Arbitration in Trusts and Estates

Thanks to a Supreme Court of Texas opinion issued earlier this year, estate planners and probate litigators alike can add a new twist to their practices – arbitration clauses in trust instruments.  Trust litigation, like most will contests, has historically followed much the same procedural track.  A lawsuit or contest is filed and a judge or jury ultimately determines the disputed issue if it is not resolved before trial by mediation or some other negotiated compromise.  Now, mandatory arbitration may enter into the process.

 

In the case of Rachal v. Reitz, a father created a trust for his sons and named himself as Trustee.  The father eventually died and his attorney became the Successor Trustee.  When the sons sued the Successor Trustee, the fiduciary invoked the mandatory arbitration provision that the father had written into the trust.

 

The trial court declined to impose arbitration, and the appellate court agreed that the Trust, which the sons never signed, could not remove from them their right to present their dispute to a judge or jury.  But our highest court disagreed.  Instead of having their dispute decided by the court, the sons would have to present their case to an arbitrator.

 

Planners and litigators have pored over the opinion to gain some insight and provide some reassuring certainty for future clients.  Many note the Court’s rationale that the settlor’s (father’s) intent should be honored since it reflects the conditions attached to the gift he made to his sons.  We also know that, in this case, the sons accepted benefits under the Trust before disputing the fiduciary’s actions.  The Court reasoned that this acceptance of the benefit (Trust distributions) also counted as acceptance of the Trust’s terms (the arbitration clause).

 

Undoubtedly, we will see arbitration clauses popping up in future trusts.  And while some lawyers will focus on a perceived loss of the right to a jury, or access to our courts, others will highlight the advantages of arbitration, of which there are plenty.  In any event, our landscape is always changing.  In the business of planning for uncertainty, we usually have to recognize that the outcomes may be just a little uncertain.