Will you lose your inheritance? The Beneficiary’s Corner — Course 5 California No Contest Clauses

1. The basics of California No-Contest Clauses.

Under current law, California no-contest clauses only apply to:

  1. 1. Direct contest brought without probable cause;
  2. 2. A pleading to challenge a transfer of property on the grounds that it was not the transferor’s property at the time of the transfer; and
  3. 3. The filing of a creditor’s claim or the prosecution of an action based on such claim.

2. Hypothetical

Let’s consider a hypothetical situation to demonstrate the problems that arise and the options you have when confronted with a California no-contest clause.  After the hypothetical, we will discuss the application of no-contest clauses in more detail.

  A. The Facts

On August 24, 2015, Nancy hired a lawyer and created a revocable trust that left her estate equally to her three children: Robert, Richard, and Lisa.

The following year, Nancy started showing signs of dementia.  She began having trouble driving, and could not handle her financial affairs.  Her daughter, Lisa, started helping Nancy to pay her bills and go to doctor’s appointments.  Around the same time, Robert moved into Nancy’s home because he had lost his job.  Lisa noticed that cash was being withdrawn from Nancy’s account, and she asked Robert about it.  Robert became very defensive, denied taking any cash, and refused to discuss it further.

In May 2016, Robert told Lisa that she was no longer welcome in their mom’s home.  Robert stopped Lisa from seeing mom or even talking to mom on the phone.  Robert then took over all finances for Nancy, and took Nancy to all doctor’s appointments.

Lisa continually tried to see her mother at her home or talk to her mother on the phone, but Robert would not allow any visits or communications to occur.

On January 5, 2017, Nancy died.  After Nancy’s death, Richard and Lisa both received a letter from a lawyer for Robert along with a copy of Nancy’s Trust documents.  Among the Trust documents was a Trust amendment that changed the Trust distribution so that Richard and Lisa each received a specific gift of $50,000; and Robert received the rest of Nancy’s estate.  Nancy’s gross estate was worth $2 million at the time of Nancy’s death.

The Trust amendment was dated and signed on September 14, 2016.  The amendment was drafted by Robert using an online Trust creation service.  Robert then had his neighbor, who is a notary public, notarize the Trust document.  Robert then hired a lawyer after Nancy’s death to ensure that the Trust amendment would be administered for his benefit.

Both the Trust and the Trust amendment have a no-contest clause that says if anyone directly contests the documents based on lack of capacity, undue influence, fraud, or any other grounds, then that person will lose their gift under the Trust.

Richard and Lisa would like to contest the Trust document based on undue influence and lack of capacity, but if they do so and lose then they may each lose their specific gifts of $50,000 each.

  B. The Options

It now seems that Robert has taken advantage of his mother and created a Trust amendment that benefits him.  Both Richard and Lisa are going to lose over $600,000 each due to the Trust amendment.  What can they do to fight for their inheritance?  Here are your options:

  1. 1. Do nothing
  1. 2. File Trust contest alleging undue influence
  1. 3. File Trust contest alleging lack of capacity
  1. 4. File Financial Elder Abuse lawsuit
  1. 5. Negotiate a settlement without filing a lawsuit

  C. Our Opinion

Listen to the approach that Stewart Albertson would take to fight for your inheritance.

  D. Roundhouse

Listen to Stewart Albertson and Keith A. Davidson discuss the options and their recommended approach to this difficult problem.

3. The law of no-contest clauses

A no-contest clause prevents someone challenging a California Trust or Will from receiving their stated inheritance if they lose that Trust or Will contest.

California no-contest clause law has undergone many changes in the past two decades.  The most radical change came with the implementation of the current no-contest clause statute contained at Probate Code section 21310, et seq.  Under current law, no-contest clauses can only be enforced in one of three scenarios:

  • Direct contests brought without probable cause,
  • A pleading to challenge the transfer of property on the grounds that it was not the transferor’s property, and
  • The filing or a creditor’s claim or the prosecution of an action based on it.

Keep in mind that the document you are challenging must have a no-contest clause to start with before any of these sections apply.  That means if you challenge a Will or a Trust that does NOT have a no-contest clause, then you will never be subject to disinheritance if you challenge the Trust or Will and lose.

  A. Direct Contests

A direct contest means any contest to the validity of a Trust or Will, or an amendment to a Trust or Will, that is based on one or more of the following grounds:

  • Forgery
  • Lack of due execution
  • Lack of capacity
  • Menace, duress, fraud, or undue influence,
  • Revocation of a Will or Trust, or
  • Disqualification of a beneficiary.

