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Some Thoughts on Forfeiture, Mediation and Arbitration in Estate and Trust Litigation1
Introduction
This article briefly discusses how litigation relating to the administration of estates and trusts might be reduced through careful planning
prior to the property owner’s transfer of wealth during lifetime or at death. Such litigation often involves an emotional element not present in most other legally disputed matters. That
also suggests that methods to reduce the risk of such litigation occurring may be unique to such matters.
The common element in most legal disputes is money. Even the most fundamental source of crime, even violent crime, usually is money. No
one goes to court for truth and justice. Rather, each litigant goes to court to win—and, almost always, it is to win money. However, disputes relating to estates and trusts often involve
another element: vindication for a perceived moral wrong such as one child being “wrongly” favored over another. In some cases, the hurt feelings arise not on account of another inheritor
being financially favored over another but because the individual was not selected as a fiduciary (e.g., executor of the Will) or because his or her share of the inheritance is placed in trust
rather than passing outright and free of trust.
In any case, failure to be treated as one believes he or she should have been with respect to sharing in an inheritance or gift often triggers
litigation. And, it seems that the climate for such disputes likely may never have been greater in modern time on account of three factors. One is expectation. The growing wealth of people has
allowed them to provide their offspring and spouses with ever increasing financial benefits. There is a sense of entitlement that does not have to be earned. Frustrating that sense may
lead to litigation.
Second, there are more marriages than ever before where either or both spouses have a descendant from a different union. Descendants
from an earlier union continue to have expectations of financial reward especially when the parent dies, even though the parent may be married to someone other than their other parent. The
last spouse also may expect to be rewarded financially even if the deceased spouse has descendants only from another union (or unions). In fact, most states provide to a minimum inheritance
for a surviving spouse no matter how short the duration of the marriage (unless the right to it has been effectually waived). But there are virtually no rights (with Louisiana being a major
exception) to inheritance for descendants. Not infrequently, the surviving spouse will be approximately the same age as the children from a prior union of the spouse dying first, and sometimes
considerable younger. Hence, even if property is placed in trust for the spouse with remainder over to descendants, the children will feel disinherited.
Third, more families today, than in the recent past, have three generations living together. Grandchildren expect continued support from
grandparents and some grow to believe that they should share any inheritance equally with their parents who are the children of the grandparent. Usually, however, neither the law nor the
instruments that control the disposition of wealth at death provide directly for a grandchild whose parent who is the child of the property owner and which child survives.
In addition to disputes as to the proper disposition of wealth between inheritors, disputes between fiduciaries and inheritors often arise and
lead to litigation. Usually, the complaint is made by the contestant about the conduct of the fiduciary although it has arisen in the context of the fiduciary making a complaint. Inheritors
may seek damages from a fiduciary for alleged violation of the duties of care and loyalty, or they may seek the removal of a fiduciary for a variety of other reasons.
In some ways, the law in some states itself spurs litigation. For example, in certain jurisdictions, such as New York, proving an instrument is
the property owner’s Will may be accomplished only by a commencement of a lawsuit against those who would inherit if there were no Will, those whose interests have been reduced or eliminated
by a codicil (which is also offered to probate) and those whose interests have been reduced or eliminated under the instrument offered for probate that is later in date than one filed in the
court where the probate proceeding is commenced. Hence, a lawsuit must be commenced, causing those against whom the suit is brought often to seek legal advice as to their rights and options.
Not all states follow such procedures. For example, in Pennsylvania and many other states, a document may be admitted to probate as the decedent’s Will without the commencement of a lawsuit.
It is understood that a far lower percentage of Will contests occur in such jurisdictions.
Another area where the law tends to generate litigation is with respect to the actions of a fiduciary. In New York, for example, it is common
for the executor(s) or trustee(s) to prepare a written accounting of the acts, transactions and proceedings undertaken while acting as such fiduciary and to commence a proceeding in court
against those who have an interest in the trust or estate with respect to which the accounting relates. Again, being made a party to a lawsuit may well trigger that party into seeking legal
advice. Also, the form of the accounting “required” by New York law is essentially not comprehensible except by those who have had considerable experience with it. Hence, an interested
party who receives such an accounting (sometimes at least as thick as the Manhattan telephone directory) may turn to a lawyer for advice about it and that increases the chances of litigation
with respect to matter disclosed in it (or matters which the beneficiary is advised should have been disclosed).
To attempt to prevent an heir-at-law from challenging the instrument offered as the property owner’s Will (such distributee called an
“objectant” or “contestant” because he or she is objecting to or contesting the admission of the document to probate), that instrument may provide that an objectant will forfeit any
disposition it makes in his or her favor. Such a provision is intended to frighten or terrorize any distributee from objecting and is commonly called an “in terrorem,”
“disinheritance” or “forfeiture” clause, and those terms are used interchangeably in this article. Wealth Transfer Planning offers language providing such forfeiture clauses. Usually,
such a provision states that any objectant will be treated as though he or she predeceased the testator (often without descendants if even the objectant has one or more descendants), if he or
she challenges the instrument. An in terrorem clause, quite obviously, is ineffectual to cause the disinheritance if the instrument is denied probate. In other words, if the instrument is not
proved to be the Last Will and Testament of the property owner, the disinheritance provision it contains will have no force or effect. Also, the extent to which an in terrorem clause is
enforceable depends upon state law. Some states, such as California and New York, enforce them without limitation. In general, states that have adopted the Uniform Probate Code, enforce them
only if the objectant did not have a reasonable basis to object to the admission of the Will to probate. Other states, such as Florida, do not enforce them.
