What's Lurking in Your "No Contest Clause?"
No Contest Clauses: When Trying to Prevent a Lawsuit May Protect the Wrong Person
Many people include no contest clauses in their wills and trusts because they want to prevent family disputes after they are gone. The logic seems sound: if a beneficiary knows they could lose their inheritance by challenging the document, they will think twice before filing a lawsuit.
While that may sound appealing, no contest clauses can create unintended consequences. In some situations, they do not prevent litigation at all. In others, they may discourage beneficiaries from raising legitimate concerns about the conduct of the very people charged with administering the estate or trust.
In other words, a no contest clause may end up protecting a poorly performing fiduciary more than it protects the estate plan itself.
What Is a No Contest Clause?
A no contest clause, sometimes called an "in terrorem clause," is a provision stating that a beneficiary who contests a will or trust forfeits all or part of their inheritance.
Most people envision the clause preventing a disgruntled family member from claiming that a will is invalid. However, estate and trust disputes often involve much more than simply challenging the validity of the document.
Many disputes arise because beneficiaries believe the trustee or personal representative is not properly carrying out their duties.
The Fiduciary's Actions Matter
When someone dies, beneficiaries are often told to trust the process.
The trustee or personal representative gathers assets, pays debts, manages property, and eventually distributes the estate or trust according to the governing document.
Most fiduciaries perform these duties honestly and responsibly. Some do not.
Beneficiaries may encounter situations involving:
Failure to provide accountings.
Unexplained delays in administration.
Favoritism toward one beneficiary.
Improper distributions.
Excessive compensation.
Self-dealing transactions.
Failure to collect estate assets.
Improper investment decisions.
Sale of property below market value.
Use of trust or estate assets for personal benefit.
The law generally provides beneficiaries with tools to address these issues. Courts routinely oversee trustees and personal representatives because fiduciaries owe duties of loyalty, prudence, impartiality, and good faith.
A broadly written no contest clause can make beneficiaries afraid to exercise those rights.
The Helpless Effect
Imagine a beneficiary discovers that a trustee has been living in trust-owned real estate rent-free for years. Another beneficiary learns that estate funds were used to pay expenses that appear unrelated to the administration of the estate.
Ordinarily, those beneficiaries might request records, demand an accounting, or seek court intervention.
However, if the trust or will contains a broadly worded no contest clause, they may fear, and rightly so, that any objection could be characterized as a challenge to the document or the administration.
As a result, the beneficiary faces an impossible choice:
Remain silent and risk ongoing misconduct, or speak up and risk losing their inheritance.
That is not a position most parents intend to create when they sign a will or trust.
The Clause May Encourage Misconduct
One of the greatest dangers of an overly aggressive no contest clause is that it may unintentionally encourage misconduct from fiduciaries.
The purpose of probate courts and trust litigation is not merely to resolve family disagreements. It is also to ensure that fiduciaries comply with their legal obligations.
A trustee should not be free to ignore beneficiaries, withhold information, or engage in self-dealing simply because beneficiaries may trigger a forfeiture provision.
Likewise, a personal representative should not be insulated from court oversight because heirs are worried about losing their inheritance.
When beneficiaries demand answers, accountability suffers.
Good Fiduciaries Should Welcome Transparency
Interestingly, the fiduciaries who perform their duties properly often have the least need for a no contest clause.
A trustee who provides regular accountings, responds to beneficiary inquiries, and administers the trust according to its terms generally has little to fear from transparency.
Problems typically arise when communication breaks down or when decisions cannot withstand scrutiny.
A clause that discourages beneficiaries from seeking information can sometimes hide problems rather than prevent them.
Litigation Often Shifts to the Meaning of the Clause
Another unintended consequence is that the dispute may simply change form.
Instead of litigating whether the trustee breached a fiduciary duty, the parties begin litigating whether the beneficiary's actions violated the no contest clause.
Questions arise such as:
Is a petition for an accounting a contest?
Is a request to remove a trustee a contest?
Is an objection to fees a contest?
Is a discovery of assets action a contest?
Is a demand for trust records a contest?
The focus shifts away from whether the fiduciary acted properly and toward whether the beneficiary is allowed to ask the question in the first place.
That result rarely reduces costs or family conflict.
The Better Approach
If the goal is to reduce litigation, transparency is often more effective than threats.
Clear trust provisions, regular accountings, independent fiduciaries, and thorough documentation frequently prevent disputes before they begin.
Beneficiaries who understand what is happening are generally less likely to assume wrongdoing. Likewise, fiduciaries who know their actions may be reviewed are more likely to follow best practices.
No contest clauses may have a place in certain estate plans, but they should be drafted carefully and with a clear understanding of how they may affect beneficiary oversight rights.
Final Thoughts
Most people create wills and trusts to protect their loved ones and ensure their wishes are carried out. Few intend to create a situation where beneficiaries are afraid to question misconduct by a trustee or personal representative.
Before including a no contest clause, it is important to consider not only how it may discourage frivolous lawsuits, but also how it may discourage legitimate efforts to hold fiduciaries accountable. Sometimes the greatest risk is not the beneficiary who asks too many questions. It is the fiduciary who hopes nobody asks any at all.
Disclaimer: This article is for informational purposes only and does not constitute legal advice. The enforceability and scope of no contest clauses vary by state and by the language used in the governing document. Consult an attorney regarding your specific circumstances.