MAKING CONDITIONAL GIFTS

Transcription

1 MAKING CONDITIONAL GIFTS William P. LaPiana New York Law School New York, New York I. Since at least the last quarter of the nineteenth century, the prevalent American policy regarding gifts by will or in trust has been one of almost complete deference to the intent of the testator or settlor (the donor, testator, or settlor). The policy is most strikingly evident in the all but complete acceptance of the spendthrift trust and the severe restrictions on the ability of trust beneficiaries to terminate a trust. Except for the vestigial remnant of the civil law forced share in the law of Louisiana, the only restriction on what we have come to call testamentary freedom, apart from the rather ill-defined limits of public policy, is the statutory prohibition on the disinheritance of a surviving spouse in all of the common law title (non-community property states) except Georgia. And while the restriction does exist, the statutes enacting it vary greatly and in some states it is of little practical effect. II. This outline discusses two widely accepted results of the policy of deference to the intent of the donor: the no contest or in terrorem clause which makes a gift in a will or trust contingent on the beneficiary not contesting the validity or the will or trust and what can be called incentive provisions, will or trust terms that make the gift contingent on the beneficiary doing something such as completing higher education, refraining from the use of illegal drugs, or marrying a person of a designated religious tradition. III. Because almost all of the law involved is state law, the geographical scope of the outline is broad and it does not purport to be the last word on any of the issues considered. As always, intensive research in the law of the particular jurisdiction involved is the only way to reach any certainty about the likely meaning of particular language or the outcome of litigation. IV. The idea of the no-contest clause A. The no-contest clause, that is, a clause in a will (and more recently in a trust as well) that conditions a beneficiary s gift on not contesting the validity of the document that makes the gift), has a tangled and confusing history 1. For our purposes the most significant legal legacy of the system that developed in England after the Conquest was the growth of two legal systems, law and equity. Questions involving land, including its transmission on the death of the owner, belonged to the former and questions involving the transmission on death of personal property to the latter. The two systems took different approaches to the question of conditioning a gift in a will on the behavior of the beneficiary. In the law courts, conditions were valid, period. In equity, and in the ecclesiastical courts that dealt with wills of personal property, a condition was not enforced, period. 2. In their seemingly ineluctable urge to find a middle ground, English courts came to a sort of compromise. If the testator did not dispose of the gift were the condition to be breached, that is, did not include in the will a gift 1

2 over, the courts would not enforce the condition (traditionally, a condition that lacks a gift over is a true in terrorem clause). If, on the other hand, the testator did provide for disposition of the gift were the condition to be breached, then the condition was enforceable. Eventually, American courts, following, it appears, some very problematic statements by eminent nineteenth century treatise writers, came up with a two pronged doctrine: first, a no-contest clause was invalid if it did not include a provision disposing of the gift if the condition were indeed breached and second, that the beneficiary would not suffer the consequences if he or she had probable cause for taking the action triggering the loss of the gift. (For an exhaustive discussion of the origins of the law of no-contest clauses, see Olin L. Browder, Jr., Testamentary Conditions Against Contest, 36 MICH. L. REV (1938).) B. What is the policy justification, anyway 1. In spite of its widespread, and apparently increasing, use, there is little consensus on the policy justifications for the enforcement of no-contest clauses, although the typical argument in favor of the enforceability of such clauses usually makes reference to all of these arguments, often without imposing any hierarchy on them. 2. Perhaps the most frequently stated justification is the idea of testamentary freedom, noted above. 3. Another argument sometimes put forward involves avoiding litigation. Since litigation is always to be avoided (at least that seems to be the accepted position) a device to discourage litigation should be perfectly acceptable to, if not encouraged by, the courts. 4. And the nature of the litigation involved is sometimes said to make discouraging it all the more important. Because litigation over testamentary documents often results in the destruction of family privacy, devices to limit its occurrence are justified. 5. On the other hand, the argument against enforcing such conditions, which really results in somewhat limiting their reach rather than invalidating them, is that litigation over the validity of both wills and trusts is a necessary element of our system for passing property at death. Because no public official passes on or is in any way concerned with the validity of wills and trusts, we depend on private parties to policy the boundary between valid and invalid documents. This view of the problems raised by no-contest clauses generally is not put forward as a reason for refusing to enforce but rather as a justification for the frequently stated rule that courts construe such clauses as narrowly as possible. C. These policy arguments inform the approach of both the Restatement (Third) of Property (Donative Transfers) ( Restatement Third ) and the Uniform Probate Code ( UPC ) to no-contest clauses. 1. Restatement Third 8.5 reads in full: A provision in a donative document purporting to rescind a donative transfer to, or a fiduciary appointment of, any person who institutes a proceeding challenging the validity of all or part of the donative document is enforceable unless probable cause existed for instituting the proceeding. 2

