Written by Estate Litigation Attorney Mark Andersen
When working with families who are planning their estates, estate planning attorneys rarely hear their clients acknowledge the possibility that their beneficiaries might fight over the estate after they pass on. When families do fight over money, it is very unfortunate, and can be disastrous in the following respects: (1) tens or hundreds of thousands of dollars can be wasted on attorneys’ fees and court costs in a very short period of time; (2) family relationships that previously were strong can be damaged beyond repair by accusations of undue influence or misconduct, whether true or not.
Families who do their estate planning often want to include a “no-contest clause” in their estate planning documents in order to discourage fights within the family. A no-contest clause is a provision in a will or trust that causes a beneficiary to be disinherited if the beneficiary challenges the documents or takes some other course of action that can be discouraged by a no-contest clause. In order to stay out of trouble with the beneficiaries, Trustees should consider the following questions when enforcing a no-contest clause in a Trust Agreement. [NOTE: Similar principles apply to Personal Representatives of Estates when a will contains a no-contest clause.]
1 – What is the language of the no-contest clause?
A typical no-contest clause punishes the contesting beneficiary who is challenging the terms of the distributions without probable cause to do so. The punishment usually is disinheritance of that contesting beneficiary. Other conduct can be prohibited as well, such as assisting the contesting beneficiary, or challenging the conduct of a personal representative or trustee who takes “disciplinary action” against a contesting beneficiary (i.e. Estate of Stewart, 230 Ariz. 480). Before bringing an action to enforce a no-contest clause, a Trustee should consult with counsel to consider whether the conduct of the contesting beneficiary actually violates the no-contest clause. An area of potential trouble to avoid is if a beneficiary challenges the conduct of a trustee, and does not directly challenge the documents or distributions, then it is not likely that the Trustee will prevail in an action to enforce the no-contest clause, and could be personally liable for the fees and costs of the contesting beneficiary.
2 – How should the Trustee evaluate “probable cause”?
Arizona courts have held that a no-contest clause will not be enforced if the contesting beneficiary had “probable cause” to bring the action (i.e. Arizona Revised Statues §14-2517). The trouble with this standard is that the term “probable cause” is more commonly used in the area of criminal law to evaluate the propriety of an arrest or issuance of a search warrant. The probate courts have very little precedent that defines whether a contesting beneficiary has probable cause to bring such an action.
The Supreme Court in Arizona defined “probable cause” as follows (see Estate of Shumway, 198 Ariz. 323):
“…The existence, at the time of the initiation ofthe proceeding, of evidence which would lead a reasonable person, properly informed and advised, to conclude that there is a substantial likelihood that the contest or attack will be successful. The evidence needed … should be less where there is strong public policy supporting the legal ground of the contest or attack…. A factor which bears on the existence of probable cause is that the beneficiary relied upon the advice of disinterested counsel sought in good faith after a full disclosure of the facts.”
The Supreme Court also said in Shumway that a good faith, subjective belief alone was not enough to establish probable cause. Whether the contesting beneficiary wins or loses is not the controlling factor either. Another factor in the “probable cause” analysis is whether the beneficiary relied on the advice of independent legal counsel before bringing the action. A Trustee should consider with legal counsel whether the contesting beneficiary had probable cause to attack the validity of the documents.
3 – Is the Trustee taking a reasonable position that cannot be considered retaliatory?
Emotions run high in probate litigation. Often, major strategy decisions in a will contest or trust contest are made by an emotional or knee-jerk reaction. Trustees have a duty of loyalty to the Trust and a duty of fairness to all beneficiaries. A Trustee may want to “stick it” to the contesting beneficiary for challenging the position or authority of the Trustee. There are procedures set forth in Arizona law that a Trustee can observe before taking legal action in order to protect the Trustee from liability for that action (i.e. a “notice of proposed action”, or a “petition for instructions”). These tactics and other principles of fiduciary responsibility should be considered with legal counsel. Decisions should be made after a rational, unemotional analysis is performed to consider costs and benefits of such action, and to consider whether the wishes of the Trustor would be honored by enforcement of the no-contest clause, or by observing the wishes of the Trustor as set forth in the distribution section of the Trust Agreement. If a Trustee’s act is considered retaliatory, that act likely will be considered outside the scope of the Trustee’s authority, and it could subject that Trustee to personal liability for attorneys’ fees and other penalties.