Recent decisions in California and Mississippi illustrate the divergence among states regarding enforcement of in terrorem clauses in wills and trusts.
In recent years, testators and settlors have included in terrorem or “no contest” clauses in wills and trusts with increasing frequency in an effort to discourage challenges to the validity, meaning or administration of an estate plan. An in terrorem clause is a provision included in a will or trust instrument that operates to disinherit a beneficiary who challenges the validity of a decedent’s estate plan, its terms or even the conduct of fiduciaries designated to carry out the decedent’s intent during the period of administration. A beneficiary who challenges the validity of a will or trust, its terms or a fiduciary’s actions during administration risks losing her entire beneficial interest if the will or trust includes an in terrorem clause. This risk can create a powerful deterrent to beneficiaries who might otherwise bring challenges to a testator’s or settlor’s estate plan.
Although courts initially exhibited some hostility to in terrorem clauses, such clauses are now enforceable to some extent, by statute or case law, in almost every US state. The extent to which states enforce in terrorem clauses is an area of law that continues to develop, however. Two decisions issued in 2019 illustrate this divergence among jurisdictions.
First, the decision by the Court of Appeals of California in Key v. Tyler, 34 Cal. App. 5th 505 (2019), suggests that California courts are willing to construe in terrorem clauses broadly under the enabling statute in the California Probate Code, which generally provides that a no contest clause will be enforced only against direct contests brought without probable cause. (See Cal. Prob. Code § 21311. Section 21311 also provides that a no contest clause may be enforceable against: (a) a pleading to challenge a transfer of property on the grounds that it was not the transferor’s property at the time of the transfer, and (b) the filing of a creditor’s claim or prosecution of an action based on it but only if the clause specifically covers such actions.) For this purpose, a “direct contest” is a “contest that alleges the invalidity of a protected instrument or one or more of its terms,” based on forgery; lack of due execution; lack of capacity; menace, duress, fraud or undue influence; revocation of a will or trust; or disqualification of a beneficiary. (See Cal. Prob. Code § 21310.) However, despite this apparent specific language, the court of appeals construed Sections 21310 and 21311 to apply to both a broad range of claims and actions taken by a beneficiary.
In Key, the petitioner and the defendant were sisters and beneficiaries of a revocable trust created by their mother and father. The defendant, Tyler, also served as the trustee of the trust. After their father’s death, the defendant caused her mother to amend the revocable trust (2007 amendment) to effectively disinherit the petitioner, Key. Key filed a petition to set aside the amendment on the basis that Tyler unduly influenced their mother into executing the amendment. Tyler, in her capacity as trustee, opposed Key’s petition. However, the court found that Tyler had exerted undue influence with respect to procuring the amendment. The court granted Key’s petition and held that the 2007 amendment was invalid. Key then filed a subsequent petition to enforce the in terrorem provision in the trust against Tyler on the basis that Tyler’s defense of the invalid amendment, in her capacity as trustee, qualified as a direct contest under the California Probate Code.
In response, Tyler argued that her defense of the amendment, in her capacity as trustee, did not constitute a “direct contest” under the California Probate Code because a “direct contest” must involve conduct that initiates a judicial action to obtain affirmative relief. The court rejected this argument. The court held that “Tyler’s attempt to enforce the [2007 amendment] that she obtained through undue influence amounted to a direct contest seeking revocation of the pertinent terms in the original Trust.”
In reaching this conclusion, the court found that “[n]othing in the language of section 21310 or 21311 suggests that a direct contest is limited to an action that a beneficiary initiates.” Rather, “[p]leadings amounting to a ‘contest’ under section 21310 can include responsive pleadings, such as a ‘cross-complaint, objection, answer, or response.” The court also found that the defense of the amendment satisfied the statutory criteria for the definition of a “direct contest” under section 21310 because the defense of the wrongfully procured amendment constituted a contest to the original trust based on a revocation. The court found that although the change to the trust’s terms was labeled as an amendment, it effectively constituted a revocation and therefore satisfied the definition of a direct contest under the Probate Code.