3 2. The Comments to 8.5 expand on the blackletter. Comment c defines probable cause as evidence that would lead a reasonable person, properly informed and advised, to conclude that there was a substantial likelihood that the challenge [to the donative document, including a will] would be successful. Relying on independent legal advice is a factor but is not determinative, for the very sensible reason that the institution of legal proceedings challenging a donative transfer normally involves representation by legal counsel. 3. Clearly, the question of the existence of probable cause is not any easy one, but there are some guideposts. a) A small handful of states have statutes governing the operation of no-contest clauses and most of them prevent the triggering of the penalty if there was probable cause for the beneficiaries actions b) The Nevada statute prevents the operation of a no-contest clause if a beneficiary institutes legal action seeking to invalidate a will if the legal action is instituted in good faith and based on probable cause that would have led a reasonable person, properly informed and advised, to conclude that the will is invalid. Nev. Rev. Stat (4). c) The California statute states that probable cause exists if, at the time of filing a contest, the facts known to the contestant would cause a reasonable person to believe that there is a reasonable likelihood that the requested relief will be granted after an opportunity for further investigation or discovery. Cal. Prob. Code 21311(b) d) The Texas statutory provisions governing no contest clauses in wills and trusts V.A.T.S. Probate Code 64 (replaced on January 1, 2014 by the Estates Code), V.A.T.S. Estates Code (effective January 1, 2014), and V.A.T.S. Property Code , effective September 1, 2013 make forfeiture clauses enforceable unless in a court action determining whether the forfeiture clause should be enforced, the person who brought the action contrary to the forfeiture clause establishes by a preponderance of the evidence that just cause existed for bringing the action and that the action was brought and maintained in good faith. 4. On the other hand, there are statues that expressly exclude a probable cause defense. a) The California statute, Cal. Prob. Code makes probable cause a defense against the application of a no-contest clause except where the clause expressly applies to actions involving filing of a creditor s claim or challenging a transfer on the grounds that the property involved did not belong to the transferor (i.e., that it was community property ). b) Delaware, 12 Del. Stat. 3329(a): A provision of a will or trust that if given effect would reduce or eliminate the interest of any beneficiary of such will or trust who initiates or participates in an action to contest the validity of such will or trust or to set aside or vary the terms of such will or trust shall be enforceable. 3

4 c) New York EPTL 3-3.5(b) says [a]condition, designed to prevent a disposition from taking effect in case the will is contested by the beneficiary, is operative despite the presence or absence of probable cause for such contest,... but makes an exception for contests to establish the will is a forgery or revoked by a later will. Such contests will not trigger a no-contest clause if based on probable cause. EPTL 3-3.5(b)(1) d) New Hampshire has statutes dealing separately with nocontest clauses in wills (N.H. Rev. Stat. 552:22) and trusts ( 564-B ) both of which provide A no-contest provision shall be enforceable according to the express terms of the no-contest provision without regard to the presence or absence of probable cause for, or the beneficiary's good or bad faith in, taking the action that would justify the complete or partial forfeiture of the beneficiary s interest in the will or trust, as the case may be. e) Massachusetts has adopted the Massachusetts Uniform Probate Code effective March 31, The Massachusetts version of UPC 517, M.G.L.A. 190B 2-517, omits the probable cause exception that its included in the UPC section (see below) and therefore states that no-contest clauses are enforceable without qualification. The Massachusetts comments to the Code, found at ourt/art2.pdf state that the modification was the result of the decision to continue existing Massachusetts law set out in Old Colony Trust Company v. Wolfman, 311 Mass. 614, 42 N.E.2d 574 (1942) (citing Rudd v. Searles, 262 Mass N.E. 882 (1928)(case of first impression upholding the validity of a no-contest clause after a thorough discussion of cases, especially English precedents, and concluding by saying that the disposition of the case made it unnecessary to discuss the finding of the probate court that the challenge was without probable cause) f) Oregon: O.R.S states that a no-contest is enforceable against a beneficiary of a will even though the beneficiary establishes probable cause for the contest, but like New York makes an exception is the beneficiary has probable cause to believe that the will was a forgery or had been revoked. g) Rhode Island: Elder v. Elder, 84 R.I. 13, 120 A.2d 815 (1956) expressly declined to hold that the operation of a no-contest clause was subject to an exception for actions brought with probable cause or in good faith absent a statutory provision creating such an exception. h) And note Alabama: Kershaw v. Kershaw, 848 So.2d 942 (Ala. 2002); finding no violation of the clearly enforceable no-contest clause, the court did not address the possibility of an exception to the operation of the clause for contests brought in good faith. 5. Restatement (Third) of Property, 8.5 Comment d. states that nocontest clauses are construed narrowly, consistent with their terms. 4