In a majority of Trust and Will contest cases, the Trust or Will is being challenged based on lack of capacity and undue influence, so any such lawsuit would potentially trigger the documents’ no-contest clause (if the document has such a clause).

Direct contests have a big exception to them, however, which is probable cause.  If a direct contest is filed with the court and the person filing the lawsuit has facts that would cause a reasonable person to believe that there is a likelihood that the lawsuit would be won after further inquiry and discovery, then the no-contest clause will NOT apply.  There are quite a few qualifying terms in the last sentence.  For example, “reasonable person,” “likelihood,” “after further inquiry and discovery.”  Each of these terms leaves a lot of room for argument about whether the contesting beneficiary had probable cause or not.  That means, you have a great chance to argue the existence of probable cause even if you lose a direct contest.

Notice what is NOT a direct contest, challenging the actions of the Trustee.  No where in defining direct contests does it list any lawsuit against the Trustee for the actions the Trustee has taken.  Or for requiring the Trustee to account and provide financial information.  All actions against a Trustee for management of the Trust is fair game and cannot lead to the disinheritance of a beneficiary under a no-contest clause.

  B. Challenging the Transfer of Property.

No contests also apply to a pleading to challenge a transfer of property on the grounds that it was not the transferor’s property at the time of the transfer.  (Probate Code 21311(a)(2).)  What does this mean?  Under Probate Code section 850, the Probate Court is allowed to handle property title disputes.  Let’s say your parents transfer real property to a Trust.  You claim they could not do so because you actually owned the property at the time.  You then file a lawsuit attempting to get the property back from the Trust.

If the Trust has a no-contest clause that mentions this type of action, then you could be disinherited for choosing to sue.  The fact that you win the lawsuit, or lose it, is irrelevant.  The mere fact that you file a pleading making this claim is enough to trigger the no-contest clause (provided that the no-contest clause mentions this type of action).

To make this rule even more harsh, there is no probable cause exception.  Unlike direct contests, where you can lose the lawsuit and still NOT be disinherited if you have probable cause, a pleading to challenge ownership of property applies once the lawsuit is filed.  Ouch.

  C. Filing a Creditor’s Claim or Prosecuting an Action Based on Such Claim

If you file a creditor’s claim in an estate where you are also a beneficiary of that estate, you may lose your beneficial interests.  For this section to apply there first must be a no-contest clause in the Will or Trust that precludes the filing of a creditor’s claim.  If that is the case, then any claim you file could trigger the no-contest clause and result in you losing your beneficial interests under a California Will or Trust.

For example, assume that you are a beneficiary of a Will where you are going to receive one-third of the estate, which is valued at $3 million total (in other words, you are set to receive $1 million as a beneficiary).  But you also claim that the decedent owes you his house, which is worth $500,000, because he entered into a contract to sell you the house for $100,000, which you already paid to him.  The Will has no-contest clause that mirrors the Probate Code stating that filing a creditor’s claim will trigger the provision and result in you receiving nothing.

In this example, you have a choice to make.  You can either accept the $1 million beneficial gift and forget about the contract for the house, or you can file your claim for the house and lose the $1 million gift under the Will.  What would you do?  Unfortunately, you cannot receive both the $1 million gift under the Will AND the claimed house because the no-contest clause precludes you from filing and creditor’s claim.  And there is no way for you to enforce the contract to sell you the house without filing a creditor’s claim.  It comes down to a choice.

This type of choice is much easier if you receive nothing under the Will.  If you were promised the house, but receive no gift under the Will, then you would obviously file your creditor’s claim because you have nothing to lose by doing so.  Only when the gift under the Will is substantial does this become a more difficult decision.

Why does the law allow someone to give you such a difficult choice?  It’s called an election, and a decedent has the right to make you decide between your gift under the Will or your contract rights.

Also, there is no probable cause exception for filing a creditor’s claim under the Probate Code, the mere filing of an action is enough to trigger the no-contest clause.  This can be varied, however, by the Will or Trust document.  So if the Will or Trust document provides for probable cause in this context, then probable cause would apply.  You have to read your California Will or Trust carefully to ensure you understand the no-contest clause and how it may apply to you.

  D. Strict Construction

As you might imagine, no-contest clauses can have harsh results.  The clause is effectively taking away a beneficial gift from someone, which could result in millions of dollars changing hands.  As a result, the Probate Code (and the common law before it) requires that all no-contest clauses must be strictly construed.  (Probate Code section 21312.)

Strict construction means that there are no assumptions made about whether a no-contest clause applies to a given action or not.  Either the clause specifically spells out what is to occur, or it does not.  And if the clause is vague or lacks wording that applies to the situation before the court, then the clause is simply not applied.