Posts Tagged ‘no-contest clause’

Challenge to Will Leads to Further Problems for Stepson

OCTOBER 24, 2016 VOLUME 23 NUMBER 40
We often tell clients that they should think twice (or perhaps thrice) before challenging a will. It is difficult to prevail in a will contest, but there are also other problems. The will in question might have a provision that completely disinherits anyone challenging their reduced share. There may also be other repercussions, as evidenced by a story we read recently arising from a Wisconsin court case.

Bruce and Jenny (as we usually do, we’ve changed their names) married later in life, but lived together for over thirty years before Bruce’s death. Bruce had five children from his first marriage; Jenny was childless. They had identical wills, written about a decade after they married. Each left their entire estate to the other, and on the second death everything would go to Bruce’s son Larry.

Their wills also contained a routine provision, requiring the surviving spouse to live at least four months after the first spouse’s death; if the survivor did not live that long, they would be treated as having predeceased the first spouse. Why include such a provision? To avoid having to conduct two probate proceedings (or, for that matter, figure out who died first) if both spouses died in a common accident or close in time.

In March of 2014, Bruce died. Jenny filed a probate proceeding and submitted Bruce’s will to the court. Because she filed just two months after Bruce’s death, Larry objected. He argued that she had no authority to take over Bruce’s estate because she had failed to survive him by four months.

Jenny apparently became angry, and revoked her own will. The later evidence was uncontroverted; she personally took her original will and destroyed it, intending to revoke it and to make sure that Larry did not receive any share of her estate.

After consulting with her attorney, Jenny signed a new will (and trust) a few months later (well after she had reached the four-month survivorship requirement). She left her entire estate to her late husband’s grandson — bypassing Larry altogether. She died less than a month after signing the new documents.

Larry contested her new will and trust, arguing that she had been subjected to undue influence in preparing her new documents. The probate court dismissed his complaint, finding that the revocation of her first will was not the product of undue influence. Larry appealed.

The Wisconsin Court of Appeals affirmed the probate court finding, expanding somewhat on the effect of Larry’s first will contest. It was clear, ruled the appellate court, that Jenny was angry with Larry, and that no one influenced her in her decision to revoke the earlier will. Once she destroyed it, she was intestate — that is, she had no will at all — and since Larry was not her child, he would have no right to any share of her estate.

Why would that make a difference? Because if she had no will prior to signing the new documents, Larry had no standing to even challenge those documents. According to the appellate court, his objection to probate of her later will (and trust) would have to be dismissed. Estate of Born, October 6, 2016.

What might Larry have done differently? It seems easy to suggest that the original objection in his father’s estate was probably ill-advised — if his step-mother had actually died in the two months after he raised his objection, he could probably have still made his legal point. In the meantime, he clearly offended her to the point that she changed her estate plan.

This is a balance that potential contestants need to consider in most, if not all, legal proceedings. There are legal victories (and losses) and there are practical losses (and victories). A good lawyer will earnestly discuss the trade-offs with clients and potential clients. Will contests are rare — and they are also expensive, and they often lead to unintended consequences.

The Difference Between an Heir and a Beneficiary

APRIL 18, 2016 VOLUME 23 NUMBER 15

Your estate is simple, your family relationships clear, your intentions easy to understand. Why can’t you just write your own will, and save the legal fees?

Because of Esther Hill, that’s why. Actually, that’s not her real name — we change the names of most of the people we write about, because we don’t particularly want later internet searches for their name to turn up our articles high on the list. But her story doesn’t depend on her name.

Esther had two children — a daughter Leslie and a son Leonard. Leslie and her mother were very close — they visited regularly, went on shopping excursions together, and had a strong relationship. Leslie had two daughters, and they visited their grandmother regularly.

Leonard was not married, and lived with his mother in her home in Saratoga, California. She helped support him, and she tried to involve him in family events — but he chose not to participate.

