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Bequest Management

No-Contest Provisions: Proceed with Caution

May 18, 2021
No-Contest Provisions: Proceed with Caution

“To challenge or not to challenge: that is the question.” This Shakespearean-sounding conundrum can be just as vexing as the problem from Hamlet that it evokes. For a charity, it can mean the difference between a significant gift and a missed opportunity.

Here is one way the issue can arise. The last will and testament of curmudgeon Melvin Leibniz directs a substantial bequest to Charity but only if the money is used “to provide Charity’s services on islands having populations of less than forty persons.” The bequest will do nothing to advance Charity’s mission, which is focused on the inner city.   Leibniz’s will further directs that “any person or entity challenging this will in any way will take nothing from it and the challenger’s gift will instead be directed to the care and feeding of my prize sow Spinoza and his lineal descendants.” In short, this is the classic no-contest (also known as in terrorem) clause.

Charity could seek modification of the onerous restriction, perhaps by suggesting that the Leibniz gift be used for “isolated, underserved populations located in the inner city.” But Charity is taking a risk of losing the gift altogether.  The enforceability vel non of no-contest clauses is very much a matter of state law, and the statutes are by no means uniform.

What Constitutes a Challenge?

Common sense suggests that not EVERY lawsuit filed ancillary to a probate is a “challenge” that would trigger the forfeiture required by a no-contest provision. As usual, common sense is correct. In the many states where no-contest provisions are potentially enforceable, a direct challenge to the validity of the will itself is usually required to put such a clause in play. Such “direct” challenges include efforts to invalidate the will based on incompetence of the testator, duress, failure to comply with formalities or existence of a later will. An effort to strike a particular restriction as repugnant to morality or public policy may also qualify as a challenge.

For the most part, actions filed for the construction of a will or for some issue arising from the performance or non-performance by a fiduciary will not be considered “challenges.”

The Stakes are High

The question of the enforceability of no-contest clauses pits two cherished principles against each other:

  1. A testator has the right to control disposition of her/his property and to set conditions for the receipt of such property by others.
  2. A beneficiary participating in a proceeding involving a testamentary gift has the right to raise legitimate objections.

The current state of the law on no-contest clauses reveals varying efforts to reach compromises that accommodate both of those principles to some degree or other.

State Laws on Enforceability of No-Contest Clauses

The laws of individual states on this issue are highly nuanced. What follows is an attempt to group them into general categories.

Category 1: No-Contest Clauses Are Unenforceable

Only Florida has adopted a strict unenforceability statute. Florida Statute 732.517 provides as follows: “A provision in a will purporting to penalize any interested person for contesting the will or instituting other proceedings relating to the estate is unenforceable.” (Until 2018, Indiana law was like Florida’s, but has since been modified to allow limited enforceability.)

There has been amazingly little litigation on the Florida statute. The leading case involved a near-identical Florida enactment, but pertaining to trusts instead of wills. The court was unequivocal: “a beneficiary cannot be forced to choose between the right to contest an instrument and the right to take under it.” Helpfully, the court noted that the same public policy is enshrined in Section 732.517, cited above.

Category 2: No-Contest Clauses Are Enforceable Unless Challenge is Bona Fide

Apart from Florida, states that have addressed the issue – and that is all or nearly all of them – have allowed for some enforcement of no-contest clauses. A little more than half the states have adopted a doctrine resembling that in the Uniform Probate Code (“UPC”). On this view, no-contest clauses will not be enforced if the otherwise-prohibited challenge is (1) based on just cause; (2) filed in “good faith”; and/or (3) supported by “probable cause.” These three tests may be similar but are not necessarily identical. Complicating the matter further, some states require that two of the three factors be present. States adopting this approach include both UPC and non-UPC jurisdictions.

CCK TIP: The common approach taken by the more than two dozen states in this group should not blind a charity to the significant nuances that can differentiate facially similar statutes. These subtle differences are sometimes only apparent from relevant caselaw.

Category 3: No-Contest Clauses Are Enforceable Except For Specified Challenges

About one-third of the states reject the UPC-type approach to the no-contest question. Indeed, the New Hampshire statute declares “good faith” or “probable cause” to be irrelevant to the enforceability question.

These states appear to have the same policy goal as the “good faith” states: to allow meritorious challenges to proceed without penalty and to sanction frivolous challenges with forfeiture. Instead of references to “good faith,” these jurisdictions are more inclined to describe the types of challenges that can be brought without running afoul of a no-contest provision. Sometimes, court approval is required prior to filing a suit. In other statutes, lengthy (and sometimes Byzantine) definitions of “challenges” are offered, with the goal of separating serious from frivolous lawsuits. In still others, the success of a challenge is an after-the-fact litmus test for determining the propriety of the claim (winners don’t forfeit, but losers do).

CCK TIP: Categories 2 and 3 comprise most of the states. Despite the de facto rejection of the “good faith” and “probable cause” standards in Category 3, careful reading of the statutes reveals an almost inevitable incorporation of those factors. This is not surprising. If the goal is to separate meritorious lawsuits from frivolous challenges, those considerations are necessarily part of the mix. We believe the result of a given no-contest case should usually be the same in either a Category 2 or a Category 3 state.

However, the successful presentation of a case to a court, a mediator or an opposing party requires reference to the factors in the applicable statute. To put it succinctly, a Category 2 script will not sway a Category 3 audience. This is precisely the reason that charities cannot ignore local law in any case where a no-contest clause is in play.

Category 4: No-Contest Clauses Are Enforceable If There Is A “Gift Over”

This is an older doctrine, sometimes called the “gift over” approach. It appears that this approach survives in only two states, Georgia, and Mississippi.  Georgia Code § 53-4-68 states the rule succinctly: “A condition in terrorem shall be void unless there is a direction in the will as to the disposition of the property if the condition in terrorem is violated, in which event the direction in the will shall be carried out.” In the Leibniz example posited at the outset of this posting, the “gift over” was for Spinoza and his issue, so if Charity filed a challenge, it likely would have forfeited its bequest to Mr. Leibniz’s barnyard buddies.

What about Trusts?

In some states, the law concerning no-contest clauses in wills is expressly applicable to similar provisions in trusts. In other jurisdictions, we would expect that adjudication of trust disputes would be guided by the rules applicable to probate. There is little evidence that courts are treating no-contest clauses in trusts differently from those in wills.