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In a recent decision from California, the Court held that a beneficiary seeking to compel the trustee to distribute funds pursuant to the trust did not violate the trust’s no-contest clause.
The trust in Arnall v. Arnall, like many trusts, contained a provision that disinherited any beneficiary who contested, attacked, or sought to impair the trust. This type of provision is commonly referred to as a “no-contest" clause.
In Arnall, the issue was the applicability of Roland Arnall’s no-contest clause. Roland established a trust in life, which at his death, created several subtrusts. The original trust established the order of funding to each subtrust pursuant to priority. For instance, a trust was created to pay taxes and expenses, the remaining funds went to trusts for Roland’s wife, Dawn, his children, and his brother Claude, in that order.
Dawn was the Trustee and, therefore, it was her fiduciary duty to fund the substrusts within six months. However, well after the six month deadline, Dawn had not funded any of the subtrusts. At that point, Claude filed a petition demanding Dawn to make a distribution and an accounting. Dawn argued that Claude’s action violated the no-contest clause in the trust.
The Court held that Claude’s action did not violate the no-contest clause. The Court reasoned that compelling the fiduciary to take action pursuant to the trust, does not contest, attack, or seek to impair the trust. Rather, Claude’s action simply sought to enforce the Trust pursuant to the Grantor’s wishes. The Court pointed out that public policy was in favor of allowing beneficiaries to challenge a fiduciary without risking disinheritance. Had the Court not ruled in Claude’s favor, fiduciaries could disregard provisions of the trust, thus disregard the wishes of the grantor and be shielded from attacks by beneficiaries because of the no-contest clause. Rather, the Court correctly distinguished between a beneficiary that seeks to alter the distribution of the trust, which would violate a no-contest clause, and that of a beneficiary who only seeks to compel distribution pursuant to the trust.
This case illustrates that a well-written no-contest clause protects the trustee from needless litigation while still enabling beneficiaries to enforce the trustee to act according to her fiduciary duty and the grantor’s wishes.
Arnall v. Arnall, 2011 WL 150187 (Cal.App. 2 Dist.).
- Michael Wolsh & Gary Altman