Leslie became sick and died in 1991, and Esther was devastated. Just three weeks after Leslie’s death, Esther hand-wrote her own will. She wrote (with name changes in order to keep our intended level of anonymity):

I, Esther Hill, aka as E. Hill; declare this will, is my only and last testament.

I, name my son, Leonard Hill, as sole heir and executor to manage estate affairs.

In the event of any challenges to said estate, I hereby authorize said Executor to dispense the amount of $1.00, one dollar, to any claimant.

I am confident that my son, as Executor, will also subscribe to my wishes, along lines that were discussed previously and privately in the past. A simple cremation, without ceremony is the wish of Esther Hill.

It turned out that Esther’s estate was worth a little more than $10 million. Leonard filed the will with the California probate courts, and got himself appointed as executor of her estate. He didn’t rush to wrap up her estate, though — three years after her death, he hired a woman to come to the home and help him organize and purge old business files. Two years later, he and the woman who helped him became romantically involved, and ten years later they were married. Still, though, the estate was not closed.

Leonard himself died in 2009, but without having closed his mother’s estate (or making distribution of the remaining assets, after payment of considerable estate taxes). His widow asked the probate court to appoint her to finish up the estate administration, and to determine who should receive Esther’s assets.

Can you see the problem? It’s in the language of that handwritten will, in which Esther names Leonard as her “sole heir.” The difficulty: “heir” has a specific meaning under probate law, and Leonard wasn’t her sole heir.

An heir is a person who would be entitled to a share of the decedent’s estate if the decedent died without issue, and under California law that would mean Leonard and his two nieces. If Esther had not left a will, half of her estate would go to Leonard, and one-quarter each to the two nieces. (Arizona law would be the same, as would the law of most — if not all — other American jurisdictions.)

Did Esther mean to name Leonard as her sole “beneficiary”? Or, perhaps, “devisee”? That last is the word lawyers and judges use to identify a person named as a beneficiary in a will. If she had written that she named Leonard as “sole beneficiary” or “sole devisee,” then he would have been clearly entitled to her entire estate, and his widow would receive Esther’s assets through his estate.

Esther’s granddaughters (Leonard’s nieces) objected. They argued that Esther was simply identifying Leonard as her sole surviving child, and that they should be entitled to one-half of her estate (they acknowledged that Leonard’s widow would receive the other half).

In the contested probate proceeding, various witnesses testified about Esther’s relationships with Leonard, Leslie and the two granddaughters. Some witnesses observed that Esther (and, for that matter, Leonard) talked to the granddaughters from time to time as if they would eventually inherit the property, and others testified that Esther sometimes didn’t seem to approve of her granddaughters. Because the probate court decided that the use of the word “heir” was ambiguous, it considered all that evidence — and ruled that Esther had meant to leave half of her estate to be divided between her granddaughters.

The California Court of Appeals disagreed. It ruled that the word “heir” as used by Esther was unambiguous — she clearly meant “beneficiary.” That was true, according to the appellate judges, because it would make no sense for Esther to write, in effect, that “I name Lester, my son, as my only son”. Furthermore, the final sentence (in which she indicates that she trusts Lester to carry out her wishes) does not change the result, and does not create what the Court of Appeals calls a “secret” trust for the benefit of family members.

What about the effect of Esther’s attempt to create an in terrorem or no-contest provision? If, for example, the will was construed as disinheriting the granddaughters, would they be entitled to receive $1.00 just because they objected? The Court of Appeals acknowledges that Esther’s attempt at creating a no-contest provision was clumsy, but it does not indicate that she intended to give a larger share of her estate to her granddaughters.

One of the three appellate judges disagreed with the other two. In that judge’s mind, the probate court had gotten it right — and the ruling in favor of the granddaughters should be upheld. That judge was outvoted by the other two, however. Estate of Hinz, March 22, 2016.

