No-Contest Clauses: It is Hard to Avoid Them

Take-Away: An in terrorem clause used in a trust, also known as a ‘no-contest’ clause,  is an effective way to prevent after-death challenges to the validity of the trust (or a Will.) But often creative efforts are taken by lawyers to discern how a probate court would react to a potential challenge to the trust (or Will) short of filing a direct challenge to that instrument which would otherwise jeopardize the challenger’s potential inheritance. One example of the ‘indirect’ approach is to file a motion for a declaratory judgment with the probate court. Last month the Michigan Court of Appeals provided very clear a ‘better not try’ message to a lawyers who ‘fish for’ the probate judge to tip his/her hand on whether a ‘no-contest’ provision will be triggered with a challenge filed by an unhappy beneficiary.

Case: In re Robert E. Whitton Revocable Trust, No. 337828, unpublished, August 9, 2018.

Background: An in terrorem clause, also called a ‘no-contest’ clause, [I used to refer to them to clients as a poison pill clause] provides that a beneficiary of a Will or trust forfeits any interest under the dispositive instrument if the beneficiary challenges or contests any of its provisions. The obvious purpose of a ‘no-contest’ clause is to deter probate litigation of the decedent’s final Will or trust.

• Michigan Trust Code: No-contest clauses received a lot of attention back in 2010 when the Michigan Trust Code was first adopted. One of the new Michigan Trust Code provisions was: “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.” [MCL 700.7113; see also MCL 700.2518 that provides the same probable cause exception to a Will’s ‘no-contest’ clause.] What got many estate planning attorneys upset was that they thought that this probable cause exception in the Michigan Trust Code was optional, like many of the Trust Code sections, and a trust instrument could be drafted to ‘opt out’ of the probable cause exception to the effectiveness of a trust’s ‘no-contest’ clause. But the Michigan Trust Code also expressly provides that this is one of those rare Trust Code provisions that cannot be altered by differing terms used in a trust. [MCL 700.7105(2)(p).] Consequently, MCL 700.7113 is not a default rule that only applies if the trust instrument is silent; it applies even when a trust instrument attempts to circumvent the probable cause exception, all of which made some lawyers worried that there would be an increase in trust challenges if a probate judge found that probable cause existed for the challenge.
• ‘Proceeding Relating to a Trust’: No-contest clauses predictably get the attention of unhappy heirs. The heir’s concern is whether he/she has enough evidence to satisfy the probable cause exception. But rather than try their luck with a direct challenge putting their entire inheritance or interest in the trust at risk, they often attempt to induce  subtle guidance with respect to their case, i.e. ‘do I have enough to meet the probable cause exception?’, from the probate judge short of filing the challenge and thus inviting the application of the ‘no-contest’ penalty. Consequently, there were some beneficiaries who felt that a petition for a declaratory judgment from the probate judge would provide helpful guidance on the question of probable cause without jeopardizing their inheritance or devised interest under the decedent’s Will or trust. Restated, the concern of many probate litigants is the rather vague standard, probable cause that might invoke the trust instrument’s in terrorem clause, and their additional anxiety that if an indirect approach to the probate court is taken, would that approach be viewed as yet “another proceeding relating to the trust” also jeopardizing their expected inheritance or beneficial interest. Does a motion for instructions or clarification from the probate court trigger a ‘no-contest’ clause? Does a petition for a declaratory judgment constitute a court action that ‘relates to’ the trust?’ We now seem to have an answer to these questions that usually came up whenever a ‘no-contest’ clause was encountered and a challenge to the Will or trust was contemplated.

Facts: In the Whitton  case the petitioner’s father created a trust in 1992, which was later restated in 2003, which contained an extensive ‘no-contest’ clause. Under the restated trust the petitioner was to receive one-third of her late father’s investment accounts; apparently the investment accounts were worth about $3 million on the settlor’s death, meaning the petitioner’s inheritance (‘at risk’) was about $1.0 million if she challenged the restated trust. The petitioner father’s total estate was estimated to be worth $150 million at his death. The petitioner claimed that her father had a trust amendment drafted just prior to his death that gave to the petitioner one-third of the entire estate, but the settlor did not live long enough to sign that most recent trust amendment. The petitioner thus wanted (‘fished for’) an opinion from the probate judge if the unsigned trust amendment was sufficient as probable cause to support a planned petition to modify the terms of the trust to include the unsigned trust amendment, thus taking her inheritance from $1.0 million to $50 million.

Since a specific bequest to the petitioner of $1.0 million was at stake, and the trust instrument contained a comprehensive ‘no-contest’ clause, the petitioner did not file a direct challenge to her father’s trust, nor did she immediately seek a modification of that trust instrument. Instead, she proposed a petition to be filed with the probate court  to modify the terms of the trust under MCL 700.7412(2) [a modification of the trust by the probate court is permitted ‘because of circumstances not anticipated by the settlor, and the modification would further the settlor’s probable intention.’] but in a manner that would not trigger the existing trust’s ‘ no-contest’ clause. In short, the petitioner sought to circumvent the trust’s lurking ‘no-contest’ clause by asking the probate court for a ruling that if she filed the anticipated future petition to modify the trust,  whether that subsequent petition would violate the trust’s no-contest clause? This indirect inquiry was in the form of a petition for a declaratory judgment requested from the probate court related to the trust instrument in question.

