New Indiana Law Permits ‘In Terrorem’ Clauses in Will, Trust Cases

July 1, 2018 | Author: Deppe Fredbeck & Yount

Deppe Fredbeck & Yount Franklin, Indiana

Indiana has been one of two states to hold onto a probate code provision that has been outlawed in nearly every other state, until now. We’re talking about the law that prohibited no contest, or in terrorem, clauses in wills and trusts. Prior to a recently passed change in Indiana legislation (effective July 1, 2018), no contest clauses were automatically void and unenforceable.

In terrorem is a Latin phrase that roughly translates to “in fear.” In wills, a testator (the person writing the will) might wish to add a no contest clause in order to scare or deter beneficiaries from contesting the will in court. Most of these clauses state that the inheritance that would have gone to the beneficiary is void if that beneficiary contests the will.

There are reasons why a testator may include such a clause. For example, litigation surrounding a will can cost the estate large amounts of money, and named beneficiaries typically end up sharing that cost by ultimately inheriting less, once litigation expenses are paid by the estate. This means that, theoretically, if a testator left unequal amounts to her children, the child set to inherit the lesser amount had very little risk in filing an action to set aside the will. Now, in the same scenario, a child who files that same lawsuit risks losing the amount given to her in the will.

While the new law permits in terrorem clauses, it should not deter all future will contest lawsuits because the updated law provides for exceptions. The most relevant of the exceptions is if a beneficiary brings a law suit for “good cause.”

While we of course have no case law to reference yet, the good cause exception should apply to instances where a testator signed the will under undue influence, through fraud, or while mentally incapacitated. The law also provides a way for beneficiaries to find out if a certain action would count as a contest before acting upon it and potentially triggering the no contest clause. A beneficiary may also ask a court for interpretation of a will or a trust without triggering a no contest clause.

Only time will tell how exactly Indiana courts will apply the new law. Hopefully the changes will provide more flexibility for testators while also giving estate planners another tool to ensure their clients achieve their estate planning goals.