Under California law, no-cotest clauses in California Trust and Wills have been substantially limited in their applicability. In most cases they simply will not apply. But even when a no-contest clause does apply, it may still be possible to escape its affects. In this video, Stewart Albertson discusses when you can escape the harsh affects of a no-contest clause.
In an earlier post we discussed the terrorizing effects of no contest clauses. For all the uncertainty the new no contest law has created—and the very real possibility that such clauses are rarely enforceable—many decedent’s doom the effectiveness of their own no contest clause themselves when including a no contest clause in their will or trust. This is because many decedents fail to provide a meaningful threat of disinheritance under the trust or will.
For example, let’s say that I am a trust beneficiary and the trust has total assets worth $4,000,000. The trust is created by my father and provides for an equal distribution of assets between my brother and me—a 50/50 split. Shortly before my father’s death, he changes the trust terms leaving me a specific gift of $10,000 and leaving the rest to my brother. The newly revised trust has a no contest clause that states that I am disinherited (i.e., I lose my $10,000 gift) if I challenge the trust terms. But if I challenge the trust terms and win, I stand to receive half of $4 million, or $2,000,000. Will I risk losing $10,000 to contest the trust and hopefully receive $2 million? Most likely, yes. In this scenario I have no reason not to contest the trust. Thus, from a practical perspective, the trust’s no contest clause has failed to prevent a contest. The gift is too small and the threat of disinheritance too irrelevant when compared to the overall trust value.
So how big must a gift be to prevent a contest? That’s a relative question of course, but it should be big enough to cause a beneficiary to stop and think. In the example above, a specific gift of $500,000 certainly could have changed the decision. A gift of $1 million probably would have prevented a contest.
The overall value of a particular trust may be smaller than $4,000,000, but the analysis is the same—what amount is enough to prevent a contest. Giving a potential contestant nothing under the will or trust will definitely invite a contest because that person will have nothing to lose. Yet all too often that is exactly what occurs—a zero gift is a certain contest. But a gift of substance when compared to the overall value of the trust or estate is a different story. So give it some thought a try to plan with a realistic number so that the no contest clause has some practical effect behind it.