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Can I Use Arbitration Clauses in Estate Planning?

Posted by Chris Peterson | Jun 16, 2014 | 0 Comments

Can I Use Arbitration Clauses in Estate Planning?

Estate planningAs a matter of fact, you can include arbitration clauses in trust documents and other estate planning tools. The Supreme Court of Texas in Rachal v. Reitz, 403 S.W.3d 840 (Tex. 2013) held that an arbitration clause in a trust can be enforceable against the trust beneficiaries, as long as the beneficiaries acquiesced to receiving the benefits available under the trust and the dispute is within the scope of Texas's arbitration statute.

How common are arbitration clauses in estate planning?

Arbitration clauses are old news in contracts law, but they only slowly began appearing in estate planning documents in the last ten to fifteen years. Though arbitration clauses have been upheld by high courts many times over in the contract arena, it has taken time for this more narrow issue of arbitration clauses in estate planning to get through state court challenges and the appellate process to establish legal precedent. Because estate planning documents are not usually considered contracts — where there is a bargained-for exchange — estate planning lawyers and clients alike have been reluctant to rely on arbitration clauses too heavily. We expect that reluctance to change, since the Texas Supreme Court has upheld the enforceability of an arbitration clause in an inter vivos trust.

What happened in the Rachal v. Reitz case?

In this case, the beneficiaries of a trust became unhappy and sued the trustee for misusing trust funds and failing to provide an accounting, among other things. The trustee, who also happened to be the lawyer who drafted the trust document, moved to enforce the arbitration clause in the trust. The beneficiaries objected, saying they could not be bound to an arbitration clause they never agreed to. The Texas trial court agreed with the beneficiaries, as did the mid-level appellate court. The Texas Supreme Court, however, agreed with the trustee, holding that the arbitration clause was enforceable if its terms were within the scope of Texas's arbitration law and if the beneficiaries had accepted benefits from the trust.

Why did they enforce an arbitration clause against the beneficiaries?

First, the court reiterated the rule that the settlor's intent (the person who established the trust in the first place) must be enforced to the extent it can be reasonably ascertained from the trust document itself. The trust clearly indicated the settlor's intent to have such disputes arbitrated. The high court went on to explain that even though the trust instrument did not meet the strict definition of a contract, it did fit the definition of an agreement, which is broader. A contract requires a bargained-for exchange and adequate consideration, but an agreement requires only mutual assent of the parties. In the case of a trust, the settlor can spell out the terms of the deal (within the law) and the beneficiaries get to choose whether or not to accept those terms. Beneficiaries routinely give their implied assent to the terms of a trust by simply seeking or obtaining benefits available to them under the trust.

There's the “gotcha”

Once the beneficiaries accepted benefits provided to them under the trust, they were bound to the terms of the trust, to the extent permitted by law, which included the arbitration clause. In other words, if they didn't want to be bound by the terms of the trust, then they shouldn't have accepted the benefits of the trust.

Call our office today for help drafting or interpreting documents

Whether you are contemplating the terms of your future trust or wondering how a Texas court may interpret certain provisions, the attorneys at Peterson Law Group listen carefully to your situation and recommend a course of action to meet your goals. Contact us today at 979-703-7014 to schedule an appointment or visit us online to get started.

About the Author

Chris Peterson

Chris Peterson is the owner of Peterson Law Group. He practices primarily in the areas of wills, trusts and estate planning; probate and trust administration; elder law; and business law. Chris is also the owner of Brazos 1031 Exchange Company.


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