Finally, the court found that the fact that Tyler defended the amendment in her capacity as trustee did not affect the analysis. The court stated that “[i]t is the effect of Tyler’s conduct that establishes whether she defended the 2007 Amendment solely in her capacity as a disinterested trustee, not the title on the pleadings that she filed.” The Court held that because Tyler’s “defense of the 2007 Amendment was consistent with her own interests as a beneficiary . . . [h]er pleadings defending the 2007 Amendment therefore were sufficient to trigger enforcement of the No Contest Clause.”
Thus, the decision in Key indicates that the California Court of Appeals will construe in terrorem clauses broadly and find them applicable in a wide range of circumstances. In particular, the court appears willing to find that a broad range of actions can amount to a “direct contest” under the Probate Code and can fit within the specific criteria listed in Section 21311.
In contrast, in Estate of Roosa v. Roosa, No. 2017-CA-01707, 2019 Miss. App. LEXIS 163 (Miss. Ct. App., Apr. 23, 2019), the Mississippi Court of Appeals refused to enforce an in terrorem clause against the beneficiary under a will in very similar circumstances to those present in Key. In Roosa, the testator died survived by four children and several grandchildren. Under the terms of the will and codicil, all of the testator’s children and grandchildren were beneficiaries. The will also contained an in terrorem provision. The executor of the estate, who was one of the testator’s sons, submitted the testator’s will and first codicil to probate. Shortly thereafter, one of the testator’s daughters, Rosemary, submitted a second codicil to probate. Under the terms of the second codicil, the testator left the bulk of the estate entirely to Rosemary.
The executor and the testator’s other three children contested the validity of the second codicil, claiming that Rosemary had exerted undue influence over the testator. After a trial, a jury returned a general verdict finding that the second codicil was invalid. Subsequently, the executor sought to enforce the in terrorem provision in the testator’s will against Rosemary, because Rosemary sought to interfere with the testator’s testamentary wishes by filing the second codicil. Although the jury determined that the second codicil was invalid, the chancery court held that the forfeiture provision in the will was not enforceable because Rosemary acted in good faith when she sought to probate the second codicil. The executor appealed, and the Mississippi Court of Appeals affirmed the chancery court’s decision.
In reaching its decision, the court’s analysis in Roosa diverged from the California Court of Appeals’ analysis in two significant ways. First, the court in Roosa did not find that Rosemary’s actions in probating and defending the second codicil qualified as a contest in violation of the in terrorem clause, as the court did in Key. Rather, the court concluded that the in terrorem clause only potentially applied to Rosemary’s actions because the specific language of the in terrorem provision covered any actions taken by a beneficiary to “prevent any provision [of the will] from being carried out in accordance with it terms.” Thus, under Mississippi law, a beneficiary may be able to take a number of actions that could affect an estate plan without triggering an in terrorem clause unless the clause is drafted broadly enough to cover conduct that does not qualify as a traditional challenge to a will or trust instrument.
Second, and more importantly, the court in Roosa found that under Mississippi law an in terrorem clause is not enforceable where a challenge to the will is brought in “good faith.” Thus, unlike California law (and the law of several other jurisdictions), Mississippi law requires a court to consider both (1) whether a contestant has objective probable cause to bring the challenge, and (2) the subjective intent of the contestant, in determining whether an in terrorem clause is enforceable.
The court found that the record included sufficient evidence to demonstrate that Rosemary acted in good faith when she submitted the second codicil. Even though the second codicil was challenged on the basis that it was procured with undue influence, and even though the jury found the second codicil invalid, the court held that “this decision alone does not mean that it was submitted in bad faith or without probable cause.” Therefore, at least in Mississippi, a petitioner must establish that another beneficiary acted with the requisite bad faith before for a court will enforce an in terrorem clause.
The decisions by the California Court of Appeals in Key and the Mississippi Court of Appeals in Roosa highlight the diverging enforceability standards for in terrorem clauses amongst states, including whether a court should consider the subjective good faith of the contestant, and what actions qualify as a contest. If this divergence continues to expand, the state law that applies to determine the enforceability of in terrorem clauses in wills and trusts will affect how effective an in terrorem clause may be in deterring and overcoming challenges. This divergence also may cause more testators and settlors who are domiciled in states that interpret in terrorem clauses narrowly to attempt to modify the state law that governs their estate plans so that the laws of a state that is more liberal in enforcing in terrorem clauses will apply.