No-Contest Clauses; Still Only Slowly Evolving in Georgia

The Georgia court advance sheets recently included Slosberg v. Giller et al., No. S21G1226, Georgia Supreme Court (June 30, 2022) dealing with a no-contest clause in an irrevocable trust. The point of this blog post is that “no-contest clauses” in Georgia are still in a state of uncertain flux. Judicial opinions like this Slosberg case are part of the slow evolution of the body of law in Georgia for the design and use of these clauses.

In Slosberg a settlor created an irrevocable trust that, upon his death, left the bulk of the trust to his two daughters, and only a nominal amount to his son. The trust included a no-contest clause providing that any beneficiary who contested the validity of the trust would lose all benefits under the trust.

The son filed a lawsuit alleging his two sisters unduly influenced their father as to the creation and provisions of the trust document. After some head-spinning motion for summary judgment and jury trial activity in the trial court, a jury ultimately found undue influence existed with a result that the trial court ruled the trust was void.

But, the case then went up on appeal, and the Georgia Court of Appeals declared that the son nonetheless violated the no-contest clause by initiating the litigation, even though the jury found undue influence. See Giller v. Slosberg, 359 Ga. App. 867, 858 S.E.2d 747 (2021).

The Georgia Supreme Court reversed and held that a no-contest clause does not bar a beneficiary from asserting a claim for undue influence, referring to the longstanding Georgia common law rule that the valid formation of a trust may be challenged.

But, now here is the kicker. The Supreme Court went on to state that if an undue influence challenge fails, the challenging beneficiary is then deemed to have triggered against himself or herself the no-contest clause in the trust. A potentially quite costly Pyrrhic victory.

Here is my take. For years I have (and still do) complain that Georgia does not have a “probable cause” exception to filing challenges to a Will or trust that potentially might trigger a no-contest clause. See, for example, Duncan v. Rawls, 345 Ga. App. 345, 812 S.E.2d 647 (2018)(no good faith/probable cause exception exists under O.C.G.A. Section 53-12-22 [trust no-contest clauses]).

A probable cause exception could enable a claimant to challenge the validity of a trust document, but even if the challenger loses would not trigger the no-contest clause as long as the challenger had sufficient probable cause. There will remain a risk for a losing challenger; but a probable cause exception broadens the opportunity for potentially necessary challenges in some cases.

For example, a test case I wait for is a situation where a lawyer, or other close financial advisor with a confidential relationship to the settlor, himself or herself becomes a beneficiary in a trust, or in some other financially beneficial manner, etc., by potentially having unduly influenced the trust settlor.

Under current Georgia law without a probable cause exception, another beneficiary challenging the lawyer’s (or other advisor’s) potential undue influence may well be a risk the beneficiary simply cannot take. Or, more importantly, cannot afford to lose.

By contrast, if Georgia did have a probable cause exception, I would argue that any lawyer, or other advisor, who has placed himself or herself in a financially beneficial position within a client’s trust document — on its face — provides probable cause reasonably warranting a protected no-contest clause challenge.

Email me and I can send you copies of both this Slosberg opinion, and the Duncan opinion. james@ktlawllc.com

The 2017 Gibson Opinion. Divorce? Squirreling Away Assets in Trust?

This blog post is about whether the 2017 Georgia Supreme Court opinion in Gibson now opens the door wider for one spouse more easily – while married — to squirrel away his or her assets in a trust, and then later use that trust as a shield in a divorce proceeding. It does not.

In Gibson,the husband during his marriage funded two trusts with $3.2 million of property; the husband prevailed in keeping the $3.2 million out of his divorce proceeding without the trust assets being subject to equitable division. This is $3.2 million that otherwise would likely have been marital property in the divorce, absent the trust planning. Click here for a copy of Gibson v. Gibson, 801 S.E.2d 40, 301 Ga. 622 (2017).

The key factual distinction laying the foundation for the husband to prevail in Gibson was the lower trial court’s conclusion that the husband retained no interest in the trusts, including no interest as a trustee or beneficiary.  As I touch on again below, my experience is that most spouses who unilaterally create and fund a trust during marriage do retain interests in the trust, albeit as part of the purposeful, stealth design of certain opaque, highly-technical trust provisions.

