April 1, 2013

No Contest Clauses in Trusts and Powers of Appointment: Is Colorado’s Silence an Oversight or an Opportunity?

by Kelly Cooper

With the increasing diversity in the make up of today’s families, many estate plans now treat family members differently or disinherit certain family members completely.  When there is unequal treatment or a disinheritance, estate planners often include no contest clauses in their documents to try to avoid costly disputes and litigation after a client’s death.  Under Colorado law, a no contest clause is only enforceable against a beneficiary if the beneficiary lacked probable cause to bring a contest.  An in-depth discussion of these clauses and the probable cause exception to enforceability was posted to our blog last week, to read it, click here.  We expect the use of these clauses to increase and for clients to request these clauses as they become more familiar with them through media reports about the use of them in celebrities’ estate plans (e.g. Michael Jackson, Brooke Astor).

The topic for today is whether a contest clause in a trust agreement is subject to the same probable cause exception as a contest clause contained in a decedent’s will.  Since a revocable trust is considered a will substitute, some will argue that there is no compelling reason to treat a contest clause in a revocable trust any differently than one in a will.  While Colorado’s probate statutes are clear that a probable cause exception exists for contest clauses in wills, Colorado’s trust statutes do not contain any similar provision.  Is this silence an oversight or an opportunity for planners?  

Colorado’s silence on the question of contest clauses in trusts made me wonder how many states had statutes addressing contest clauses in trusts (enforceability and/or exceptions to enforceability).  The answer is thirteen (and is found in a great 2012 State Laws Survey cited at the end of this post) – Alaska, California, Delaware, Florida, Hawaii, Indiana, Michigan, Nevada, New Hampshire, Oregon, Pennsylvania, South Dakota and Texas.  According to the survey, another nine states have case law addressing the question of the enforceability of contest clauses in trusts, but Colorado and twenty-five states have no statute or case law on this issue.  The Uniform Trust Code is also silent on whether contest clauses in trusts are enforceable.  In light of the fact that numerous states have already addressed the issue of contest clauses in trusts, it can be argued that Colorado’s silence is purposeful.

Colorado law is also silent on the issue of a decedent can place a condition on the exercise a power of appointment.  For example, a decedent’s will may state that he exercises a power of appointment to give assets equally to A and B if no contest is filed, but that he exercises the power to give all of the assets to A if B files a contest.  While this is a conditional exercise of the power of appointment, it reads very similarly to a contest clause.  Unlike revocable trusts, which are often will substitutes, a power of appointment is not a will substitute and the argument that a power of appointment should be treated like a will may well fall short.  In addition, powers of appointment are generally exercisable in regard to trust assets, not probate assets.  Here, Colorado’s law silence on the enforceability of contest clauses in trusts may provide a real opportunity to avoid the probable cause exception, but also causes uncertainty for fiduciaries and administrators of trust assets subject to powers of appointment.

In light of the uncertainty in this area, planners may want to consider drafting trusts instead of wills for those clients who wish to include contest clauses.  When possible, planners may also want to include powers of appointment to allow for greater flexibility and to assist their clients in exercising powers of appointment to implement any plan of unequal treatment among beneficiaries.

For more information about the differing state laws in regard to contest clauses, see a great survey “State Laws: No-Contest Clauses,” T. Jack Challis and Howard M. Zaritsky, March 24, 2012.