No-Contest Clauses may not be effective unless properly inserted in most recent trust or will instrument

A no-contest clause or in terrorem clause, should be carefully drafted and implemented in estate planning to avoid potentially catastrophic consequences.  Such a clause can punish a person from filing a pleading in any court and result in disinheritance.  

Some people and some estate planners may insert a no-contest clause in the initial trust or will instrument and then years later draft an amendment to a trust or a codicil to a will or even a new instrument.  However, if the subsequent instrument does not include a no-contest clause or is not drafted properly to reference a prior no-contest clause then it may not be protected.  Also, if the original instrument does not properly refer to subsequent instrument(s) then such instrument(s) may not be protected.  This can be very problematic as a no-contest clause only applies to "protected instruments" under Probate Code section 21310.  Again, many no-contest clauses do not apply to future instruments (as such are not contemplated) and many amendments or subsequent wills may revoke prior instruments in their entirety. 

Even in situations where prior instruments are referenced as being given full effect, no-contest clauses have generally been narrowly construed and found to be ineffective.  The recent Court of Appeals case in Aviles v. Swearingen (2017) 2d Civil No. B281420, provides a prime example.  In that case a restatement and amendment of a trust incorporated terms of a prior trust (which had a no-contest clause) but did not specifically include a new no-contest clause, nor did it cite specifically to incorporating the old no-contest clause.  

If you find yourself in a litigation situation or potential dispute, it is best to consult with experienced counsel in such matters, such as the attorneys at the Demiris Law Firm to help guide you.

Kelly v. Orr - Appeals Court Holds that One-Year Statute of Limitations for Professional Negligence is Tolled and does not run until the date Counsel for the Predecessor Trustee ceased Representation.

Plaintiff, James C. Kelly, as trustee of the Beverly Snodgrass Clark Inter Vivos 1999 Separate Property Trust (Trust), sued Barbara J. Orr, Joseph Holland, Gretchen Shaffer, and DLA Piper LLP (US) (Defendants) for professional negligence in relation to legal advice they provided to his predecessor trustee of the Trust.  The Defendants demurred on statute of limitations grounds under Code of Civil Procedure section 340.6, arguing that the action was pursued more than one-year after the date the alleged act occurred during the legal representation of the former trustee and thus the action is time-barred.  The demur was granted at the trial court level without leave to amend.  Kelly then filed a timely appeal.  On appeal, the lower court’s ruling was reversed and remanded for further proceedings. The Court of Appels held that because Kelly filed suit less than one-year after the Defendants ceased representation of the predecessor trustee, his action is not time-barred.  The Appellate Court found Defendants represented the predecessor trustee in her capacity as trustee and not as an individual and therefore the successor trustee could sue counsel for the former trustee.

Creditor Cannot Force an Assignment Order Against a Beneficiary who does not Consent

FirstMerit Bank N.A. v. Diana L. Reese

CA Fourth Appellate District, Division Two

Filed November 19, 2015

                In this recent case, the California Court of Appeals held that a creditor cannot sue to obtain an order assigning a beneficiary’s right to inherit from a trust to the creditor when the beneficiary does not consent to such an assignment.  In the case at hand, the creditor was owed money (about $150,000) from the Defendant.  The Defendant was alleged to be the beneficiary of a trust that provided distributions of principal and income of $11,000/month from one trust and monthly distributions of principal and income of $10,498.78.  It does not appear the Defendant ever executed an assignment of her interest.  The trust was a spendthrift trust.

                The creditor wished to tap into the trust distributions and have the trust assign the distributions directly to the creditor.  However, the Court of Appeals held that under CA law an assignment order must include an order that assigns a right to payment outright and not simply directing a judgment debtor to make payment of funds that the judgment debtor may receive from a third party (trust).  Those funds are already able to be levied upon pursuant to a writ of possession, one they fall into the hands of the judgment debtor.  Simply put, although the Defendant owes money – the creditor can only collect from the Defendant and not from the trust (spendthrift).  Plaintiff tried to get around this by arguing that it is permitted to seek an order requiring Defendant to turn over funds already distributed to her.  The Court of Appeals pointed out such argument misses the point: once the trustees have distributed the funds they are not subject to an assignment order, but can “be levied upon pursuant to a writ of possession once they fall into the hands of the judgment debtor.”

http://cases.justia.com/california/court-of-appeal/2015-e061480.pdf?ts=1447974028

Can a No-contest Clause in a California Trust affect a separate Will, Power of Attorney, or group of contracts and deeds? The answer may shock you - YES it can.

 

                Many people believe that a “no contest clause” is limited to the legal instrument that it is written into.  For example, if there is a trust and that trust has a “no contest clause,” then a person may believe that only the trust is affected by the “no contest clause.”  In reality other instruments, such as a will, powers of attorney, or even contracts may be affected by the “no contest clause” in the trust – and vice versa, depending on the language of the "no contest clause" and the other instrument or classes of instruments identified.

                Under California Trust Law a “no contest clause” is defined as a provision in an otherwise valid legal instrument that, if enforced, would penalize a beneficiary for filing a pleading in any court.  California Law in this instance defines a “pleading” as a petition, complaint, cross-complaint, objection, answer, response, or claim.  A “protected instrument” is defined in CA Trust Law as either 1) an instrument that contains the “no contest clause” or 2) an instrument that is in existence on the date that the instrument containing the “no contest clause” is executed and is expressly identified in the “no contest clause,” either individually or as part of an identifiable class of instruments, as being governed by the “no contest clause.”  In other words, a “no contest clause” contained in a trust, could just affect the trust, but if it identifies a separate instrument (will, power of attorney, contract) in existence on the date the trust is created, then it could affect the other instrument(s).  If the “no contest clause” refers to an “identifiable class of instruments” such as “estate planning documents” or “contracts” or “deeds” then it could likely also affect those identifiable classes of legal instruments.