A no
contest clause is a provision you can include in your living trust (as well as
other trusts) and your will which provides that if someone contests the
document, he or she is disinherited.
A new California law makes
three changes to no contest clauses.
1.
The law changes how the no contest clause applies to
various documents you have signed.
2.
It changes how no contest clauses apply to creditor
claims.
3.
It changes how the law applies to a challenge to a
transfer of property on the grounds that it was not your property at the time
of the transfer.
You are not
required to have a no contest clause in your documents.
Some attorneys
believe that choosing not to have a no contest clause is the best way to ensure
that your wishes are carried out because any beneficiary who believes there is
an error in your documents can file an action in court without fear of being
disinherited.
Other attorneys believe that having a no contest
clause in your documents can help prevent beneficiaries from filing actions that
you would not want to have filed, including actions by beneficiaries that have
either been disinherited or given less than they believe they should have
received.
Application of No Contest Clause
to Documents
The new law specifies
that a no contest clause can be broad enough to include a contest by a
beneficiary against other documents you have signed, such as your living trust,
will, beneficiary designations for IRAs, retirement accounts and life insurance,
deeds to real estate, as well as other documents and trusts you have created
(such as life insurance trusts), provided that you have mentioned those
documents (either specifically or in general) in your no contest clause.
The advantage of
having the no contest clause be as broad as discussed in the preceding
paragraph is that you can prevent challenges to any of the documents you
have entered into.
For example,
assume you have two children, your family trust leaves everything in equal
shares to the children, and you have signed a beneficiary designation for your
IRA leaving the IRA entirely to your daughter. If your family trust provides
that the no contest clause includes challenges to your IRA beneficiary
designation, then if your son challenges that beneficiary designation, he would
be disinherited from your family trust.
If you assume your
changing your IRA beneficiary is consistent with your intentions, having the no
contest clause be broad should not cause unwanted results.
Application of No Contest Clause
to Creditor Claims
Under
the new law, your document can specify that if a person files a creditor's
claim against your estate after you die, that would result in the person being
disinherited. A creditor's claim is a
claim that you owe someone money or that the person spent money on your behalf,
e.g., paying your bills or your funeral arrangements.
The
issue with including this provision as part of the no contest clause is that if
a child pays expenses on your behalf (e.g., your living expenses, funeral
expenses or last illness expenses) and the child files a creditor's claim to be
paid back, that would result in the child being disinherited.
It is important
to decide whether you feel such a provision might work against a child who
advances monies on your behalf.
Application of No Contest
Clause to a challenge to a Transfer of Property
If
you include this provision in your no contest clause, a challenge to your
ownership of property can result in disinheritance.
For
example, if you leave an interest in real estate to your son and your spouse
believes that you do not have the right to make that transfer because the
property is her separate property (e.g., she inherited the property), a
challenge to the transfer by your spouse could result in your spouse being
disinherited from the entire trust.
Whether or not
to include such a provision depends on whether you believe that a beneficiary
might object to your claim of ownership in a property.
Summary of New No Contest
Clause
As
you can see, the new law can apply in different ways with different
results. While it is not possible to
anticipate all future events in terms of challenges to your estate planning
documents, you need to decide how to apply the new no contest clause law to
your estate planning documents.
Based on the new
law, you should decide whether you want to continue to have a no contest clause
in your trust and will and, if so, what matters that clause should apply to.
Please let us
know if you would like to discuss this matter and how it relates to your estate
plan.
