Can a Bad TrusteeLose it All?

The ever confusing Trust and Will no-contest clause is continually being used and abused in California Trust and Will lawsuits. The irony is that a beneficiary is rarely, if ever, disinherited under a no-contest clause any more because the law is favorably skewed to prevent forfeiture. In other words, no-contest clauses simply do not apply except in the most extreme cases (and your case is not extreme no matter what you think). Not only must you meet the requirements of the Probate Code for a no-contest clause to apply, you must also be acting without probable cause—a nearly impossible standard to meet. If you don’t meet the standard, then you are not in danger of being disinherited regardless of the legal action you file.

But what about a bad Trustee, can he be disinherited under a no-contest clause if he breaches his duties as Trustee? The short answer is no, but why not?

The first rule of no-contest clauses is that you must undertake an action that is specifically listed in the no-contest clause as being a triggering event. More than that, Probate Code section 21310 specifically limits the actions a no-contest clause can affect. Actions that can be used to trigger a no-contest clause are limited to: (1) direct contests of a document (meaning you are trying to overturn a Trust, Will, or Trust or Will amendment), (2) creditors’ claims, and (3) challenging the characterization of property as being either community or separate. Further, a no-contest clause will not apply where someone acts with probable cause of success.

Notice how there is no mention of disinheritance for a bad Trustee?  That’s because there no basis to disinherit a bad Trustee just for breaching a duty to the Trust.  In fact, I have never seen a no-contest clause that includes a provision that triggers disinheritance if a Trustee/beneficiary breaches his duties as Trustee. But even if a Trust or Will no-contest clause had such a provision, it would be unenforceable because only the items outlined in the code can be enforced for no-contest clause purposes.

So that means a bad Trustee who is also a beneficiary will not be disinherited due to his bad actions as Trustee. But the Trustee is not off the hook for engaging in breaches of Trust. The Trustee can still be held liable for any damage that is caused as a result of a breach of Trust, and those damages can be taken out from the bad Trustee’s share of the Trust estate. Unfortunately, that only occurs when a court orders it.  That means the burden is on you to file your lawsuit, prove your case at trial, and get your order surcharging the Trustee for damages.

In January 2010, California once again changed the law of No-Contest clauses in an attempt to make the area easy to apply.  Hard to say if that goal was accomplished.  In this video we discuss some of the basics of California No-Contest clauses.  For those viewing this blog by email subscription, you can click on the title for a link to the video.

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.

No contest clauses were originally referred to as “In Terrorem” clauses. In Terrorem is Latin for “To Scare the Pants off my Beneficiaries”—loosely translated. And that’s what a no contest clause is supposed to do, prevent a trust or will contest by disinheriting a beneficiary who dares to contest the terms of the instrument.

California has a love-hate relationship with no contest clauses. And their application seems to be in constant flux. For example, prior to January 1, 2010, all no contest clauses were enforceable except for clauses that pertained to certain protected actions—such as challenging the actions of a trustee or filing a creditor’s claim. And the law allowed a beneficiary to receive an advanced ruling from the court (called Declaratory Relief) to determine that a proposed filing would or would not be a contest. The advanced ruling process allowed beneficiaries to test the waters before committing themselves to a filing that could later be deemed a contest.

That all changed effective January 1, 2010, when a new law came into effect that radically changed the application of no contest clauses in California—in the hopes of making them easier to apply. Let’s test that theory: under the new law, no contest clauses in wills and trust are generally unenforceable except certain narrowly defined actions. These narrowly defined actions include:

  • A direct contest against the instrument based on things like lack of capacity, undue influence, fraud, lack of proper signing,
  • Filing a petition to transfer title in property into or out of a trust or an estate, or 
  • Filing a creditor’s claim.

These actions only trigger the no contest clause if: the precise action is stated in the clause itself, and the action is brought without probable cause. Sound simple?

Furthermore, the advanced ruling procedure (the Declaratory Relief referenced above) has been abolished. So now beneficiaries must take their chances in filing a petition. If a beneficiary contests a trust or will and wins, then the no contest clause does not apply and the beneficiary is happy. If a beneficiary contests a trust or will and loses, the no contest clause may apply (if it falls into one of the three categories set forth above) and then the beneficiary must argue whether they brought their action with “probable cause.” If the beneficiary has probable cause, then no harm, no foul and the beneficiary is not disinherited. If there is no probable cause, the beneficiary loses all interests in the trust or will.

So what then constitutes “probable cause?” Impossible to say at this time because there have been no cases on this issues to date. But rest assured, case law will be coming because the new law is perfectly primed to result in voluminous litigation. Not the easy application the legislature was hoping for, but a good way to keep trust litigation attorneys fully employed.