“No contest” clauses are often a client’s dream and a lawyer’s nightmare. A “no contest” clause (often referred to as an in terrorem clause because lawyers like to use Latin) is a provision in a will or trust which states that if a beneficiary contests any provision of a will or trust he or she forfeits his or her share of the estate. Client’s often ask for in terrorem clauses to be included in their document in the hope it will prevent fighting among beneficiaries. However, no contest clauses are strictly enforced, which too often causes a beneficiary to lose his or her inheritance, contrary to the testator or grantor’s intent.
The Supreme Court recently revisited in terrorem clauses in Hunter v. Hunter. The plaintiff, Chip Hunter, sought an explanation for why assets in his mother’s trust dissipated significantly during a time when the economy was booming, and the market increased significantly. However, his mother’s trust waived the trustee’s requirement to inform and report to the beneficiaries of the trust. (We question whether such a provision is ever a good idea). In addition, the trust contained a paragraph entitled “In Terrorem Provision” which stated that a “beneficiary’s interest would be revoked if the beneficiary were to contest any provision of the trust agreement.” Chip was forced to either accept the fact that the assets decreased significantly in value, contrary to the stock market and the general economy, or pursue the matter in court and risk triggering the in terrorem clause.
Chip chose to take a chance and his attorney filed a two-count Complaint. Count I asked for a judgment from the Court that Count II would not violate the in terrorem clause in the trust. Count II asked for an interpretation of the trust to require a financial report from the trustee but only if the Court first declared in Count I that Count II would not violate the in terrorem clause. Instead, the trial court found that both counts of the Complaint had to be read as a whole, that the Complaint violated the in terrorem clause, and that Chip’s inheritance must be revoked.
Chip appealed and the Supreme Court of Virginia reversed the trial court’s decision. In its opinion, the Supreme Court made three key rulings:
- First, the Supreme Court expressly approved Chip’s two-step method of testing a no-contest clause. Now, beneficiaries may feel comfortable using this method to first seek a declaration that they are not violating the in terrorem clause, and if (and only if) successful, seeking the substantive relief they desire.
- Second, the Supreme Court explicitly held that seeking an interpretation of the document is not the same as an outright contest. As a result, litigants may feel much more comfortable seeking an interpretation of the will or trust without risking violating an in terrorem clause. This particular issue has always been the concern of the drafting attorney and advisors on the use of in terrorem clauses.
- Third, the court reiterated that in terrorem clauses will be strictly construed and strictly enforced “without any wincing on our part as to the alleged harshness or unfairness.”
Hunter is clearly a win for beneficiaries who are seeking to ask reasonable questions surrounding their inheritance. However, Hunter does not negate the power of an in terrorem clause. As a result, beneficiaries should exercise extreme caution and seek the advice of legal counsel before taking any action that may be interpreted as contesting a will or a trust. In addition, we as drafters and estate planners must take extreme caution in advising our clients on the potential pitfalls of an in terrorem clause before including one in a will or a trust.
If you are a beneficiary seeking advice on how to proceed in light of a “no contest clause” or a interested in discussing your estate planning and the benefits or pitfalls of including a “no contest clause” in your estate plan, contact us today at 804.270.1300.