“No-Contest” Clause in Trust Can Be As Effective As Will Provision

JANUARY 19, 2015 VOLUME 22 NUMBER 3

When we prepare wills and/or trusts for our clients, they often ask if they should include a “no-contest” provision. Typically, they want us to add language that would penalize anyone who challenges the validity of their estate planning documents.

Are such provisions effective, or even permitted? We explain to our clients that no-contest clauses can be effective — but they presume that the possible contestant has something to lose. There is no point in writing a will or trust that says something like “I hereby leave nothing to my son Barry, and if he contests this he will be disinherited.”

That aside, no-contest provisions can be a way of avoiding legal complications among beneficiaries and the person in charge of handling an estate. We have written before about the difficulty in interpreting and applying such provisions, but there is no doubt that there are circumstances in which such a clause (also sometimes called an “in terrorem” provision) can be beneficial.

A no-contest provision can sometimes be worded more broadly, and become a much more powerful, if blunt, instrument. Take, for instance, the circumstances behind a recent Arizona Court of Appeals decision.

Details of the family relationships are sketchy in the reported court decision, but they involve a 1994 trust, apparently signed by Terry Simmons (not her real name) and her then-living husband, that included this language:

“If any beneficiary under this Trust, in any manner, directly or indirectly, contests or attacks the validity of … this Trust or any disposition … by filing suit against … Trustee … then any share or interest given to that beneficiary under the provisions of this Trust is hereby revoked and shall be disposed of in the same manner as if that contesting beneficiary and all descendants of that beneficiary had predeceased the Surviving Settlor.”

Fifteen years later, two of the remainder beneficiaries did file suit against Terry, who was serving as the trustee of the trust. They alleged that she had violated her fiduciary duty in a number of ways. The court ultimately distilled their objections down to nine different challenges to Terry’s administration of the trust.

Terry responded, and litigation ensued. The probate judge denied all of the objections to the administration of the trust. That left one question: had the remainder beneficiaries been disinherited by their trust contest?

Arizona has a statute governing the validity of no-contest provisions in wills, but there is no statute expressly covering similar provisions in trusts. The statute governing wills says that a no-contest provision is “unenforceable if probable cause exists” for the contestant to have filed their action. In other words, if the case had involved a will rather than a trust, the test would have been whether the contesting beneficiaries had “probable cause” to file their objections.

The probate judge applied the same standard to determine the validity of the no-contest provision in Terry’s trust. The judge found that, though the contestants were not successful, they had at least probable cause to file their contest and therefore would not be disinherited.

The Court of Appeals agreed that the same standard should apply (though they got there by a slightly different route), but disagreed on the outcome. Because the beneficiaries had made nine different complaints about the trust’s administration, ruled the appellate court, they had to have probable cause for every one of the nine challenges. It was as if, the appellate judges reasoned, the beneficiaries had filed nine separate lawsuits; each one would have to have been based on probable cause, and the mere fact that they combined all nine into a single complaint made no difference.

With that different reading of the requirement, the appellate court reversed the holding of the probate judge and ordered that the beneficiaries had been disinherited by their filing. One of the complaints they made had insisted that Terry, though she was entitled to the annual income of the trust, should have distributed it to herself only once per year, and not on a monthly basis. That was simply not the law and not required by the trust document, said the appellate court; because there was no basis for that single allegation, the no-contest provision was triggered. The court did not even have to review the other eight allegations to determine whether there was any basis for filing a contest. In Re Shaheen Trust, January 16, 2015.

