ALI-ABA Course of Study Sophisticated Estate Planning Techniques

Transcription

1 497 ALI-ABA Course of Study Sophisticated Estate Planning Techniques Cosponsored by Massachusetts Continuing Legal Education, Inc. September 13-14, 2010 Boston, Massachusetts Not So Fast: Drafting, Planning, and Litigating No Contest Clauses By T. Jack Challis Polsinelli Shughart PC St. Louis, Missouri

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3 499 NOT SO FAST: DRAFTING, PLANNING, AND LITIGATING NO CONTEST CLAUSES SEPTEMBER 13-14, 2010 By: T. Jack Challis St. Louis, MO I. INTRODUCTION Contest clauses come in many shapes and sizes and are identified by a number of names. These provisions in documents are variously referred to as Contest clauses, No Contest clauses, Anti-Contest clauses, Forfeiture clauses and In Terrorem clauses. Unless otherwise distinguished in this paper, reference will be a general reference to a clause which can be described by one of the above terms. Probably the most descriptive term is that of a forfeiture clause as this is the intended effect of the clause with respect to particular conduct by a named beneficiary. For general reference purposes, however, these clauses will be called no contest clauses. A. The scope here deals with the general concept and uses of no contest clauses, drafting of these clauses in the Will or Trust context, analysis of state law issues, and some alternatives to the pure, or stand-alone, no contest clause. B. Because of the substantial penalty visited on a beneficiary by a no contest clause, these provisions in testamentary documents represent some of the most hotly contested and, from a contestant s point of view, dangerous bet-the-farm provisions in Wills and Trusts. 1. Given close family relationships that sometimes exist and the emotional nature of the inheritance process, beneficiaries frequently believe they are not being treated fairly in the disposition of trust or estate assets. The perception of the beneficiary is that what is received is not enough and that this beneficiary is somehow entitled to receive a larger distribution than provided. 2. Beneficiaries attempt to rationalize the amount which is fair by their relationship with a decedent or the valuable services or advice they provided to decedent. Except in the most straightforward of situations, the beneficiary s expectation is rarely satisfied in the real world. 3. As the inheritance almost always represents a gratuitous transfer and not a transfer based on entitlement or fair market value, it is easy for a beneficiary s expectations to be unfulfilled. 1

4 Should the helpful family member or friend receive more? Should a distribution be on a per stirpes or a per capita basis, and is this fair in a particular family situation? Should a child receive more than the collective or individual descendants of a deceased child? Should a natural descendant receive more than a descendant by adoption? 5. Carefully drafted documents may answer many of these questions without reference to a challenge or contest of the instrument. An ambiguity does not need to result in litigation. C. Inheritance process is complicated by the fact that beneficiaries simply do not understand how the process works, or bring just enough information/experience to the process to become hopelessly confused. 1. Process can be further complicated by a decedent s carelessness or lack of attention to detail in the designation of beneficiaries and contingent beneficiaries in connection with assets not passing by Will or Trust disposition, such as retirement benefits, insurance or assets with T.O.D. or P.O.D. designations. 2. Because of the highly charged and emotional nature of family dynamics at the time of death, it takes very little in the way of disappointment or bruised feelings to raise the level of dispute to full blown litigation. 3. For example, a recent Virginia case confirmed that the same rules holding no contest clauses in Wills enforceable should also apply to Trusts. The court also found that such clauses are to be enforced strictly depending upon the wording and the circumstances of the case. Keener v. Keener, 278 Va. 435, 682 S.E.2d 545 (2009). a) The Keener court found that no contest language is to be strictly construed to protect the decedent s right to dispose of property as he sees fit, according to terms carefully selected by the testator and his draftsman. b) The trial court found that decedent s daughter s conduct in opening an intestate probate estate triggered the no contest clause where there existed a valid pourover Will. The Supreme Court disagreed. c) Testimony indicated that the original Will was in the possession of one of non-contesting siblings (the successor trustee) and that he did not file the Will or offer it for probate, instead explaining that there really was no Will, apparently meaning that the Will referred everything to the Trust. His sister, the contestant, confirmed that no Will was on file, signed an oath of intestacy, and requested that she be appointed administratrix of the estate. Such misunderstanding of the precise facts of the process involving a Will and Trust is not at all unusual. 2

5 501 D. In determining the enforceability and construction of no contest clauses, courts will frequently balance two distinct and conflicting legal principals: (i) the right of each testator or settlor to dispose of property as he or she determines to be appropriate while avoiding the expense, risk and devisiveness of litigation; and (ii) protecting the rights of interested parties to petition the courts for redress of valid grievances. With some exceptions, courts strive to balance the effect of these competing principals by favoring enforcement of no contest clauses while frequently limiting the enforcement with measurable (and appropriate?) restrictions. 1. Courts further provide that such clauses will be enforced even though it is said that equity abhors forfeiture. And, courts have looked more favorably at enforcement if there is a gift over of the forfeited property. a) The Georgia legislature and courts have provided that an in terrorem clause shall be void unless there is direction in a Will as to the disposition of property if the clause is violated. This is a modification of the prior rule which required that there would be a gift over of the property to some other beneficiary if the no contest clause required a forfeiture. The revised law only requires that there be an alternative disposition of the property. Ga. Code Section (1996); Cox v. Fowler, 279 Ga. 501, 614 S.E.2d 59 (2005). b) New Hampshire law provides that a no contest clause is valid, without regard to good faith or probable cause, if there is a gift over of the forfeited property. Burtman v. Butman, 97 N.H. 254, 85 A.2d 892 (1952). c) As courts regularly express great disdain for no contest clauses and look for ways to avoid enforceability, courts can be imaginative in determining what is a valid gift over or alternative disposition of property. 2. The effect of state law on the enforceability of no contest clauses must be the place to start the estate plan analysis. States vary widely in their recognition and enforcement of no contest clauses. 3. The specific terms of the no contest clause, including its scope and effect on particular actions, transfers and even conduct by the fiduciary, must be analyzed within the context of state law and the documents at issue. II. THE NO CONTEST CLAUSE ENVIRONMENT Attached to this paper as Appendix I is an analysis of the law of select states concerning the application of No Contest Clauses in Wills and Trusts. This Appendix was completed by the Will and Trust Contest Subcommittee of the Fiduciary Litigation Committee of the American College of Trust and Estate Counsel 3