People often harbor misconceptions about trusts, and one of them is the idea that you cannot challenge the terms of a trust in court. This stems from a misunderstanding of a basic truth about revocable living trusts.
Living Trusts, Probate, and Will Challenges
One of the major benefits that a living trust will provide over a simple will is the avoidance of probate. A will would be admitted to probate, which is a court supervised legal process. It is time consuming and expensive, so probate avoidance strategies are often implemented.
If you have a living trust, you would act as the trustee while you are living, and you would name a successor to assume the role after your passing. When the time comes, the trustee would distribute assets to the beneficiaries, and the probate court would not be involved.
When a will is being probated, an interested party could come forward to challenge the validity of the will, and the court would hear their argument. Acceptable grounds include fraud, undue coercion, improper execution, and incapacitation of the testator.
Since a living trust is not automatically subject to probate, this window of opportunity for challenges does not exist. For this reason, a lot of people assume that you cannot challenge a trust since there is no venue built into the process.
Filing a Lawsuit
In reality, a living trust can be challenged, but the individual that wants to contest the terms would have to file a lawsuit. The court would then enter the picture to hear the arguments, so the idea that a trust cannot be contested because the distributions are not subject to probate is false.
No-Contest Clause
If you establish a living trust and you want to make it difficult for someone to challenge the terms, you could include a no-contest clause. Some people think that you can absolutely prevent a challenge through the inclusion of one of these causes, but that is not the case.
A person could still file a lawsuit to contest the terms even if there is a no-contest clause, but it would serve as a powerful disincentive.
Let’s say that you leave an inheritance to a family member through the terms of a living trust, but they think that it is inadequate. If there is a no-contest clause, the beneficiary could still file the lawsuit, but they would be completely disinherited if they lose in court.
Few people would take that risk unless they are absolutely certain that they had an ironclad case. On the other hand, if you completely disinherit someone and there is a no-contest clause, they would have nothing to lose if they challenge the trust terms.
Weigh the Consequences of Disinheritance
Disinheriting someone to send a message can certainly damage the target, but there can be collateral damage as well. If a challenge is issued, the people that are receiving inheritances will be drawn into a good bit of turmoil, and this is something you should keep in mind.
A no-contest clause and a modest inheritance can be a better choice in many instances if you take a step back and look at the big picture.
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- Do You Avoid Probate With a Will? - July 18, 2021
- Estate Planning for Millennials - July 16, 2021
- Five Things You Should Know About Living Trusts - July 15, 2021