What does Terry’s trust tell us about writing trusts, administering them or challenging the administration? Several things, at a minimum:

  1. In Arizona, at least, no-contest provisions are as effective in trusts as they are in wills, and clients may want to consider including them — especially in contentious families, second marriages, or other cases where everyone might not be (or stay) on the same page about what should happen.
  2. People who genuinely think that they should file a challenge need to be very cautious, and first look for any no-contest provision. If there is such a provision, any contest should start small, with only the most flagrant misbehavior included — rather than a scatter-shot challenge to a variety of actions.
  3. It may also be appropriate to include alternative dispute resolution provisions in one’s will or trust — mandating, for example, that contestants first submit to arbitration, or perhaps mediation, before filing formal challenges. This might help reduce the cost and the antagonism that occasionally appears in inheritance contests.
  4. If one beneficiary is intended to be given more latitude than others (if, for example, a surviving spouse is to be given more deference than the children — or the reverse), the trust ought to say so, and make clear that the trustee is to favor that beneficiary, and include provisions giving the other beneficiaries only those powers to inquire or object that the trust settlor wants to give them. That would help the legal system analyze the purpose and meaning of no-contest provisions if and when contests do arise.
  5. Another idea we have written about before, the concept of a “trust protector“, might be a way to allow the trust to be modified to deal with changing circumstances — like deteriorating relationships among the beneficiaries and trustees.

“In Terrorem” Provision Does Not Violate Public Policy

OCTOBER 1, 2012 VOLUME 19 NUMBER 36
From time to time we have written about what lawyers usually call “in terrorem” provisions in wills and trusts. They are perhaps better known as “no-contest” clauses, and they are intended to prevent will (or trust) contests after the death of the signer. Typically, they say something like: “if anyone contests this will, he or she will be treated as having predeceased me.” In other words, if your father’s will leaves you half as much as your brother receives, and you file a court petition saying you think he was incompetent when he signed that will, you will get nothing at all. It can be a strong incentive not to challenge the will.

A recent Arizona Court of Appeals decision raised a new wrinkle on challenges to in terrorem provisions. Partly, that is because the actual provision was so much broader than the short and simple language we spell out above.

Thomas J. Stewart’s will and trust disinherited one of his adult children. It also contained a detailed in terrorem provision. That provision said that if anyone challenged his will or trust in any of a number of listed ways, they would be treated as having died before him — in other words, they would be disinherited. It also penalized anyone who “cooperates or aids in any action described in the preceding provisions of this paragraph with any other person, regardless of whether that person is himself or herself subject to this article.”

The disinherited son filed a contest of both the will and trust. Why would he do that in face of the in terrorem provision? Because he had nothing to lose — he had already been disinherited. But his challenge to the provisions of the two documents was a little different. He argued that they penalized any other family member who might tell him that they thought his father was incapacitated or subject to undue influence. That would be the case even if they genuinely thought Mr. Stewart’s will or trust was questionable.

The probate court agreed with the disinherited son’s argument, and ruled that the broad in terrorem provision violated Arizona’s public policy in favor of court review when there is a question of improper procurement of a will or trust. Consequently, the trial judge invalidated Mr. Stewart’s in terrorem provision.

The disinherited son later settled his claim with the estate (the terms are not described in the Court’s opinion), and an order was presented to the probate judge for signing. Since it was no longer relevant to the determination, the estate’s personal representative and trustee argued that the judge should strike the language invalidating thein terrorem provisions. The probate judge declined, and the estate appealed.

The Arizona Court of Appeals ruled that the probate court was wrong to invalidate the provision in the first place. Yes, there is a public policy consideration in favor of reasonable access to the legal system, said the appellate court. But there is also a public policy in favor of discouraging will or trust contests, and avoiding waste of estate resources on contested proceedings. The key, said the appellate court, is that Arizona’s in terrorem statute already invalidates such provisions if the contestant has probable cause to initiate the proceeding. Matter of Estate of Stewart, September 27, 2012.

But what does that mean in the real world of will and trust contests? Are Mr. Stewart’s other heirs at risk of losing their inheritance if they talk to the disinherited son? Wouldn’t it be too ironic if he settled his claim (and got some share of his potential inheritance returned) and then a brother, sister or other heir lost their share because they had sympathized with him? Would the mere fact that the estate settled with the disinherited son provide enough “probable cause” to deter any attempted disinheritance of a cooperating heir? These are all questions left unanswered by the appellate court’s decision.

