Since ancient times, the wealthy have sought to ensure their assets are distributed the way they intend and to foil any effort by survivors to undermine their estate plans.
The practice continues, with wills and trusts using language that revokes legacy benefits for anyone who dares challenge the terms of the testamentary document.
A recent Virginia Supreme Court ruling highlights the narrow pathway a beneficiary with questions might have to travel to avoid operation of what is sometimes called an “in terrorem” clause.
The opinion cites testamentary language from 13th century Mesopotamia to illustrate the long heritage of no-contest provisions. For modern practitioners, the court makes it clear that the rules for no-contest provisions in wills apply also to testamentary trusts.
A careful wordsmith can avoid pitfalls and obtain interpretation of a legacy document without invoking a penalty clause referred to as a “doomsday weapon” by one justice. The ruling comes in the court’s March 12 decision in Hunter v. Hunter (VLW 020-6-013).
The case began with a son’s suspicion about disappearing assets.
Chip Hunter stood to receive a one-third share of his parent’s trusts after his mother died, but he came across a financial statement showing a dramatic reduction in the value of trust assets during his parents’ final years.
“Chip, as a beneficiary of his parents’ trust, quite logically wanted to know what happened that they went from $4.25 million down to about $1.79 million in the course of a few years,” said Chip’s lawyer, William W. Sleeth III of Williamsburg. At oral argument at the Supreme Court, Sleeth explained the stock market had returned positive gains all those years and, in some years, significant gains.
“There’s lots of money at stake in these situations involving no-contest clauses,” Sleeth said.
When Chip asked his sister for a full financial report, she refused. Her lawyer pointed to a trust provision waiving the trustee’s requirement to inform and report.
“Chip was left with a dilemma,” Sleeth told the justices. Chip wanted to ask a judge to order a report on what happened to his parents’ assets, but he was confronted with what was explicitly styled an “In Terrorem Provision” of the applicable trust. It said a beneficiary’s interest would be revoked if the beneficiary were to contest any provision of the trust agreement.
“I desire that my children and grandchild not expend resources disputing loans, gifts or bequests that I have made,” Chip’s mother wrote in her trust.
So Chip’s counsel crafted a two-count complaint intended to create a firewall between the two parts of his request. Count I sought a declaratory judgment that Count II would not violate the no-contest clause. Count II sought an interpretation of the trust to require a financial report from the sister.
The complaint asked the court to consider Count II if – and only if – the court deemed the no-contest provision inapplicable.
But Williamsburg Circuit Judge Michael E. McGinty agreed with Chip’s sister, Eleanor, that the complaint should be viewed as a whole. He revoked Chip’s beneficial interest in the trust and directed Chip to pay attorneys’ fees.
On appeal, Chip argued he had carefully followed the guidance of the Supreme Court’s 1993 will-interpretation decision in Virginia Foundation of Independent Colleges v. Goodrich.
That ruling opened a door for actions to interpret a will as distinguished from complaints to contest a will.
“He proceeded, simply trying to follow the roadmap of Goodrich that this court has laid out for parties as to how they can confront these difficult situations,” Sleeth told the justices.
At oral argument, Justice D. Arthur Kelsey described the risk in graphic terms: “You’ve got a doomsday weapon that you just got hit by, and if you get out of that doomsday weapon, you can start talking about the merits of the case. But, if the doomsday weapon takes you out, there’s nothing more for you to say.”
Daniel R. Quarles of Williamsburg, counsel for sister Eleanor, contended the Goodrich ruling did not create a “blanket exception” for declaratory judgment actions in the face of no-contest provisions.
“There is just no precedent in American jurisprudence … for that kind of ‘Mother-may-I’ pleading. And to open the door and allow that, … the positive effect of no-contest provisions and preventing litigation – that would just go out the window,” Quarles told the justices.
Alternative pleading approved
But the Supreme Court gave a unanimous thumbs-up to the two-step method of testing a no-contest provision.
“We now give our express approval to the alternative-pleading model implicitly accepted in Goodrich,” wrote Kelsey for the full court. McGinty erred by disregarding the “if-and-only-if” proviso of Count I, the court said.
The trial judge also erred in viewing Count II as challenge to the trust document and ordering forfeiture of Chip’s interest.
“Construing a legal document and contesting it are two different things. The distinction may be fine, but it is a sharp one,” Kelsey wrote.
Chip sought a narrow interpretation of the trust’s waiver of the inform-and-report obligation, but the trial court “equated Chip’s disagreement with the broad interpretation as an outright contest of the provision itself,” the court said.
“The point of Goodrich, however, was to provide a safe harbor for seeking a judicial interpretation of a disputed provision without the risk of the request for interpretation being characterized as an attempt to invalidate the provision,” Kelsey wrote.
The court rejected Eleanor’s contention that any request for interpretation triggers forfeiture.
“[W]e have never addressed (much less approved) a no-contest provision seeking to seal the courthouse doors to a litigant seeking an interpretation (rather than an invalidation) of a trust or will provision,” Kelsey wrote.
No-contest provisions are simultaneously strictly enforced and strictly construed, the court said.
“By strictly enforced, we mean that we will enforce the provision without any wincing on our part concerning its alleged harshness or unfairness – so long as the testator or settlor clearly intended the forfeiture,” Kelsey wrote, summarizing the law of in terrorem clauses.
“By strictly construed, we mean that the intent to forfeit must be very clear. The language used must ‘precisely express’ the specific intent to cause a forfeiture,” the court said.
Strictly construed, the language of the Hunter family trust did not “equate a request for an interpretation of the trust’s provisions with a contest of the trust,” the court concluded. The court reversed and remanded the case for further proceedings.
“This helpful ruling will provide estate litigators with greater clarity as to how they can obtain a ruling as to whether a proposed course of action would trigger a no-contest clause, without the risk of having to first take that action and their client risk potential disinheritance as a result,” Sleeth said.