Dec. 3, 2020
A No Contest Clause (“NCC”), also known as an in terrorem clause, in general, is a provision in an estate planning document that provides for the forfeiture of a beneficiary’s inheritance if the beneficiary takes the type of action the NCC specifically prohibits, such as a challenge to the validity of the estate planning instrument. NCCs have been used for many decades as a tool for deterring and preventing challenges to a will or trust after death.
Enforceability of no contest clauses differs by state. For example, South Carolina, like most states, generally enforces NCCs provided the actions of the beneficiary clearly fall within the type of conduct prohibited by the NCC. South Carolina also recognizes what is generally referred to as the “probable cause” exception (several related variations have been developed by different states, sometimes referred to as a “good faith” exception) to the enforceability of NCCs. The probable cause exception means that the NCC will not be enforced against a beneficiary if the beneficiary had probable cause to make a challenge. Georgia does not recognize the probable cause exception and Florida has declared that NCCs are unenforceable under any circumstances. Regardless of the language used in the NCC, most states will not disinherit a beneficiary who seeks to hold a fiduciary accountable for wrongdoing or who seeks to construe an ambiguous provision in an estate planning document.
States universally strictly construe NCCs. Generally speaking, courts will not enforce a NCC against a beneficiary unless the beneficiary’s conduct clearly falls within the type of conduct explicitly prohibited by the NCC. Recently, the Georgia Court of Appeals issued two decisions in cases involving NCCs. The decisions demonstrate that NCCs do not always work as intended, and that even the universal rule of strict construction may have some wiggle room depending on the facts.
On October 26, 2020, the Georgia Court of Appeals reversed the probate court’s enforcement of a NCC against a beneficiary. In re Estate of Penland, No. A20A0998, 2020 WL 6268105 (Ga. Ct. App. Oct. 26, 2020). The case involved a dispute about a Will of a decedent who passed away in 2007 (the time lapse between the date of death and the court’s decision indicates that NCCs do not always prevent costly and lengthy litigation as intended). In Penland, during 2008, the daughter of the decedent, who was a co-executor and a beneficiary under the Will, sought an order from the probate court compelling payments of specific bequests under the Will, and her brother, who was also a co-executor and beneficiary under the Will, opposed the daughter’s petition and sought to delay the payment. The probate court granted the daughter’s petition and ordered for the bequests to be paid. Ten years later (in 2018), the probate court granted a petition by the daughter to enforce the NCC in decedent’s Will against the brother—thus disinheriting him—for his earlier failure to pay the specific bequests, reasoning that such failure triggered the NCC because the failure prevented a term of the Will from being carried out. The initial sentence of the NCC provided that the NCC applied, among other times, “[s]hould any beneficiary . . . prevent any provision [in the Will] from being carried out in accordance with its terms . . . .” The Court of Appeals, however, citing prior case law as precedent and relying almost exclusively on the universal rule that NCCs “must be strictly construed[,]” reversed the probate court because the brother “was acting in his capacity as co-executor when he challenged the distribution of the specific bequests[,]” and the NCC, though prohibiting actions of beneficiaries (which the brother was), did not contain any language governing actions by executors, in which capacity the brother was acting.
Just four days later, on October 30, 2020, the same court issued another opinion involving a NCC, this time affirming the lower court’s enforcement of a NCC against the decedent’s daughter. Barry v. Barry, No. A20A0839, 2020 WL 6375421 (Ga. Ct. App. Oct. 30, 2020). Conspicuously absent from the ruling is any reference to the rule of strict construction—and based on the facts, for good reason.
The decedent (“Dad”) in Barry had a Will, a Revocable Trust (“trust”), and three children. He named his only son (“Son”) as the personal representative of his estate and as successor trustee of his trust. Both the Will and trust provided for equal shares to decedent’s three children. In 2011, after their mother passed away, one of the children (“Daughter”)—a lawyer—contacted Dad’s estate planning lawyers, inquired about declaring Dad incompetent, demanded privileged communications from Dad’s lawyers (which they denied), and threatened them with litigation by demanding copies of their malpractice insurance. Dad passed away four years later in 2015 (with no evidence of being incompetent). The day after his passing, Daughter emailed her siblings telling them to save their money, and emailed her niece telling her that her mom is a “Brainwasher,” and to get ready for a fight because she picked the wrong side.
Son, who lived in Maine and despite having to be the primary caregiver for his wife (who had just had her leg amputated), managed to prepare a preliminary accounting of the estate within 90 days of Dad’s death and was ready to begin the probate process. By then the Daughter had already reached out to two local lawyers in Dad’s small hometown—not to hire them, but to intentionally create a conflict of interest (which the Daughter refused to waive) for the purpose of preventing Son from hiring someone local to help probate Dad’s Will. Weeks later, she filed a lawsuit seeking an accounting and alleging Son refused to file the Will or provide adequate information about Dad’s assets. Daughter proceeded by not opening a bank account that was needed for Son to deposit part of her inheritance; she hired her own appraiser to challenge Son’s appraisals of Dad’s property; she refused to respond when Son asked her if she wanted stock or cash, and then she alleged Son breached his fiduciary duties by selling the stock a year later for a substantial profit that accrued over the past year; and last but not least, she refused Son’s offer for her to walk through Dad’s home and take what she wanted, and then later insisted that Son failed to provide an adequate inventory of household items. The trial court found that Daughter’s claims were brought with malice, without substantial justification, and in bad faith, and stated that she was making up claims and making misrepresentation of facts to try to fool the court into finding Son was breaching his fiduciary duties.
Dad’s Will and trust each had its own NCC. The NCC in the trust prohibited the beneficiaries from “directly or indirectly, contest[ing] in any court the validity of [the] agreement, including any amendments thereto[.]” Under the rules of strict construction, this is a relatively narrow NCC—generally speaking, courts rarely give any weight to the “directly or indirectly” language which is commonly used in NCCs, and generally would read this simple clause as prohibiting a challenge that seeks to invalidate the entire trust agreement or amendment thereto. This clause, unlike many clauses, says nothing about challenges to any provision in the trust, nor does it prohibit other types of interference with the administration of the trust. In fact, the trial court noted that Daughter, as a lawyer, carefully avoided contesting the entirety of the trust, and as both the trial court and Court of Appeals noted, a petition for an accounting will not trigger a NCC in Georgia. Nonetheless, the trial court found, and the Court of Appeals affirmed, that Daughter’s bad faith actions violated the NCCs in both instruments. Specifically, the Court of Appeals stated that it is not confined by the nomenclature used in the petition for an accounting, nor will it turn a blind eye to someone’s actual intent. The violation of the NCC in the Will was apparent, but the same cannot readily be said about the NCC in the trust. Nonetheless, the Court of Appeals affirmed the trial court’s enforcement of the NCC in the trust, finding that Daughter’s actions “at least indirectly” warranted enforcement. Notably, and perhaps justifiably, the rule of strict construction cited and relied upon by the Court just four days prior was not mentioned.
In conclusion, the law surrounding No Contest Clauses is complex and constantly evolving. Even the rules that are generally accepted by all courts, such as the rule of strict construction, has some flexibility when warranted by the facts and circumstances.
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