As people grow older, they frequently consider how and to whom they will leave their assets, assuming they are fortunate enough to have any assets to pass on. Wills commonly provide for distribution after death and require the involvement of a court. A trust can also provide for distribution after death, but generally creates an entity into which all or a portion of a person's assets may be transferred prior to death. A funded trust (i.e., a trust into which the decedent's assets were properly transferred prior to death) may not require any court action for distribution after death of the trustor.
Will and Trust Contests
Wills and trusts may, however, be challenged or "contested," usually by those who received nothing under the terms of the document or less than they anticipated and wanted. The law governing wills and trusts, and thus contests, varies from state to state. There are, however, a number of grounds upon which wills or trusts are commonly contested, including:
- The instrument lacked required formalities, for example there was improper execution or no execution at all.
- The person executing the document was not mentally competent at the time.
- Another person or persons exerted undue influence, so the trust or will does not really reflect the intent of the person executing it.
- The will was a product of mistake, fraud, and/or duress.
"No-Contest" Clauses
One common way to avert or discourage contests is the inclusion of a "no-contest" or "in terrorem" clause in the will or trust instrument. Such clauses can be long and complicated or short and simple, but their intent and function is to penalize anyone who takes action to contest or attack the will or trust or some portion of it. Commonly, the contesting beneficiary is then treated as though he had predeceased the decedent, i.e., loses any inheritance. Some estate planning practitioners suggest that the trust or will should provide a bequest or gift to a potential contestant, in an amount substantial enough that the individual will not risk contesting the document for fear of invoking the no-contest clause. An individual who receives nothing has little incentive not to contest the will or trust.
Enforcement of No-Contest Clauses
Whether and to what extent a no-contest clause can be enforced, i.e., the contestant can be effectively deprived of a bequest to which he would otherwise be entitled, depends largely on applicable state law. A successful contest may eliminate the challenged will or trust (along with the no-contest clause). If unsuccessful or only partially successful (eliminating only portions of the instrument), the no-contest clause may remain effective. However, there are states in which the law may save the contestant from forfeiture.
Bars to Enforcement of No-Contest Clauses
A Uniform Probate Code was unveiled in 1969 (Uniform Code). Approximately one third of the states have adopted a version of the Code (it has been amended several times), sometimes with modifications. Portions of the Uniform Code are similar to or the same as provisions included in the laws of other states. The Uniform Code provision regarding no-contest clauses states that a "provision of a will purporting to penalize an interested person for contesting the will or instituting other proceedings related to the estate is void," if there is "probable cause" for the action.
New Jersey has not adopted the Uniform Code, yet its law contains substantially the same provision regarding no-contest clauses. Florida has adopted the Uniform Code, but modified it to make no-contest clauses "unenforceable," whether or not there is "probable cause" for the contest. In some states, no-contest clauses may be enforced, but are not favored and can be read narrowly by courts to avoid forfeiture. For example, no-contest clauses are generally upheld in Texas, but are strictly construed to avoid forfeiture (the loss of property or privilege due to breaking a law).
Other State Law
Under California law, no-contest clauses are enforceable, unless the contest is based on alleged forgery, revocation, or an action to invalidate certain transfers. California law also lists actions that cannot constitute a contest as a matter of public policy and other actions that are not deemed a contest unless specifically identified in the will or trust instrument as violations of the no-contest clause.
California law also allows one contemplating an action against a trust or estate to first petition the court for a determination of whether the proposed action would constitute a contest under the no-contest clause. The would-be contestant can thus determine if bringing such an action will result in the loss of a bequest or gift, and evaluate risks and potential rewards of pursuing such an action.
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