Back to the Gibson opinion. My sense in talking with other lawyers is that some have an over-optimism leading them to conclude Gibson opens the door wider now enabling one spouse to keep his or her trust out of the divorce arena. For the reasons I state below, I disagree. The backdrop to this misplaced optimism is the following portion of the Gibson opinion:

This is not an issue of first impression for our Court, which has permitted property placed in certain types of trusts to be exempt from equitable division.  . .  . Therefore, property that has been conveyed to a third party is not subject to equitable division absent a showing of fraudulent transfer. See id. If a spouse places property in a trust of which he is the sole beneficiary, that property may be subject to equitable division. See Speed v. Speed , 263 Ga. 166, 430 S.E.2d 348 (1993). But if a spouse is not the sole beneficiary of a trust, the corpus of the trust is not subject to the other spouse’s claim of distribution. See McGinn v. McGinn, 273 Ga. 292, 292, 540 S.E.2d 604 (2001).

Excerpt from the Gibson opinion (I added the bolding and underlining).

The optimists read Gibson (and the “sole beneficiary” excerpt above) to support the notion that a spouse who funds a trust – where that spouse is not a sole beneficiary of the trust –  can now exclude the trust from claims in a divorce. This is a misreading of the above Gibson reference to sole beneficiary.

This sole beneficiary reference is merely a passing remark by the Georgia Supreme Court (what lawyers call obiter dictum) in stating the Gibson case was not a case of first impression on the question of how a trust created during marriage fares later in a divorce action. This sole beneficiary element also was not a fact for consideration as to the Gibson husband’s trusts and not part of the holding in Gibson.  [I have not seen the Gibson trust documents.]

Here are my broader Gibson points for this blog post:

One. I am called upon from time to time to assist divorce lawyers with attacking a trust in a divorce proceeding. My job is to help attack the trust and keep it in the divorce proceeding. My attack at times is directed at the deficiency and shortcomings in the trust document itself, where the drafter failed to cross the “t”s and dot the “i”s. My attack also gets into the various quasi-hidden, stealth trust powers purposely built into the design and framework of the trust that do not easily – merely on the face of the trust document – alert a non-trust lawyer to the existence of continuing powers and potential benefits the spouse retained in the trust (such as powers of appointment held by a friend or other family member; powers to decant the trust to another trust; using someone other than the spouse as the purported settlor of the trust document giving the diversionary appearance the spouse did not create the trust, etc.).

One might ask “Why would a spouse hold these stealth ties to the trust?” The answer, in my experience, is that it is a rare instance where one spouse creates and funds a trust during marriage without making sure he or she still possesses indirect options either to get back the property after the divorce situation ends or ultimately later control the property for that spouse’s own benefit.  Thus, arguably most unilateral trusts are not third-party trusts.  I use the term unilateral for when one spouse puts this trust planning in place without the knowledge of the other spouse.

Two. Whether a trust is or is not a third-party trust is not merely an easy simple ‘yes’ / ‘no’ question. The status and nature of any trust depends in most cases (divorce and non-divorce cases) on the effect of the opaque, stealth technical provisions in the trust document, as part of the purposeful design of the trust. This opaque-stealth question, in my opinion, is where the heart of the fight lies when dealing with a trust in a divorce setting.

Three.  When the trust at issue in a divorce is a third party trust (as in Gibson), that trust under the Gibson opinion will still be subject to a fraudulent transfer analysis in the divorce proceeding, as is the case with virtually any other third-party transfer of property prior to divorce.

The procedural rub is that the law requires, as generally in any fraudulent transfer attack, that the opposing party (the non-trust spouse in a divorce) bears the burden of proof for the fraudulent transfer attack.

Four. But, by contrast, I read Gibson as not changing the existing law or theories in divorce proceedings for trusts that are not third-party trusts. Those trusts are still subject to attack, but without the non-trust spouse bearing the burden of proof under a fraudulent transfer attack.  Here the burden is on the spouse who created the trust — during the marriage – to prove the trust is not marital property.