A “no contest clause,” according to California Probate Code section 21310(c), is “a provision in an otherwise valid instrument that, if enforced, would penalize a beneficiary for filing a pleading in any court.” Stated simply, a no contest clause prohibits a beneficiary from receiving a gift under a will or trust that they would otherwise receive had they not filed a “contest.” The law—Probate Code sections 21310-21312—includes several types of direct contests, but the most common grounds for contesting (challenging) a will or trust are lack of capacity, undue influence, and fraud.
One of the biggest misconceptions in California trust litigation concerns the effectiveness of no contest clauses. This article explains no contest clauses and their limited effectiveness in California trust and estate litigation.
A typical no contest clause says:
If any beneficiary under this instrument, singularly or in combination with any other person or persons, directly or indirectly does any of the following acts, then the right of that person to take any interest given to him or her by this instrument shall be void, and any gift or other interest in the trust property to which the beneficiary would otherwise have been entitled shall pass as if he or she had predeceased the settler without issue.
(a) Without probable cause challenges the validity of this instrument on any of the following grounds:
(ii) Lack of due execution;
(iii) Lack of capacity;
(iv) Menace, duress, fraud, or undue influence;
(v) Revocation pursuant to the terms of this instrument or applicable law;
(vi) Disqualification of a beneficiary who is a “disqualified person” as described in California Probate Code section 21350 or applicable successor statute.
(b) Files a pleading to challenge the transfer of property on the grounds that it was not the transferor’s property at the time of the transfer;
(c) Files a creditor’s claim or prosecutes any action against the trust for any debt alleged to be owed to the beneficiary-claimant.
If a will or trust contains such a clause, and a beneficiary does any of the things listed in (a)-(c), above, he will forfeit any gift he would otherwise receive under the terms of the will or trust. As an example, consider a trust that says John will receive one-third of his father’s trust property when his father dies. If John were to consider suing to invalidate the trust based on undue influence, it would seem that the co contest clause would be a powerful deterrent against John suing, because doing so would put his one-third inheritance at risk. In practice, this is often not the case.
First, a no contest clause does not prevent a beneficiary from suing. Clients often believe that a beneficiary cannot sue if the trust contains a no contest clause. This is a misconception. In fact, nothing an estate planning attorney includes in the terms of a trust can prevent a beneficiary like John from suing. The no contest clause says—in essence—that if a beneficiary files a certain limited type of lawsuit, and loses, and the judge finds that the lawsuit was not brought with “probable cause,” the beneficiary would forfeit his inheritance under the trust. This does not mean that the beneficiary cannot sue.
Second, a no contest clause only has a deterrent effect if the beneficiary considering a contest would receive a substantial gift if he doesn’t sue. If a no contest clause is enforced, the beneficiary loses his inheritance, which is the potential downside of a contest. If the potential contestant receives no inheritance under the trust, the clause has no deterrent effect. In John’s case, if he received nothing from his father’s trust, he has nothing to lose by filing a contest. A client who fears a contest from a particular beneficiary should consider making a substantial gift to that beneficiary. How large the gift should be to deter a contest depends on the size of the trust and the beneficiary’s financial circumstances. In our experience, $10,000-$20,000 gifts have little deterrent effect.
Third, no contest clauses have limited effect because they are only enforced after the contestant loses at trial. If the contestant wins, the trust and the no contest clause are typically deemed invalid. Likewise, if the case settles before trial, the no contest clause is never enforced. Because most civil cases in California settle without a trial, no contest clauses are rarely enforced. Even if the case goes to trial and the contestant loses, a no contest clause will only be enforced against a direct contest (e.g., contests based on undue influence, incapacity, fraud) brought without “probable cause.” Under Probate Code section 21311(b) “probable cause exists if, at the time of filing a contest, the facts known to the contestant 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.” Even if the contestant loses, he may still receive his gift under the trust if the judge determines that a reasonable person would believe that the contest had a reasonable chance of success.
If you are facing a potential trust or will contest, please call us for a free consultation.