An in terrorem clause can be used to intimidate heirs into not challenging a will, but it may end up being more confusing than effective. Contact The Unger Company to learn more about how we can help.
Disinheriting a descendent is something that people sometimes threaten when planning their estate. This doesn’t only happen among the high-net-worth (HNW) and ultra-high-net-worth (UHNW) clients who are estate tax planning clients of The Unger Company, but also among people with much smaller estates.
Sometimes this can be chalked up to people being people and a desire to punish someone for not listening or doing something with which a parent or grandparent disagrees. But using an “in terrorem” clause is not always that easy nor is it necessarily the best tool to achieve the objective of delivering that last measure of “medicine” to or having the last word with a difficult person in your life. In fact, if not structured carefully it can cause more problems than its worth.
The Unger Company deals with very wealthy clients – our job is to protect assets and provide avenues of wealth transfer to avoid the bite of estate taxes – so given the scope of our work, we tend to deal with much larger asset bases than the average American estate. But just because the amounts are bigger doesn’t mean the impulse fails to exist.
The first thing you probably came across in researching this clause is that “in terrorem” is Latin for “in terror.” That’s a nice bit of law school language, but let’s face it – nobody is running screaming for the exits because of a legal clause. To put this a little more bluntly, an in terrorem clause is essentially a forfeiture clause, which brings an end to the obligations of a party who is participating in the contract, or a no-contest clause, meaning it is designed to prevent someone from challenging the validity of the estate plan and imposes penalties – including disinheritance – if they proceed. In the case of a trust, a will, or an estate plan, it is the decedent who initiates the contract, and the heirs are participants. By challenging the estate plan, an in terrorem clause that is included in the plan may be triggered, and that can immediately serve to disinherit a participant.
Wow, that seems harsh! But bear in mind it may not always be wrong for someone to challenge an estate.
There can be many reasons for including an in terrorem clause. In some cases, it could be because an heir has a problem, such as drugs or gambling, and the grantor wants to be sure the person receiving a large asset will be responsible. A challenge by this person could be understood to be a challenge of the decedent’s judgment, and courts may not only refuse to entertain such a motion, but could determine that this triggers the in terrorem clause and the heir loses his or her inheritance. Ouch!
In other cases, there could be “probable cause” for someone to challenge an estate plan. For instance, if suddenly a person who is not a relative or long-term associate of a decedent inherits a very large sum or asset. That could create enough doubt in the mind of a court to allow a challenge of the estate to proceed.
What is incredible to us about this is that there are no uniform standards for how different states determine whether an in terrorem clause will stand or not. Florida and Indiana do not recognize in terrorem clauses at all. In Arizona, Colorado, Michigan, Minnesota, New Jersey, Arkansas, Illinois, Iowa, North Carolina and Tennessee probable cause, good faith or just cause — one or all, depending on the state, are required. New Hampshire, Vermont, Alabama, Missouri, California, Delaware and New York all have their own regulations, lack of regulations or precedents that have to be followed. These rules apply to both estates and trusts, except in Alaska, where different rules apply to estates and trusts. The broad array of rules is like the deliberately confusing rules of the fictional card game fizzbin on the classic TV series Star Trek!
This is another reason why The Unger Company works with a client’s existing legal team. Estate attorneys have unique and well-positioned knowledge of each state’s laws regarding estate resolution and use of legal devices like in terrorem clauses. With 50 states and the District of Columbia each applying its own unique touch to such items, it is wise to defer to people with precise local knowledge, just as it is wise for them to work in consultation with the experts at The Unger Company to structure an optimal estate tax strategy.
The Unger Company, Ltd. is an authoritative firm with a deep and broad knowledge of estate tax planning designed to provide maximum protection of the assets of high-net-worth (HNW) and ultra-high-net-worth (UHNW) families against estate and other death taxes. Our elegant and effective planning has saved our clients countless millions during our five decades in business. The Unger Company uses insurance in combination with legal entities to offset estate and similar taxes at the federal and state levels. Contact us through our website or call us at 212-755-4777 to learn what we can do for you.
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The Unger Company, Ltd. does not seek to practice law for clients and these published items are intended only to be informational in nature.