5 a) The exact meaning of this generally accepted rule is perhaps not as important as it once was because drafters of no-contest clauses have been quite adept at making sure that the language of the clause sweeps up everything a beneficiary could possibly do to try to derail the donor s plans. b) One facet of the narrowly construed rule, however, probably cannot be avoided by drafting. In the words of Restatement Third, A suit to construe, reform, or modify the language of a donative document is not a contest of the document and hence is not a violation of a nocontest clause, unless the result sought would invalidate the document or some portion of it. In all other cases, the goal of such a suit is the determining and protecting of the donor s intent. 6. Restatement (Third) of Property wraps up its consideration of nocontest clauses in the comments to 8.5 by noting a) A clause can be violated by an indirect challenge such as aiding another person not subject to a no-contest clause to challenge the document by sharing expenses of the proceeding or an agreement to guarantee to the beneficiary subject to the clause the property or some part of the property given to the beneficiary even if the document is invalidated. b) A beneficiary subject to a no-contest clause should not be found to violate the clause when acting in a representative capacity as guardian or personal representative of another person or in any other representative capacity, unless the representative status is being used as a means of presenting personal views. c) An action by another person that triggers a no-contest clause should not affect the beneficiary s interest unless the clause clearly provides for the opposite. d) Contrary to the traditional common law discussed above, the absence of a gift over does not affect the validity of the no-contest clause. If the language of the instrument is ambiguous to begin with, however, the absence of a gift over is a relevant factor indicating that the language was not intended to create a no-contest clause. D. The UPC has two identical provisions, and entitled Penalty Clause for Contest and both state: A provision in a will purporting to penalize any interested person for contesting the will or instituting other proceedings relating to the estate is unenforceable if probable cause exists for instituting proceedings. The only comment to either section is the reprinting of the blackletter of Restatement (Third) of Property 8.5 and Comment c. Although Restatement Third is quite clear that the principles of 8.5 apply to all donative documents (Comment i), the Uniform Trust Code does not have a section analogous to UPC and E. Note that the lack of UTC analogue to the UPC provisions may be significant, in spite of the position of Restatement (Third) of Property that the common law will not enforce a no-contest clause if probable cause exists for the contest. 1. The Supreme Court of Michigan in In re Griffin Revocable Grantor Trust, 483 Mich (2009), aff g on dissent below, 281 Mich.App

6 (2008), held that a no contest clause in a trust was enforceable even if there was probable cause for the contest because in adopting the UPC provision the Michigan legislature changed Michigan common law, which had no probable cause exception, only with regard to wills, leaving the common law intact as to no-contest clauses in trusts. 2. Within a year the legislature responded by enacting Mich. Comp, Laws : 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. 3. Griffin raises a nice question of the extent to which enactment of a statute contrary to common law also changes the common law in a closely analogous area. Whether or not the Michigan high court was correct, the legislature certainly thought that the probable cause exception should apply to no-contest clauses in trusts. a) However, in the absence of a statute applicable to trusts, courts are often not likely read a statutory provision expressly applicable to wills to also apply to trusts. b) The reluctance holds even when dealing with no-contest clauses in a revocable trust which is the sole beneficiary of its creator s will and is clearly meant to be a will substitute. See, e.g., In re Estate of Stewart, 230 Ariz. 480, 484 n.4 (Ariz. Ct. App. Div. 1, 2012) ( By its plain language, [A.R.S.] [identical to UPC 2-517] applies only to an in terrorem clause set forth in a will, and no party offers an argument to the contrary. On this basis alone, the superior court erred by invalidating the in terrorem clause in the Trust as violating Thus, we address the parties' arguments concerning only as they apply to the in terrorem clause in the Will. ) c) This pattern of refusal to extent statutory provisions applicable to wills to any sort of trust is not limited to statutes dealing with nocontest clauses. A good example is the widespread refusal to apply anti-lapse statutes to gifts in revocable trusts that are not expressly contingent on survival of the settlor. See, e.g., Tate v. Community First Trust Company, S.W.3d, 2012 Ark. 455; Baldwin v. Branch, 888 So.2d 482 (Ala. 2004); First Nat l Bank of Bar Harbor v. Anthony, 557 A.2d 957 (Me. 1989). F. The probable cause exception is very different from a good faith exception which protects from the effects of a no-contest clause a beneficiary who acts in good faith. 1. The probable cause exception, as difficult as it may be to definitively define, is at least somewhat objective: it looks at the facts and arguments put forward by the unhappy beneficiary and tries to arrive at an objective judgment about the likelihood of success. Note that all of the statutory definitions set forth above use a reasonable person standard to evaluate the claim. A good faith standard, on the other hand, focuses on the motives of the contestant and is more subjective than that probable cause standard. 6

