Mandatory Arbitration: Viable Alternative To Trust Litigation?

Whether undertaking their estate planning or attempting to resolve a business dispute, Michigan residents may be interested in a trend affecting how disputes between trustees and beneficiaries are resolved. Mandatory arbitration clauses have been routine for years in commercial contracts, such as credit card agreements, due to the expense and time of litigation.

Arbitration has never been popular in trust creation, however, even though trust disputes may be emotionally charged and contentious. Now, the clauses are being increasingly used, but their enforceability remains uncertain. There are several reasons for this.

First, the enforceability of the arbitration clause has been hampered by a lack of established precedent or regulations. Trusts are not truly contracts; there is no mutual agreement between parties, nor is there consideration. Making a trust mandatory arbitration clause enforceable under contract law is problematic. Florida and Arizona have passed laws making the clauses enforceable, however.

The Texas Supreme Court has also established a case law precedent supporting enforceability in Rachal v. Reitz. In that case, the court found in favor of enforceability of arbitration because in attempting to enforce the trust terms, the beneficiary had agreed to the terms, a written agreement being necessary under the Texas Arbitration Act. Another reason was that the settlor of the trust determined the conditions attached to the trust, and one of those conditions was the mandatory arbitration of disputes. Depending upon a state's Arbitration Act, this Texas case may help determine enforceability nationwide.

Treating trust and will disputes more like business disputes and requiring arbitration may be an increasingly viable option for estate planning. Adopting the some of the tenets of business and commercial law, such as regarding a trust as a contract containing inviolable clauses, may help individuals embroiled in disputes in this other important practice area, estate planning, to make headway much as business owners may do through similar measures.

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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