No-Contest Clauses- Keep ‘Em Guessing

Take-Away: No-contest clauses are ubiquitous in trusts these days. The growing tendency to expand the scope of no-contest clauses could, however,  have a chilling effect on beneficiaries who may not be willing to assume a risk of forfeiture in order to hold a fiduciary to account or to ask for clarification of ambiguous trusts.

Background: An in terrorem, or no-contest, clause in a Will or Trust  causes a beneficiary to forfeit their interest. Such a clause is expressly authorized in Michigan by statute. Such a clause causes the beneficiary who raises a challenge to forfeit their beneficial interest in a Will or Trust.  While a settlor’s attempt to prevent a challenge to the validity of their Trust is understandable, the recent trend is to draft trusts to expand the scope of a no-contest clause to cover much more than just a direct challenge to the trust’s validity. As such, while the public policy of a no-contest clause is to (i) carry out the settlor’s intent and (ii) protect other beneficiaries from the delays and legal expense caused by unwarranted or frivolous challenges to the Trust, it is also possible that the presence of a broadly phrased no-contest clause could cause a beneficiary to remain silent out of a fear of forfeiting their interest under the instrument, in effect preventing the beneficiary from enforcing the trustee’s fiduciary duties or asking legitimate questions with respect to the trust’s administration. More to the point, a no-contest provision is sometimes viewed by other beneficiaries as a weapon that can result in another beneficiary’s disinheritance.

EPIC: The Michigan Estates and Protected Individuals Code (EPIC) contains express provisions that authorize the use and enforcement of a no-contest provision in a Will or Trust.

Trusts: The Michigan Trust Code’s authorization with regard to no-contest provision in a trust provides: “A provision in a trust that proposes 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.” [MCL 700.7113.] It should be noted, too, this this provision that pertains to no-contest clauses in a Trust cannot be altered by the settlor, i.e. it is one of the few provisions of the Michigan Trust Code that cannot be altered by the settlor. [MCL 700.7105(2)(q).]

Wills: A comparable provision relates to challenges to a Will, including the another proceeding relating to language noted with respect to Trusts. [MCL 700.2518; MCL 700.3905.]

Probable Cause: While this term is not defined in EPIC, Michigan Courts have adopted the definition used in the Restatement (Third) of Property (Wills and Other Donative Transfers, (Section 8.5, comment c.) “ 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.”  [This Restatement  definition was adopted by the Michigan Court of Appeals in Estate of Stan, 301 Mich App. 435 (2013). See also Jauw v Jauw, (In re Estate of Jauw),  No. 305902 (Michigan Court of Appeals, September 13, 2012, Unpublished.)]

Strictly Construed: At common law, no-contest clauses are to be strictly construed by courts. Saier v Saier, 366 Mich. 515, 520 (1962).

Example: An example of a broadly phrased no-contest provision that goes well beyond just a challenge to a Trust and covers proceedings that relate to the trust might be the following:

For purposes of this Trust, a person shall be deemed to contest this Trust if he or she takes any action that seeks to invalidate, nullify, set aside, render unenforceable, or otherwise avoid the effect of this Trust, or any action or transaction that is taken under this Trust, or this Trust’s administration. Therefore, should any beneficiary contest the validity of this Trust or any provision of this Trust, or institute any proceeding to contest the validity of this Trust, or change any provision of this Trust from being carried out in accordance with its terms (whether or not in good faith and with probable cause), or who seeks to modify the terms of this Trust in any way,  then all benefits provided for such beneficiary under this Trust are revoked and annulled. In addition, if such a beneficiary makes a claim against the Trustee for maladministration or breach of trust or attempts to remove a Trustee for any reason, with or without cause, then such contest or claim and such attempt shall cancel and terminate all provisions for or in favor of such beneficiary who makes or who incites such contest or claim, whether or not such contest or claim shall succeed or not, and any and all provisions in favor of the beneficiary so making such contest or claim, or attempting or inciting the same,  shall be revoked and be of no force or effect.

Proceedings that Relate To: Michigan Courts have struggled with the scope of no-contest clauses that go beyond a challenge as to validity, with regard to other proceedings that relate to the trust.

Challenge to Personal Representative: In Estate of Stan a petition to remove the personal representative of a pour-over Will to the trust triggered a no-contest clause. The court, however, found that there was probable cause to avoid triggering the no-contest clause as there was some evidence that existed that the personal representative could have been removed for her actions.