7 2. One of the few cases that at least mentions the possibility of using a good faith standard alone to excuse what would otherwise be a violation of a no-contest clause is Moskowitz v. Federman, 72 Ohio App. 149, 51 N.E.2d 48 (Ct. App. Summit County 1943). The Moskowitz court s statement, however, was dismissed as dictum in Modie v. Andrews, 2002-Ohio-5765, 2002 WL (Ct. App. Summit County). V. The first step in planning a no-contest clause A. First, the document must make a gift to the person subject to the clause. 1. After all, the idea behind a no-contest clause is to make the beneficiary who might challenge the document realize that a bird in hand is worth two in the bush. Without the possibility of losing a gift by challenging the document the threat of loss is meaningless. 2. This requirement may be blatantly obvious, but that does not mean nocontest clauses have not been included in documents that disinherit the person or person who are the object of the clause. (For an example known to many lawyers because of its inclusion in widely used casebooks, see Lipper v. Weslow, 369 S.W.2d 698 (Tex. Ct. Civ. App. 1963)) This completely illogical situation no doubt arises at least in part through unthinking use of form books, but, whatever the cause, its existence highlights a serious problem 3. The usefulness of a no-contest clause rests on the assumption that the persons who might challenge the will or other document are rational economic actors, that they will weigh the value of the gift on offer against the possibility of gaining more by contesting the validity of the document. 4. Any estates practitioner, however, is likely to report that decisions by disappointed beneficiaries about whether or not to challenge a will or trust are driven at least as much by emotion as by dispassionate economic calculation. 5. The difficulty inherent in determining an amount that will deter a contest makes some commentators question the usefulness of no-contest clauses. One way to look at that determination is to think of the no-contest clause as a settlement offer how much will it take to get the disappointed beneficiary to go away. a) The problem with that approach is that the hypothetical settlement is truly hypothetical and one-sided. b) Settlements come from negotiations and negotiations require at least two parties. c) In addition, if we do want to look at the proffered gift as a settlement offer, we have to realize that the person selecting the amount, the testator (or settlor) is not really the person who has a stake in the negotiation. At least where the no-contest clause is directed at a beneficiary or beneficiaries judged likely to contest the instrument, other beneficiaries might be willing to give the objects of the clause more, or less, than what the clause offers to avoid a contest. d) This possibility emphasizes the conundrum involved in much of trusts and estates law. Respect for the intent of the donor means that the living are subject to decisions not only made some time ago but which cannot be changed. Again, think of the will beneficiaries who 7

8 would be willing to pay a good deal more than the document is offering to make a contest go away. Why should they make the offer when a failed contest means no gift at all? Does it matter that the perhaps avoidable contest will consumer judicial resources? B. Another threshold question is whether the no-contest clause is valid under the law of the jurisdiction where litigation over the document would occur. 1. Only two states have statutory provisions invalidating no-contest clauses a) Florida, expressly unenforceable in trusts, Fl. Stat : (1) A provision in a trust instrument purporting to penalize any interested person for contesting the trust instrument or instituting other proceedings relating to a trust estate or trust assets is unenforceable. (2) This section applies to trusts created on or after October 1, For purposes of this subsection, a revocable trust shall be treated as created when the right of revocation terminates. And in wills, Fl. Stat : A provision in a will purporting to penalize any interested person for contesting the will or instituting other proceedings relating to the estate is unenforceable. VI. b) Indiana, expressly unenforceable in trusts, Ind. Code : A provision in a trust that provides, or has the effect of providing, that a beneficiary forfeits a benefit from the trust if the beneficiary contests the trust is void And in wills, Ind. Code : If, in any will admitted to probate in any of the courts of this state, there is a provision or provisions providing that if any beneficiary thereunder shall take any proceeding to contest such will or to prevent the admission thereof to probate, or provisions to that effect, such beneficiary shall thereby forfeit any benefit which said will made for said beneficiary, such provision or provisions shall be void and of no force or effect. 2. Vermont has no statute addressing the question of validity nor do there appear to be any cases. (Although there is one late nineteenth century case in which the Vermont Supreme Court enforced a provision in a will conditioning the widow s enjoyment of the testamentary gift on remaining unmarried, remarking that the existence of a gift over on her remarriage meant the clause could not be regarded as in terrorem only. If it were, presumably it would have been unenforceable. McCloskey v. Gleason, 56 Vt. 264 (1883)) Drafting the no-contest clause A. Like so many tasks that confront the drafter of wills and trusts or any transactional lawyer for that matter, drafting is an exercise in responding to case law and statutory developments that make old ways of doing things less than effective. B. For example, consider a very simple clause that directs the forfeiture of any gift given to a person who contests the will. 8

9 1. The idea that a no-contest clause is to be strictly construed is widely held. 2. Indeed, only New Hampshire appears to have contrary law. Effective for proceedings beginning on or after September 10, 2011, N.H. Rev. Stat. 551:22(IV) states (applicable to wills) It is the intent of this section to enforce the testator's intentions as reflected in a nocontest provision described in paragraph II of this section to the greatest extent possible. The provisions of this section shall be construed and applied in a manner consistent with such intent. (Identical language applicable to trusts is found in N.H. Rev. Stat. 564-B: (d)) 3. And while several states that have adopted the UPC provision do not have express law on the subject, see Redman-Tafoya v. Armijo, 138 N.M. 836 (N.M. App. 2005) holding that under the UPC provision no-contest clauses are to be strictly construed. 4. Given the widespread acceptance of the strict construction approach it is not surprising the courts have limited the effect of a clause applicable to contests or to a beneficiary who contests the will to the actual beginning of a suit. E.g.: New York, Matter of Cronin, 237 A.D. 856 (2d Dep t 1932), aff g 143 Misc. 559, 257 N.Y.S. 496 (Sur. Ct. Westchester County 1932) where objections to probate were filed but withdrawn before trial, held, no violation of a no-contest clause applicable to a beneficiary who... contests the will. Accord, Matter of Stiehler, 133 Misc. 2d 253 (Sur. Ct. Nassau County 1986); 5. Perhaps the strictest of strict constructions of the concept of contest is found in a Michigan case, Saier v. Saier, 366 Mich. 515 (Mich. 1962) where the court construed a no-contest clause penalized any beneficiary contest[ing] or attempt[ing] to contest admission of the will to probate. The Court held that the following actions by a beneficiary did not trigger the penalty contained in the clause (as summarized from the Appendix to the opinion in Martin D. Begleiter, Anti-Contest Clauses: When You Care Enough to Send the Final Threat, 26 ARIZ. ST. L.J. 629 (1994), n. 265 a) The beneficiary moved in with his brother, the actual contestant, although they had not been close. The brother stated that beneficiary was assisting him with the law in the contest. b) The beneficiary contacted witnesses to attempt to convince them to testify favorably to his brother in the contest. He [dug] up ancient records pertaining to [one witnesses ] father s criminal conviction and threatened and intimidated that witness. c) The beneficiary hired a number of lawyers to prevent the appointment of both the special administrators and the executors and to remove them once appointed and filed objections to accountings. He litigated numerous steps in the administration of the estate and appealed the decisions when he lost. d) The beneficiary alleged the will was forged and accused one of the executors of stealing the will. e) The beneficiary contacted the Attorney General to examine testatrix s signature. 9

