17-Nov-20
No-Contest Provisions – Will They Be Enforced
Take-Away: A no-contest, forfeiture, or in terrorem, clause in a Will or Trust will be enforced in Michigan, unless the challenger possesses probable cause to challenge the validity of the Will or Trust. As a broad generalization, courts are reluctant to enforce a no-contest clause.
Background: A no-contest clause provides that any beneficiary who contests a Will or Trust will forfeit some, or maybe all, of his or her interests under the applicable Will or Trust. The purpose of the no-contest clause is to deter an unhappy heir or beneficiary from contesting the Will or Trust. A no-contest clause is an example of testamentary freedom and the desire to assure that an individual’s final expression of how they want their wealth distributed on death will be carried out- without challenges or disruption. Standing in contrast to a no-contest clause is the common law maxim that equity abhors a forfeiture, which means that many judges, and in particular, appellate judges, are loath to enforce a no-contest.
- States have taken a variety of approaches to no-contest clauses. No-contest clauses are presumptively valid in Michigan.
- Yet Florida expressly prohibits the enforcement of a no-contest clause.
- Many states, e.g. California, Illinois, Texas will strictly construe the enforcement of a no-contest clause, which means that courts in those states will frequently find a beneficiary’s actions did not trigger the no-contest clause.
- In addition, some states like Iowa or Texas, have added the requirement that the challenge to the Will or Trust must be instituted in good faith, which means that the motive or subjective intent behind the challenge will be weighed in the decision whether, or not, to enforce the no-contest provision.
Probable Cause: Michigan is one of 20 states that will enforce a no-contest clause, unless the challenger possessed probable cause it institute the proceedings which challenge the validity of a Will or Trust. [MCL 700.2518 (Wills); MCL 700.7113 (Trusts).] These Michigan statutes, along with the other states, are based on the Restatement (Third) of Property, Section 8.5, which defines probable cause as: “… 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.” Note that the Uniform Trust Code, on which much of Michigan’s Trust Code is based, is totally silent on the issue of no-contest clauses, so this is an area where Michigan intentionally added provisions what would not have been available if the UTC had been adopted in its entirety, suggesting that this is important to the state and its public policy.
Public Policy: No-contest clauses can also be evaluated in light of a state’s public policy. For example, no-contest clauses often go beyond challenges to the validity of a Will or Trust, and they seek to ‘punish’ actions that are only tangential to the Will or Trust. An example of this more sweeping scope of a no-contest clause that might implicate a state’s public policy follows:
“In addition to any challenge to the validity of my Will or my Trust, any beneficiary shall forfeit whatever interest he or she would have taken under this instrument, and this instrument shall be administered and distributed as though such beneficiary had predeceased me, if such person initiates any of the following proceedings: (i) asserts any claim based on an alleged agreement to make a will or trust, or otherwise dispose of my estate or any part of my estate; (ii) requests an accounting for any period prior to my death; (iii) initiates a proceeding claiming tortious interference with an inheritance or expectancy; (iv) brings an action with regard to the eligibility, removal, or conduct of a fiduciary to serve under this instrument; or (v) challenges any accounting filed by the fiduciary.”
Some states might view the scope of the no-contest clause as possibly promoting a possible breach of fiduciary duty if the beneficiaries would be punished in bringing that perceived breach to public light.
Accordingly, the scope of many no-contest clauses goes well beyond attacking the validity of the testamentary instrument and extend to administrative actions of a fiduciary, or they seek to prohibit separate tort claims that are intended to achieve the same monetary outcome as if the Will or Trust had been successfully challenged. In many states, such as Georgia, Illinois, and New York, this often results in a court refusing to enforce a no-contest clause because it is contrary to the state’s public policy. As one court said, a no-contest clause cannot be used to insulate a fiduciary from exercising reasonable care. Wojtalewicz’s Estate, 93 Ill. App. 3d 1061 (1981.)
While the state’s public policy was not cited as the official reason why a no-contest clause was not enforced, that seemed to be the basis in one Michigan Court of Appeals decision. The Court in In re Vogel, Michigan Court of Appeals, No. 288827, May 27, 2010) reversed a probate court order of forfeiture of a beneficiary’s distributive share of the decedent’s trust who had challenged the propriety of the administration of that trust. The Court of Appeals distinguished the no-contest clause on the grounds that the clause applied only to the contest of the provisions of the trust itself and found that it did not apply to the challenges to the administration of the trust. An example where a state’s public policy implicated the effectiveness of a no-contest clause was a California decision where the effect of the no-contest clause caused not only the beneficiary to forfeit his/her interest in the trust, but also caused the contesting beneficiary’s descendants to also forfeit their interests in the same trust. In Tunstall v. Wells, 144 Cal. App. 4th 554 (2006) the Court found that such a broad no-contest provision (punishing the challengers descendants who were also trust beneficiaries) came close, but did not, violate California’s public policy against forfeitures.
