Beneficiaries Forfeit $10 Million for Bringing a Trust Contest
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On January 1, 2011, the laws concerning the enforcement of a No Contest Clause against a challenging beneficiary changed significantly, both by reducing the types of challenges that can trigger enforcement of a No Contest Clause, and by increasing the burden on the party seeking to enforce a No Contest Clause. In particular, the Probate Code now requires that a “direct contest” of an estate planning document will trigger the No Contest Clause only when the contest was brought “without probable cause”. But what exactly constitutes “probable cause” under these new rules? Unfortunately, there have been no published decisions by the California Court of Appeal or Supreme Court to provide any further guidance as to what factors should be considered in determining “probable cause” under this new statutory scheme.
However, despite the new legislation making it more difficult to enforce a No Contest Clause, a recent order from the Superior Court of San Francisco, in the matter entitled: In the Matter of the Irene M. Lieberman Revocable Trust, SFSC Case No. PTR-15-299196 (“Lieberman”), disinherited trust beneficiaries for bringing a direct contest without probable cause, causing these beneficiaries to forfeit $10 million that they otherwise would have received. Lieberman provides a detailed discussion and analysis of this “probable cause” standard with respect to a direct trust contest, and the lessons from Lieberman can benefit trustees and beneficiaries alike in evaluating their litigation strategies concerning No Contest Clauses. A copy of the Order can be viewed by clicking here.
In Lieberman, trust beneficiaries challenged the validity of the trust on the grounds of undue influence, i.e., a direct contest to the trust. After the resolution of the underlying trust contest (which upheld the terms of the trust), the question that then arose was whether the challenging beneficiaries’ direct contest was brought without probable cause, for the purpose of enforcing the trust’s No Contest Clause. Relying on the plain language of Probate Code section 21311(b), which states: “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”, the Lieberman court identified several relevant inquiries in the “probable cause” analysis, as follows:
- What Facts Are Known to the Contestant at the Time of Filing?
In evaluating whether a contest has been brought without probable cause, a court must first determine which facts were known to the contestants at the time the contest was brought (as opposed to those facts which may have been uncovered later during the course of the litigation).
The contestants in Lieberman – the decedent’s son David and daughter Paula– were set to receive a total of $10 million from the decedent’s trust under the decedent’s revised estate plan (approximately 40% of the entire trust estate), despite the contestants’ known estrangement and overall poor treatment of their mother during her lifetime. Thus, in determining whether their unsuccessful trust contest was brought without probable cause, the Lieberman court focused its analysis on the nature of the contestants’ known relationship with their mother, as well as the testimony from multiple and unbiased witnesses that the decedent’s capacity was fully intact at all relevant times:
All of the people who knew Irene describe her as an intelligent woman, in full possession of her faculties . . . [and] the perceptions of those who knew Irene best are relevant because David and Paula knew the same Irene as everyone else. . .because the estrangement and extremely poor treatment that the court has found explain Irene’s estate-planning choices so well, it is unlikely if not impossible that any combination of circumstances could negate the presumption that Irene’s estate plan represented the free choice of an intelligent mind.
Thus, based on the testimony from these third-party witnesses, the court disregarded the contestants’ assertion that the decedent’s “physical and mental weaknesses” made her more susceptible to undue influence, and found that “David and Paul knew that, at a minimum, Irene was a normal person in full possession of her senses” when they initiated their action.
Therefore, for a filing party to determine whether they are at risk of violating a No Contest Clause, what matters are the actual and objective facts – not subjective beliefs, understandings, or suspicions – which are known by the contestant at the outset of the litigation. Thus, taking additional time to clearly understand what is known for certain, prior to the filing of a contest, is important to protect the beneficiary from risking their rights under the terms of the will or trust.
Conversely, this requirement creates an incentive for the party responding to such a contest to serve immediate discovery upon the contestant to identify the facts then known by the contestant, and to therefore effectively separate these known facts from any later discovered facts. Such discovery responses received from the contesting beneficiary can potentially be used to demonstrate that the direct contest was brought without probable cause, and thus trigger the enforcement of the No Contest Clause.
- What Would a “Reasonable Person” Believe?