10 f) The beneficiary tried to remove the Probate Judge and filed complaints with the State Bar against all the attorneys representing the estate. 6. There are precedents taking a more expansive view of the meaning of contest, particularly a decision of the California Supreme Court, In re Estate of Hite, 155 Cal. 436, 439 (1909)(rejecting the argument that contest means legal opposition, pressed home to a decision ); Estate of Fuller, 300 P.2d 342 (Cal. Ct. App. 1956). (Now superseded by Cal. Prob. Code and 21311, discussed below effective January 1, 2010) 7. So one lesson is to draft so that the clause is effective should the beneficiary contest the will, in any manner, directly or indirectly, language which in Matter of Ellis, 252 A.D.2d 118 (2d Dep t 1998), appeal denied, 93 N.Y.2d 805 (1999) was held to strip their gifts from beneficiaries who engaged in widespread discovery in actions alleging undue influence by another beneficiary because of the in any manner language. 8. An even more expansive clause applying to both the will in which it appeared and to revocable trusts created by the testator can be found in the latest case involving a no-contest clause to reach the New York Court of Appeals, Matter of Singer, 13 N.Y.3d 447 (2009): a) If any beneficiary shall, in any manner, directly or indirectly, contest, object to or oppose, or attempt to contest, object to or oppose, the probate of or validity of this Will or the revocable trust agreement created by me, or any part of my estate plan or any gifts made by me, or any of the provisions of this Will or of the revocable trust agreement created by me, in any court or commence or prosecute any legal proceeding of any kind in any court to set aside this Will or the revocable trust agreement created by me or any part of my estate plan or any gifts made by me, then in that event, such beneficiary, and all of such beneficiary's issue, shall forfeit and cease to have any right or interest whatsoever under this Will or under the revocable trust agreement created by me, or in any portion of my estate, and, in such event, I hereby direct that my estate and the trust estate under such revocable trust agreement shall be disposed of in all respects as if such beneficiary had predeceased me without issue. b) This clause was held to be effective where objections were filed and depositions taken over the course of year even though the objections were then withdrawn and the will admitted to probate by consent. On appeal, however, the highest court of the state held under the facts of the case there was no forfeiture because the actions of the beneficiary were within the statutory safe-harbor for certain pre-trial discovery in NY EPTL 3-3.5(b)(3)(D) (pre-august 3, 2011 version of the statute) 9. Another even more elaborate clause was litigated in In re Estate of Stewart, 230 Ariz. 480 (Ariz. Ct. App. Div. 1, 2012): 8.01 In Terrorem Clause. To the maximum extent applicable state law permits, if any person should take any one or more of the actions described in this paragraph, either directly or indirectly, then thereafter for all 10

11 purposes the provisions of this will shall be construed and my estate shall be disposed of as though such person had predeceased me, effective as of the date such action is taken. This paragraph shall take effect if any person identified in the preceding sentence: (a) Contests my will or any codicil thereto, any exercise of a power of appointment by me, either during life or at death, or any transfer of property from any person to a trust identified in the immediately following subparagraph; (b) Contests my revocable trust or any other trust created by me either during life or at death and whether by way of grant, exercise of power of appointment or otherwise, or any amendment to any of the foregoing; (c) Contests any discretionary action taken by the personal representative or by the trustee or the adviser of my revocable trust with respect to the allocation or distribution of trust property at my death under my revocable trust, the sale or disposition of any Family Business (as defined in my revocable trust), or the allocation of estate charges against any trust property or beneficiary; (d) Seeks to obtain an adjudication in any court with respect to my testamentary capacity, capacity to enter into binding contracts, or mental capacity in general at any time; or (e) Cooperates or aids in any action described in the preceding provisions of this paragraph with any other person, regardless of whether that other person is himself or herself subject to this article Interpretation. For purposes of this article, a person shall be deemed to contest an instrument, action, or transaction if that person takes any action seeking to invalidate, nullify, set aside, render unenforceable, or otherwise avoid the effect of such instrument, action or transaction. This article shall take effect regardless of whether any such contest is made in good faith or is ultimately successful. The personal representative is authorized to defend any contest by any person at the expense of my estate. a) A son of the testator who had no interest in the will or trust brought actions to set them aside on a number of grounds and also brought civil suits seeking to invalidate the trust and damages against one of his siblings. He also sought a declaratory judgment that the clause was unenforceable, arguing that it violated Arizona statutory provisions and that the language of the clause making it applicable to persons who cooperate or aid in any action described in the clause violated public policy. The trial court agreed but the intermediate appeal court reversed. b) The language making the clause effective whether or not the contest is made in good faith or is successful does not contradict A.R.S (identical to UPC 2-517) which makes a no-contest clause 11

