No Contest? Not!
By Bernard F. Brandt, Trustee
How to Keep Beneficiaries from Disrupting Your Trust
So you think that because you have set up a Trust, you have no more problems? Right?
Sometimes, Very Wrong!
If you do not know Trust law you may not be prepared for these problems. One of these twists can happen in a Revocable Trust, when you need to change or amend the Trust, but you don’t know recent events in Trust Law.
One matter that can become troublesome is if a beneficiary decides he or she is not getting a big enough slice of the Trust pie. It really becomes a problem if you did not put in your Trust document a “no contest” clause.
Matters can also get messy if you have a private irrevocable Trust, and you did not include protector instructions to stop a beneficiary from bringing a legal action against the Trust.
In either case, a beneficiary can file a lawsuit against the Trust to make the Trustees do what the beneficiary wants. Most often, what the beneficiary wants is to dissolve the Trust and to take all its cash. At the very least, the beneficiary can use the courts to divvy up the Trust property to those who are to receive assets from the Trust. Often, what the beneficiary wants is not what you wanted when you set up the Trust.
One Solution: Trust Protector
If you have an Irrevocable Trust, a Trust Protector is the best way to keep beneficiaries from looting your Trust. In the event that such a Trust does not have a No Contest Clause, the Settlor of such a Trust can write a letter to the Trustees, advising them of added powers granted to the Trust Protector.
Basically, a Trust Protector is one authorized by the Settlor to review the decisions of the Trustees, to appoint mediators, to fire Trustees, and to defend the Trust from attack by the beneficiaries. For a fuller description of Trust Protector powers, read or reread The Art of Passing the Buck, Volume Two, Chapter Eleven. For a better description of updates in powers and authorities of Trust Protectors, contact Charles Arthur Enterprises.
Another Solution: A No Contest Clause
The best way to prevent people from attacking a Trust is to make sure you have a “No Contest clause” in your Trust agreement. A No Contest clause provides that if anyone who benefits from the trust contests it, he or she will receive nothing from the Trust. That usually gets the attention of most beneficiaries.
But what happens if you amend the Trust?
If you have a statutory revocable Trust, problems can happen if you should decide to amend your Trust. A living Trust and other revocable Trusts can be amended by a notarized amendment, that adds or removes specific instructions from the Declaration of Trust.
But under California law (and many states tend to follow that law), if you want to keep any amendments to the Trust from attack by Beneficiaries, you need to include a No Contest clause in the amendment. Otherwise, under the recent case of Townsend v. Townsend (2009), a Trust Beneficiary can challenge or “contest” any amendments.
Recently, California and a number of other states made changes in the law about “no contest clauses.” You can find the California law by going to www.findlaw.com and following these instructions:
- Enter the “legal professionals” section. (Don’t worry, it is a free service, and there is no law against knowing what the law is).
- Go to the section marked “Jurisdictions” and click on the tab for “California.”
- Go down to the section marked “Codes and Statutes.”
- Go to the link for Codes that includes the “Judicial Council.”
- Click on that link, which will get you to the complete set of California codes.
- Click the box that says “Probate Code,” and hit the button at the bottom that says “Search.” That will take you to the Table of Contents for the California Probate code. Or you can just go here: http://www.leginfo.ca.gov/calaw.html
Again, don’t be upset by the large number of different statutes. Just scroll down until you get to the section which says 21300-21308, Probate Code, General Provisions. Click on that section, and you will be able to read the whole section. Or you can just go here: http://www.leginfo.ca.gov/cgi-bin/displaycode?section=prob&group=21001-22000&file=21300-21308
The code sections which are important here are Probate Code sections 21305(a) and (c).
Probate Code section 21305(a) states:
21305. (a) For instruments executed on or after January 1, 2001, the following actions do not constitute a contest unless expressly identified in the no contest clause as a violation of the clause:
(1) The filing of a creditor's claim or prosecution of an action based upon it.
(2) An action or proceeding to determine the character, title, or ownership of property.
(3) A challenge to the validity of an instrument, contract, agreement, beneficiary designation, or other document, other than the instrument containing the no contest clause”
This means after 2001, if you want your No-Contest clause to defend against a creditor’s claim, an action over who owns what property, or an action which challenges the validity of a Trust instrument, you need to spell it all out in the no contest clause.
But the important matter as described in Townsend v. Townsend is Probate Code section 21305(c), which states:
(c) Subdivision (a) does not apply to a codicil or amendment to an instrument that was executed on or after January 1, 2001, unless the codicil or amendment adds a no contest clause or amends a no contest clause contained in an instrument executed before January 1, 2001.” Just for your information, a “codicil” is an amendment to a will.
What happened in Townsend v. Townsend was a Trustor had made a Trust instrument which had a valid No Contest clause. Sadly, though, the Trustor later amended the Trust without including a No Contest clause, and without editing or republishing the original No Contest clause. The court in Townsend decided that under Probate Code section 21305(c), because the amendment to the Trust did not add or amend a No Contest clause, a beneficiary could contest the amendment without being cut off by the No Contest clause.
The Solution: Adding No Contest Clauses to Any Amendments
So, if you need to amend a living Trust, and if you want the protection of a No Contest clause, you need to put a No Contest clause in the amendment. You can also amend the No Contest clause which is in the Trust document. If you do these things, you should be able to prevent anyone from attacking your Trust.
There is one last important matter in Townsend v. Townsend. The judge said the California Judicial Counsel is changing California Trust law, including the effect of No Contest clauses. These changes happen on January 1, 2010. We will keep you posted about those changes. That way, you can expect them and make any needed revisions. But, as Scheherezade often said in The Thousand and One Nights: “That is another story.”
Bernard F. Brandt has a bachelor’s degree in English and Classics, and a Juris Doctor degree in Law. He likes to know what the law is, and he likes explaining that law to as many people as are interested in hearing it. He also has a lot of other interests besides law. He lives with his wife in Los Angeles.