Defending an Action Brought by the Trustee: In Northern Trust Bank FSB v. Becker (In re Byrne Estate), 301 Mich App 435 (2013) the trustee sued a beneficiary to recover trust property. The beneficiary filed a defense to the trustee’s property recovery complaint. The trustee then claimed that the beneficiary’s ‘defense’ to the recovery action triggered the trust’s no-contest clause. The court side-stepped the question of whether the beneficiary’s defense of the trustee’s lawsuit related to the trust by finding that the beneficiary possessed probable cause to defend the lawsuit brought by the trustee. [In reaching its decision, the Court did even not refer to EPIC sections MCL 2518, 3905 or 7133, all of which deal with no-contest provisions.]

Trust Administration: In In re Vogel, No. 288837 (Mich. Court of Appeals, May 27, 2010, Unpublished) a challenge to the administration of the trust did not trigger the trust’s no-contest clause, but that was only because the no-contest provision was very narrowly drafted to focused solely on challenges to the trust’s validity, and not to the trust’s administration.

Declaratory Judgments: More recent Michigan court decisions have grappled with a trust beneficiary filing an indirect action, seeking a Declaratory Judgment from a probate court asking if the evidence the beneficiary possessed was sufficient to constitute probable cause, and thus overcome the effect of the trust’s no-contest provision.

In Perry v Perry (In re Miller Osborne Perry Trust) 299 Mich App 525 (2013) the appeals court held that a no-contest clause in a trust was not activated by the beneficiary’s petition that sought declaratory relief to determine if probable cause existed  whether the settlor was unduly influenced.

The Trust contained the following no-contest provision: “If any beneficiary under this trust or any heir of mine, or any person acting with or without court approval , on behalf of a beneficiary or heir, shall challenge or contest the admission of this trust to probate, or challenge or contest any provision of this trust, the beneficiary or heir shall receive no portion of my estate, nor any benefits under this trust. However, it will not be a ‘challenge or contest’ if my personal representative trustee or beneficiary seeks court interpretation of ambiguous or uncertain provisions in this trust.” The probate court had denied the request for declaratory relief sought by the beneficiary, but the probate judge in doing so also held that the petition for declaratory relief was not a ‘contest or challenge.’ Court of Appeals noted that the grounds that the beneficiary’s petition asserted for declaratory relief from the probate judge were only ‘hypothetical” in nature and thus not justiciable by a court. However,  that technical issue had not formally presented to the Court on appeal, so the Court did not address that technicality.

However, in a second declaratory judgment case the Court quickly negated the use of a petition for a declaratory judgment by a beneficiary as a way to circumvent a no-contest clause. Consequently, the Court clearly sent a signal to all Michigan probate courts to not render in any declaratory decisions where the beneficiary’s petition is intended as an end-run to the trust’s no-contest clause.  In In re Estate & Trust of Whitten, No. 341737 (Michigan Court of Appeals, August 9, 2018) the Court clearly said that it is not permissible for a trust beneficiary to ask a probate court to anticipatorily rule that a particular course of action will, or will not, violate a no-contest clause or if the beneficiary has enough evidence to satisfy the probable cause standard.

In Whitten  the beneficiary was to receive a specific bequest of $3.0 million of securities, filed a Petition for Instructions Regarding Modification of Trust, citing one of the Michigan Trust Code trust modification provisions, pertaining to the settlor’s ‘probable intent.’ [MCL 700.7412(2).] An unexecuted trust amendment purported to give to the beneficiary one-third of the settlor’s estimated $150 million trust estate. The beneficiary’s petition did not, itself, seek to modify the trust; rather it sought a declaration from the probate judge that a proposed petition seeking modification of that trust to carry out the settlor’s probable intention would not trigger the existing trust’s no-contest clause. The probate judge denied the petition, but in doing so the judge gave the beneficiary what she was looking for, by finding that her proposed petition to modify the existing trust to reflect the unexecuted trust amendment would in fact violate the trust’s no-contest clause, and thus there was no probable cause for her to file the petition to modify the trust. The Court of Appeals decision took the probate judge to task:

“Petitioner argues that the probate court erred by concluding that a possible petition to modify the trust would violate the in terrorem clause. We agree, not on the merits, but because the probate court should have denied the petition as presenting an unripe and nonjudiciable issue. …Petitioner received precisely what she requested-a determination- although it did not result in the outcome she preferred….We conclude that the probate court should not have opined on the applicability of the in terrorem clause and should have dismissed petitioner’s petition as unripe and not presenting an actual case or controversy….Put another way, petitioner sought legal advice from the probate court regarding whether she would lose her entire inheritance if she were to seek to modify the trust.”

