By Staci Yamashita-Iida, Esq.
“I just don’t want my kids to fight.” This is a phrase frequently uttered by my clients when discussing beneficiary designations for their Estate Plan. Most parents, especially within the Japanese and Japanese American community, want to be as fair as possible to their children. But being fair doesn’t always mean being equal. And unequal distributions can lead to disputes and, in the worst cases, litigation.
A good Estate Planning attorney will always try to reduce or eliminate family discord through proper planning techniques. One tool that is commonly used to prevent family fighting is the No Contest clause.
The No Contest clause was originally referred to as an in terrorem clause, which is Latin for “into/about fear.” The provision served as a legal warning in hopes of compelling someone to act (or refrain from acting) without resorting to filing a lawsuit.
Nowadays, the No Contest clause is included in a will or a trust with the intention of discouraging disgruntled individuals from legally challenging your Estate Plan. If the individual does contest your will or trust and the court finds that there was no probable cause for doing so, then that person will lose his or her inheritance — i.e., they get nothing.
One important thing to note is that the No Contest clause is usually triggered by someone who has a stake in the assets like a beneficiary. If you wanted to specifically omit someone as a beneficiary of your trust (such as an estranged brother or drug-addict son), you may have been advised to leave that person $1.
The objective was to make it clear that the individual was to receive only $1 and nothing more. However, under the terms of the No Contest clause, anyone who has something to lose — even something as small as $1 — can challenge the trust. If you want to exclude someone without giving him or her the opportunity to contest later on, you may want to consider eliminating him or her from your trust all together and inserting a provision specifically disinheriting him or her from receiving any part of your estate.
So, how does the No Contest clause play out in real life? Perhaps the easiest way to understand its value is through an example.
Let’s say you have two children, Adam and Betty. Two years ago, Adam moved to Texas with his wife and has not visited since, not even during the holidays. Adam is an executive at a multinational automotive manufacturing company who owns a home in Texas, a rental property in California and a vacation home on Maui.
Betty is single with no children and lives at home with you. After your stroke last year, Betty has been cooking for you, cleaning the house and taking you to all of your appointments. She also provides around-the-clock care.
When it comes time to update your revocable living trust, you name Betty as the sole beneficiary of your home. You also name Betty as the 75 percent beneficiary of your residual assets (e.g., your financial accounts) with Adam receiving the remaining 25 percent.
Your reasoning for making these designations is that Adam is very well off and already owns his own home, whereas Betty struggles financially and does not own any real property. You also want to make sure Betty is compensated for the time and energy she has provided for her care giving.
Even though you feel like this unequal distribution is actually what is fair, you are still worried that Adam will give Betty a hard time after you’re gone.
Having the No Contest clause could be helpful in this situation to prevent Adam and Betty from fighting. If Adam challenges the beneficiary designation (perhaps alleging that Betty unduly influenced you into obtaining a larger share), and the court finds he had no reason for doing so, his inheritance will be voided. Essentially, he will be treated as if he predeceased you and would not receive his 25 percent share of the assets.
So, from Adam’s perspective, it’s beneficial to bite his tongue and accept the terms of the trust as is … otherwise he could risk everything with a contest. Would he rather get 25 percent of the estate or nothing at all?
In the perfect world, you would not have to be concerned about a challenge to your will or trust. But inheritances, especially ones involving money, have a funny way of changing the way people act. If your goal is to promote harmony and prevent conflict within your family, then it may be valuable to consult your local attorney and include the No Contest clause in your Estate Plan.
Staci Yamashita-Iida, Esq. is an Estate Planning attorney at Elder Law Services of California. She can be contacted at (310) 348-2995 or staci@elderlawcalifornia.com. The opinions expressed in this article are the author’s own and do not necessarily reflect the view of the Pacific Citizen or JACL. The information presented does not constitute legal or tax advice and should not be treated as such.
