Scaring your kids into getting along: Penalty Clauses.

I often have clients ask me to include some language in a Will or Trust instrument that threatens their kids with disinheritance if any of them start a fight over the Will or Trust. Such language is commonly known as "penalty," "no-contest," or "in terrorem" clauses. I'm always willing to do so as long as my clients understand the probable outcome of any attempt to enforce such a provision.

In theory, no-contest clauses sound great. It gives us, as parents, a final chance to exercise our parental authority. In a way, we picture ourselves intervening one last time between squabbling children from beyond the grave by saying "If you don't knock it off right now, you'll get nothing!" It's a satisfying thought to many of us.

However, in practice, it frequently doesn't work as well as we imagine. For example, what if the executor of your will (often one of the children) is in fact being unfair in the distribution of your assets after you die. Should the other children be required to sit by and say nothing for fear of being disinherited altogether, despite being fully justified? A typical no-contest clause requires exactly that from the other devisees. In other cases, the trustee (again, frequently a family member) of a trust is not being unfair, but is simply being irresponsible in their management of the trust assets, thereby causing significant wasting of those assets. Again, should the other beneficiaries of the trust be required to allow everyone, including themselves, to suffer a loss from such inept management? An in terrorem clause, if strictly enforced, would require such a result.

Utah lawmakers concluded that no-contest clauses should not be enforced if there is good reason to bring a contest. Section 75-2-515 of the Utah Code states: "A provision in a will purporting to penalize an interested person for contesting the will or instituting other proceedings relating to the estate is unenforceable if probable cause exists for instituting proceedings." Section 75-7-112 of the Utah Uniform Trust Code contains similar language regarding penalty clauses in trusts.

In other words, if a beneficiary of a Will or Trust has good reason to start a fight over the way the trustee or executor is administering the estate, or has good reason to contest a provision of the estate plan because of poor drafting, etc., a court will not enforce a no-contest clause. This reflects the legislature's intent that fairness prevail in difficult cases.

The bottom line: you can put no-contest clauses into your estate planning instruments. In fact, such clauses may be a good tool to scare your beneficiaries out of bringing frivolous or mean-spirited contests against your estate in the first place. But when push comes to shove, if a court determines that the person bringing the contest had probable cause for doing so, penalty clauses are unlikely to be enforced.