Understanding How You Can Protect Your Wishes as Recorded in Your Estate Plan

When you make the decision to create an estate plan, you likely put a lot of time and thought into getting that plan into place and making sure that it accomplishes exactly what you want. For this reason, almost anybody who puts in the effort of establishing a plan would also want to be sure that their wishes are protected from being undone after they’re gone. Depending on the laws in your state, a “no-contest” clause may be a viable solution.

“No-contest” clauses, also known as “terror” clauses (or, in some cases, by the Latin “in terrororem”,) are provisions inserted into estate planning documents like will or trusts. They state that, if a beneficiary under that document goes to court to challenge the legal validity of the document, and loses, then that beneficiary, regardless of what the plan document originally said, receives nothing.

These clauses can be very effective in some cases. For example, assume that your estate plan leaves one of your beneficiaries the flat sum of $75,000. Also assume that, if your estate plan were ruled invalid by a court and your assets were divided up according to your state’s intestacy laws, that same beneficiary would receive $250,000. A “no-contest” forces that beneficiary to consider carefully whether or not she can win in court, as a defeat in court means loses a significant sum — that being the $75,000 distribution.

A well-drafted “no-contest” clause will likely differentiate between a beneficiary who files a court challenge seeking to invalidate your estate plan and one who goes to court seeking a clarification of some aspect of your plan that is unclear. Even carefully drafted plan documents can sometimes have provisions that are ambiguous or vague. Most people would not want to punish their beneficiaries for asking a judge to make a ruling that clarifies a confusing provision, assuming that the beneficiary is not asking the judge to throw out the plan entirely.

Legacy-Assurance Plan-Eldery-lady-with-shopping-bags3

It is important to bear in mind that “no-contest” clauses are not legal in all states. Some states have decided that they violate public policy and have declared that they are unenforceable. In some states, the enforceability of a “no-contest” clause depends on whether the clause is placed in a will or a living trust. In Michigan, for example, the legislature passed a law declaring “no-contest” clauses in wills unenforceable. Because the law didn’t mention living trusts, the state Supreme Court there decided a few years ago that “no-contest” clauses in living trusts are allowable. So, if you live in Michigan (or a state whose law mirrors Michigan’s,) and you want to protect your wishes you’ve set up in your plan, you may want to consider utilizing a living trust in order to gain the added benefit of a valid and enforceable “no-contest” clause, in addition to the other potential advantages offered by a living trust.

Summary: “No-contest” clauses can serve important purposes in protecting the wishes you’ve enshrined in your estate plan. These clauses may provide a power financial disincentive that discourages disgruntled beneficiaries from using the courts in order to invalidate your plan and obtain a larger portion of your wealth as a result. “No-contest” clauses are not legal in every circumstance, however. The laws in your state may not allow them. In some states, “no-contest” clauses are allowed in living trusts and not in wills, which may provide an addition reason for residents of those states to consider using living trusts.

Advertisements