In terrorem clauses are clauses drafted into wills and trusts to prevent squabbling over a decedent’s assets by providing that any interested person who unsuccessfully contests the will or trust will receive nothing. Although Michigan law holds that in terrorem clauses are enforceable, many drafters argue they are virtually ineffective. A recently published Michigan Court of Appeals opinion illustrates exactly why in terrorem clauses in Michigan are anything but terrifying to those who wish to challenge a will or trust.
In re Estate of Stan, 2013 WL 3105808; __ NW2d __, tells a tale of two feuding sisters – Georgiann and Christine. After their father’s death, Georgiann began taking charge of her father’s assets before being officially appointed by the probate court as her father’s sole personal representative. Although their father’s will nominated Georgiann as sole personal representative, Christine petitioned the court to be named co-personal representative, claiming that Georgiann had refused to give an accounting of their father’s estate and had taken jewelry, a coin collection, and a stamp collection for her personal use. Despite the probate court’s disdain for Georgiann’s actions, it upheld her nomination as personal representative because Christine failed to provide evidence that Georgiann was unfit or unsuitable for the position.
Georgiann then filed a petition seeking to enforce the in terrorem clause in their father’s trust against Christine. The probate court ruled that the in terrorem clause, “under the circumstances,” was not enforceable against Christine, and Georgiann appealed. The Court of Appeals upheld the lower court’s decision, albeit for different reasons. Stating that the probate court came to the right conclusion for the wrong reasons, the Court of Appeals fully explained its reasoning and the law that applies to in terrorem clauses.
While Michigan law recognizes the enforceability of in terrorem clauses, the Estates and Protected Individuals Code (EPIC) restricts their enforceability when an interested person has “probable cause” to challenge the will or trust. MCL 700.2518; MCL 700.3905; MCL 700.7113. As explained by the In re Estate of Stan Court, prior opinions have held that “probable cause” is to be defined according to comment c to Section 8.5 of the Restatement of Property 3d, which states, “Probable cause exists when, at the time of instituting the proceeding, there was evidence that would lead a reasonable person, properly informed and advised, to conclude that there was a substantial likelihood that the challenge would be successful.” Concluding that Georgiann’s alleged actions could have been construed as being against the best interests of the estate and, therefore, subject to her removal as personal representative, the Court held that Christine had probable cause to bring her challenge. And because Christine had probable cause, the in terrorem clause could not be enforced against her.
This recent opinion verifies that, while, in theory, in terrorem clauses are enforceable, in application, they seldom are enforced because the threshold to establish probable cause for a challenge appears to be quite low.
Given this recent opinion suggesting the limited effectiveness of in terrorem clauses, what is the most effective way to discourage interested persons from challenging your will or trust? Without a doubt, the best defense is a good offense: Have a well-drafted and well-discussed estate plan.
Too often people are too reluctant to discuss their desired disposition of assets after death. Yet, like marriage, childbirth, retirement, or any major life event, death should be well planned and openly discussed. Wills and trusts should not be “secret” documents hidden away until death. Instead, they should invite conversation to ensure that there are no uncertainties or shocking revelations when assets are distributed after death.
It may be impossible to completely protect against a “rogue” relative who seeks to disrupt the best-laid plans. However, even if your will or trust is challenged, the better you document your wishes, the better your chance of having your wishes honored. The underlying foundation of every will or trust challenge is the court’s objective to ascertain and give effect to the intent of the decedent.
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