The Hidden Dangers of Arbitration Clauses in Trusts and How to Avoid Them
Tuesday, December, 25, 2012
Probate arbitration has long been determined as a cost-effective and time saving method to solve disputes that arise over estates and probate cases. However, in a May 10, 2011 case, Diaz Vs. Bukey, the California Second Appellate District determined that if a trust beneficiary who did not agree to handle disputes through arbitration wishes to take a probate dispute to court, it is his/her constitutional right to do so. This is true, even if there is a mandatory arbitration clause within the probate document.
The ruling was determined based on the fact that under California law, only the parties who signed an arbitration contract may be required to arbitrate if a dispute arises. Since the trust beneficiary in this case did not sign an arbitration agreement, he was not legally compelled to mandatory arbitration.
The specifics of the case are as follows. The trust in the Diaz case included an arbitration clause that required all disputes, including any dispute between the trustee and the beneficiary, to be settled via arbitration. However, the parents who created the trust were the ones who signed the contract with the trustee—not the beneficiary. After the parents passed away, the beneficiary filed a case with the probate court to demand a record of all accounting relating to the trust to be revealed. The trustee then filed a request to have the beneficiary’s case thrown out of court and for the court to force the beneficiary to arbitrate the request, as stated in the arbitration clause of the trust documents.
Since the beneficiary had not signed an agreement to arbitrate, he appealed the trustee’s request, citing that he had not entered into any contractual agreement to take the case to arbitration vs. probate court. The Court of Appeal ruled in favor of the beneficiary, as did the probate court.
Even though the creators of the trust, the parents, intended that all disputes be handled through private probate arbitration, it is important to note that in many states, arbitration clauses cannot be enforced on a party who did not agree to that clause (such as the beneficiary, in this case). Some probate experts agree that the way to avoid this happening in a trust is to require that the beneficiary sign the arbitration agreement before receiving their part of the trust. In this type of situation, it is unlikely that the beneficiary would risk his or her disbursement of the trust by refusing arbitration as a method to settle disputes.