Beneficiaries beware! The Arizona Court of Appeals has concluded that someone who challenges a trust may be disinherited for violating a “no-contest” clause.
A no-contest or forfeiture clause is a provision included in a will or trust to discourage litigation and disputes. Such provisions have obvious benefits of avoiding litigation and allowing the prompt distribution of trust or estate assets.
But, there are conflicting public policies when it comes to enforcing such clauses. Courts have a strong public policy of enforcing the maker’s intent, including his direction to disinherit someone who challenges the document. Such challenges sometimes waste time and money. A contestant may also use such a challenge to coerce a more favorable disposition in settlement from other beneficiaries than what the maker intended.
On the other hand, forfeiture is generally disfavored. And public policy typically ensures access to the courts to pursue legitimate challenges. Such challenges may include, among other things, that the maker lacked mental capacity, was unduly influenced or defrauded into making the will or trust. In those cases, the document does not reflect the maker’s true intent. If a challenge were not permitted, it would allow the enforcement of a document that does not genuinely set forth the person’s true intent for the disposition of his assets.
It was in the context of these competing public policies that Division 2 of the Arizona Court of Appeals decided the In Re: Shaheen Trust case on January 16, 2015. There, the trust included a forfeiture clause:
If any beneficiary under this Trust, in any manner, directly or indirectly, contests
or attacks the validity of either Settlor’s Will, this Trust or any disposition under
either, by filing suit against . . . Trustee . . . then any share or interest given to that
beneficiary under the provisions of this Trust is hereby revoked and shall be
disposed of in the same manner as if that contesting beneficiary and all descendants
of that beneficiary had predeceased the Surviving Settlor.
Two beneficiaries, the Robertses, filed multiple claims alleging breach of trust. The trustee filed a counter petition claiming that the Robertses should be disinherited under the no-contest clause. The Court of Appeals decided several key points.
No-Contest Clause in Trust is Unenforceable Where the Challenge was Supported by Probable Cause
Under ARS § 14-2517, “a provision in a will purporting to penalize an interested person for contesting the will or instituting other proceedings relating to the estate is unenforceable if probable cause exists for that action.” By its terms, that statute only applies to no-contest provisions in wills, not trusts. The Court, however, easily concluded that since a trust is a will substitute and a donative transfer just like a will, a no-contest clause in a trust can be used to disinherit a beneficiary only if there was no probable cause for the trust contest.
So, the same requirement for probable cause applies to both wills and trusts. No matter what the forfeiture provision says, if the challenge to the will or trust was supported by probable cause, the beneficiary is not disinherited or penalized even if he loses the case. But what is probable cause and how does the Court analyze petitions alleging several separate claims? Those questions were also answered in the Shaheen Trust case.
The Probable Cause Standard
The Court reiterated the definition of probable cause from prior cases. Probable cause means
the existence, at the time of the initiation of the proceeding, of evidence which would lead a reasonable person, properly informed and advised, to conclude that there is a substantial likelihood that the contest or attack will be successful. Subjective belief that the claims are likely to succeed, while required, is not sufficient; the petitioner’s subjective belief must be objectively reasonable.
So, whether there was probable cause must be determined based upon the evidence that the contestant had at the time of filing the challenge. The evidence is analyzed from the perspective of an objective reasonable person, not just the subjective belief of the contestant.
The court went one step further and found that the contestant’s petition must be broken down by claim. Each separate claim must be supported by probable cause in order to avoid forfeiture. If even one claim lacks probable cause, according to the court, the beneficiary’s interest will be forfeited. The Court explained the reasons for this rule:
Litigating nine separate claims is necessarily more costly than litigating a single claim. Clearly, if a petition asserts one claim that is supported by probable cause and eight claims that are not, that petition will result in greater expense to the trust than the litigation of a single claim. Furthermore, if probable cause for a single claim protected a party from disinheritance under a no-contest clause, that party could file a petition with one legitimate claim and any number of frivolous claims, thereby using the threat of extensive litigation to “coerce a more favorable settlement.”
Resolution of the Robertses’ Claims
In their petition, the Robertses made numerous allegations, which the court distilled into nine separate claims. One of their claims was that the trustee was required to make yearly, not monthly, disbursements to herself. But, the trust did not specify any such requirement and the Robertses cited no legal authority supporting that allegation. As a result, the trial court found that the claim lacked merit. However, the trial court somehow concluded, without specifying why or how, that the Roberses had a valid subjective belief in the validity of their claim, such that they were not disinherited.
The Court of Appeals disagreed: “The Robertses have not pointed to, nor have we found, anything in the record that would show this claim was objectively reasonable. We therefore must conclude the court erred when it found the Robertses’ claims were supported by probable cause and refused to enforce the forfeiture provision of the Shaheen Trust against them.” In other words, the Robertses subjective belief alone was insufficient.
There was no actual evidence based upon which an objective reasonable person would conclude that they had a substantial likelihood of success on the claim. Therefore, the Court of Appeals concluded that their claim lacked probable cause and the Robertses were disinherited: “we remand this case to the trial court for entry of an order of forfeiture against the Robertses.”
This case highlights the importance of consulting with experienced estate or trust litigation counsel before pursuing a will or trust contest or other litigation. The attorneys at Berk Law Group, PC are here to help. Please do not hesitate to contact us if you have any questions. Please read our article about no-contest clauses if you would like to learn more.