12 unenforceable if the proceeding is brought with probable cause. The statutory provision does no more than what it says and there is no requirement that a no-contest clause include specific language in order to be enforceable. c) The clause is compatible with public policy because, contrary to the trials court s conclusion, it does not apply to persons who testify in a court proceeding or who provide documentary evidence. A better interpretation of the clauses, the court wrote, and one that does not violate public policy, is that beneficiaries forfeit their interests when they urge or voluntarily aid a party to contest testamentary documents. Id. at 485, 286 P.3d at d) Note that the court added to footnote to the quote language immediately above: We do not define the contours of conduct prohibited by an in terrorem clause, as this task is best accomplished by considering the unique facts of individual cases on appeal. The propriety of any particular conduct in this case is not before us. The footnote is an excellent reminder that many cases dealing with nocontest clauses are truly inseparably from their facts. 10. What the decision in Stewart does mean, however, is that prohibitions on cooperation with efforts to contest a will or trust do not violate public policy so long as they do not apply to giving testimony or answering a subpoena duces tecum. 11. Accord: Elder v. Elder, 84 R.I. 13 (1956) where a no-contest clause that applied to anyone who share[s] in any proceedings to oppose the probate of the will did not apply to the testator s widow who voluntarily testified in the probate proceeding. Had she refused, she could have been summoned, [i]n the circumstances her response to such call to testify, which does not appear in the record to have been initiated, offered or designed by her, does not constitute such a voluntary act in opposing the probate of the will as is usually required to come within the terms of similar provisions for forfeiture. In this respect each case must be adjudicated on its own facts. On the record here we do not think that the widow s appearance as a witness, which was substantially involuntary, comes within the terms of the forfeiture clause in question. Id. at 25. C. What should happen to the beneficiary who violates the clause 1. Drafting that simply states that the offending beneficiary s gift is forfeit runs the risk of running afoul of the lingering disapproval of forfeitures and the concomitant requirement that there be a gift over should the beneficiary do what the no-contest clause forbids. 2. One common solution is to make the consequence of violating the nocontest the deemed death of the offending beneficiary (akin to the usual result of a properly made disclaimer). For example: I hereby direct that my estate shall be disposed of in all respects as if such beneficiary had predeceased me. 3. When included as part of a no-contest clause in a will, such language will then force the gift to the offending beneficiary to lapse. 12

13 4. The problem with that solution is the possible application of the jurisdiction s anti-lapse statute. a) With very few (if any) exceptions anti-lapse statutes apply to testamentary gifts to relatives of the testator (UPC is limited to gifts to the testator s grandparents and descendants and stepchildren; NY EPTL is limited to gifts to the testator s issue and the testator s siblings). b) The result of the anti-lapse statute (again, with few if any exceptions; see Md. Estates and Trusts Code which passes the gift through the testate of the deceased beneficiary) is to create a substitute gift in the dead (or deemed dead) beneficiary s issue. c) Therefore, if the beneficiary who violates the no-contest clause is a beneficiary covered by the anti-lapse statute (and it is probably more likely than not since the beneficiary is likely a relative of the testator), then the deemed death can result in the forfeited gift passing to the beneficiary s issue who survive the testator. This result will diminish the terror of the no-contest clause to the extent the beneficiary will be as pleased, or almost as pleased, with his or her descendants receiving the gift as he or she would be with receiving the gift. 5. The simplest approach to negating this possible effect of the anti-lapse statute on the usefulness of a no-contest clause is to add two little words to the language above so that the estate is distributed as if the beneficiary who violates the clause had predeceased me without issue. 6. Eliminating the possible application of the anti-lapse statute in this way works well when the gift that might be lost is a pre-residuary gift, either a specific bequest of property or a general bequest of (most likely) a pecuniary amount. The failed gift will simply be added to the residuary gift, the beneficiaries of which are likely the favored beneficiaries who are unlikely to quarrel with the testator s estate plan. 7. But that is not every situation. Consider the testator whose will gives the residue to my children A & B and makes A subject to a comprehensive no-contest clause which will distribute the estate as if A had predeceased the testator without issue should A s actions trigger the clause. a) A does violates the clause and the estate is then distributed as if A had predeceased the testator without issue, thus negating the application of the state s anti-lapse statute. In the vast majority of estates where a lapsed portion of a residuary gift to more than one beneficiary passes to the other residuary beneficiary or beneficiaries who are do take under the will, B will take the entire residuary estate. However, in the small number of states where the traditional common law no residue of a residue rule is the law, lapsed residuary gifts pass in a partial intestacy. If that is the result of A s deemed death, it is possible for A to take part of the lapsed residuary gift as the testator s heir. b) Whether or not that is the result turns on whether the language of the no-contest clause directing that the estate be distributed as if A 13