On the other side of the coin, suppose you want to sign a bullet-proof will or trust (that is, one that simply will not be challenged — regardless of the circumstances). Does Mr. Stewart’s example provide any guidance on how to do that? Perhaps, but we might make a few observations:

  1. Obviously, the in terrorem clauses in his will and trust were not completely effective. We don’t know how much his son received, but he was not completely disinherited.
  2. Mr. Stewart did not follow one common tactic: leave a lesser share to the disfavored child and couple that with an in terrorem provision. In other words, leave that son, say, $10,000, or half the share he would otherwise get, or some other amount — and provide that he will lose that if he challenges the documents. Maybe that would have deterred the contesting son in this case, but if the estate was large it might not have worked any better. Perhaps the settlement amount he actually received turned out to be less than such an arrangement might provided.
  3. If you want to really discourage any family member’s involvement in a contest, the broad language in Mr. Stewart’s will and trust might be a model. If you want to encourage family harmony among those who will receive a share of your estate, it might not be — the result in this case now potentially pits the heirs who do inherit money against the estate (if they gave any comfort to the disinherited son, that is).
  4. The fact that this case — with very strong language and careful planning — resulted in a contested probate proceeding and an appellate court opinion indicates that it can be pretty difficult to prevent contests in every circumstance.

Should There Be An In Terrorem Clause in Your Will or Trust?

AUGUST 3, 2009  VOLUME 16, NUMBER 49

You would like to make sure that your children get along after you are no longer around to tell them to behave, wouldn’t you? Although you may not anticipate any disagreements, you know that money can change relationships, and you have seen how the death of a parent can interfere with sibling relationships. Perhaps you have considered including a “no-contest” provision in your will or trust, and you wonder: Would that help maintain family harmony?

The name lawyers usually apply to such no-contest provisions is revealing. We call them “in terrorem” clauses — meaning that they are intended to terrorize anyone who would otherwise receive a share of the estate from filing any contests. But do they actually work? They can, but they seldom do. Why not?

The primary reason is simple. Say your plan is to leave everything to your three children, in equal shares. Since that is exactly what would happen if you had no will (or trust — in terrorem provisions can be used in trusts, too), there is no incentive for any of them to contest your estate plan anyway. No one else would receive anything even if your documents were successfully challenged, so there is simply no need to include a no-contest clause.

Maybe your plan is different. Say one of your children has already received a significant share of your property, or you disapprove of his or her life choices. You want to disinherit that child, and you want to make sure he or she does not contest your plan. In this situation the in terrorem provision is not going to make much difference — since the disinherited child receives nothing anyway, providing that they will be disinherited if they contest the documents is not much of a deterrent.

All right. Let’s say you really want to make the point. You agree to leave a small share of your estate — perhaps a few thousand dollars — to the disfavored child, and then include an in terrorem provision. Will this work?

It might. Obviously, the beneficiary who is slated to receive something but who will lose it for contesting will have to think twice about filing any objections. You should know, however, that Arizona law (like the law of a number of other states) limits the effectiveness of the provision. If your disgruntled heir has “probable cause” to file an objection — even if he or she is ultimately unsuccessful — the in terrorem provision will not be enforced. (For one illustration of how this might work, consider the 2000 Arizona Supreme Court case of Matter of Shumway, which we described in an “Editor’s Note” to our 1999 article on the Court of Appeals decision in the same case.)

We do not include many no-contest clauses in wills and trusts we draft for our clients. They probably do no harm, except that they would leave our clients with a false sense that they had protected against family conflicts. If conflict avoidance is important to you, we need to come up with a better plan — like including a requirement that any contest be submitted to arbitration or mediation. We can discuss specific ideas for your particular situation.

