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Mandatory arbitration provisions in trusts

Rising court costs associated with courtroom trust litigation have done much to popularize trust arbitration throughout the state of Texas. However, statutes regulating the general arbitration process in many states don't contain provisions mandating the enforceability of arbitration in trust agreements. A further complication is the fact that the assent of all parties may not be inferred by the formation of the trust itself because the beneficiaries normally do not execute the agreement.

In the past, some courts have distinguished between trusts and contracts in a manner that led them to conclude arbitration provisions in trust agreements were not strictly enforceable. Florida and Arizona have enacted legislation specifically allowing these clauses, but the issue remains unclear in many states.

In 2013, the Texas Supreme Court concluded that the arbitration clause in an inter vivos trust is enforceable, overturning the decision of a lower court on the matter. The matter had arisen when one of the beneficiaries of a trust sued to have the trust's trustee removed, alleging fiduciary improprieties. The trustee moved instead to compel arbitration under the terms of the Texas Arbitration Act. The trial court initially determined that a binding arbitration provision had to be the product of an enforceable contract, which did not exist as the beneficiaries had not signed the agreement. The Texas Supreme Court, however, ruled that assent to the arbitration provision of the trust was expressly implied by the beneficiaries' acceptance of trust benefits.

While this case may establish a precedent in Texas, the law remains in flux in other states. Many settlors of trusts would prefer to have disputes resolved by arbitration instead of litigation, and one suggestion is to include in the trust agreement itself a provision that a beneficiary must agree in writing to the arbitration clause prior to receiving any distributions.

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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