Did you know that being disinherited may not be the only way you could lose your inheritance?
Sure, you could just be excluded from the trust or the will and thereby be disinherited: that’s the first and most obvious way you could lose your inheritance. But there are more subtle ways in which you may lose out.
Inheritance Kept in Trust
The second way of being disinherited is with an inheritance kept in trust that is managed by a sibling or other hostile trustee. For example, a parent leaves her trust equally to her three kids: John, Bill, and Tom. Two of the kids, John and Bill, receive their shares outright. One child, Tom, has his share held in trust. The trust is managed by John, Tom’s older brother. John and Tom have never gotten along. John thinks Tom is irresponsible and incapable of handling money. Tom thinks John is an overbearing know-it-all.
Even though Tom receives an equal share of the trust, it is not in Tom’s control. What’s worse, John is supposed to make distributions to Tom to provide for his care and support, but he refuses to do so. John demands to see receipts before paying for anything out of Tom’s trust. Even when receipts are produced, John refuses to pay on the grounds that the expenses were unnecessary. The trust terms do not allow John to withhold distributions just because he thinks they are “unnecessary,” but John does so anyway.
Having assets held in a trust that is managed by a trustee who is hostile to the trust beneficiary is another, more subtle way, to disinherit someone. Yes, Tom is technically a trust beneficiary with an equal share. But John’s hostility towards his brother effectively keeps the trust assets away from Tom. Every distribution and every request is a struggle. Additionally, the trust terms may state that after Tom’s death, his trust assets pass to John or John’s children. This adds even more incentive for John to be stingy when it comes to making trust distributions. This type of disinheritance is subtle in the sense that it is not an outright exclusion from the trust property. In some instances, it may be easier to convince a parent to enter into a trust where a child is not outright disinherited, but has his or her share held in trust.
Let’s say the parent in the example above wants to leave her assets to her three sons equally. Maybe John is the one helping the parent draft the trust with the lawyer. John knows that he cannot convince the parent to disinherit Tom outright. So, he comes up with a different plan. Why not hold Tom’s share in a trust and let him manage the assets? John assures the parent that he’s fair and will watch out for the best interests of Tom. Naturally, the parent believes this to be true. Once the parent dies, however, John does something different. He ignores the trust terms, refuses distributions, and uses the trust fund as a way to control Tom. Not a direct disinheritance, but it has largely the same effect.
Reduced Share
Finally, the third way to be disinherited is to receive a substantially reduced share. This is also a tricky situation compared to outright disinheritance. This occurs when someone was previously named to receive an equal share, but through a trust amendment (or creation of a new trust) their share is reduced to a set amount that is much lower than the value of the equal share. Using the example above, if Tom’s equal one-third share would have been $2 million, but the trust is amended to give him an outright gift of $75,000, then Tom’s share has been substantially reduced but not eliminated.
How is this different from an outright disinheritance? It creates a dilemma when deciding whether or not to challenge the trust amendment. Most trusts and trust amendments in California have a no-contest clause. This clause states that if you challenge the validity of the trust or trust amendment in court and you lose, you can be completely disinherited. While there are exceptions to the application of no-contest clauses, there is still a risk of outright disinheritance if you challenge a trust document and lose. If you are entirely disinherited you have nothing
to worry about when it comes to the no-contest clause because if you file a lawsuit and lose, you wouldn’t be receiving anything regardless. However, if you are getting a specific gift of $75,000 under the trust terms, then you do have to worry. If you file a lawsuit and lose, you are potentially losing $75,000.
If your specific gift is higher in value, then the risk is bigger. Imagine you are set to receive a specific gift of $1 million. Would you risk losing $1 million to contest a trust amendment where the most you can win is $2 million? Some people would take that risk while others would not. What if you had to risk losing $1 million but the amount you might recover by contesting a trust is $10 million? The risk of loss is still $1 million either way, but the potential gain is bigger and that may justify taking the risk in the first place.
By giving a trust beneficiary some amount of money, it forces that beneficiary to make a choice. In Tom’s example, he must risk losing $75,000 to challenge the trust terms. That may be worth it to Tom if his full share is $2 million. But that risk may not be worth taking if Tom’s full share is only $250,000. Only Tom can decide what risk he is willing to take.
In Summary
In short, here are the three ways you could be disinherited: (1) full disinheritance, (2) retaining your inheritance in trust with a hostile trustee managing it, or (3) a reduced share that forces you to make a tough decision.
Talk to a California Trust Contest Lawyer
Our attorneys have recovered more than $400 million and helped hundreds of clients regain their dignity as a trust or will beneficiary through litigation – if you believe you’ve been the victim of inheritance, tell us your story to see if your case qualifies for a free consultation. We’re here to stand, fight and win for you.
Call (877) 408-3813 or reach out online to consult a trust contest lawyer.
