Protecting Wills and Trusts from Beneficiary Contests

One of the primary goals in executing an estate plan is the ability to control the distribution of assets. While many clients decide to divide assets equally among their beneficiaries, others choose to provide for different beneficiaries in different amounts or with different limitations. In some cases, the client has a child who has received large gifts during their lifetime and therefore the client chooses to reduce that child’s share or exclude that child from distributions at their death. In other situations, the client seeks to spread out distributions over the beneficiary’s lifetime due to worries about spendthrift behavior. Sometimes the child has exhibited such bad behavior the client decides to disinherit that child completely.  Occasionally, these clients worry that their family members will argue about assets or trust provisions after their death and want to prevent this type of action. Fortunately, a Settlor can add provisions to a Trust to discourage beneficiary from arguing or starting litigation after the client's death.

Michigan law allows the use of "in terrorem" or "no-contest" clauses to discourage contests of Trusts. No-contest clauses work by providing that any beneficiary who contests the provisions of the trust forfeit any distribution from the trust to which they were otherwise entitled. The goal of a no-contest clause is to deter beneficiaries from engaging in costly litigation against the Trustee or one another by severely penalizing the beneficiary who take such actions. The hope is to minimize litigation, cost and delays in the administration of documents, prevent family discord and damage to long-term relationships, and keep personal family matters private.

While Michigan courts have traditionally enforced contestability clauses, irrespective of good or bad faith shown in the contest, in 2010, Michigan's legislature codified the use of contestability clauses, but limited them in certain situations with the statutory language:

“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.”

            This statutory language limits the enforceability of no-contest clauses to times when no probable cause exists for instituting a challenge to the Will or Trust. "Probable cause" exists if there is evidence that would lead a reasonable person, to conclude that there was a substantial likelihood that the challenge would be successful.

Courts now must decide if enforcing a Settlor's intent and desire to reduce frivolous claims by beneficiaries should be superseded by the need to protect beneficiaries from mistakes or wrongdoings by trustees. Due to this standard, probable cause is usually determined on a case-by-case basis, requiring the courts to find substantial basis for a contest. This requirement may still cause a beneficiary challenging a document a high level of discomfort if a court determines that there is no probable cause.

It is possible to draft no-contest to cover a broad spectrum of situations or to apply to specific individuals, such as a difficult child. When including no contest clauses in documents designed to address concerns regarding particular beneficiaries, it may be appropriate to explain the Settlor’s concern about that beneficiary. Such explanations may assist the court in determining that there is no probable cause for any contest. As with other complex estate planning issues, drafting documents to include no-contest clauses only should be done after consultation with and with assistance from experienced professionals.

Alan Ferrara