Drafting No Contest Clauses Under the New Law
| Publication year | 2009 |
By Neil F. Horton* and Richard L. Ehrman**
As of January 1, 2010,1 Probate Code sections 21310—21315 govern the enforcement of no contest clauses in all instruments, whenever executed, that became or become irrevocable after January 1, 2001.2 This new legislation greatly restricts the enforceability of no contest clauses. As a result, estate planners need to rethink whether and when to use no contest clauses, how they draft no contest clauses, and whether and when to use alternatives to no contest clauses. They also will want to reconsider no contest clauses in existing estate plans that contain revocable trusts.
This article discusses how the new law restricts the planner's ability to use no contest clauses, advises planners how to use no contest clauses in light of the new restrictions, suggests alternatives to traditional no contest clauses, and provides forms for planners to consider and adapt.
The old law had an open-ended definition of "contest." It defined contest to mean any action identified in a no contest clause as a violation of the clause.3 The new law, on the other hand, limits the ability of courts to enforce a no contest clause to only three types of contests:
(1) A direct contest brought without probable cause.
(2) "A pleading to challenge a transfer of property on the grounds that it was not the transferor's property at the time of the transfer," but only "if the no contest clause expressly provides for that application."
(3) Filing a creditor's claim or prosecuting an action based on a creditor's claim, but only "if the no contest clause expressly provides for that application."4
For convenience, this article will refer to the two kinds of indirect contests as a "Property Contest" or a "Creditor's Contest."
The new law defines a "direct contest" as a pleading alleging the invalidity of a "protected instrument" on at least one of the following grounds:
(1) Forgery;
(2) Lack of due execution;
(3) Lack of capacity;
(4) Menace, duress, fraud, or undue influence;
(5) Revocation of a will, trust, or other instrument as provided by Probate Code sections 6120 or 15401 or by the instrument; and
(6) Disqualification of a beneficiary as an interested witness under Probate Code section 6112 or as a disqualified donee under Probate Code section 21350.5
The new law limits the definition of a "protected instrument" to either (1) the instrument containing the no contest clause, or (2) an instrument that both exists on the date the no contest clause is executed and that the no contest clause expressly identifies as being governed by the no contest clause, "either individually or as part of an identifiable class of instruments. . . ."6
The Legislature reformed the law governing no contest clauses in response to concerns that existing law governing no contest clauses was too complex and uncertain in its operation, resulted in an increased use of the declaratory relief procedure, and caused undue delay and expense in administering trusts and estates.7
The authors have reviewed many testamentary documents in which drafters have incorporated broad no contest clauses as boilerplate. These no contest clauses invariably apply to "any beneficiary" who takes "any action" that violates the no contest clause. Too frequently, planners use these clauses without any meaningful discussion with their clients about the no contest clause's potential consequences to the clients' loved ones. These same planners, on the other hand, often devote a great deal of attention to the conditions under which beneficiaries receive distributions. Surely, in advising clients about no contest clauses, estate planners should be as careful as they are in advising clients about the other conditions that qualify the beneficiaries' gifts.
No contest clauses are not appropriate in most estate plans. For example, absent other factors, if the client's estate plan leaves everything to the surviving spouse and, if the surviving spouse does not survive, in equal shares to their children, a no contest clause would not be appropriate. Nor is a no contest clause appropriate where the surviving spouse leaves the trust assets to surviving descendants by right of representation, absent other factors.
On the other hand, a no contest may be appropriate when the conflicts that exist during the client's life are likely to continue after
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the client's death. For example, a no contest clause may be appropriate if the client wants to make a substantial gift to a second spouse who is not the parent of the client's children, or if some children receive significantly less under the client's estate plan than other children, or if some beneficiaries have emotional, health or substance abuse problems.
The estate planner's job does not end when the planner determines that a no contest clause may be appropriate. As we show next, the planner's task is just beginning.
A no contest clause consists of three components:
(1) The identity of the persons whose gifts are subject to penalty or forfeiture;
(2) The type of action that triggers the no contest clause;
(3) The penalty that a trigger of the no contest clause causes.
A. To Which Beneficiaries Should the No Contest Clause Apply?
Political advisors know that they can manipulate poll results by how they frame their questions. Similarly, if an estate planner asks a client if he wants to discourage contests by causing a forfeiture for anyone who contests the instrument, the client is likely to answer "yes." But if the estate planner questions the client more closely, asking if the client wants to disinherit a particular loved one who brings a contest, the client is not as likely to say "yes."
Before drafting a no contest clause, the drafter should determine more than whether a no contest clause is appropriate and desired by the client. In order to draft an appropriately tailored no contest clause, the drafter must understand the client's specific wishes and concerns. This information will assist the drafter to determine the identity of the beneficiaries whom the client is willing to disinherit. For example, if the client wants a no contest clause because the client wants to protect a gift that provides more for one child than for another, it does not make sense to draft a no contest clause that could cause the favored child to forfeit her gift. The drafter should draft the no contest clause to apply only to the disfavored child.
On the other hand, the client may want to benefit the children of a second marriage more than the children of a first marriage. In that situation, even though the client may be especially concerned about a particular child of the first marriage, the client may want to consider applying the no contest clause to a class consisting of all the children of the first marriage, if any one of them brings a contest.8 Otherwise, the children of the first marriage may agree that one of them will contest the instrument and that, if a forfeiture occurs, the other children will compensate their sibling.
B. What Actions Should Trigger the No Contest Clause?
Although the new law limits the applicability of no contest clauses to just three types of identified contests, the drafter should not assume that the client wants the no contest clause in his or her instrument to apply to all three types of contests or even to all kinds of direct contests.
In particular, estate planners should be careful about drafting no contest clauses that cover the two types of indirect contests. Clients often make significant gifts or engage in other transactions with their loved ones after signing their estate plan and do so without consulting their estate planning attorneys. The client may sign the instrument containing the no contest clause many years before death, but the terms of that instrument will only be enforced as of the moment of the client's death.
1. No Availability of Declaratory Relief or Probable Cause Exception for Indirect Contests
Although the new law exempts a direct contest brought with probable cause from the reach of a no contest clause, the new law contains no such exception with regard to Property Contests or to Creditor's Contest. In addition, the new law contains no provision for a beneficiary to file an action for declaratory relief to determine whether a particular action will violate a no contest clause.
Because both Property Contests and Creditor's Contests may apply inflexibly to transactions that occur long after the client signed the estate plan, drafting a no contest clause that can be triggered by a Property Contest or a Creditor's Contest may lead to forfeitures that the client did not anticipate. The lack of either a probable cause exception or the declaratory relief procedure should cause estate planners to proceed cautiously when considering whether to include a Property Contests or Creditor's Contests as a trigger of a no contest clause. And if the client wants to include Property Contests or Creditor's Contests, the planner should carefully identify what actions will trigger the no contest clause, who the no contest clause will apply to, and what penalty the no contest clause will exact.
2. Avoid Unintended Consequences in Property Contests
The impetus for allowing no contest clauses to apply to Property Contests came from estate planners who use no contest clauses to create a so-called forced election, that is, to require a surviving spouse to choose between the gift under the will or trust, on the one hand, and litigation to enforce the surviving spouse's community property rights to property, on the other.9 But the Legislature did not limit Property Contests to community property claims, or to forced elections. Property Contests include a claim by any beneficiary that the asset...
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