Should You Include a No-Contest Clause?

Filed under: Estate Planning

Imagine this scenario: You establish a trust to provide for your spouse and children in the event that you pass away unexpectedly. That does indeed happen, and after your death, your son tells the family that he suspects you were unduly influenced to make certain decisions. He decides to challenge the trust in court, causing much grief and financial strife for everyone involved. Could this situation have been avoided?

Actually, yes. To a certain extent, you can avoid having the terms of your trust challenged after your death. If you include what is called a no-contest clause in your trust, beneficiaries will be discouraged, although not outright prevented, from challenging the terms in court.

How a no-contest clause works: If a beneficiary decides to challenge the terms of the trust and loses the challenge, he or she receives 0 dollars from the trust. Ouch! On the other hand, they have the choice to simply accept what is provided to them via the trust. Essentially, challenging a no-contest clause is an all-or-nothing gamble. Your heir would have to be pretty certain of a win in court, in order to be motivated enough to challenge your terms.

A no-contest clause only applies to challenges of the trust’s validity, but not to challenges of the trustees themselves. Using the above example, let’s assume your son sues to invalidate the terms of a trust based on the suspicion that you were subject to undue influence when you established it. In this case, the no-contest clause would take effect. If your son loses his case, he would lose all money due to him in the trust.

On the other hand, the no-contest clause would not affect a motion to remove a particular trustee for breach of trust. Further, vested beneficiaries always have a right to receive any and all information regarding the trust. Therefore, if your son suspects that his stepmother has violated the terms of the trust, he can petition to have her removed, and the no-contest clause will not apply if he loses his case. In this manner, the no-contest clause protects your trust against unfounded challenges, but at the same time cannot be used to protect a possibly unscrupulous trustee.

For more information on trusts and protecting your heirs, call us to speak with our estate planning attorney. We can help you review your estate plan, or create a plan that provides for your loved ones.

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