, including Arizona, Colorado, Hawaii, Michigan and Minnesota, have adopted the UPC and Restatement Third approach that no-contest provisions are unenforceable when there’s probable cause or good cause to institute proceedings.8 The Restatement Third says that “probable cause” means:
. . . at the time of instituting the proceeding, there was evidence that would lead a reasonable person, properly informed and advised, to conclude that there was a substantial likelihood that the challenge would be successful.9
Additionally, eight states, including Connecticut, Iowa and Texas, also require a litigant to bring a lawsuit in good faith as well as with probable or just cause.10 While probable cause is a determination that a lawsuit was objectively reasonable, good faith focuses more on the subjective intent of the litigant.
The law regarding no-contest provisions in trusts is less established. The UPC only applies to wills, and the Uniform Trust Code (UTC) is silent on the issue of no-contest clauses. Moreover, many states haven’t ruled on the enforceability of no-contest provisions in trusts. However, no state court or legislature to our knowledge has stated that the rule applicable to wills wouldn’t be applicable to trusts. In fact, many states, such as Illinois, have held trusts will be subject to the same interpretive treatment as wills—as wills and revocable trusts are different in form, but not necessarily in substance.11
Limitations to enforcement based on public policy. Several states, including Georgia, Illinois and New York, have found it violates public policy to enforce a no-contest provision against a beneficiary who brings a lawsuit regarding the eligibility or conduct of a fiduciary, and those states refuse to enforce a no-contest clause in those situations.
For instance, Georgia and New York courts have held that it’s a violation of public policy to enforce a no-contest provision against a beneficiary who brings litigation that questions the eligibility or conduct of fiduciary.12 Similarly, in Illinois, it’s a violation of public policy to enforce a no-contest provision against a beneficiary challenging the appointment of an executor.13 Courts have emphasized that no-contest clauses can’t be used to insulate fiduciaries from exercising reasonable care.14
Generally speaking, courts don’t seem to want to cause a chilling effect on beneficiaries bringing litigation when a no-contest provision is included in an estate plan. While some courts have never stated they won’t enforce a no-contest provision against a litigant who acted in good faith, it seems fairly implicit that many courts will allow litigants to bring such an action with little consequence. In Wojtalewicz’s Estate v. Woitel, the beneficiary aimed to deny the appointment of an irresponsible executor.15 In In re Estate of Mank, a guardian filed a petition to contest a will on behalf of a beneficiary to toll the statute of limitations to get the court’s approval of a settlement agreement.16 Implicit in these holdings is the notion that the court is concerned about impacting the behavior of good faith litigants.
Alternative No-Contest Provisions
Returning to our example above, Anna is concerned about her son, David, contesting the validity of her trust and wasting the trust’s assets in prolonged litigation. Below are three alternative no-contest provisions that courts may be more willing to enforce, as they avoid or reduce forfeiture, which courts seem to find particularly loathsome:
Litigation holdback fund.
No Contest. If any person beneficially interested in this Agreement (the “Contestant”) shall enter into an agreement to, commence or, except as required by law, participate in any proceedings to; (a) contest the validity of this Agreement or any part thereof, (b) contest the validity of either Grantor’s will or any part thereof, (c) assert any claim based on an alleged agreement to make a will or trust agreement or otherwise dispose of either Grantor’s estate or any part thereof, (d) request an accounting for any period prior to the Survivor’s death, (e) contest the validity of any other trust of which a Grantor is a grantor, or (f) contest any beneficiary designation for insurance, employee benefits, deferred compensation or any other asset passing to or outside this Agreement (each a “Contest”), then:
(i) all gifts to and interests of the Contestant under this Agreement or any trust created hereunder shall be held by the trustee(s) of the trust(s) being challenged, or if none, then the trustee(s) of the trust(s) from which the gifts or interests would otherwise be received (collectively, the “Defending Trustee”), without the Contestant having any right to receive distributions, withdraw assets or exercise any lifetime powers of appointment (the “Withheld Funds”),
(ii) all of the costs of such defense, including but not limited to attorneys’ fees, court costs, experts’ fees, trustee’s fees, expenses and any other fees or expenses which would not have been incurred but for the Contest, to be determined in the sole and absolute discretion of the Defending Trustee, shall be charged to and paid from the Withheld Funds, and
(iii) upon the full, final and complete resolution of all elements of such Contest, including the expiration of any periods of time in which an appeal may be filed, then any remaining Withheld Funds shall pass to or in trust for the Contestant as otherwise provided in this Agreement. The Contestant shall not, at any time, be a Defending Trustee, and in the event of a vacancy in the position of Defending Trustee, a successor Defending Trustee shall be appointed in the same manner in which the Defending Trustee was or could have been appointed under this Agreement, except that the Contestant shall not participate in any such appointment. We request, but do not require, that the trustee not settle any Contest, and no court of competent jurisdiction permit the settlement or resolution of any such Contest, in a manner which would interfere with this Agreement or either Grantor’s estate planning generally.
