Changes to Enforcement of No-Contest Clauses

No Contest Clauses Defined

No contest clauses have been recognized in the State of California since 1909, when a California Supreme Court case determined that no contest clauses are valid and enforceable. A no contest clause is a provision in a trust, will or other estate planning document that states if a beneficiary chooses to challenge the terms of the document, that beneficiary will forfeit any gift or bequest under the document. The purpose of a no contest clause is to discourage beneficiaries from initiating litigation challenging the validity or the terms of an estate planning document.

No contest clauses are typically coupled with a gift or bequest to the person who is otherwise being excluded from the estate; for example, a son of the trustor (the person creating the trust) might be given a bequest of $10,000, with the balance of the estate passing to his two sisters, in equal shares. The rationale was to offer a bequest large enough to the son that he would not want to risk invoking the no contest clause of the trust, and thereby forfeit his $10,000 gift. A no contest provision without a bequest to the person being excluded would not serve as a deterrent to a filing a contest, since the person would feel they have nothing to lose by filing a contest challenging the document.

Proponents of no contest clauses note that these clauses are designed to assure that a testator’s wishes are carried out after death and discourage litigation. Opponents of no contest clauses argue that no contest clauses fail to protect the testator, in that they fail to consider circumstances where the testator was the victim of undue influence, coercion, or simply lacked the capacity to understand the testamentary gifts specified in the estate planning document.

Many elder law attorneys expressed concerns that no contest clauses could be used as a shield for persons who have manipulated the estates of the elderly. Consider, for example, a case where an elderly woman was convinced to leave her multimillion dollar estate to a young woman who recently befriended her. The young woman drove the elderly testator to an attorney, who prepared a will naming the young woman as the sole beneficiary of the estate and specifically disinheriting the testator’s relatives. The new will included a no contest provision. Upon the elderly woman’s death, her relatives were shocked to learn that they were excluded from her estate. Should the relatives be allowed to challenge the provisions of the will? What if the elderly woman had not spoken to her relatives in years? What if the elderly woman had previously been diagnosed with Alzheimer’s?

Whether one believes no contest clauses should be enforced or not, one thing is indisputable; litigation over no contest clauses has been steadily increasing. From 1992 to 2007, there were 26 reported cases in the appellate courts or State Supreme Court involving no contest provisions, as opposed to only 17 reported cases in the preceding 82 years.

History of No Contest Clauses in California

Beginning in 1991, the California State Legislature decided action was necessary to clarify whether an action constitutes a contest to a document. For example, if a family files a petition challenging an amendment to a trust, does this constitute a contest invoking the no contest clause? The Legislature decided to implement a process or procedure to end the uncertainty over whether or not a proposed action was a contest.

The California Legislature initiated a declaratory relief petition where a petition may be filed with the court to determine if a particular action will be deemed a contest to the estate planning document. Essentially, this petition allowed a beneficiary to ask the court whether or not filing a particular action challenging an estate planning document would constitute a contest. The common problem with such petitions is that they take time, are frequently appealed, and many estate planning practitioners noted that similar facts often yielded very different results depending on the reviewing judge.

In 2005 the executive committee of the Trusts and Estates Section of the California State Bar recommended that the Legislature make no contest clauses unenforceable. Only two states, Florida and Indiana, do not enforce no contest clauses. Most states follow the Uniform Probate Code, which allows the enforcement of no contest clauses unless probable cause exists to invalidate the no contest provision. Probable cause refers to reasonable cause supported by facts or circumstances.

Changes in the Enforcement of No Contest Clauses

Governor Arnold Schwarzenegger approved Senate Bill 1264 changing the enforcement of no contest clauses in wills and trusts. The law, which becomes effective on January 1, 2010, effects estate planning documents which become irrevocable on or after January 1, 2001, regardless of when the instrument was actually signed. A trust becomes irrevocable under certain circumstances, including when the testator dies.

This new bill substantially changes the law regarding the enforceability of no contest clauses. The new law changes the following:

• The new law changes the actions beneficiaries who are subject to no contest clauses may take.

• The new law also changes how parties will litigate disputes arising under instruments with a no contest clause. The declaratory relief procedure is now eliminated under SB 1264.

• The new law changes how fiduciaries administering instruments containing no contest clauses respond to challenges to the instrument.

No Contest Clauses Will Only be Enforceable in Certain Situations

Under the new law, no contest clauses will be enforceable only in three situations:

1. A challenge to the transfer of property on the grounds that it was not the transferor’s property at the time of the transfer. This is referred to as a “forced election”.

2. Filing or prosecuting creditors’ claims.

3. A direct contest brought without probable cause. Probable cause is considered to exist if the facts known to the person filing the contest, at the time of filing the pleading, would cause a reasonable person to believe there is a reasonable likelihood that the requested relief will be granted after an opportunity for further investigation or discovery.

For further information on the new law regarding no contest provisions, or to view SB 1264, click on the following link: www.leginfo.ca.gov

Does SB 1264 Impact Your Estate Plan?

The estate planning attorneys at Pinkerton & Doppelt stay apprised of new developments within the area of trust and estate law, including SB 1264. We are available to answer any questions you may have about the impact of this new legislation on your estate plan. Contact Pinkerton & Doppelt to schedule a consultation regarding your estate plan today.