In a recent California case, the California No Contest provisions in a Living Trust were tested. In Balian v. Balian decided in December 2014, the mother, Mary, created the Balian Family Trust designating her children and a Special Needs Trust for her daughters Patricia and Diane as beneficiaries. There was significant animosity between Patricia and her brothers which was known to all of the family. During the Trust Administration after Mary’s death, Patricia brought numerous claims against her brothers as Successor Co-Trustees including petitions to have them removed, surcharges for waste and failure to distribute assets. Attorney fees amounted to six-hundred thousand dollars ($600,000.00) due to Patricia’s challenges which were mostly denied by the court. As a result, the Successor Co-Trustees filed a petition to surcharge Patricia and/or her Special Needs Trust for the costs of the protracted litigation during the Trust Administration.
The court agreed with the Successor Co-Trustees and assessed Patricia thirty percent (30%) of the attorney fees to be taken out of share. Patricia appealed and the appellate court upheld the surcharge by the Probate Court against Patricia. The court in citing the No Contest provisions under California law stated that if a beneficiary contests a Trustee’s action in bad faith and without reasonable cause, a Court may award compensation to the Trustee for costs and expenses. The court in defining “reasonable cause” stated that it is an objective standard in which one must ask “whether an attorney, would have thought the claim tenable”. The appellate Court upheld the decision for lack of reasonable cause to bring the action because she failed to produce any evidence to support her claim and contradicted herself on the record.
Summation
The most recent California No Contest provisions to contest a Living Trust or Estate were enacted to prevent unfounded claims against the Trustee or Executor. Any person who is considering such a claim should be prepared to prove that the claim is reasonable with opportunity for success. This law is designed to avoid sibling rivalry and animosity among beneficiaries and the Trustee. Otherwise, a petitioner against the Living Trust could incur damages, surcharges and/or loss of inheritance unless reasonable grounds for success in bringing the action are demonstrated.
Solution
Include Trust Protector provisions in the Living Trust to designate a person to act in that capacity. The Trust Protector can moderate and attempt to arbitrate or cure differences between beneficiaries and the Trustee in the Administration and distribution of the Living Trust.