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George F. Bearup, J.D. Senior Legal Trust Advisor

19-Sep-19

The Outer Limit of an In Terrorem Clause

Take-Away: An in terrorem or no-contest clause is enforceable in Michigan, unless the challenger to the Will or trust has probable cause to initiate the challenge. Much less clear is the enforceability of a no-contest clause’s expansive scope that seeks to prevent any challenges by a beneficiary to the actions or decisions made by the trustee of a trust.

Background: An in terrorem or no-contest clause is normally used to prevent a challenge by a beneficiary to the validity of a Will or trust. Each state has its own rules with regard to the enforceability of a no-contest clause. On one end of the spectrum are Florida and Indiana, which have laws that simply state that no-contest clauses are void. Other state laws on the other end of the spectrum, like Georgia, Massachusetts, Wyoming, and Missouri, simply look to the language used in the no-contest clause to determine if the legal action that is filed activates the no-contest’s forfeiture of a beneficiary’s interest. Michigan, along with 10 other states, provides that a no-contest clause is enforceable, unless the contestant possesses probable cause to support their challenge.

  • Wills: MCL 700.2518 provides: A provision in a will purporting to penalize an interested person for contesting the will or instituting other proceedings relating to the estate is unenforceable if probable cause exists for instituting proceedings. MCL 700.3905 also provides: In accordance with section 2518, a provision in a will purporting to penalize an interested person for contesting the will or instituting another proceeding relating to the estate shall not be given effect if probable cause exists for instituting a proceeding contesting the will or another proceeding relating to the estate.
  • Trusts: MCL 700.7113 provides: A provision in a trust that purports to penalize an interested person for contesting the trust or instituting another proceeding relating to the trust shall not be given effect if probable cause exists for instituting a proceeding contesting the trust or another proceeding relating to the trust. This limitation on no-contest clauses is not a default provision of the Michigan Trust Code that can be avoided in how the trust instrument is drafted. This no-contest provision is one of the few of the Trust Code that is imposed on all trusts. [MCL 700.7105(2) (q).]
  • Probable Cause: While neither EPIC nor the Michigan Trust Code furnish a formal definition of probable cause, Michigan courts have adopted the Restatement (Third) of Property (Wills and Other Donative Transfers) definition: Probable cause exists when, at the time of instituting the proceeding, there was evidence that would lead a reasonable person, properly informed and advised, to conclude that there was a substantial likelihood that the challenge would be successful. Section 8.5, comment c. This definition of probable cause was approved in In re Estate of Stan, 301 Mich. App 435 (2013).
  • ‘Instituting Another Proceeding Relating To’: This phrase is used in both of the Michigan no-contest statutes that direct that the presence of probable cause will cause a no-contest clause in a Will or trust to be ignored by a trial court. An action to construe a Will or trust instrument would not normally trigger a no-contest clause since such an action that seeks to construe or interpret a testamentary document is understood as only carrying out the testator/settlor’s intent and not a challenge to the validity of the document. Similarly, an action to determine the rightful ownership of an asset is treated as more of an action to construe, and is not normally viewed as a challenge that invokes a Will or trust’s no-contest A Michigan Court of Appeals decision came close to providing some guidance on what relates to, but then it stopped short. In Northern Trust Bank, FSB v Becker, (In re Byrne Estate) No. 307641, (2014) the trustee brought a lawsuit against a trust beneficiary for misappropriation of property that the trustee claimed rightfully belonged to the trust. The trustee then later alleged that the trust beneficiary’s defense of the trustee’s lawsuit triggered the trust’s no-contest clause. The court did not address whether the beneficiary’s defense of the trustee’s lawsuit was an act sufficient to violate the trust’s no-contest clause. Instead, the Court of Appeals merely found that the trust beneficiary had probable cause to defend the trustee’s lawsuit.
  • What Does the No-Contest Provision Cover?: In one Michigan court decision the beneficiary sought declaratory relief from the probate court, asking that court if he had probable cause to challenge one trust amendment on the grounds of undue influence. The beneficiary’s petition stated that ‘it should not be construed as contesting the validity of the trust’ but that he only ‘seeks a declaratory judgment on the existence of probable cause if he were to bring such an action.’ The Court of Appeals noted that the settlor had “not provided that a beneficiary would forfeit his rights under the trust if the beneficiary had filed any action- however tangentially related to the trust. Instead, he provided that only a beneficiary who contests or challenges the trust’s admission to probate or who challenges a provision will forfeit his or her rights under the trust.” Since the beneficiary did not challenge the trust itself, nor did he allege the no-contest trust itself was invalid, nor did he seek monetary relief, the requested declaratory relief did not transform the beneficiary’s petition into a legal challenge to the trust’s validity. Perry v Perry (In re Miller Osborne Perry Trust) Mich. Ct. App. 831 N.W.2d 251 (2013.)

