No parent wants to think that the estate they have worked so hard to leave behind will be anything other than a source of succor and comfort for their families.
Unfortunately, that is not always the case and there’s nothing like greed to get beneficiaries scrapping over an inheritance like stray dogs over a bone. Some families intend to head trouble off at the pass by making sure their estate plan is “airtight” and can’t be challenged.
The “in terrorem” or incontestability provision, is one tool used in such cases. This provision disinherits or reduces the inheritance of any beneficiary who attempts to challenge a will or trust.
Take the example of the estate of Allen F. Willey. Last year, Wyoming’s Supreme Court enforced an incontestability provision against Willey’s son, who contested a family trust, as well as against the son’s two minor children. The trust stipulated that “[a]ny challenge to this Trust made directly by or on behalf of [my son] or [my] grandchildren shall immediately terminate any interest in the Trust of any descendant of mine.” The court rejected the grandchildren’s position that the provisions violated public policy.
The state of Michigan, for example, has several statutes on the books relating to incontestability provisions. One law states that a “provision in a trust that purports to penalize an interested person for contesting the trust or instituting another proceeding relating to the trust shall not be given effect if probable cause exists for instituting a proceeding contesting the trust or another proceeding relating to the trust” (MCL 700.2518 and 700.3905 states the same for wills).
The statutes attempt to balance competing interests. There is a compelling interest in respecting a decedent’s wishes regarding who benefits from trust assets. However, there is also a compelling interest in the courts’ ability to oversee the conduct of trustees. Beneficiaries should rightfully be allowed to contest negligence or willful bad conduct without the threat of disinheritance.
When working with clients on estate plans, it’s important to explain the ramifications of “in terrorem” clauses and ensure that everyone involved is clear on the how the law works in all states that are relevant.
For more information, please read:
In Terrorem Provisions – Them’s Fightin’ Words! | Wealth Management