Drafting trust documents is tricky business, and even a small error could lead to litigation and big trouble years down the road. Although it is always best to allow a trusts and estates lawyer to draft your trust document, understanding the general issues at stake will help you make the decisions that are only yours to make.
The following are some options that you might want to consider when drafting a trust agreement. You need not include all of them. Depending on your circumstances, it might be a good idea to include some, all, or none of them in your trust agreement. Before including more than one of them, consider how they might interact with each other to cause unintended consequences.
Disputes Among Trustees
When disputes among trustees break out, two concerns tend to become prominent: (i) the trust may become deadlocked if the trustor appointed an even number of trustees and they are split (the only two trustees disagree, for example) or (ii) an outvoted trustee may become concerned about liability for the actions of the majority. Either eventuality could lead to litigation.
The first problem can be resolved by appointing an odd number of trustees or by providing for mediation or arbitration (see below) in the event of a deadlock. The second problem can be solved by allowing a dissenting trustee to file a written objection that absolves him from liability for any action taken or not taken by the trust in spite of the dissenting trustee’s objection.
Disputes between Beneficiaries and Trustees
A dispute between a trustee and a beneficiary is considerably more likely to break out than a dispute among trustees. There are several potential means of handling disputes between beneficiaries and trustees that can avoid or mitigate the disadvantages of litigation.
- A Notice of Complaint Requirement
One way to forestall legal action by a beneficiary against a trustee is to include a section in the trust agreement requiring a beneficiary with a grievance to submit a written notice of the complaint. That notice would include a specified deadline to remedy the complaint before legal action can be taken. Many disputes begin and end here; Others are resolved through informal negotiations.
The section should (i) specify the content of the notice and how it is to be delivered (certified mail, for example) and (ii) prevent a beneficiary from seeking legal fees and costs from a trustee in a legal action that was commenced before the deadline expired. An exception should also be made for emergency circumstances in which prompt action is required to protect the trust.
- A Mediation Requirement
The trust agreement might require that mediation be attempted before litigation may be commenced. Many beneficiary/trustee disputes are generated by simple misunderstandings or impulsive actions that are hard to back away from later. A skilled mediator knows how to overcome these difficulties before they are blown out of proportion.
A mediation requirement should set a time period for mediation that allows any party to commence litigation if this period expires without an agreement. A provision should also be included that sets forth either how mediation expenses will be allocated, or authorizes a neutral third party (the mediator, for example) to make this decision on behalf of the parties.
- An Arbitration Requirement
Arbitration might be described as “rent-a-judge.” In an arbitration proceeding, a third party rules on the dispute just as a judge would and the parties can agree in advance that the decision will be binding (they can also agree on non-binding arbitration). Arbitration proceedings can be streamlined and the grounds for appeal to a court can be limited to reduce time and expense.
Three primary options are available:
- Non-binding arbitration – Although the parties are free to ignore a non-binding arbitration ruling, an adverse decision can discourage a complaining party from seeking courtroom litigation. Moreover, clarifying the strengths and weaknesses of a complaint through non-binding arbitration can provide the basis for a subsequent negotiated solution.
- Binding arbitration – In this scenario, you’re stuck with the results of arbitration unless you file an appeal with a court. In Texas, appeals of arbitration awards are governed by the Texas Arbitration Act, which strictly limits the grounds upon which an arbitration decision may be appealed. It is much easier to appeal a court decision than an arbitration award.
The arbitration provision should include the following information:
- The types of disputes that can be submitted to arbitration
- A description of arbitration procedures
- How the expenses of arbitration are to be allocated
- The identities of the arbitrators or the arbitration organization that will select the arbitrators
- A statement that clarifies whether the arbitration will be binding
- A statement that no trustee will be in a breach of his fiduciary duties by way of participating in the arbitration of a trust dispute
- Waiver of the Right to a Jury Trial
This option allows you to proceed to trial with a trust dispute. However, the decision must be rendered by a judge rather than a jury. This approach avoids the limited grounds of appeal that make arbitration unattractive to some while limiting the costs of litigation at the same time (certain legal ambiguities apply).
Contact Us with Your Questions and Concerns
The best way to “win” in trust litigation is to avoid litigation before it occurs. In other words, an ounce of prevention is worth a pound of cure. Be sure to consult with a trusts and estates lawyer before you draft your trust agreement or at least before you sign it. If you already have a trust agreement, consider contacting the trust and estate lawyers and Romano & Sumner to have the agreement reviewed and to get suggestions for modification.
Contact the trust litigation attorneys at Romano & Sumner, either online or by phone at (281) 242-0995, to schedule a free initial consultation where we can explore your options and answer your questions. Our clients hail from all over Sugar Land including Greatwood, First Colony, Avalon, Riverstone, and elsewhere in town. We also serve clients throughout greater Houston.