June 21, 2023
Arbitration in Wills and Trusts
Take-Away: There is currently a reluctant trend among the states if a state’s general arbitration statute can be applied to probate litigation disputes with regard to Wills and Trusts. While there are a couple of aberrations, generally a court will not enforce an arbitration provision in a Will or Trust unless there is a specific state statute that enforces an arbitration provision that is contained in a Will or Trust.
Background: Mandatory binding arbitration provisions are specifically authorized in Wills and Trust instruments in a few states by statute. What initially got a lot of attention was back in 2013 when the Texas Supreme Court found such authority in a general arbitration statute that was not specifically directed at Wills and Trusts. In 2022, a couple of state court decisions departed from the Texas position, concluding that ‘nope’ there must be a Will or Trust specific statute that applies to arbitration provisions in a Will or Trust.
General Position: As a generalization, courts that have dealt with arbitration clauses in Wills and Trusts have found them not to be a valid alternate dispute resolution mechanism because the beneficiaries of the Will or Trust are not contracting parties, i.e. there is no mutuality of agreement or consent to the alternate dispute mechanism contained in the Will or Trust by the beneficiary. Rather, the arbitration provision is unilaterally imposed on the beneficiary, without their consent, by the testator or settlor, which is why a vast majority of the states have concluded that the requirement in the Will or Trust to arbitrate probate disputes to be unenforceable. First, the departure states, then the more recent judicial decisions finding the arbitration obligation to not be binding on beneficiaries.
Texas -2013: In Rachal v. Reitz, 403 S.W. 3d 840 (Texas, 2013) the successor trustee was sued by one of the decedent’s children for misappropriation of assets. The successor trustee invoked the arbitration clause that was in the Trust. While the lower courts denied the successor trustee’s motion to compel arbitration, the Texas Supreme Court found that the Texas Arbitration Act requires only an agreement’, not a contract to enforce an arbitration clause. While a contract require a ‘meeting of the minds’ an agreement requires only mutual assent, which can be achieved through accepting one’s rights under the terms of a Will or Trust, through the principle of direct benefits estoppel. In short, a beneficiary who accepts any benefits under a Will or a Trust is equitably estopped from challenging the validity of the Will or Trust’s mandatory arbitration clause. Additionally, the Texas Supreme Court concluded that federal and state express policies clearly favor arbitration over contested court litigation.
Nevada-2017: In In re Kent and Jane Whipple Trust, No. 69945, WL 2813974 (Nevada, 2017), the Court enforced an arbitration clause that was in a Trust instrument, even in the absence of a specific state statute with that legitimized binding arbitration in probate disputes. Two years later, Nevada formally adopted a specific statute that authorizes arbitration in Will or Trust disputes, but it did not rely on the Texas Rachel decision as legal authority for its decision.
Virginia-2022: In Boyle v. Anderson, 871 S.E.2d 226 (Virginia, April 14, 2022), the Court provided a stern rejection of Rachel’s reasoning. That Virginia Trust provided that “any dispute that is not amicably resolved, by mediation or otherwise, shall be resolved by arbitration.” The decedent’s widow, as Personal Representative, filed a complaint against the successor trustee (the decedent’s daughter) claiming a breach of Trust fiduciary duties. The complaint sought the removal of the successor trustee, or in the alternative, an order that the successor trustee comply with the express terms of the Trust instrument. The successor trustee filed a motion to compel arbitration as required by the Trust instrument. The widow objected to the motion claiming that the Trust was not a contract, and that that she had not agreed to resolve the dispute by arbitration. The Virginia Supreme Court found that the arbitration clause in the Trust was not enforceable, holding that “access to courts to seek legal redress is a constitutional right…..[But] a party cannot be compelled to submit to arbitration unless he has first agreed to arbitrate.” While Virginia had adopted the Uniform Arbitration Act, which expressly established a state’s public policy in favor of arbitration, “a trust does not qualify as a contract or agreement. Trusts are generally conceived as donative instruments creating a fiduciary relationship with respect to property.” In sum, while the Virginia Uniform Arbitration Act applies to contract, the Court concluded that “a trust is not a contract.”
New Jersey: A trial court in New Jersey In re Hekemien, No. P-479-21 (Superior Court February 7, 2022) found that while New Jersey’s strong public policy favors mediation and arbitration, when a beneficiary sought an accounting from the estate fiduciary, there are nonetheless limits to that express state public policy. “Here, there is a lack of mutual asset regarding an arbitration clause. The Will is a statement of testamentary intent, not an instrument that reflects a consensual understanding between the parties. In short, a Will is not a contract, nor is it an agreement as defined in Rachal….Applied to the instant case, Plaintiff cannot be compelled to arbitrate because (1) the Will is not a contract between two parties in the traditional sense, and (2) the benefits of the Will have not extended to the Plaintiff based on ‘traditional principles of contract and agency law.’ Plaintiff has not agreed to arbitrate disputes concerning the Will because the Will is not a contract or an agreement of consensual understanding between two parties.”
Other Decisions: Getting back to the Rachal decision, other courts have attempted to ‘split hairs’ with regard to its view that beneficiaries are subject to mandatory arbitration of probate disputes:
California: In McArthur v. McArthur, 224 Cal. App. 4th 651 (20140, the Court addressed Rachal’s reasoning, but it concluded that there was no actual or implied consent to arbitration by an estate beneficiary.
Federal: In a federal court decision, Burgess v. Johnson, 835 Fed. Appx. 330 (10th Cir.) (November 4, 2020), the Court cited Rachal, but it ultimately construed a binding arbitration clause to allow only the trustee to only accept an arbitration, not to compel others to do so.
Michigan: While Michigan has adopted the Uniform Arbitration Act, it does not have a specific statue that makes arbitration binding in Will or Trust disputes. Given my cynical view of Michigan’s do-nothing Legislature, this should come as no surprise. That said, most Probate Courts around the state have back-logged calendars where a binding arbitration provision in a Will or Trust might help to relieve some of that backlog, but far from me to make a suggestion that might help to expedite justice in the Probate Courts. Instead, for a testator or settlor to attempt to curb the propensity of probate litigation, they are left with either a (i) no contest provision in the Will or Trust to deter litigation, so long as the probate judge does not find any probable cause for the challenge, or (ii) the use of a conditional bequest or devise based upon the acceptance of the terms of the Will or Trust.
Conclusion: Probate litigation is a ‘growing cottage industry’ in Michigan these days. Probate courts are swamped with litigation claims. One would think that the state Legislature would look closely at adopting laws to expeditated claims that that clog a probate court’s docket. But I have become disappointed with Michigan’s Legislature, which appears to be far more interested in getting reelected than in passing meaningful legislation that might actually benefit its electorate. Maybe someday, far into the future, Michigan will enact a statute that permits mandatory binding arbitration in Will or Trust contests, but I will not be holding my breath awaiting that legislation.