Financial advisors who work with wealthy clients are increasingly being called upon to help with legacy planning, often in collaboration with lawyers and other legal representatives.
Drafting wills and trusts is an important part of that process, according to David Baker, an attorney with McDermott Will & Emery LLP.
But, as Baker reviewed during a presentation Tuesday at the Heckerling Institute on Estate Planning conference in Orlando, Florida, advisors might not realize that between 1% and 3% of wills are contested in the United States each year. Trusts are also challenged, although it happens less frequently.
The situation affects tens of thousands of people annually and can spark conflict among even tight-knit families. Fortunately, Baker said, there are tools and techniques that clients can put in place to reduce the potential for intrafamily drama over inheritance plans.
Among these are no-contest clauses, also known as in terrorem clauses, which are inserted into wills and trusts to discourage heirs from contesting a will by voiding their claims to any part of the estate if they challenge the language of the will in court.
When properly drafted, Baker said, these legal mechanisms can go a long way to “bulletproof” a client’s estate plan.
Why No-Contest Clauses Are Useful
The causes of challenges to wills and trusts vary, Baker noted, ranging from alleged drafting errors to more serious expressions of unresolved intergenerational resentment. The outcomes of challenges in which no-contest clauses are lacking also vary depending on factors like state statutes, evolving case law, the quality of the will or trust, and the litigiousness of the parties involved.
Fostering open dialogue about inheritance and legacy planning well ahead of the enactment of a will or trust, Baker said, gives all stakeholders time to work through disagreements without involving the court. But not all challenges can be avoided, he added, making it important for clients with sizable estates to consider the use of no-contest clauses.
Virtually all jurisdictions have positively addressed the enforceability of no-contest clauses either by statute or by case law, Baker observed. Vermont is the only state that does not appear to have any law addressing enforcement, while only Indiana and Florida prohibit the enforcement of no-contest clauses by statute.
Power and Limits of No-Contest Clauses
No-contest clauses are relatively simple and enforceable, Baker said, but advisors should consider their limits as well.
For example, no-contest clauses work only for named beneficiaries who have an actual claim in the will. And even named beneficiaries must be given a sufficient interest under the testamentary document for a no-contest clause to be practically useful. Otherwise, the potential plaintiff and their representation will not hesitate to challenge the will if there is only a meager inheritance at stake.
In practice, Baker said, many contests of testamentary dispositions do involve beneficiaries who receive significant interests but who nonetheless object to perceived unequal, discriminatory or non-controlling interests created for the contesting beneficiary.
In such cases, enforcement of no-contest clauses should be “relatively straightforward,” Baker said, especially in cases where a beneficiary is trying to invoke forced heirship by challenging a document simply due to a perceived lack of equality.
Baker noted that challengers who file actions based on the concept of “undue influence” are also particularly vulnerable to no-contest clauses. This is because very few contestants actually understand undue influence as a legal concept, as it requires a form of “brainwashing” such that no “free will” exists at the time of execution of the contested document.
The typical undue influence complaint, he pointed out, doesn’t focus on free will and self-control. Instead, it alleges bad or unfair choices brought about by an alleged wrongdoer’s nagging, false pretenses or overbearing conduct that causes the will-maker to placate the alleged wrongdoer.
But, as Baker emphasized, none of these behaviors are actually “undue influence.”
As a result, where evidence does not support the existence of overwhelming behavior and an overwhelming loss of control by a will-maker, a no-contest clause should be effective in these situations.
Potential Workarounds Exist
While Baker emphasized the legal power of no-contest clauses, he also noted that plaintiffs’ attorneys are increasingly striving to frame litigation in a manner other than traditional will and trust contests.
Their idea is to “get around” no-contest clauses by structuring lawsuits as challenges to estate administration, including actions over failed or allegedly improper investments. Other strategies include attempting to show failures in will construction or raising alternative interpretations of alleged ambiguities.
While there are generally jurisdictional barriers to bringing these cases, and the grounds typically do not include simple dissatisfaction with the terms of the estate plan, it is not difficult to conjure up an alleged ambiguity in a legal document. Plus, Baker said, courts are not always exacting about determining whether a genuine ambiguity exists before allowing a construction suit to go forward.
In Baker’s experience, a broadly drafted no-contest clause, which expressly includes a construction or reformation proceeding to materially alter a beneficiary’s interest without probable cause, is probably the best way to contain this type of challenge. It’s also important for the clause to include trigger mechanisms with respect to “tortious interference.”
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