This clause functions differently from a typical no-contest clause because a beneficiary doesn’t forfeit his interest simply by filing a will or trust contest. Rather, the beneficiary’s interest is: (1) restricted during the contest, and (2) diluted by the cost of litigation. Therefore, beneficiaries won’t forfeit their entire interests by filing a lawsuit.
We’re not aware of courts ruling on this type of no-contest clause. Courts may be more willing to enforce this type of provision given litigants won’t forfeit their entire interest by filing a will or trust contest.
Risking more than just your share—risking your child’s share.
No Contest. If any person beneficially interested in this Agreement shall enter into an agreement to, commence or, except as required by law, participate in any proceedings to: (a) contest the validity of this Agreement or any part thereof, (b) contest the validity of my will or any part thereof, (c) assert any claim based on an alleged agreement to make a will or trust agreement or otherwise dispose of my estate or any part thereof, or (d) request an accounting for any period prior to my death (collectively, a “Contest”), such beneficiary and such beneficiary’s descendants shall forfeit whatever interest they would have taken under this Declaration and my estate shall be administered and distributed as though such beneficiary and all of his or her descendants had predeceased me.
Under this provision, if a beneficiary contests the will or trust, the beneficiary and his descendants will forfeit their share under the instrument. If this were employed in our example, if David contests the trust, not only will he forfeit his $1 million, but also his daughter Kate would forfeit her $250,000.
The enforceability of such a provision is unclear as most appellate courts have never ruled on this type of provision. However, in Tunstall v. Wells, a California appellate court found that a similar provision didn’t violate public policy.17 In Tunstall, a grantor included a no-contest clause in his trust that stated if any of his three named daughters contested the trust, they would each forfeit their shares.18 The court reasoned this clause is no different from traditional no-contest clauses and clearly expressed the settlor’s intent.19
While courts could choose not to enforce this type of no-contest provision, it may never make it to court given that parents don’t want to risk forfeiting their interests and their children’s interests. This clause provides an even stronger deterrent not to litigate as parents may risk their share but may be more reluctant to risk their children’s inheritances.
Condition precedent. Courts have expressed reluctance to enforce no-contest provisions as equity disfavors forfeiture.20 In a traditional no-contest provision, a beneficiary who contests a will or trust will forfeit his interest in the instrument. Testators and settlors can eliminate the risk of forfeiture by conditioning an individual’s share on not contesting a will or trust. For instance, in this example, Anna could state that David will receive $1 million if he doesn’t contest her will or trust for two years after her death.
The foregoing alternative functions similar to a traditional, forfeiture-like no-contest clause. David won’t receive money if he contests Anna’s will or trust, and this deters him from filing a lawsuit. Courts may be more willing to enforce this condition precedent as there’s arguably less of a concern over forfeiture. Then again, courts may also find this clause violates public policy because it chills litigation.
Endnotes
1. Florida is the only state that expressly prohibits the enforcement of no-contest provisions. Fla. Stat. Ann. Section 732.517.
