Why Repealing the No Contest Clause Is a Good Idea

• Publication year: 2004
• Author: By John A. Hartog, Neil F. Horton, Shirley L. Kovar

WHY REPEALING THE NO CONTEST CLAUSE IS A GOOD IDEA

By John A. Hartog^*, Neil F. Horton^**, Shirley L. Kovar^***

I. INTRODUCTION

California is unique among the fifty states in the volume of its no contest clause litigation. Its law also is unique in that it both enforces no contest clauses and allows some would-be contestants to bring actions for declaratory relief to determine whether their proposed actions would violate no contest clauses.

The majority of states either do not enforce no contest clauses, or enforce such clauses only when the contestant lacks probable cause for the challenge to the instrument. These states usually allow the court either to make a determination after and not before the contest.

Practitioners from other states are simply astonished at the volume of no contest litigation in California and the uncertainty as to the reach of the clause in any particular instrument. Ironically, the public policies that purport to justify enforcing no contest clauses are to deter litigation and to give effect to the testator's purposes.¹ These policies are not served under the present state of California law.

Recognizing this failure, the California legislature recently has tried to "reform" the enforcement of no contest clauses. Probate Code §§ 21305, 21306, and 21307 codify an increasing number of exceptions to the general enforceability of no contest clauses. As we show below, however, this effort will not reduce the flood of no contest litigation.

There is a better way. Stop enforcing no contest clauses and thereby end all declaratory relief litigation. Use fee-shifting in both the proposed statute and in the client's estate plan to discourage litigation and to carry out the client's wishes.

This article advocates the rationale for the legislative proposal advanced by the Trusts and Estates Section Executive Committee of the California State Bar. It critiques the case law that brought us to the present mess. It describes the resulting uncertainty that present law causes in determining when a contest occurs. It also explains the inability of declaratory relief proceedings to reduce litigation or to carry out a client's wishes efficiently. This article next shows why the recent limitations on using in terrorem clauses under Probate Code §§ 21305(a) and (b) will not staunch the flow of litigation.

The article concludes by arguing that the proposed statute and more thoughtful planning with conditional gifts will allow testators to have their intent accomplished with less litigation than under the current statute. Fee-shifting and new estate planning tools will fulfill the public policies of deterring litigation and carrying out the testator's intent more effectively than continuing to enforce no contest clauses.

II. THE SUPREME COURT GOT IT WRONG

Before 1994, no contest clause litigation in California was occasional, with generally predictable results. The decision of Burch v. George² changed that equilibrium dramatically.

Frank Burch was a successful car dealer from Oxnard. He married Marlene, his fifth wife, in 1985. In 1988, he consulted an attorney about estate planning and subsequently executed a revocable trust estate plan. Frank funded the trust with various assets, including stock in his automobile dealership. He also made the revocable trust the beneficiary of his interest in the dealership's qualified pension plan.

Frank died in 1989, survived by Marlene and other relatives. At his death, the value of Frank's assets exceeded $7 million. Marlene received $800,000 in joint tenancy property and was the designated beneficiary of $200,000 in life insurance benefits. In addition, the provisions of the revocable trust entitled her to receive outright a Mercedes-Benz automobile, a 53-foot yacht, a $1 million beach house still under construction, life insurance proceeds of $60,000, and an income interest in a QTIP trust that paid her approximately $6,000 per month.

The trust instrument contained a typical no contest clause:³

In the event that any beneficiary under this Trust ... seeks to obtain in any proceeding in any court an adjudication that this Trust or any of its provisions ... is void, or seeks otherwise to void, nullify, or set aside this Trust or any of its provisions, then the right of that person to take any interest given to him or her by this Trust shall be determined as it would have been determined had such person predeceased the execution of this trust instrument without issue.