Whether or not a contest has been brought without probable cause is analyzed under the “reasonable person” standard. In Lieberman, the court again focused its analysis on the nature of the contestants’ relationship with their mother and whether such relationship justified a proportionate reduction in their inheritance:
Here, a reasonable person would conclude that the things David and Paula said and did to their mother – which they haven’t denied, and which, for the most part, were established through their own words – create a picture of a tremendously destructive relationship. . . Irene left some $10 million to David and Paula despite her estrangement from them and their poor treatment of her. A reasonable person would likely conclude this amount was substantially more than a reasonable mother would have left them at that point in their relationship. Such a reasonable person would not believe it reasonably likely that David and Paula could establish that their gift was inequitable.
Using a “reasonable person” standard renders the subjective belief of the contesting beneficiary irrelevant to the analysis. A court is likely to use its own judgment to determine what a “reasonable person” would have done at the outset if this hypothetical “reasonable person” stood in the shoes of the contesting beneficiary.
For the filing party, a circumspect and objective evaluation of the facts underlying a proposed contest is advisable. Evaluating a client’s claim from all angles and drawing upon past experiences in similar situations is a reasonable proxy for a Court’s determination; pointing out the potential flaws and weaknesses before filing a contest is an important part of the representation process.
- Is There a Reasonable Likelihood That the Requested Relief Will Be Granted Based Upon the Facts Known to the Contestant at the Time of Filing?
The “reasonable likelihood” of success is an imprecise standard, falling somewhere between “merely possible” and “more probable than not”.
In Lieberman, the Court grounded its inquiry on the facts that contestants knew or should have known at the time of filing. And, the court noted that even if there were other facts known to contestants at the time of filing which would have supported their theory of undue influence, given the weight of facts which should have been known to contestants from the outset of this case which support the conclusion that decedent’s estate plan “was the free act of an intelligent mind”, the court reasoned that “these other facts would not negate” the reasonableness of the Settlor’s estate plan.
Therefore, as stated above, because the Settlor in question was widely regarded as intelligent, strong willed, and in good mental and physical health at the times the Trust was executed and amended, the Lieberman Court found it unlikely that the contesting beneficiaries knew or should have known factsat the inception of this litigation, sufficient to show that the Settlor was susceptible to undue influence, that the trustee/primary beneficiary actively participated in the procurement of the Trust or its amendment, or that the benefit conferred on the primary beneficiary was undue in light of the totality of the circumstances.
Finally, the Lieberman court makes clear that the analysis under Probate Code section 21311 “turns not on whether the contestant had enough evidence at the time of filing to prevail, but on whether 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 the opportunity for further investigation or discovery.”As the court notes, “[t]he Legislature thus considered the fact that a contestant could not obtain evidence before filing a contest and incorporated an appropriate accommodation into the probable cause standard.” Here, the court reasoned that: “[w]hat is relevant is the absence of facts supporting David and Paula’s speculation and suspicion at the time of filing that would lead a reasonable person to conclude that facts later found would support a conclusion of undue influence by clear and convincing evidence.”
Thus, while the decision in Lieberman is not precedentially binding, it is illustrative of one Court’s analysis on this unreported area of law, and provides valuable insight for parties defending and beneficiaries bringing such a claim involving the enforcement of a No Contest Clause.
 Prior to January 1, 2011, challenges to a will or trust based on “mistake” or “misrepresentation” were considered direct contests and therefore subject to a No Contest Clause. See Law Review Commission Comments, 2008 Addition, Prob. C. § 21310.Direct Contests are now limited to allegations that a protected instrument, i.e. a will or trust, are invalid due to forgery, lack of due execution, lack of capacity, menace, duress, fraud, or undue influence, revocation of the will or trust, or disqualification of the beneficiary. See Prob. C. § 21310(b).
 Prob. C. § 21311(a).
In re The Irene M. Lieberman Revocable Trust, Order Granting Cross-Petition to Ascertain Beneficiaries and Instruct Trustee, San Francisco Superior Court Case No. PTR-15-299196, November 9, 2016, pp. 4-5, 8.
Id. at 5.
Id. at 6.
Id. at 18 (emphasis added).
Id. at 18-19.
Id. at 19 (emphasis added).