2. Wojtalewicz’s Estate v. Woitel, 93 Ill.App.3d 1061, 1063 (1st Dist. 1981). In Wojtalewicz, a beneficiary under the decedent’s will, which contained a no-contest provision, filed a petition to deny the appointment of the named executor in the will. The named executor timely failed to admit the will to probate, failed to file estate tax returns and caused the estate to incur substantial penalties. The appellate court held the beneficiary’s petition to deny the appointment of the executor fell within the scope of the no-contest clause, but declined to enforce the clause as it believed it would violate public policy. The Wojtalewicz court reasoned that the beneficiary had a statutory right to challenge the appointment of an executor who failed to admit the will to probate within 30 days after learning he’d been named executor. Further, the court highlighted enforcement of the no-contest clause would endanger the assets of the estate as it would inhibit beneficiaries from protecting the estate against waste. The court emphasized “the petitioner, a legatee under the will, cannot be terrorized into relinquishing his legacy by any threat of forfeiture. Otherwise, he would be forced to stand by silently while the executor jeopardizes the assets of the estate.” Illinois courts strongly favor testamentary freedom and will effectuate a testator or settlor’s intent so long as it doesn’t violate public policy (In re Estate of Feinberg, 235 Ill.2d 256, 268 (2009)) (“the public policy of the state of Illinois protects the ability of an individual to distribute his property, even after his death, as he chooses, with minimal restrictions under state law); Harris Trust & Savings Bank v. Donovan, 145 Ill.2d 166, 172 (1991); Harris Trust & Savings Bank v. Beach, 118 Ill.2d 1, 3, (1987).
3. Cal. Prob. Code Section 21312; Matter of W.N. Connell and Marjorie T. Connell Living Trust, 134 Nev. 613, 617 (2018); Badouh v. Hale, 22 S.W.3d 392, 397 (Tex. 2000); In re Ellis, 683 N.Y.S.2d 113, 119 (1998); Linkous v. National Bank of Georgia, 247 Ga. 274, 274 (1981); Wojtalewicz’s Estate, supra note 2.
4. Clark v. Bentley, 398 Ill. 535, 540 (1947).
5. Matter of W.N. Connell, supra note 3; Perrin v. Lee, 164 Cal. App. 4th 1239, 1249 (2008); In re Ellis, supra note 3.
6. See, e.g., Schroeder v. Sullivan, 2018 IL App (1st) 163210, par. 51, 104 N.E.3d 460, 473, as modified on denial of reh’g (June 1, 2018).
7. Uniform Probate Code Section 2-517; Restatement (Third) of Property(Wills & Don. Trans.) (Restatement Third) Section 8.5 (2003).
8. Alas. Stat. Section 13.16.555; Ariz. Rev. Stat. Section 14-2517; Colo. Rev. Stat. Section 15-11-517; Haw. Rev. Stat. Section 560:2-517; Idaho Code Section 15-3-905; Ind. Code Ann. Section 29-1-6-2; Me. Rev. Stat. tit. 18-C, Section 2-516; Md. Est. & Tr. Code Section 4-413; Mich. Comp. Laws Section 700.2518; Minn. Stat. Section 524.2-517; Mont. Code Section 72-2-537; Neb. Rev. St. Section 30-24,103; N.J. Stat. Section 3B:3-47; N.M. Stat. Section 45-2-517; N.D. Code Section 30.1-20-05; 20 Pa. Con. Stat. Section 2521; S.C. Code Section 62-3-905; S.D. Codified Laws Sections 29A-2-517 and 29A-3-905; Utah Code Section 75-3-905; In re Estate of Foster, 190 Kan. 498, 500 (1962).
9. Restatement (Third) supra note 7.
10. Tex. Est. Code Ann. Section 254.005; Winningham v. Winningham, 966 S.W.2d 48 (Tenn. 1998); Matter of Estate of Westfahl, 1983 OK 119, (1983); Estate of Kubick v. Potter, 9 Wash. App. 413, (Wash. App. Div. 2, 1973); Ryan v. Wachovia Bank & Trust Co., 235 N.C. 585, (1952); Cocklin’s Estate v. Watkins, 236 Iowa 98 (1945); Dutterer v. Logan, 103 W.Va. 216 (1927); South Norwalk Trust Co. v. St. John, 92 Conn. 168, 101 (Conn. 1917).
11. Handelsman v. Handelsman, 366 Ill.App.3d 1122, 1129 (2d Dist. 2006).
12. Duncan v. Rawls, 345 Ga.App. 345, 351 (2018); In re Estate of Prevratil, 121 A.D.3d 137, 148 (2018).
13. Wojtalewicz’s Estate, supra note 2.
14. In re Estate of Prevratil, supra note 12; Wojtalewicz’s Estate, ibid.
15. Wojtalewicz’s Estate, ibid.
16. In re Estate of Mank, 298 Ill.App.3d 821, 827 (1st Dist. 1998).
17. Tunstall v. Wells, 144 Cal. App. 4th 554, 570 (2006).
18. Ibid., at p. 558.
19. Ibid., at pp. 563-570.
20. See supra note 3.