No family is perfect. Sometimes a child is mean or indifferent to parents’ needs as they age, while the others go out of their way to help. Though parents / aunts & uncles / grandparents may say they love all of their potential beneficiaries equally, the truth may be different. And (of course) there may be an obvious disincentive to leave the troubled beneficiary equal (if any) proceeds upon passing away. These clients tend to leave a lesser sum of money to the beneficiary in their Will, not realizing that the beneficiary may attack the Will, and line the pockets of a few attorneys and diminish the estate in the process.
There has been a good deal of discussion recently surrounding In Terrorem (also known as “No Contest”) Clauses in Wills. The thinking is that completely disinheriting a potential beneficiary will only incentivize himto dispute the Will throughout the Probate process. This leads to increased legal fees for the estate, delays in distributions, and consternation between family members. In theory, by giving a less-favored beneficiary a small bequest, then including a clause stating that any dispute raised by the beneficiary will nullify this bequest will save money on attorney fees. In short, the disgruntled beneficiary would rather take something over nothing and not want to “roll the dice” by pursuing court action.
First, a few New York cases have come out which have significantly diminished the power of In Terrorem clauses. It should also be noted that these clauses are not effective as to court proceedings where the Will is examined and potentially nullified (“1404 Examinations”), as those proceedings question whether the Will with the In Terrorem Clause is even valid (and the bulk of the funding for this examination is paid for at the estate’s expense). Therefore, the thinking that a No Contest clause can save funds on estate fees may be at least somewhat of a fallacy.
These facts aside, seasoned estate planners continue to utilize In Terrorem Clauses. The disgruntled beneficiary will have to rely on his own funds to retain legal assistance, and will often face an estate with enough assets to outspend him. An unrepresented party may be scared off enough not to pursue an action. There may also be a chance that the clause is upheld, and the disgruntled beneficiary “loses” the toss of the dice.
Of course, the only way the “stick” of the In Terrorem will be upheld is if the “carrot” of the bequest is large enough. The right amount to leave the disfavored beneficiary is often the hardest question to answer: Is the beneficiary docile enough to let the unequal distribution stand? Are they financially compromised to the extent that they can’t afford legal representation, or desperate enough that they will accept anything? These and other factors should be weighed in assessing how large the bequest should be in order to give the No Contest clause the “teeth” it needs to have effect.