The Court went on to cite at length a 1961 Michigan Supreme Court decision for the proposition that it is not permissible to ask a probate court to anticipatorily rule that a particular course of action will, or will not, violate a no-contest clause, and that a declaratory judgment may not be properly invoked for the determination of a question of law submitted by a trust beneficiary. “Whether the in terrorem clause will have any effect on a future petition for modification is a purely hypothetical question until petitioner may actually file such a petition. It is petitioner and her counsel, not the probate court, who must determine whether the risk of such an action is worth the potential reward.” Restated, the message to all Michigan probate judges is that they cannot make a probable cause determination until the challenge has actually been filed, thus exposing the challenger to the no-contest’s forfeiture penalty.

Other States: While Michigan Court decisions have made it clear that a trust beneficiary cannot resort to an indirect approach to a probate judge, via a petition for a declaratory decision,  by asking if the evidence the beneficiary possesses is sufficient to meet the statutory probable cause exception to the application of a trust’s no-contest clause, other states take a different view in light of the concern that overly broad no-contest clauses ‘chill’ a trust beneficiary’s exercise of their statutory rights for information, or their inquiries about the possible modification of a trust, or simply their right to hold a trustee accountable.

• New York: New York amended its trust code to permit a beneficiary to conduct preliminary discovery with regard to the merits of her or her challenge to a Will without the risk of forfeiture caused by a Will’s no-contest clause. [N.Y. Estate Powers and Trusts Law Section 3-3.5(b)(3)(D).]
• Missouri: Missouri adopted a statute that is directly contrary to Michigan’s position on a probate judge responding to a petition for a declaratory judge on the grounds constituting probate cause. That Missouri statute provides:

If a trust instrument containing a no-contest clause is or has become irrevocable, an interested person may file a petition to the court for an interlocutory determination whether a particular motion, or other claim for relief by the interested person, would trigger application of the no-contest clause or would otherwise trigger a forfeiture that is enforceable under applicable law and public policy. [Mo. Rev. Statute Section 456.4-420.]

Observations: Why the topic of no-contest clauses is of some relevance to a trustee is because the trustee is charged with administering a trust in good faith, expeditiously, and in accordance with its terms and purposes. [MCL 700.7801.] Consequently, a trustee cannot blissfully ignore a trust’s no-contest clause. And, as noted earlier, some beneficiaries, may seek to improve their position or inheritance under the trust by demanding that the trustee take steps to enforce the no-contest clause against another beneficiary, in effect ‘weaponizing’ a trust’s no-contest provision to improve their position or benefits under the trust. Life is easy if the trustee becomes, by default,  the ‘fall-guy’ for invoking the clause to disinherit another beneficiary.

For example, what if one beneficiary approaches the trustee with the request that a nonjudicial settlement agreement under MCL 700.7111 be entered into which alters how trust accountings are reported by the trustee to all trust beneficiaries. Is such a request, which seeks to depart from what the written trust instrument prescribes in the way of accountings or annual reports, a sufficient requested alteration to the written trust to trigger the trust’s no-contest clause?

It would seem that if Greenleaf Trust is asked to act as trustee of an irrevocable trust that contains a no-contest provision, that provision should be narrowed as much as possible, or written in such a way that if one beneficiary believes that another beneficiary has triggered the no-contest provision, the other beneficiary possesses legal standing [not only Greenleaf] to bring the no-contest forfeiture provision to the probate court’s attention. The way so many no-contest clauses are now broadly drafted to encompass so many actions or proceeding that relate to a trust, it places the trustee in the unenviable role of acting as policeman to monitor and enforce [without assurances a court agrees with the trustee] if an act or formal legal proceeding initiated by a trust beneficiary is encompassed by the no-contest provision.

It would be nice if Michigan followed Missouri’s lead and permit tentative trust beneficiaries to pursue a declaratory judgment proceeding without jeopardizing their interest in the trust. That, however, would require an amendment to the Michigan Trust Code, but MCL 700.7113 could be easily amended to add language like that used in the Missouri statute.

Conclusion: While no-contest clauses have their place to prevent frivolous challenges to the validity of a trust, the expanded version of many no-contest clauses these days to cover all sorts of actions that do not extend to the trust’s validity tends to make them more like weapons of forfeiture. Pay close attention to no-contest clauses and whenever possible try to clarify what actions a beneficiary may take will not activate the no-contest clause. Perhaps as a start, require the clause included in the Perry decision (cited above) that a petition that seeks to clarify an ambiguous trust provision will not be treated as a claim or challenge that triggers the no-contest clause.