If the individual is domiciled in a state that limits or prohibits the enforcement of such disinheritance clauses, such a provision might be
made enforceable against his or her heirs-at-law by directing the instrument to offered to original probate in a state that will enforce them. Both New York and Alaska have statutes
authorizing the admission to original probate of Wills of non-domiciliaries. Alternatively, the individual may place his or her assets (or almost all assets) into a revocable or irrevocable
trust to be governed by the law of a state that will enforce such forfeiture provisions in such a trust. (A trust may be made irrevocable without it constituting a taxable gift. See
Treas. Reg. § 25.2511-2.)
Many reasons have been cited to use arbitration or mediation especially with respect to estates and trusts. These include reducing costs and
time to resolve a dispute, privacy and to avoid the nearly inevitable results of hostility (or enhanced hostility) that individuals develop in litigation toward the other party or parties. And
it seems certain that no individual wants his or her wealth to be the source of generating disputes among surviving family members or between beneficiaries whom the property owner has selected
to enjoy the benefits of his or her wealth and the fiduciaries selected by the property owner to manage and care for it.
Methods of Reduce Disputes
Depending upon the jurisdiction involved and the goals the property owner seeks to achieve, it seems there are at least six methods that may be
available to reduce the risk of litigation with respect to trust and estate matters.
Advise Inheritors of Inheritance Plans. Although Will and related “contests” are often about claims to wealth, the litigation often includes
an element of perceived entitlement. And that feeling of entitlement is based upon emotional feelings.
Regardless of whether the complaint is spurred by a failure to receive an equal share or failure to receive more than an equal share, telling
the children (or others) ahead of time what their shares in the estate will be may reduce the risk of a post-mortem dispute. A child or other inheritor, who is displeased with the advice,
especially if it is given long before death, has many opportunities to try to change the outcome. In some cases, the advice is given initially verbally. A parent, for example, may tell the
child who will receive less than an equal share that the parent is discriminating in favor of another child on account of a perceived additional need of such other child. This may be less
likely to cause anger if the parent states that the other child who will receive more does not know about it.
However, advising a child that he or she will not receive an equal share may have adverse effects even if it prevents litigation after death.
For example, the child may refuse to communicate with the parent and may turn against the other child who will receive an enhanced share even if that other child is unaware of the plans for
provide an unequal disposition of wealth.
Another option may be not just to advise the potential contestant of the property owner’s plans for disposition but to enter a contract with
that person that he or she will not object to the validity of the document or otherwise challenge it. Such a pre-death contract seems enforceable but the state law varies widely as to how much
consideration must be provided to make it enforceable. In at least some jurisdictions, it seems that the person releasing the claim must receive “fair consideration.” See, e.g.,
Restatement of Property (third), section 2.6, comment j. It seems extremely difficult to determine what fair consideration would be. Hence, it seems “risky” at best to rely on such a
pre-death contract to avoid Will contests and similar challenges.
Use a Trust in Lieu of a Will. A Will becomes operative only when the testator dies. It typically has no practical effect during lifetime. It
seems to be more credible to contend that the decedent did not know the contents of the Will or that it does not reflect his or her true wishes than a document that has impact during his or
her lifetime. A trust, whether revocable or irrevocable, especially if funded with substantial assets during lifetime, seems more difficult to challenge on the ground that the individual was
unaware of its terms. Usually, after creating such a trust, the property owner will have assets retitled into the name of the trust, a tax identification number for the trust may be acquired,
tax returns and other tax forms may have been filed by the trust, insurance in the name of the trust may be obtained (to insure assets the trust owns) and other action may be taken that
demonstrates that the property owner is aware of the trust’s existence if not its post-death effects. Also, as a general rule, a trust is valid even if not executed in accordance with the
formalities of a Will. (It should be noted that under Florida law, a revocable trust must be executed with essentially the same formalities as a Will.) Furthermore, when the
grantor of the trust dies and the trust becomes irrevocable, no lawsuit need be commenced to “prove” the document in order to make it effect in transmitting property. Finally, it seems
that a property owner, in general, has significantly greater flexibility in choosing the law that will govern the validity, construction and effect of the trust than of his or her Will.
However, at least in some states, the capacity to make a Will is lower than that required to create a trust.
Nevertheless, as discussed above, it seems that a successful challenge to the validity of a document is less likely if it is a lifetime trust,
which has been significantly funded, rather than if a Will is used. Having the law of another jurisdiction govern the validity, construction and effect of the instrument, which jurisdiction
has “softer” rules (such as no rule against perpetuities), may limit the grounds for challenge. Similarly, alternative rules of evidence, etc. also likely can be controlled by using a
lifetime trust rather than a Will.
