In Key v. Tyler, 34 Cal. App. 5th 505 (2019), a California appellate court held that a trustee’s defense of an invalid trust amendment, if made without probable cause, can activate a no contest clause and result in disinheritance. This hurt, because the trust at issue was worth over $70 million.
What is a no contest clause in California?
No contest clauses are placed in wills and trusts as a caution to potential challengers. Beneficiaries under the will or trust who challenge the document and lose forfeit their inheritance under the document. The idea behind no contest clauses are to discourage would-be challengers from contesting the document.
Not all states permit no contest clauses, but in California such clauses are enforceable. No contest clauses are addressed in sections 21310-21315 of the California Probate Code.
With some exceptions, a no contest clause can be enforced against “a direct contest that is brought without probable cause.”
Direct contest is defined in the California probate code as follows:
(b) “Direct contest” means a contest that alleges the invalidity of a protected instrument or one or more of its terms, based on one or more of the following grounds:
(2) Lack of due execution.
(3) Lack of capacity.
(4) Menace, duress, fraud, or undue influence.
(5) Revocation of a will pursuant to Section 6120, revocation of a trust pursuant to Section 15401, or revocation of an instrument other than a will or trust pursuant to the procedure for revocation that is provided by statute or by the instrument.
(6) Disqualification of a beneficiary under Section 6112, 21350, or 21380.
Probable cause exists if:
at the time of filing a contest, the facts known to the contestant would cause a reasonable person to believe that there is a reasonable likelihood that the requested relief will be granted after an opportunity for further investigation or discovery
How Did The Defense Of A Trust Amendment Implicate A No Contest Clause?
The Key case involved three sisters, a family trust, and over $70 million.
The 1999 version of the Trust split the trust equally between the three sisters.
In 2007, the Trust was amended, and basically disinherited sister Key. Key went from being left one-third of $70 million to being left about $1 million. In the 2007 amendment sister Tyler received 65% of the business assets, and the third sister received about 35%. A $2.5 million debt was also forgiven to Tyler.
Key Petitioned to Invalidate The Trust Amendment
Sister Key sued to invalidate the Trust on the grounds of undue influence by Tyler. Key won. Key then filed a petition to enforce the no contest clause against Tyler for defending the invalid 2007 amendment. The California probate code denied the petition, but the appellate court reversed.
Defending the Validity of The Trust Amendment Was A Direct Contest Of The Earlier Trust
The California appellate court looked at the definition of “direct contest” and reasoned that Tyler’s defense of the 2007 amendment was a direct contest because Tyler was asserting that the original trust was invalidated by the 2007 amendment. Said another way, Tyler’s defense if successful would have invalidated the earlier version of the trust, and was therefore a contest of the original trust, implicating the no contest clause in the earlier trust.
The California appellate court expanded the traditional understanding of no contest clauses in California and stated:
Tyler defended a spurious Trust amendment in court in an attempt to defeat the provisions of the original Trust. For purposes of enforcing the No Contest Clause, it does not matter that Tyler’s attempt to enforce the spurious amendment through judicial proceedings began with a petition filed by Key.
This decision adds another layer of uncertainty into inheritance litigation in California. Defending the validity of a Trust amendment can trigger a no contest clause and puts at risk any benefits under the prior version of the Trust under California law.