No contest clauses are an ever-evolving area of the probate law in California.  The Court of Appeal further refined the rules governing no contest clauses in a decision issued last week, Aviles v. Swearingen (2017) ___ Cal.App.5th ___.  In brief, in order for a no contest clause to apply to a trust amendment, the no contest clause must be stated in the amendment or the amendment must expressly reference the no contest clause set forth in a prior document.

The takeaway from the case for estate planners is that if your client wants a no contest clause, then you must mention the no contest clause in every trust amendment that you draft for the client.  It is not good enough to simply include a no contest clause in the client’s trust and then refer back to that trust, generally, in later amendments.  Each subsequent amendment must either contain its own no contest clause or must expressly reference the no contest clause of the original trust instrument.

The Story of Peggy Chappell

Peggy Chappell created a living trust in 2010.  Her original trust instrument left everything to Peggy’s boyfriend, Jose Francisco Aviles (“Aviles”).  Before her death in 2016, Peggy would amend her trust three times:

• In the first amendment, Peggy left Aviles her real property and directed that the remaining trust assets be split with 50% going to her brother and 50% to her nieces and nephews.
• In the second amendment, Peggy left Aviles her real property, with 50% of the remainder going to her brother and 50% of the remainder going to her godchildren.
• In the third, and final, amendment, Peggy still left Aviles her real property, but left 100% of the remainder interest to a friend, Tracy Swearingen (“Swearingen”).

The third amendment was signed only after Peggy suffered a relapse of cancer in 2015, and after she had given Swearingen a copy of her estate planning documents for safekeeping.  Peggy complained to others that Swearingen had read her trust documents.  Swearingen confronted Peggy about the terms of the second amendment, and in the months afterwards, Peggy signed the third amendment that favored Swearingen without the advice of an attorney.

After Peggy’s death, Aviles filed a petition to invalidate the third amendment.  Aviles claimed that Swearingen owned and operated a marijuana dispensary and supplied Peggy with marijuana even though Peggy did not have medical approval.  Aviles alleged that Peggy became addicted to marijuana and that Swearingen coerced Peggy into amending her trust to remove her brother and her godchildren in favor of her pot dealer, Swearingen.

In response, Swearingen filed a counter petition alleging that Aviles had violated the no contest clause in asserting his petition.

The third amendment did not contain its own no contest clause.  Instead, the third amendment stated that “[t]hese Articles once included, and along with any Articles not amended, shall result in the Third Amendment and Restatement of the Trust Agreement for the Living Trust of Margaret B. Chappell.”  Swearingen argued that this clause meant that the no contest clause in the second amendment continued in effect as to the third amendment.

The Court’s Ruling

The trial court disagreed with Swearingen’s argument and held that the no contest clause in the second amendment could not flow through to the third amendment.  The court noted that it strictly construes no contest clauses and narrowly examined the definition of “protected instrument” in Probate Code section 21310.

A “protected instrument” – one where it is possible for a beneficiary to trigger a no contest clause with a direct contest – is defined as an “instrument that contains the no contest clause” or an “instrument that is in existence on the date that the instrument containing the no contests clause is executed and is expressly identified in the no contest clause, either individually or as part of an identifiable class of instruments, as being governed by the no contest clause.”  (Prob. Code § 21310(e)(2).)

According to the Court of Appeal, a settlor may create a “protected instrument” either by (a) expressly and specifically incorporating a no contest clause from a prior instrument by reference, or (b) republishing a no contest clause in full in the subsequent amendment.  However, generally referring to the terms of a trust or to a prior amendment that contains a no contest clause is not sufficient to extend a no contest clause to subsequent amendments.

As such, the Court ruled in Aviles’ favor, declared that there was not a no contest clause in the third amendment, and protected Aviles’ gift even though he filed a contest against the third amendment.  You might expect for the matter to move forward with Aviles’ contest on the basis of undue influence, but the parties apparently settled the case on the eve of the Court of Appeal’s decision.

The Other Side of the Coin

No one is perfect, and there is a debate in our office about whether the Court of Appeal reached the right decision in the Aviles case given the definitions in the Probate Code.

Specifically, the definition of the phrase “protected instrument” in Probate Code section 21310(e) relies upon the word “instrument,” which is itself a defined term in Probate Code section 45.  The Court of Appeal did not discuss the fact that the word “instrument” is separately defined.

Instrument is defined in Probate Code section 45 as “a will, trust, deed, or other writing that designates a beneficiary or makes a donative transfer of property.”  But, a trust is a fiduciary relationship, not an entity or a document.  The terms of the trust, as expressed in a writing or orally, govern the  relationship.  And, in other sections of the Probate Code the phrase “terms of the trust” means not only the written trust instrument in effect at the settlor’s death, but also the amendments to the trust.  (See Probate Code section 16060.5.)

When the Legislature used the word “trust” did it mean to separate original trust documents from later amendments?  What if the later amendment does not stand on its own?  What if the later amendment only modifies the identity of the successor trustee and does not make a donative transfer of property?  Is it possible that some trust amendments are “instruments” and some are not?  The Legislature’s definition of the word “trust” at Probate Code section 82 is not illuminating.

If the Legislature’s use of the word “trust” in Probate Code section 45 is meant to include all of the “terms of the trust,” that would include the original trust document and all amendments, and it would not be appropriate to piecemeal the original trust instrument from later amendments as the Court of Appeal has done in Aviles.  It not clear whether this argument was made to the Court of Appeal.

Take Away Notes

The Court of Appeal said that “generic no contest clauses . . . are obsolete” and cited a prior decision for the proposition that estate planning attorneys must carefully draft each no contest clause with particularity for each individual client.  Rather than more individualized drafting, it seems likely that this decision will convince estate planners to homogeneously insert the same generic no contest clause language from Probate Code section 21311 into every trust and into every amendment.

If you are a planner, and your client wants the no contest clause to apply to each and every one of his or her amendments, then the best practice is to republish the complete text of the no contest clause into each amendment.

The only certainty is that the law of no contest clauses will remain uncertain going forward.  This decision is sure to be interpreted and construed by future courts.  In addition, new case law and the Legislature will continue to tweak this issue and other issues related to the enforceability of no contest clauses.

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