When you create a trust as part of your estate plan, the trustee is obligated by California law to be “impartial” with any beneficiaries you name. In other words, if you specify the trust assets should be divided equally among your children after your death, your trustee cannot favor one child over another. This requirement of impartiality is especially important if your trustee is also a beneficiary. You do not want the beneficiary-trustee misusing trust assets to benefit themselves at the expense of the other beneficiaries.
One consequence of this impartiality rule is that when someone challenges or contests your trust, the trustee may normally not use trust assets to defend against such a challenge unless it touches upon the validity or assets of the trust itself. So if someone files a lawsuit claiming they are a rightful beneficiary of the trust—or someone else is not a rightful beneficiary—the trustee should not get involved. Of course, California law only establishes a default position. In making a trust, you are free to instruct the trustee to defend against any and all lawsuits at the trust’s expense.
Daughter Contests No-Contest Clause in Mother’s Trust
Recently, a California appeals court addressed the applicability of such a provision in relation to a trust contest. A woman established a trust in 1999 and amended it several times before her death in 2014. The woman’s daughter was one of the trust’s beneficiaries. She believed another beneficiary, her mother’s former gardener, exercised undue influence over her, making the mother’s gift to him from the trust invalid.
The trust contained a no-contest clause, which specified any beneficiary who challenged the validity of the woman’s estate plan would forfeit their inheritance. The trust further directed the successor trustee—in this case, a bank—to expend whatever trust assets were necessary to defend against a contest. Based on this, the trustee sought instructions from the court overseeing the daughter’s lawsuit confirming its authority to use trust funds to pay for legal expenses.
The daughter acknowledged she was contesting the trust but argued that the court should not allow the trustee to use trust funds to pay litigation expenses unless and until it was determined her challenge lacked merit. As the daughter saw it, the authorization to pay legal expenses was itself part of the no-contest clause, meaning as a matter of law it cannot be enforced until the court rules on the merits of her lawsuit.
The courts did not see it that way. Both the probate court and later the Court of Appeal held that “the defense directive is not an element of the no-contest clause” and this directive was “enforceable prior to the determination of the merits” of the daughter’s lawsuit. While the daughter’s underlying lawsuit remains pending, the trustee is free to spend trust assets to defend the other beneficiaries’ rights.
Need Help Drafting a Will or Trust?
As this case illustrates, estate planning does not prevent all disagreements that may arise among beneficiaries. You can protect beneficiaries from frivolous challenges through the use of no-contest and legal defense provisions in your trust or will. A qualified California estate planning attorney can assist you with this any other issue you may have. Contact the Law Office of Scott C. Soady in San Diego today to speak with someone today.