While the idea of the “carrot and stick” seems simple in theory, in terrorem clauses are governed by state law, with their application varying in large part by jurisdiction. Nevertheless, this Note seeks to identify some of the broad principles on which many in terrorem clauses rely, while also delineating several of the different state law approaches thereto. It does this by describing some of the potential problems with in terrorem clauses and posing potential solutions in the context of a variety of state law jurisprudence.
This Note will first address what will be defined as the “puppet problem.” By drafting in terrorem provisions that purport to cut out only the contestant and not the contestant and his or her descendants, however, planners expose their clients to the puppet problem. There are many instances in which a testator or settlor will amend his plan, leaving his grandson with substantially less than in the previous plan, and omitting his son (the grandson’s father) from the amended plan completely. The son still has standing to contest the plan, but under the amended plan, nothing to lose. Consequently, the grandson can use the son as a “puppet” to contest the amended plan in hopes of getting the original plan’s distribution reinstated, while also avoiding forfeiture under the amended plan. By drafting and permitting provisions that preclude a distribution to the son and his descendants, planners and judges can not only prevent the “puppet problem” but also make the contestant think twice about a contest, even absent a substantial distribution.
On the basis that in terrorem clauses be enforced against contestants and their descendants, this Note next argues that planners should take great care to draft in terrorem clauses to ensure compliance with jurisprudence in the state in which they practice. In those states where the law is favorable to the validity of in terrorem clauses, practitioners should offer them to their clients routinely. Even if there is no perceived “black sheep” who might contest the will, clients may well opt for the deterrence benefits of the clause as it affects all named beneficiaries. In today’s litigious society, adopting such precautions may appeal to many clients. In fact, they may choose to establish trusts in jurisdictions favorable to upholding in terrorem clauses, either through the use of a trustee situated in that state or by other means. In all cases, ensuring that a client’s in terrorem clause complies with state law will be of even greater importance as the clause purports to effectuate forfeiture of more than just the contestant.
Finally, once planners and lawmakers have worked together to improve in terrorem clauses in these ways, this Note maintains that their utility will stretch to other nonprobate assets beyond wills and trusts. Indeed, because individual retirement accounts (IRAs) and insurance policies already purport to preclude a distribution to a beneficiary for reasons such as undue influence or fraud of the policymaker, there is no reason that the same should not apply for failed contests involving these assets. The use of in terrorem clauses with other nonprobate assets will consequently be a direct benefit of their improved utility.
Part I of this Note thus describes the necessary background on which arguments for in terrorem clauses stand. Section II.A describes to whom in terrorem clauses should apply to avoid the “puppet problem” and maximize the effectiveness of the “carrot and stick” approach. Section II.B focuses on claims to which in terrorem clauses should apply in order to comport with modern state jurisprudence. Section II.C of this Note concludes with potential ways in which in terrorem clauses, when drafted effectively, can be useful to planners in novel contexts, such as life insurance policies and IRAs.
Evan J. Shaheen,
In Terrorem Clauses: Broad, Narrow, or Both?,
Notre Dame L. Rev.
Available at: https://scholarship.law.nd.edu/ndlr/vol95/iss4/12