Effective July 1, Indiana’s prohibition of “no contest” clauses (also in terrorem or forfeiture clauses) has been repealed in both Wills and Trusts. A no contest clause is a provision in your Will or Trust that reduces or eliminates a beneficiary’s inheritance due to that beneficiary’s conduct in the administration of the estate. The goal of these clauses is to deter disgruntled beneficiaries from waging costly and divisive litigation after you die.
A no contest clause allows you to have control over disgruntled beneficiaries after your death. You can dictate that a beneficiary who contests the validity of your Will or Trust forfeits all or even a portion of the inheritance he otherwise would have received. You can also provide that the attorney fees and expenses incurred during the contest come out of that beneficiary’s share.
For years, Indiana was one of only two states that prohibited testators from including no contest clauses in their estate plan. Some states, like Texas, have been enforcing no contest clauses for over a century. Now, no contest clauses are enforceable except under certain provisions. For example, one exception to a no contest clause is if the contest is brought for “good cause.” Basically, an heir will not forfeit his inheritance if probable cause exists to pursue a Will or Trust contest. Beneficiaries can contest a Will or Trust if such documents were procured through fraud or undue influence without fear of retribution. “Good cause” has not yet been defined so Courts will likely look to other contexts to develop a proper definition.
Actions brought to seek the construction or interpretation of a Will or Trust will not be deemed a contest of the Will or Trust. Other types of actions like a beneficiary’s objection to the discretionary action taken by a fiduciary (e.g. a trustee’s excess fees or self-dealing) will also not be considered under a no contest clause.
Because no contest clauses are meant to be a deterrent, a beneficiary’s potential inheritance must be substantial enough to deter that beneficiary from bringing a contest. Thus, you may be inclined to include some amount of inheritance to a problematic beneficiary in order to avoid the expense and divisiveness of later litigation. The greater the inheritance, the greater the incentive not to bring a contest.
Although Indiana has not adopted any specific statute, it may be prudent to clarify your intent as to any forfeited inheritance. For example, if your son contests your Will and loses out on his inheritance, do his children also lose out on their inheritance or will they receive your son’s inheritance? Should descendants be able to inherit despite the beneficiary’s misconduct or should that whole branch of family be disinherited? It would be good practice to specify which beneficiaries will inherit if a no contest clause is enacted. You can also be specific about what conduct or acts are prohibited. Prohibited conduct could include challenging your beneficiary designations, filing a claim in your estate, or pursuing an action to collect a debt against your estate.
No contest clauses offer a new tool to include in your estate plan that will help deter litigation over your estate after you die. We will see in the future how Indiana courts interpret this new statute.