estate planning
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California No Contest Clause
California courts may not always enforce a no contest clause, but a no contest clause can still be an effective way to block a lawsuit.
Gabi Aboujaoude
Jun 22, 2023
No contest clauses are presently valid in a limited way in California. California courts have recognized the enforceability of no contest clauses while strictly construing their terms.
The no contest clause is only enforceable if it is in the challenged document or expressly references it. See
Aviles v Swearingen
(2017) 16 CA5th 485.
With limited exceptions, a no contest clause that became irrevocable on or after January 1, 2001, may be enforced only against "direct contests" brought without probable cause. See
Funsten v Wells Fargo Bank
(2016) 2 CA5th 959.
No contest clauses generally are not enforceable against beneficiaries of California trusts when there is “probable cause” to challenge the trust instrument.
California Probate Code Section 21311
Prob. Code § 21311 states that a no contest clause can only be enforced in
limited situations:
1) a direct contest
and only if it is brought without probable cause;
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 only where the contest clause expressly states such restriction;
3) the filing of a creditor’s claim or prosecution of an action based on it
and
only if the contest clause expressly states such restriction.
Under
Meiri v. Shamtoubi (2022) Cal.App.5th, a Court of Appeal opinion issued August 2022, the probable cause safe harbor may disappear if the contest is untimely. The court held that plaintiffs who file time-barred contests lack “probable cause” to believe that the requested relief will be granted, and that no-contest clauses can therefore be enforced against them.
No contest clauses have limited effect because they are only enforced after the contestant loses at trial. If the contestant wins, the trust and the no contest clause are typically deemed invalid. Likewise, if the case settles before trial, the no contest clause is never enforced. Because most civil cases in California settle without a trial, no contest clauses are not frequently enforced by the courts.
Purpose and Effect of No Contest Clause
A no contest clause is a provision in an otherwise valid estate planning instrument, such as a living trust or will, that, if enforced, would disinherit a beneficiary for filing a “direct contest” without probable cause in any court.
Generally, no contest clauses are used to discourage contests of living trusts by providing that any beneficiary who contests the trust forfeits what he or she would have received under the living trust. Of course, a no-contest clause is an ineffective deterrent if the contestant has no beneficial interest in the living trust.
In addition, a no contest clause usually stipulates that the contesting beneficiary's issue must forfeit any right to take the contestant's place. This limitation prevents the issue from taking under the antil-apse statute when the contestant is kindred of the settlor (or the settlor's spouse or registered domestic partner) and the contestant, by virtue of the no-contest clause, is treated as having predeceased the settlor.
With limited exceptions, a no-contest clause in an instrument that became irrevocable on or after January 1, 2001, may be enforced only against "direct contests" brought without probable cause. See
Funsten v Wells Fargo Bank
(2016) 2 CA5th 959.
Probate Code §21311 provides that a no-contest clause may be enforced only against the following:
- Direct contests as defined in Prob C §21310(b) brought without probable cause (Prob C §21311(a)(1));
- Challenges to a transfer of property on the grounds that it was not the transferor's property at the time of transfer, if expressly barred by the no-contest clause (Prob C §21311(a)(2)); or
- Filing or prosecution of creditors' claim against challenges to property transfers on the grounds that the property was not the transferor's, if expressly barred by the no-contest clause (Prob C §21311(a)(3)).
A "direct contest" is a contest alleging the invalidity of an instrument or one or more of its terms, based on one or more of the following grounds (Prob C §21310(b)):
- Forgery;
- Lack of due execution;
- Lack of capacity;
- Menace, duress, fraud, or undue influence;
- Revocation of a will under Prob C §6120, of a trust under Prob C §15401 (trusts), or of another instrument as provided by statute or by the instrument; or
- Disqualification of a beneficiary under Prob C §6112 or §21380.
Late Trust Contest May Trigger Enforcement of No Contest Clause
Under
Meiri v. Shamtoubi (2022) Cal.App.5th, a Court of Appeal opinion issued August 2022, the probable cause safe harbor may disappear if the contest is untimely.
The court held that plaintiffs who file time-barred contests lack “probable cause” to believe that the requested relief will be granted, and that no-contest clauses can therefore be enforced against them.
Potential contestants who receive a notice of trust administration under § 16061.7 must file their contest before the 120-day period runs.
Factors to Consider
First, a no contest clause does not prevent a beneficiary from suing. In fact, nothing an estate planning attorney includes in the terms of a trust can prevent a beneficiary like Bob from suing. The no contest clause says, in essence, that if a beneficiary files a certain limited type of lawsuit, and loses, and the judge finds that the lawsuit was not brought with “probable cause,” the beneficiary would forfeit his inheritance under the trust. This does not mean that the beneficiary cannot sue.
Second, a no contest clause only has a deterrent effect if the beneficiary considering a contest would receive a substantial gift if he doesn’t sue. If a no contest clause is enforced, the beneficiary loses his inheritance. But if the living trust leaves nothing to the potential contestant, the clause has no deterrent effect.
A client who fears a contest from a particular heir may want to consider making a big enough gift to that heir to discourage him from suing. How large the gift should be to deter a contest depends on the size of the trust and the heir’s financial circumstances.
Third, no contest clauses may have limited effect because they are only enforced after the contestant loses at trial. If the contestant wins, the trust and the no contest clause are typically deemed invalid. Likewise, if the case settles before trial, the no contest clause is never enforced. Because most civil cases in California settle without a trial, no contest clauses are rarely enforced.
Even if the case goes to trial and the contestant loses, a no contest clause will only be enforced against a direct contest (e.g., contests based on undue influence, incapacity, fraud) brought without “probable cause.” Under Prob. Code § 21311(b) “probable cause exists if, at the time of filing a contest, the facts known to the contestant would cause a reasonable person to believe that there is a reasonable likelihood that the requested relief will be granted after an opportunity for further investigation or discovery.” Even if the contestant loses, he may still receive his gift under the trust if the judge determines that a reasonable person would believe that the contest had a reasonable chance of success.
Planning Strategy
If you have an heir, such as a wayward son, that you feel you must disinherit, rather than completely disinheriting him, you may want to consider leaving him enough to discourage him from suing. If you leave him something, he has skin in the game. Will he want to risk the bird in the hand by contesting the living trust? To file a lawsuit, he will need to hire an attorney. A good attorney won't take a bad case unless they get paid a hefty retainer. Does your wayward son have the financial resources to pay an attorney?
While the California courts do not often enforce no contest clauses, a no contest clause, combined with a well written living trust, could provide a strong deterrence against a trust contest and block