A no contest clause is sometimes included in an estate plan when people do not want their relatives to challenge the wills and trusts. A trustee could be charged with abuse if they act in bad faith as demonstrated in a recent Virginia case.
Estate planning can be difficult when blended families are involved and Wills, Trusts & Estates Prof Blog reported on a case decided by the Virginia Supreme Court in “Exculpatory Clause Does Not Apply to the Trustee’s Decision on Whether Beneficiaries Violated a No Contest Clause.”
In 1989, a man created a revocable trust with his wife and his two sons from a previous marriage as equal beneficiaries. The man designated himself as the trustee and one of the sons as the successor trustee.
In 2012, that trust was revoked and a new trust was created.
This time the trust stated that the man’s wife was to be entitled to all trust distributions during her lifetime and the two sons would only be able to receive distributions after she passed away. This time one of the wife’s friends was designated to be the successor trustee.
This second trust upset the two sons and they announced they would challenge it after their father passed away, which he did not too long afterwards. Next, the sons sent a letter to their stepmother suggesting that instead of going to court the three of them all agree to dissolve the trust and divide the assets equally between them.
What the sons did not know is that their father had amended the trust to include a no contest provision.
This provision allowed the trustee discretion to determine that a beneficiary had violated the clause and remove the beneficiary unless the trustee acted with fraud, dishonesty or bad faith. The trustee in this case determined that the letter sent by the sons was a challenge to the trust.
The letter was not a contest to the trust and the trustee acted in bad faith, according to the ruling by the Supreme Court of Virginia.
Reference: Wills, Trusts & Estates Prof Blog (Dec. 7, 2015) “Exculpatory Clause Does Not Apply to the Trustee’s Decision on Whether Beneficiaries Violated a No Contest Clause.”