After Frank's death, Marlene claimed entitlement to all death benefits payable under the pension plan. She also claimed community property interests in qualified plan assets titled in the name of the trust. To avoid violating the no contest clause, Marlene filed a petition under former Prob. Code § 21305 [now Probate Code § 21320], seeking an advance determination that her proposed assertion of her claimed rights in the qualified plan and trust assets would not be deemed a contest of the trust. The trial court ruled against Marlene, finding that each of the proposed actions would violate the no contest clause. The Court of Appeal affirmed, and further rejected her argument that that the application of California's no contest law would improperly interfere with Marlene's rights under federal ERISA law.

The California Supreme Court affirmed. Looking first to the trust's terms, the Court found it "reasonably clear" from its recitals that the property transferred to it was, and was to remain, his separate property, that Frank intended all property transferred to it to be subject to the trust's distribution plan, and that he intended to put his widow to an election between taking under the trust's distribution plan "or, alternatively, renouncing that distribution and taking ... pursuant to her independent legal rights."⁴ The Court next looked to the extrinsic evidence to confirm its interpretation of the

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trust. The most telling evidence that the Court recited was that of the attorney who "implemented Frank's estate plan." His declaration stated that Frank anticipated that his widow would assert claims against the trust and that by providing generously for her, he hoped to "preclude claims by her upon his estate."⁵ Despite the legislative command to construe strictly no contest clauses,⁶ the Court reasoned that, by claiming a right in conflict with Frank's "separate property" declaration, Marlene's proposed actions would "thwart" Frank's intent⁷ and thus be a contest of the instrument.

The result of Burch was to invite the Courts of Appeal to explore the limits of the enforceability of in terrorem clauses, and that is precisely what they did. A no contest clause in a revocable trust was invoked when a surviving spouse sought to litigate the purchase price of a stock redemption plan because it was part of an "integrated estate plan."⁸ The children of a decedent's first marriage who sought to show that her separate property had been erroneously listed on the community property schedule forfeited their bequests because their request fell afoul of the no contest clause.⁹ In contrast, a no contest clause that explicitly attempted to prevent petitions to remove the trustee was against public policy, unless, of course, the actual removal petition was itself frivolous.¹⁰

The effect of Burch and its progeny has been to destroy certainty as to the meaning of any particular no contest clause. The law of unintended consequences has resulted in a current reality diametrically opposed to the original intent of the in terrorem clause and the statutes enacted to enforce it. Ironically, in order to regain the original statutory purpose the present regime must be repealed.

III. ENDING FORFEITURE ENFORCEMENT WILL END THE FLOOD OF DECLARATORY RELIEF LITIGATION

A. Allowing Declaratory Relief Increases Litigation.

Proponents of the no contest clause (and therefore opponents of repeal) assert that such clauses deter litigation. But the present proliferation of declaratory relief petitions belies that assertion. When first enacted in 1990, the declaratory relief provisions of Probate Code § 21320 were viewed as a welcome reform. Parties could now learn in advance whether their proposed legal action would result in forfeiture of their gift. The liberal construction of no contest clauses that prevails after Burch v. George has vitiated this benefit. A failing of the declaratory relief petition procedure is that it now focuses litigation on the decedent's intent in signing the no contest clause instead of on the underlying grievance.

When does a proposed petition violate a no contest clause? The theory of the statute is that after obtaining an order on the proposed action, the prospective petitioner will know the consequences of filing her proposed action. If the proposed action would be a contest, she presumably will not file it. If the proposed action would not be a contest, she can file it with the assurance of knowing that even if she loses on the causes of action alleged in the proposed action, she would not lose her bequest in the instrument containing the no contest clause. In short, the declaratory relief procedure was intended to avoid inadvertent forfeitures.

Unfortunately, the case law and the availability of declaratory relief have served to increase a beneficiary's expense and to delay conflict resolution. Because those opposing the beneficiary may use extrinsic evidence to show the testator's intent, the beneficiary cannot rely solely on the language contained within the no contest clause. The uncertainty over what constitutes a "contest" under any particular in terrorem clause compels beneficiaries under instruments containing in terrorem clauses to file petitions as a matter of course, even when the proposed action would have seemed innocuous before Burch v. George. Increasing the costs of litigation and delaying its resolution serves no valid public policy.

Prudent practitioners now routinely file petitions for declaratory relief under...