Probate Court: To the surprise of many, the probate judge did respond to the petition by issuing an opinion that held that the proposed petition (if filed by the petitioner to modify the existing trust) would violate the trust’s ‘no-contest’ clause and that the petitioner had no probable cause to file such a proposed petition to modify the trust. The surprise is that a probate court, like any court, is not supposed to provide an advisory opinion on hypothetical fact situations. The technical rule is that the a judge is not supposed to provide rulings on hypotheticals that are unripe for adjudication,  and therefore is nonjusticiable [yes, that is actually a word] by the court. But that is precisely what the probate judge did in this situation- while the probate judge gave the petitioner the answer that the petitioner did not want to hear, the probate judge only dismissed the petition without invoking the trust’s ‘no-contest’ clause, arguably a ‘win’ for the petitioner (but admittedly she probably did not feel that way.)

Court of Appeals: On appeal, the Michigan Court of Appeals found that the probate court’s decision premised solely upon the petitioner’s hypothetical petition to modify the existing trust should not have been issued by the probate judge. Citing a 1961 Michigan Supreme Court decision, McLeod v. McLeod, 365 Mich 25 (1961) which had found unripe a petition that sought to ascertain the legal consequences of a proposed petition to enforce a purported oral contact to modify the decedent’s Will that contained a ‘no-contest’ clause, the current Court likewise found:

“Under McLeod, it is not permissible to ask a probate court to anticipatorily rule that a particular course of action will or will not violate an in terrorem clause. That is precisely what petitioner asked the probate court to do in this case. The probate court should not have ruled on the petition at all; rather, it should have rejected it as unripe and nonjusticiable. Whether the in terrorem clause will have any effect on a future petition for modification is a purely hypothetical question until such time as 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 award.

As to the thought that filing a petition for a declaratory judgement might be a way to avoid directly triggering a ‘no-contest’ clause, the Court went on to address a petition for declaratory relief as an indirect way to obtain guidance from the probate court on the availability of the challenge falling within the statute’s probable cause exception:

“Petitioner further argues that her petition can be brought under the declaratory judgment court rule, MCR 2.605(A)(1) which allows a court to ‘declare the rights and other legal relations of an interested party.’ But McLeod holds that a declaratory judgment is not available in situations such as that presented here. This Court has no authority to ignore or overrule a decision of our Supreme Court….McLeod stands for the proposition that there is no justiciable controversy (and hence no jurisdiction) in a case such as that presented here. Therefore, MCR 2.605(1) does not, given McLeod’s holding of non-justiciability, afford a right of action.”

Conclusion: With the rise  in the public’s awareness of probate litigation by disgruntled heirs, it is fairly commonplace these days to find a ‘no-contest’ clause in a Will or a trust instrument. There is always the probable cause exception that might encourage some heirs to challenge a Will or trust, but then there is also the companion worry that the challenger’s evidence or claims will not meet the probable cause exception identified in the two Michigan statutes. Creative lawyers thought that they could file petitions for declaratory relief with the probate court, or other motions with a probate court, that would provide indirect guidance, i.e. in search of a ‘free bite of the apple’  if what evidence they did possess would be ‘enough’ to meet the probable cause exception to overcome the Will or trust’s ‘no-contest’ clause. We now have a pretty clear directive from the Court of Appeals that advisory opinions in response to probate litigator’s ‘fishing expeditions’ will not be tolerated. Nor will indirect judicial guidance be available that pertains to the suspect Will or trust instrument be available through a petition for a declaratory judgment.

I doubt whether the Whitton decision will slow down the onslaught of probate litigation (the new ‘home’ for the plaintiff’s bar in light of a couple of decades of tort ‘reform’), but it will be a helpful reminder to probate judges that they should summarily dismiss ‘fishing expeditions’ and, as the Court notes in its quote, force the petitioner and his/her legal counsel assess the risk whether a challenge in the face of a ‘no-contest’ clause is worth the potential award. A review of the two Michigan ‘no-contest’ statutes is also a good reminder that a ‘no-contest’ clause can be written broadly enough to also apply to other activities or actions that ‘relate to a trust,’ such as a petition to modify the trust or a petition that seeks to validate an unsigned amendment to the trust, or a petition to remove a named trustee, such that the ‘no-contest’ provision might be applied years later when the trust beneficiaries are unhappy with how the trust is being administered. It’s at least something to think about if a ‘no-contest’ provision is deliberately added to a governing instrument in anticipation of probable challenges to the testator-settlor’s estate plan.