14 had died without issue is sufficient to prevent A and A s issue from taking in intestacy; in other words, does the language amount to a negative will preventing A and A s issue from taking both under the will and in intestacy. According to one recent survey (Hirsch, Incomplete Wills, 111 MICH. L. REV. 1423, 1435 (2013), twenty states give effect to negative wills, twenty-five do not and five have no law one way or the other. For a thorough discussion of the history and current state of the law, see Estate of Melton, 272 P.3d 668 (Nev. 2012) c) Even if the testator is domiciled in and the will is expected to be offered for probate in a jurisdiction where the forfeited gift passes to the favored residuary beneficiary either because the no residue of a residue rule has been abolished or, if it has not, the jurisdiction recognizes negative wills and the language directing distribution of the estate as if the forfeiting beneficiary died before the testator without issue is construed to be a negative will (and query how likely that result) the testator could move or the law of the jurisdiction could change. Once again, we have a good illustration of the generally wholesome rule of thumb: do not rely on default rules. d) The only way to be certain that the forfeited gift will not end up in the hands of the forfeiting beneficiary is to expressly provide for disposition of the gift should forfeiture occur, and the best way to do that, perhaps, is to have two dispositions of the residuary estate, one to A and B, the other to take effect if A violates the no-contest clause. 8. The problem is even more acute where the no-contest clause is in a trust. a) With very few exceptions, courts that have considered the application to revocable trusts of anti-lapse statutes which apply to wills have held that the statutes are limited to lapsed gifts in wills. See, e.g., Tate v. Community First Trust Company, S.W.3d, 2012 Ark. 455; Baldwin v. Branch, 888 So.2d 482 (Ala. 2004); First Nat l Bank of Bar Harbor v. Anthony, 557 A.2d 957 (Me. 1989). (A specific example of the general reluctance, noted above, to extend rules applicable to wills to will substitutes.) These decisions leave intact the traditional law of future interests under which conditions of survival to the time an interest vests in possession or enjoyment (the distribution date in the UPC and UTC) are not implied. b) Consider the same gift discussed above, but in the context of a revocable trust: the trust instrument directs the trustee on the settlor s death to distribute the trust property outright and free of trust to the settlor s two children, A and B. Once again, A violates the no contest clause included in the trust and by its terms the trust property is distributed as if A had predeceased the settlor. Under the traditional law of future interests, A s death before the termination of the trust at the settlor s death does not result in lapse so long as A s remainder interest is not conditioned on A surviving the settlor. Instead, the interest simply passes through A s estate to the heirs if A died intestate or under 14

15 A s will (which could make a specific devise of the interest, but it is more likely that the interest will become part of the residuary devise). c) How to pass an interest through the estate of a person who is deemed dead de jure but is very much alive de facto is a nice little puzzle. (One that also arises in the context of disclaimers and led to the addition to the Uniform Disclaimer of Property Interests Act of 6(b)(3)(D) (UPC (b)(3)(D)) which is a rather complex bit of drafting.) Indeed, there is no sensible answer, at least outside of those states that have adopted UPC (or a similar statute) which makes all interests in trusts contingent on surviving the distribution date. d) The problem is more acute than it is in the will context because every gift in a revocable trust is a future interest. A trust term directing the trustee to distribute a pecuniary sum to a named person at the settlor s death is also subject to the no presumed requirement of survival rule. e) But the solution is same the trust terms should expressly provide for the disposition of the forfeited gift. D. One related issue involves what can be described as a truly draconian no-contest clause which not only treats the errant beneficiary as having died before the testator without issue but also takes away gifts from other members of the beneficiary s family. 1. The language suggested above does punish the issue of a beneficiary who violates the no-contest clause, but only by preventing the anti-lapse statute from giving then the gift lost by their ancestor. 2. What if the will makes a separate gift to the issue of a beneficiary who violates a no-contest clause that has language like the following involved in Matter of Robbins, 144 Misc.2d 510, 512 (Sur. Ct. New York County 1989): FIFTEENTH: If any beneficiary under this Will shall in any way, directly or indirectly, contest, object to, or hinder the probate of this Will, or dispute any of its provisions, or exercise or attempt to exercise, or give any notice with a view to exercising any right to take any part or share of my estate otherwise than in accordance with the provisions of this Will, or institute or prosecute, or be in any way, directly or indirectly, interested or instrumental in the institution or prosecution of, any action, proceeding, contest or objection, or give any notice, for the purpose of setting aside or invalidating this Will, or any of its provisions or question in any manner the exercise by my Executors of any discretionary power hereunder, or conspire with or give aid to any person doing or attempting any of the foregoing, then in each such case all provisions for such beneficiary and his or her descendants herein shall be void, and my estate shall be disposed of as though such person had predeceased me leaving no descendants surviving me. (emphasis added) 3. The will made a bequest of certain items of personal property to Daughter and general bequests of $25,000 to each of Daughter s two children. 15

