Wednesday, August 12, 2009

A Gamble Worth Taking?

Occasionally, clients may wish to leave their natural heirs less than what their heirs would inherit by law if they never set up an estate plan in the first place.  Some clients even wish to completely disinherit a natural heir for a variety of reasons.  In these situations, an heir has an incentive to challenge the validity of the estate plan.
 

To discourage the challenge of an estate plan, attorneys for years have inserted "No Contest Clauses" into their clients' wills and trusts.  A "No Contest Clause" is a provision that states if anybody contests the validity of an estate plan and loses that challenge, that person gets absolutely nothing.  By forcing the heir to "gamble" his or her inheritance when challenging an estate plan, the idea is to give the beneficiary pause about creating trouble.

For years, the Probate Code Section outlining "No Contest Clauses" was so open-ended that it applied to a broad spectrum of situations.  Courts held that an estate plan's "No Contest Clause" applied to a petition to remove a trustee and to a petition by a beneficiary to increase the dividends of corporate stock that the trustees held.  The result was chaos: beneficiaries were losing their shares so often that the legislature created a procedure whereby potential litigants could "ask" the court whether a potential action would violate the "No Contest Clause" before actually taking that action.  This was creating a huge backlog of court filings which caused unnecessary expense and delays.

In response to the excessive litigation, California recently dramatically narrowed the application of "No Contest Clauses" to only apply to six specific allegations: (1) Forgery; (2) Lack of Due Execution; (3) Lack of Capacity; (4) Menace, Duress, Fraud, or Undue Influence; (5)  Revocation; or (6) Disqualified Beneficiary.  If a litigant contests an estate plan based on one of these allegations and lacks probable cause, the "No Contest Clause" will apply.  Furthermore, the new Probate Code Section eliminates the ability for potential litigants to "ask" the Court whether a particular action will violate the estate plan's "No Contest Clause."  These changes will take effect on January 01, 2010 and will be applicable to estate plans that became irrevocable on January 01, 2001 or later.  It remains to be seen how this "retroactive" application will play out.   

Even with this narrowed application, a "No Contest Clause" can ensure that your wishes get carried out at death.  However, "No Contest Clauses" only work if the disgruntled heir actually has something worthwhile to lose by challenging the estate plan.  It is for this reason that I often counsel my clients to leave a certain amount to a particular beneficiary (i.e., $20,000) rather than leaving that beneficiary nothing - make them ask themselves, "Is this a gamble worth taking?"