When beneficiaries and the successor trustees reach different conclusions about what should happen with the property, litigation is often the result. While one of the main goals in estate planning is to avoid litigation, its helpful to look at the complete picture.
The Good: Holding Successor Trustees Accountable
Litigation is a good thing when it allows beneficiaries to hold successor trustees accountable for their bad acts. “[A] beneficiary should be able to question the actions of a faithless fiduciary without being subject to the restrictions of [a no contest] clause” Bradley v. Gilbert (2009) 172 Cal.App.4th 1058
The Bad: Litigation As A Bully Tactic
But what about the trust beneficiary who is the thorn in everyone’s side? In this case, litigation can be used to create havoc and delay, testing everyone’s patience, and pocketbook.
The Delicate Balance: No Contest Clauses
Won’t the “no contest” clause protect the successor trustee from frivolous claim? It is part of the standard practice for most attorney’s to include a “no contest” clause in their estate planning documents. What many people don’t realize is how limited the no contest clause is in practice.
The rules regarding “no contest clauses” have been tweaked by the legislature over the last hundred years or so. Most recently, in 2008, “no contest” clauses were limited to three types of contests: (1) a direct contest, as specifically defined, brought without probable cause; (2) a creditor claim; and (3) a challenge to a transfer of property amounting to a forced election. (Revision Rep., supra, 37 Cal. Law Revision Com. Rep. at pp. 392-394, 397.)
In short, a challenge to the successor trustee is allowed unless it falls in one of those three very narrowly defined categories. The net result, confirmed in a recent California Supreme Court ruling in Donkin v. Donkin is that trustees can be held accountable.
So What Should You Do?
Create clear instructions for the trustees. In the Donkin case, the argument boiled down to what did the language in the trust (and amendment) mean? Clarity can avoid years of expensive litigation. I shudder to think what it has cost the Donkin’s so far, and they’re just getting started.
Pick good trustees. It can be tempting to pick the oldest child, or the nearest child. Better to take some time and think through who is the most responsible, and trustworthy, the one who can best carry out their responsibility without becoming greedy, or overwhelmed.
And finally, don’t rely on a generic “no contest” clause to keep all arguments away.