365 Route 59, Suite 231 ~ Airmont, New York 10952
(845) 425-3900 info@haaszaltz.com

Understanding Undue Influence – Part II


July 14, 2022

Some clients worry that certain beneficiaries will challenge their Estate Plan after death. Sometimes it’s because they have structured their plan to favor one beneficiary over another. Other times, it’s because they have left assets in a trust and named an individual other than the beneficiary of the trust to serve as Trustee of the trust. Occasionally, it’s because they have disinherited their family members in favor of a charity or individuals to whom they are unrelated. No matter the reason, clients have options to protect their carefully constructed Estate Plans. Qualified Estate Planning practitioners often recommend inserting provisions designed to lower the chance of a post-death challenge by a disgruntled beneficiary. The first part in this two-part series, Understanding Undue Influence – Part I, explored undue influence, the most common challenge to an Estate Plan, along with many of the typical scenarios in which beneficiaries raise the issue. This second part will provide practical advice for preventing challenges to an Estate Plan.

Including a “no-contest” clause as part of your Estate Plan represents one of the easiest ways to prevent an attack against the plan. In basic terms, a no-contest clause, sometimes also referred to as an “in terrorem” clause, provides that if a beneficiary challenges the plan unsuccessfully, that beneficiary forfeits any gift to which they would have otherwise been entitled under the plan. This means that for the no-contest clause to have the desired effect of chilling litigation and potential challenges, the testator needs to spend time considering how much to leave the beneficiary they expect to challenge the Estate Plan. There’s no deterrent for someone who has nothing to lose.

Let’s review an example to illustrate this principle. Assume that Betty has $6 million and three children, Blanche, Dorothy, and Sophia. Sophia stopped talking to Betty several years ago and for that reason, Betty has decided to leave her estate to Blanche and Dorothy. If Betty leaves nothing to Sophia, Sophia could challenge the plan, even if Betty’s plan included language that specifically disinherited Sophia. While Sophia may lose the challenge, the stress and turmoil could fracture her relationship with her sisters and delay the distribution of Betty’s estate. If Betty decided to leave $100,000 to Sophia, perhaps that amount along with the inclusion of a no-contest clause in her plan would deter Sophia from initiating litigation. If she decided against challenging the plan, Sophia would receive her $100,000 and each of Blanche and Dorothy would take $2,950,000. This would also preserve family harmony and prevent the financial and emotional drain of a protracted dispute. If instead, Sophia decided to challenge the Estate Plan and lost, then she would lose the $100,000 altogether and risk irrevocable damage to her relationship with her sisters.

As the above example demonstrates, the use of an in terrorem clause in a Will or Trust protects the intentions of the testator or grantor from attack by the disgruntled beneficiary by completely disinheriting the beneficiary who challenges the terms of a Will or Trust. These clauses do not work the same in every state and some states impose additional requirements before disinheriting the beneficiary. It’s important to understand the enforceability of these clauses in the various states. For example, neither Florida nor Indiana recognizes in terrorem clauses, but all other states acknowledge the use of the no-contest clause in varying degrees. About half of the states that enforce the no-contest clause require probable cause on the part of the beneficiary to initiate the lawsuit which adds another layer of protection for the plan. Most states construe a no-contest clause strictly and narrowly and will enforce a no-contest clause only when the beneficiary’s conduct falls into a category prohibited by the no-contest clause.

Even in those states that recognize an in terrorem clause, if your Estate Plan deviates from equal treatment of all beneficiaries of the same relation to you, then it’s best to let your family and loved ones know of your plans and the underlying reasoning for its structure. While they may not agree with your decision, advance knowledge of the plan and time to digest the consequences of that plan while you are alive may prevent litigation after your death. Couple this with inclusion of an in terrorem clause and you may have significantly decreased the chance of future challenges. Remember that leaving a token amount to a beneficiary may not be enough to deter a beneficiary determined to overturn your plan. Instead, you should ensure that the in terrorem clause has teeth by including a modest gift to ensure that forfeiture of that amount would disappoint the beneficiary should they choose to challenge the plan. The harsh result of forfeiture of the gift or bequest under a Will or Trust helps to protect the plan. Even in states like Florida and Indiana that do not recognize the validity of no contest clauses, inclusion of the clause in an Estate Plan may chill litigation and ensure that the testator or grantor’s intended plan of distribution stands. No matter your jurisdiction, it’s vital to understand these complex and evolving rules and a qualified Estate Planning attorney will help you understand how inclusion of this clause along with other provisions safeguards your plan.

Tereina Stidd, J.D., LL.M.