The omnipresent no-contest clause (originally called in terrorum clauses–as in to terrify one’s beneficiaries) is meant to prevent lawsuits. The idea being that if a beneficiary contests a California Will or Trust containing the clause, then that beneficiary is entirely disinherited and loses his gift under the document (see our previous blog post on how no contest clauses work and their practical application).
But does a no contest clause apply to a beneficiary’s challenge of a Trustee’s actions as Trustee (i.e., challenging the management of the Trust)? The simple answer is no. As a matter of public policy, California law specifically precludes the application of no contest clause to the actions of fiduciaries, including Trustees and Executors (or Administrators) of Wills. In fact, the law wants beneficiaries to have the right to question fiduciaries and to contest a fiduciary’s actions in managing a Trust or administering a Will, provided the contest is not frivolous.
What does this mean for beneficiaries? Question your Trustee or Executor all you want. Nothing in the Trust or Will can stop a California beneficiary from asking about the management, investment, distributions, bookkeeping, professional fees, etc., of a Trust or Will.
Unfortunately, many fiduciaries, especially when they are individuals, do not understand that the no-contest clause does not apply to questioning their actions and they will threaten a beneficiary with the no contest clause as a way to prevent questioning. But this is an empty threat.
What does this mean for fiduciaries? You must be completely transparent in your actions as Trustee or Executor. Everything you do is subject to review and questioning. Worse yet, it is the Trustee’s duty to prove they acted reasonably (see our prior blog post on trustees duty).
Being a fiduciary can be a thankless job because the fiduciary has all the burdens and responsibilities and very few benefits.