By: Victoria Tran Sood, elder care and inheritance attorney
An alternative dispute resolution clause in a revocable living trust requiring beneficiaries and trustee to resolve disputes over the trust without court litigation (through collaboration, mediation, or arbitration) is generally not enforceable against trust beneficiaries in California. However, like most general rules, there are exceptions. Beneficiaries are bound to the alternative dispute resolution clause in the trust in these circumstances: 1) they voluntarily agree to use alternative dispute resolution instead of litigation or 2) they have accepted a benefit from the trust.
Beneficiaries Cannot Be Forced Not To Litigate
In the recent court case McArthur v. McArthur, mother had a trust giving all her assets equally to her three daughters. Mom later changed the trust: 1) leaving a greater share to daughter Kristi, 2) naming Kristi as successor trustee, and 3) requiring arbitration and mediation of all disputes involving the trust. When mom died, daughter Pamela sued daughter Kristi to void the changes in the trust. Pamela claimed that when mom changed the trust she lacked capacity and was unduly influenced by Kristi.
Kristi asked the court to order Pamela to resolve the disputes in arbitration as mandated by the trust. The court ruled that Pamela could litigate the disputes in court and was not required to resolve the disputes in arbitration. The court explained that Pamela did not agree to the changes to the trust, and did not receive any benefit from the amended trust amid the purpose of Pamela’s lawsuit was to void the amended trust and reinstate the original trust.
Donkin v. Donkin is another court case in which the court did not enforce the alternative dispute resolution clause in the trust. This court, however, did not explain its reasoning.
Incentives For Beneficiaries Not To Litigate In Court
Consider these incentives to encourage beneficiaries to resolve disputes without litigation. These incentives are suggestions only and they may not be suitable for your specific circumstance:
- Include all beneficiaries in discussions about changing or creating an estate plan, with professional assistance as necessary. Including beneficiaries in discussion about estate planning matters allows a beneficiary’s concerns to be heard and addressed. Many parents do not want to include their children beneficiaries in discussions for fear of causing or having to deal with family conflicts or because they want to keep their finances private. However, the benefits of preserving family relationships and assets from litigation outweigh the parents’ concerns, which can be resolved with assistance from alternative dispute resolution professionals such as mediators or collaborative practitioners.
- Include alternative dispute resolution clause in the original document and all subsequent changes. This gives the trustee a tool to convince the court to enforce the alternative dispute resolution clause in the uncontested valid original trust. Even if the recent amended trust is allegedly void, the original trust that is to replace the voided amended trust still requires alternative dispute resolution. Thus, disputes over the changes to the original trust must be resolved using alternative dispute resolution as required by the original trust. The beneficiaries are bound by the terms of the original trust as they have accepted its terms by seeking to reinstate the original trust. This argument, however, has not been tested in court.
- Pay from trust assets the beneficiaries’ attorney fees and costs incurred in alternative dispute resolution. Objecting beneficiaries carry the risks of funding the litigation on their own, without contribution from other beneficiaries. This incentive minimizes that risk by sharing the objecting beneficiary’s expenses among all beneficiaries. This strategy is more effective when the trust has more than one beneficiary.
Litigation is expensive and breeds additional litigation. Beneficiaries should consider alternative dispute resolution before litigation, even if they are not bound by the alternative dispute resolution clause in the trust.