Disinheriting – How to do that Effectively

One way to disinherit someone is to state in your California Will or living trust that if a beneficiary files a “pleading” in court, that person is penalized in some fashion, often by forfeiting their inheritance or distribution out of a trust.  This is often referred to as a no contest clause or an in terrorem clause.  The term “pleading” means a claim, petition, complaint, objection, cross-complaint, response or answer.  No contest clauses are valid in California and are favored by the public policies of discouraging litigation and giving effect to the settlor’s expressed purposes.  There are, however, other public policies that compete with that one and therefore no contest clauses are also disfavored by the policy against forfeitures and may not extend beyond what was clearly the trustor’s intent.  The California Probate Code contains an entire Part dedicated to no contest clauses in Sections 21310 through 21315.

California Probate Code Section 21311 defines what no contest clauses can be enforced and provides that a no contest clause may be enforced against a direct contest that is brought without probable cause. A “direct contest” is defined to mean 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:

(1) Forgery.

(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 Probate Code 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 Probate Code Sections 6112, 21350, or 21380.

In a recent court case, Aviles v. Swearingen, 16 Cal.App.5th 485 (2017), Tracy J. Swearingen appealed from an order denying her petition to enforce a no contest clause and disinherit Jose Francisco Aviles as a trust beneficiary of the Margaret B. Chappell Living Trust. The trial court found that the trust third amendment and restatement, which contains general language of incorporation of a prior trust amendment, did not specifically refer to a no contest clause. It also found that the Third Amendment was not a “protected instrument” within the meaning of Probate Code section 21310(e).  The court affirmed the lower court’s Order denying the petition to disinherit Aviles.

Margaret B. Chappell (Peggy) created the Margaret B. Chappell Living Trust in 2010 and amended the trust three times before dying on January 12, 2016. Peggy’s attorney prepared the original trust. It provided that Peggy’s boyfriend, Jose Francisco Aviles, would receive all the trust assets on Peggy’s death. The first amendment provided that Aviles would receive Peggy’s real property and stated that the remaining trust assets be distributed half to Peggy’s brother and the other half to be divided equally between the children of Peggy’s nieces and nephews. The second amendment provided that Aviles would receive Peggy’s real property and half of the remaining trust assets would be distributed to her brother and the other half to Peggy’s godchildren.

In 2015, Peggy gave Swearingen her estate planning documents.  Swearingen confronted Peggy about the disposition of trust assets. In the months that followed, Peggy executed the Third Amendment without her attorney’s input or advice. The Third Amendment changed the trust to make Swearingen the sole remainder beneficiary and successor trustee. It incorporated by reference the unchanged provisions of the second amendment and provided: “These Articles once included, and along with any Articles not amended, shall result in the Third Amendment and Restatement of the Trust Agreement for the Living Trust of Margaret B. Chappell.”

After Peggy died, Aviles filed a petition to invalidate the Third Amendment on the ground that it was the product of undue influence and financial abuse. The petition alleged that Swearingen and her husband owned and operated a marijuana dispensary, that they supplied Peggy marijuana without a medical approval, that Peggy became addicted to marijuana, and was a dependent adult within the meaning of the law. It also alleged that appellant was Peggy’s “care custodian” under the law, and coerced Peggy to disinherit her brother and godchildren and name Swearingen the sole beneficiary of the trust.

Swearingen opposed the petition and filed a counterpetition to disinherit Aviles alleging that he violated the no contest clause in the second amendment by challenging the Third Amendment.

Denying the petition, the trial court ruled that the Third Amendment was not a “protected instrument” as defined by the law in Probate Code Section 21310(e) because the instrument did not contain a no contest clause or expressly reference the no contest clause in the second amendment.

Pursuant to this statute, the settlor may “either incorporate by reference or republish in full a no-contest clause in a … trust amendment by expressly referring to a no-contest clause contained in an instrument previously executed by the [settlor].

Swearingen conceded that the Third Amendment did not have a no contest clause. At issue is whether the Third Amendment is a “protected instrument” because it incorporates by reference the no contest clause in the second amendment without specifically mentioning it. Swearingen claimed that Peggy intended to include the no contest clause in the Third Amendment because the Third Amendment incorporates all of the terms of the second amendment not amended by the Third Amendment.

In its holding against Swearingen, the Appeals Court argued that under former law and current law, the no contest clause is not enforceable unless it is set forth verbatim in the Third Amendment or the Third Amendment expressly refers to the no contest clause in the second amendment.  In other words, the no contest clause in the second amendment does not apply to future trust amendments, such as the Third Amendment, unless the amendment specifically refers to the no contest clause.  Although no contest clauses are favored by the public policies of discouraging litigation and giving effect to the trustor’s intent, they are also disfavored by the policy against forfeitures and may not extend beyond what plainly was the settlor’s intent.

The Appeals Court was unable to say that Peggy unequivocally expressed her intent to apply the no contest clause to petitions contesting trust amendments that are the product of fraud or undue influence. Application of the clause here would defy common sense. “An instrument that is the product of menace, duress, fraud, or undue influence is not an expression of the transferor’s free will and should not be enforced.”

The lesson is that with multiple amendments to a trust, each amendment ought to restate the no contest clause in full.  For help in properly drafting your trust amendment, call a qualified attorney.