No Contest Clauses and Trustee Actions: While usually a no-contest cause is added to a Will or trust to stop challenges to the validity of those testamentary documents by a disgruntled beneficiary, on occasion a no-contest provision will be expanded to  include beneficiary challenges to actions taken by a personal representative or trustee. In short, the action filed by the beneficiary is not directed at the legal document’s validity, but instead the action is directed at the fiduciary’s administration of the estate. Arguably, a beneficiary’s court action that challenges a fiduciary’s decision, i.e. a claim of breach of fiduciary duty,  would fall within the ‘instituting another proceeding’ and a no-contest clause might be enforced in the absence of a court finding of any probable cause.

Exculpation?: A breach of fiduciary duty no-contest clause would seem to be a type of fiduciary exculpation provision, if its effect was to deter a beneficiary from ever challenging any decisions of a trustee (good or bad.) It is important to keep in mind that a term of a trust that relieves a trustee of liability for breach of trust is unenforceable if the term seeks to relieve a trustee of liability for breach of trust committed in bad faith or with reckless indifference to the purposes of the trust or the interests of the trust beneficiaries, or the exculpation term was included in the trust as the result of abuse by the trustee of a confidential relationship with the settlor. [MCL 700.7908(1) (a) (b).] Note, too, that this provision that limits the exculpation of the trustee is not a default provision that a trust instrument can be drafted around. A trustee’s exculpation is also one of the few provisions of the Michigan Trust Code that will be applied to all trusts, regardless of what the trust instrument says. [MCL 700.7105(2) k).]

  • A breach of duty no-contest provision is also materially different from a conventional fiduciary exculpation clause. With a conventional exculpation clause, there is no possibility that the beneficiary who challenges the fiduciary’s acts (or omissions) will be removed as a beneficiary if the court finds the beneficiary’s challenge not justified. In addition, the condition for the enforcement of a breach of duty no-contest clause is much different from the condition for enforcement of no-contest clause that potentially disinherits a beneficiary who attacks the validity of a Will or trust. A no-contest clause in a proceeding that attacks the validity of the Will or trust operates only if the challenge is unsuccessful. If the beneficiary’s contest is successful, the no-contest clause in the validity-of-instrument-challenge setting also falls along with the challenged instruments. In contrast, a breach of duty no-contest clause on its face seems to operate regardless of the merits of the ultimate success of the beneficiary’s contest.
  • A very troubling recent court decision from Missouri demonstrates the dangers of a breach of duty no-contest In this case, the trustee simply stopped making mandatory distributions to the trust beneficiary. The trustee told the beneficiary that no further distributions would be made. No surprise, the trust beneficiary then filed a suit that alleged the trustee had breached its fiduciary duty, and sought to have the trustee removed. The trust contained a broad no-contest clause that, among things, terminated the beneficiary’s interest in the trust if the beneficiary made a claim against the trustee for breach of trust or sought the trustee’s removal. The trustee filed a declaratory action that asks the court to find that, because of the expansive breach of duty no-contest clause, the beneficiary’s interest in the trust terminated. Both the trial judge and the Missouri Court of Appeals held for the trustee! The appellate court found that the breach of duty no-contest provision must be enforced when there is a clear intent on the part of the settlor that particular conduct by a beneficiary would cause the forfeiture of the beneficiary’s interest in the trust. Knopik v. Shelby Investments, LLC, 2019 WL 2093887 (Mo. App. W.D. May 14, 2019.) This case is troubling because there was no discussion as to the trustee’s behavior in refusing to make mandatory distributions to the trust beneficiary. However, the case demonstrates how a breach of duty no-contest clause can function as an exculpatory trust provision that apparently would allow and permit intentionally bad behavior by the trustee to stand. The result in Knopik would probably be different in Michigan, due to Michigan’s probable cause exception to the enforcement of a no-contest provision in a trust.

Conclusion: Many Wills and trusts are drafted these days with no-contest provisions (usually in the boilerplate provisions, meaning the settlor/testator may not even be aware of its existence or understand its impact. A no-contest clause is clearly an effective device to prevent costly and time-consuming probate court litigation caused by spurious claims. Yet there is the dark-side to a no-contest clause, too. The threat of enforcement of a no-contest provision could lead to an unjust result, when a document that could be proven to be contrary to the testator/settlor’s intent and thus invalid, remains operative only because the beneficiary was not prepared to risk an unsuccessful challenge that would lead to his/her removal as a beneficiary. If a Will or trust contains a no-contest clause, it would be wise to spend some time speaking with the testator/settlor with regard to the implications of its existence, and to identify what actions the no-contest clause is intended to prohibit with the threat of forfeiture of a beneficial interest.