Will Prepared By Bookkeeper Valid–Contestants Disinherited

SEPTEMBER 20, 1999 VOLUME 7, NUMBER 12

Six days before he died, Arizonan Ralph Shumway signed a new will. Rather than consult a lawyer to prepare the will, Mr. Shumway had relied on his bookkeeper, Adelida Vega Rodriguez, to prepare the document for him. Because the will she prepared left one fourth of Mr. Shumway’s estate to Ms. Rodriguez, two of his daughters challenged its validity.

Ms. Rodriguez had used computer software to prepare Mr. Shumway’s will for him. As she testified at trial, the program did not allow her to edit his will or make any changes; she answered questions on the computer and the final product was automatically produced. Furthermore, she said, she simply read the questions to Mr. Shumway (who was blind) and he provided the answers.

The will Mr. Shumway signed was actually Ms. Rodriguez’ second effort on his behalf. The first version of his will left one-quarter of his estate to be divided among his daughters, and one-quarter each to Ms. Rodriguez and two of Mr. Shumway’s brothers. When he reviewed that draft, Mr. Shumway decided one of his brothers should receive only a token amount instead—this change was later taken as evidence that Mr. Shumway was making his own decisions and not unduly influenced by Ms. Rodriguez. His final will left a few small bequests to individuals, and divided the remainder half to his daughters and one-quarter each to his brother Newell and to Ms. Rodriguez.

Mr. Shumway’s will also included an in terrorem clause—a provision that called for the disinheritance of any beneficiary who challenged the validity of the will. When two of Mr. Shumway’s daughters objected to the will’s provisions in favor of Ms. Rodriguez, she responded by arguing that their legal challenge caused them to lose their interest in the estate.

Mr. Shumway’s daughters made two attacks on their father’s last will. They first argued that Ms. Rodriguez had unduly influenced their father, and that the provision leaving her one quarter of the estate was invalid. Then they argued that by preparing the will she was practicing law without a license, and that she should be prevented from seeking admission of the will to probate. They noted that under Arizona law a lawyer who prepared a will for a non-relative leaving one-quarter of the estate to himself or herself would be subject to disciplinary proceedings, and the bequest to the lawyer would be set aside.

Arizona law holds that a will (or deed, or gift) is presumptively invalid if it was procured through the efforts of one who shares a “confidential relationship” with the person making the transfer. Both parties agreed that Ms. Rodriguez, because she handled Mr. Shumway’s finances and worked closely with him for an extended period of time, held such a confidential relationship. They disagreed about whether she had overcome the presumption that the will was invalid.

The Arizona Court of Appeals agreed with Ms. Rodriguez that she had shown, clearly and convincingly, that the will represented Mr. Shumway’s own wishes. They pointed out that he had made changes to the first draft she prepared, and that Mr. Shumway had a reputation as a strong-willed, opinionated man even during his final illness, and that he had not been close to his children.

The claim that Ms. Rodriguez was practicing law when she prepared the will was also easily disposed of. The court noted that she had not given Mr. Shumway any legal advice, and had really only answered questions posed by the software program she used to prepare his will. To hold that the will was invalid simply because a non-lawyer was involved, noted the court, would invalidate thousands of wills unnecessarily.

The last question was whether the provision of Mr. Shumway’s will which penalized his daughters for filing the will contest should be enforced. The court held that an in terrorem clause can be valid in Arizona, at least where the contestant did not have probable cause to file litigation. In this case, ruled the judges, Mr. Shumway’s daughters should have known that the contest would fail, and should not have filed it. Mr. Shumway’s daughters inherited nothing from his estate. Estate of Shumway, September 7, 1999.

[Editor’s note: Almost exactly a year after this article was written, the Arizona Supreme Court reversed the Court of Appeals decision with regard to the effect of the in terrorem provision. In Matter of Shumway, September 15, 2000, the state’s high court considered Arizona law on the subject and held that there was at least probable cause for the filing of a contest of Mr. Shumway’s will. Since probable cause existed, the daughters’ shares under his new will should not have been forfeited. The Supreme Court vacated the Court of Appeals decision, or at least that portion of it which applied the in terrorem provision.]

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