Doctrine of Election: Unlike a no-contest clause that leads to a forfeiture, the doctrine of election is an equitable principle that can achieve the same result as a no-contest clause to prevent post-death litigation that take time and cost legal fees to the decedent’s estate or trust. This common law principle is based on equitable estoppel, which requires that a person cannot accept the benefits under a document like a Will or Trust, and then turn around and challenge the validity of the same instrument. The doctrine of election was used in a couple of fairly recent Michigan cases: In re Genevieve Garcia Revocable Living Trust, Michigan Court of Appeals, No. 309170 and 311123, January 7, 2014 and In re William W. Weigle Revocable Trust, Michigan Court of Appeals, No. 314772, June 19, 2014.) In Garcia, the Court noted that the petitioner had the choice to either accept disbursements under the Trust, and therefore acquiesce to the validity of the Trust, or not accept disbursements and challenge the trust: “Petitioner could not accept disbursements from the Trust and question its validity at the same time.” In the Weigle, the Court held that “if a party wishes to challenge the validity of the trust after accepting the distribution, then the party must withdraw the acceptance by tendering back the distribution before initiating the action.”
Alternatives: As noted earlier, courts seem to be highly reluctant to find a forfeiture of an inheritance, bequest or devise under a Will or a Trust. If a state’s public policy is somehow impacted by the scope or effect of a no-contest clause, there might be even more reluctance by a court to enforce such a clause. Of course, if the challenger is to receive nothing under the Will or Trust, there is nothing to forfeit, and as such, the presence of a no-contest clause in a Will or Trust will not deter any challenge. If the ‘unhappy’ beneficiary is to receive something under the Will or Trust, then the presence of a no-contest provision might have the effect of stopping a future challenge. One alternative to the ‘all-or-nothing’ implications of a no-contest provision might be to convert or restrict the rights of the beneficiary in the event of such a challenge. Rather than simply state that the beneficiary receives nothing if the beneficiary initiates a challenge, the assets that would otherwise have been distributed to the challenging beneficiary might continue to be held in trust.
Sample: “All gifts and bequests to and interests of a contesting beneficiary under this instrument, or any trust created under this instrument, shall be held by the trustee of the trust that is being challenged, or if none, then the trustee of the trusts from which the gifts, bequests or interests that would otherwise be received (for convenience referred to as the ‘defending trustee’) without the contesting beneficiary having any rights to receive distributions, withdraw assets, or exercise any lifetime powers of appointment. All of the costs of such defense, including but not limited to attorneys’ fees, court costs, experts’ fees, trustee’s fees, expenses and any other fees or expenses which would not have been incurred but for the action brought by the contesting beneficiary, to be determined in the sole and absolute discretion of the defending trustee, shall be charged to and paid from the withheld funds.”
Such a provision functions differently than a normal no-contest clause because the contesting beneficiary does not forfeit his or her interest simply by filing the contest. Instead, the beneficiary’s interest is restricted during the contest and/or the duration of the trust, and also diluted by the cost of litigation. Accordingly, the beneficiary does not forfeit his or her entire interest by filing a petition challenging the Will or Trust. Knowing that an unsuccessful challenge could cause an distribution to be held in a fully discretionary trust might be sufficient to deter a challenge by a disgruntled beneficiary.
Conclusion: While Michigan will enforce a no-contest clause in the absence of probable cause to initiate the challenge, many court decisions suggest that judges are inclined to try to find that the challenger possessed probable cause, thus avoiding a complete forfeiture of the beneficiary’s interest in the Will or Trust, following the old common law maxim that equity abhors a forfeiture. Consequently, the intended purpose of including a no-contest provision in a Will or Trust may not be as effective as the settlor or testator intended. If a court views a no-contest clause as impeding the state’s public policy, then a no-contest clause may not be enforceable, even if the challenger did not possess probable cause. The rhetorical question is simply, do no-contest clauses still work? Perhaps a better approach would be to rely on the doctrine of election, where rather than an immediate distribution from the Will or Trust, a beneficiary’s share remains in trust for a period of time, e.g. 3 to 5 years, after which the full distribution is then made; if the beneficiary takes the distributions during the ‘hold-back’ period, then a court would more likely assert the doctrine of election and dismiss any future challenge to the Will or Trust. In short, the ‘hold-back’ acts as a conditional gift, inducing the beneficiary to not challenge the Will or Trust.