Including an Arbitration Clause in Trust Agreements


Irrevocable trusts are often recommended as part of estate planning for families in a variety of circumstances. Whether you have a high net worth and want to use a trust for tax purposes, or you want to ensure that your children’s finances will be handled in the event of your untimely passing, there may be many reasons why a trust could be the right choice for you. When you decide to create a trust, however, you may also have to decide how any potential disputes would be handled should they arise in the future. Would you prefer that the trustee or the beneficiaries of your trust handle matters in court? Would you request they go through mediation first? Or would you prefer arbitration? If you are considering including an arbitration clause in your trust agreement, here is what you need to know.

Including an arbitration clause in your trust agreement means that if there is any dispute in the future between your trustee and the trust beneficiary or beneficiaries, the dispute will go to an arbitrator. Arbitration is a private method of dispute resolution in which an arbitrator makes a binding decision on what to do after hearing from both sides. This means that the dispute would not likely go to an actual court and would not be handled by a judge. This may or may not be the right choice for your trust and your family’s circumstances.

Arbitration may be a good choice if your trust is relatively straightforward and beneficiaries are on relatively equal footing. An arbitrator may cost less overall than litigating due to lower legal fees and no court fees, and arbitration will keep matters private. You can also specify in your trust agreement that the arbitrator chosen must be experienced in handling matters concerning minors, for example, if you are leaving money in trust that may be distributed to minors. Arbitration may be a particularly good choice if you are setting up a special needs trust because many regular judges do not specialize in special needs cases, but you can decide that an arbitrator who has a lot of experience in special needs matters be used.

There are, however, a few reasons why arbitration may be difficult. One such reason may be that not all courts will enforce an arbitration clause in a trust agreement. Courts have grown more favorable to arbitration clauses in general over the past few decades, but not all states follow this guidance, and some states may be friendlier than others. When it comes to the actual arbitrator, that person also exerts stronger power than a judge, because arbitration cannot be appealed as easily as a judge’s decision. This may be one reason some states do not promote arbitration as heavily as others.

To help set your trust up for success and help ensure it meets your goals, properly drafting the trust agreement can be vital. Our office can help. Please reach out to us to schedule an appointment.

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