I have had requests to explain the EFFECT of the new trust law....not just what it says, but what it means. Ahem. So this is my attempt, but with typical attorney disclaimer. No one really knows what a law means until it is tried, tested, and interpreted by courts.....so here goes.
Nearly all trusts and wills have a provision called a "no-contest clause" by which an heir who brings a lawsuit to challenge the trust/will could end up taking no share of the estate whatsoever. Such a clause was valid except for specific challenges, like fraud or mishandling of distribution, and the like. This is also called a "penalty clause." For many years, heirs who wanted to challenge estate documents could first file a court proceeding to obtain a declaratory order from the court as to whether the challenge would be considered a contest resulting in no inheritance. This preliminary filing ("safe harbor action") was not a contest.
The new law basically provides that a contest may NOT result in disinheritance IF the contestant has evidence amounting to probable cause that the claims made are true--and the claims must be within one of the areas identified in the statute (fraud, etc.). The existence of "probable cause" evidence does NOT mean "actual" evidence, so if the heir loses the action and the estate wins, the heir might still inherit as long as the court finds that the heir had probable cause to bring the action. Any no-contest clause that provides differently may be ineffective against this new law--the law takes precedence over contrary provisions.
Of even more importance, the new law allows two enforceable no-contest provisions BUT ONLY IF the trust/will actually expressly provides for them. 1) One will uphold certain property transfers against challenge. 2) The other prohibits a creditor from bringing a court action to challenge the estate plan.
These two no-contest provisions reach beyond what most trusts/wills currently provide because they govern persons other than just heirs of the decedent. In addition, an express statement in the no-contest clause that refers to beneficiary designations in other instruments (such as pension plans or life insurance policies) can bring these other intruments under the coverage of the no-contest clause. Again, this is not currently provided in most trusts/wills. There must be an express statement in the no-contest clause to put these provisions into effect.
At this time, the new law is being analyzed and interpreted, so that its full import is not yet clear. However, it will apply regardless of what your estate documents currently state. In other words, the no-contest clause in your documents will not control whether an heir may be disinherited for challenging the plan--the California law will control and it requires only "probable cause"--and to take advantage of the added provisions re property transfers and creditors, your documents MUST contain express provisions.
The recommended course of action is to contact your estate attorney.
Tuesday, March 9, 2010
Saturday, March 6, 2010
California No-Contest Clause Changes in 2010
Effective January 1, 2010, California laws governing Trusts and Will have changed. Specifically, the new law has amended the requirements for the NO-CONTEST CLAUSE in any “protected instrument.” This clause WILL NOT BE ENFORCEABLE in California unless it is amended to comply with the new law. Here’s the facts:
What is a No-Contest Provision?
It is a common provision in trusts and wills that sets up a penalty if, in certain situations, a beneficiary brings a court action (“a pleading”) to “contest” trust or will provisions. The provision is governed by Probate Code Sections 21310 - 21315.
Effective January 1, 2010, a no-contest clause can be enforced against only three types of contests:
1. A “direct contest” brought without “probable cause.”
3. The filing of a creditor’s claim or prosecution of an action based on it, PROVIDED the no-contest clause expressly prohibits this type of contest.
A no-contest clause that applies a penalty in any other circumstances may be invalid, unless otherwise permitted by case law. The statute will apply regardless of contrary provision in the instrument. It applies to all instruments regardless of when executed, that become or have become irrevocable after January 1, 2001, but not before that date. (Revocable trusts typically become irrevocable on the death of the trustor.)
A few clarifying definitions
To understand the application of a no-contest clause under the new law, it is important to know these definitions:
Contest: A pleading filed with the court by a beneficiary that would result in a penalty under a no-contest clause if enforced.
Pleading: A petition, complaint, cross-complaint, objection, answer, response, or claim.
Direct Contest: A contest that alleges that a protected instrument, or any of its terms, is invalid based on grounds of forgery, lack of due execution, lack of the maker’s capacity, menace, duress, fraud, undue influence, revocation pursuant to statute or the instrument terms, statutory disqualification of a beneficiary.
Probable Cause: It exists if, when the contest is filed, the contestant knows facts that 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 and discovery.
Protected instrument: An instrument containing a no-contest clause (such as a trust or will) and another instrument expressly identified in the no-contest clause as being governed by it, provided the first instrument exists when the second is executed. For example, the beneficiary designation in a life insurance policy, qualified pension trust, or IRA could be covered by the no-contest clause in a trust or will if specifically referenced in the clause.
Do you need to amend your trust/will?
Most likely. It is highly recommended that you contact your estate attorney for a review of your documents to determine whether the new law applies.
What is a No-Contest Provision?
It is a common provision in trusts and wills that sets up a penalty if, in certain situations, a beneficiary brings a court action (“a pleading”) to “contest” trust or will provisions. The provision is governed by Probate Code Sections 21310 - 21315.
For example, if a son does not like the gift given to him in his father’s trust, he might file a court action contesting the trust. That action may be allowed in certain situations, such as when there is clear evidence of fraud. However, if there are no grounds for the contest, the son may be entirely disinherited, losing even the gift given. Hence, the penalty is disinheritance.What is the new law?
Effective January 1, 2010, a no-contest clause can be enforced against only three types of contests:
1. A “direct contest” brought without “probable cause.”
NOTE: The clause is NOT required to prohibit these types of contests expressly.2. A pleading that challenges a property transfer on grounds that the property did not belong to the person making the transfer at the time it was made, PROVIDED the no-contest clause expressly prohibits this type of contest.
3. The filing of a creditor’s claim or prosecution of an action based on it, PROVIDED the no-contest clause expressly prohibits this type of contest.
A no-contest clause that applies a penalty in any other circumstances may be invalid, unless otherwise permitted by case law. The statute will apply regardless of contrary provision in the instrument. It applies to all instruments regardless of when executed, that become or have become irrevocable after January 1, 2001, but not before that date. (Revocable trusts typically become irrevocable on the death of the trustor.)
A few clarifying definitions
To understand the application of a no-contest clause under the new law, it is important to know these definitions:
Contest: A pleading filed with the court by a beneficiary that would result in a penalty under a no-contest clause if enforced.
Pleading: A petition, complaint, cross-complaint, objection, answer, response, or claim.
Direct Contest: A contest that alleges that a protected instrument, or any of its terms, is invalid based on grounds of forgery, lack of due execution, lack of the maker’s capacity, menace, duress, fraud, undue influence, revocation pursuant to statute or the instrument terms, statutory disqualification of a beneficiary.
Probable Cause: It exists if, when the contest is filed, the contestant knows facts that 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 and discovery.
Protected instrument: An instrument containing a no-contest clause (such as a trust or will) and another instrument expressly identified in the no-contest clause as being governed by it, provided the first instrument exists when the second is executed. For example, the beneficiary designation in a life insurance policy, qualified pension trust, or IRA could be covered by the no-contest clause in a trust or will if specifically referenced in the clause.
Do you need to amend your trust/will?
Most likely. It is highly recommended that you contact your estate attorney for a review of your documents to determine whether the new law applies.
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