Berman & Asbel, LLP

Enforceability of mandatory arbitration of trusts

Trust settlors in eastern Pennsylvania and Delaware may have heard about a decision by the Texas Supreme Court regarding the mandatory arbitration of trusts. The court held that mandatory arbitration was enforceable in a particular case because that was the intention of the person who established the trust.

The Texas Supreme Court's reasoning was that a trust is different from other types of contracts in that the benefits of a trust are a gift rather than a mutual exchange. By accepting the benefits of the trust, the beneficiaries also accepted the terms and conditions of the trust. Unless the beneficiaries challenge the validity of all or part of the trust itself, they cannot challenge the condition that trust contests be settled by binding arbitration.

Although the Texas decision is relatively recent, it is one of the few cases to establish any kind of precedent in the enforceability of mandatory arbitration in trust planning. State statutes are mostly silent on the issue. Florida and Arizona have enacted statutes addressing the issue in the last few years, but most states leave the problem for the courts to resolve. One reason for this is that many settlors and their attorneys overlook the option of drafting trusts that include a mandatory arbitration provision. Courts have not had to issue very many rulings on whether mandatory arbitration provisions were enforceable. State legislators have had little prompting by their constituents to draft legislation to address the issue.

Anyone who plans to establish a trust for their children or other family members may want to discuss their intentions for the trust with an attorney. Trust planning and estate planning in general can be extremely complicated.

Source: Wealth Management, "Enforceability of Mandatory Arbitration Provisions in Trust Agreements", John T. Brooks and Jena L. Levin, December 30, 2013

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