16 4. Daughter had engaged in extensive litigation with the testator during her lifetime and immediately after death attempted to procure letters of administration in testator s estate, an attempt that failed because Daughter could not produce a death certificate. 5. In litigation involving the executors intermediate account, the Surrogate, relying on the general rule of strict construction of no-contest clauses, held that Daughter s attempt to secure letters of administration did not violate the clause. Query whether every court would be as forgiving of an attempt to open intestate administration where the no-contest clause can be violated by hinder[ing] the probate of this Will. 6. And in what is most likely dictum, the court said that even if Daughter had violated the no-contest clause, the language purporting to make her children s gifts forfeit could not be given effect. The children do not take these gifts as successors in interest to their mother as they would under the anti-lapse statute but in their own right and it is a violation of public policy to deprive them of those gifts because of the actions of another. Indeed, a statutory provision allowing a gift to be conditioned on the actions of another person was enacted and then repealed before its effective date. 7. While the portion of the Robbins opinion dealing with the possible loss of the children s independent gifts clearly rests on the history of New York s statute dealing with no-contest clauses (and conditional gifts in general), EPTL 3-3.5, the attempt to punish through a no-contest clause those who themselves do nothing to violate the clause is problematic. 8. It is worth asking if the result would be different in New Hampshire where the statutes state that the intent of the statutory provisions is to enforce the testator s (or settlor s) intent to the greatest extent possible. (N.H. Rev. 551:22; 564-B:1-1014) VII. Even if the clause is well drafted to reach actions by a beneficiary other than carrying through to the end a proceeding to prevent probate, there are some actions a beneficiary can take that are unlikely to trigger penalties under even the most comprehensive of no-contest clauses. A. The first and most discussed both by commentators and cases is probably an action for construction of the will. 1. Restatement (Third) of Property, 8.5 Comment d states that A suit to construe, reform, or modify the language of a donative document is not a contest of the document and hence is not a violation of a no-contest clause, unless the construction, reformation, or modification advocated by the person bringing the suit would invalidate the donative document or any of its provisions. The Comment then cites to example three, discussed above, involving a suit to construe a power of appointment which if successful would invalidate the exercise of the power in the will containing the no-contest clause. 2. Statutory provisions dealing with the issue all say that a construction proceeding does not violate a no-contest clause. a) Delaware: 12 Del. Code 3329(b)(5): A no contest clause shall not apply to: (5) Any action brought by a beneficiary under a will or trust instrument for a construction or interpretation of such will or trust instrument, 16

17 b) New York: NY EPTL 3-3.5(b)(3)(E): The following conduct,..., shall not result in the forfeiture of any benefit under the will... (E) The institution of, or the joining or acquiescence in a proceeding for the construction of a will or any provision thereof. c) Nevada: Nev. Rev. Stat (3)(c): 3. Notwithstanding any provision to the contrary in the will, a devisee's share must not be reduced or eliminated if the devisee seeks only to:... (c) Obtain a court ruling with respect to the construction or legal effect of the will (3)(C) applies the same rule to no-contest clauses appearing in trusts. d) New Hampshire: N.H. Rev. Stat. 552:22(III)(d): a nocontest clause does not apply to Any action brought by a beneficiary under a will or on behalf of any such beneficiary for a construction or interpretation of the will 564-B (c)(4) applies the same rule to no-contest clauses appearing in trusts. Both sections are effective September 11, e) The California statute, Cal. Prob. Code 21311, effective January 1, 2010, limits the enforcement of a no contest clause to direct contests (defined in to mean a contest alleging invalidity of the instrument in which the no-contest clause appears because of forgery, lack of due execution, lack of capacity, menace, duress, fraud, or undue influence, revocation of the instrument or disqualification of an beneficiary under various statutory provisions) and therefore does not allow enforcement of a no-contest clause against a beneficiary who initiates or takes part in a construction proceeding. 3. Case law generally takes the same approach. a) In the words of the Supreme Court Virginia in Virginia Foundation of Independent Colleges v. Goodrich, 246 Va. 435, 436, 436 S.E.2d 418, 420 (1993): As a general principle, one who seeks the guidance of a court in interpreting a provision in a will is not considered to have contested the will in a manner which would actuate a forfeiture clause. While forfeiture clauses or no contest clauses effectuate the testator's legitimate interest in preventing attempts to thwart his intent, a request for interpretation does not challenge the intent of the testator or the validity of the will. b) The no-contest clause in Virginia Foundation of Independent Colleges, however, applied to more than contests : a beneficiary who question[s] any acts in making this will or any of its provisions loses any gift under the will. The court stated that questions regarding the meaning of the will are not questions about making the will. c) There is additional case authority stating that a construction proceeding does not violate a no-contest clause, but most of these cases, involve clauses that penalize the bringing of a contest. (1) Georgia: Hicks v. Rushin, 228 Ga. 320, 324 (1971): The search for the true meaning of a will is not an attack upon it. 17