Use an In Terrorem Clause. When the child (or other intestate taker) is to receive what is likely to be perceived as a significant although not
equal share, a disinheritance clause usually will help to reduce the risk of litigation arising. If the property owner lives in state that will not enforce such a clause, he or she may
consider directing the admission of his or her Will to original probate in a state (such as New York) that permits that and will enforce such clauses.
Much of the litigation involving estates and trusts is other than a “Will contest,” that is, a challenge to the validity of the document. It
may be a construction of the instrument, the choice of fiduciaries and how the fiduciaries administer the estate or trust. In order to reduce the risk of such litigation, an in terrorem clause
may be considered and which would provide a forfeiture of benefits under the document if any such a challenge is made. However, even in those states which uphold disinheritance provisions for
the successful challenge of a Will, it may not be certain that such disinheritance or forfeiture clause may be used to deter other litigation, such as a challenge over certain fiduciary
actions.
Just as a challenge to the validity of a trust created during lifetime may be less likely to occur and be less likely to be successful than the
challenge to the validity of a Will, it seems that it may be possible to use a disinheritance provision in a trust, which is made subject to the laws of a state that will with great certain
enforce a forfeiture provision, with respect to more than just an attack on the instrument’s validity. For example, under Alaska Statute § 13.36.330, a provision in a trust purporting to
penalize a beneficiary by charging the beneficiary’s interest in the trust, or to penalize the beneficiary in another manner, for instituting a proceeding to challenge the acts of the
trustee or other fiduciary of a trust, or for instituting other proceeding relating to the trust, is enforceable even if probable cause exists for instituting the proceedings. This broad
authority given to an individual who creates the trust under Alaska law seems powerful and has been used by attorneys to prevent almost certain litigation against the validity of other
documents (including a threatened challenge by a spouse to a prenuptial agreement enter with the decedent), against fiduciaries or against other family members.
Use Mediation or Arbitration Provisions. It seems that some individuals will choose to use some type of disinheritance clause (or other
incentive) to prevent a Will contest of the equivalent with respect to other dispositions taking effect at the property owner’s death. But, as indicated, many disputes arise even after the
validity of the document has been established. And although a total forfeiture provision, similar to the foregoing sample, may prevent such challenges, it may be that the property owner
instead would like to provide an alternate forum of dispute resolution (such as arbitration or mediation) rather than forfeiture.
As a practical matter, arbitration cannot be used with respect to a challenge of the validity of a document, such as a Will contest, unless the
parties voluntarily contest to it. It might be possible for a testator to request those in a position to contest the Will to agree to arbitration. Mediation might also be voluntarily entered
by the parties in a dispute as to the validity of the document. But unless state law will enforce it, the document itself may not impose mandatory mediation or arbitration.
One option is to direct that the property owner’s Will be direct original probate in a state, that will enforce mandatory arbitration
provisions, such as Florida Statute § 731.401. However, Florida does not appear to have a statute, as some states do, to permit original probate in Florida of the Will of someone who is not a
Floridian. Also, Florida’s statute does not apply to a direction for mediation. So alternate steps, perhaps, should be considered be taken to make an arbitration or mediation provision
enforceable. It seems it might be accomplished with an “in terrorem” clause as described above to enforce them.
For example, a Will, whose in terrorem provision will be enforced under applicable local law, provides that, if a party wishing to challenge the
validity of the instrument agrees to resolve the challenge by first entering into good faith mediation and, if that is unsuccessful, arbitration, he or she will still receive all or a portion
of the disposition in his or her favor under it even if the challenge in arbitration is unsuccessful.
Little, if any law, however, has developed as to the application of such a disinheritance provision. Nevertheless, it would appear to be fully
enforceable under Alaska law with respect to interests in a trust governed by the law of that state.
The arbitration as to the admission of the document to probate would not be binding upon the court that ultimately may be asked to admit the
Will to probate. However, the instrument would provide and the potential contestant would have to agree that by entering into arbitration he or she would forfeit standing to contest or would
lose his or her “remaining” inheritance if he or she attempts to contest again in court.
Use a Condition Precedent to a Bequest as an Alternative Method of Causing Participation in Mediation or Arbitration. As stated above, it seems
that a “challenging individual” likely would agree to the mediation and arbitration resolution procedures unless he or she were nearly certain the forfeiture provision for failing to do so
would not be enforced. At least some commentators suggest that such a forfeiture provision would not be enforced because, among other reasons, a person cannot be forced to participate in
arbitration unless agreed the person agrees to it, unless state law provides for its enforcement if contained in the document to be challenged, as Florida now does.
A special structuring of “mandatory” mediation and arbitration provisions might be considered. Rather than provide that benefits provided
under the instrument will be forfeited for failure to agree to participate, the instrument might condition the bestowing of benefit on each individual agreeing to mediation or arbitration. In
other words, just as a Will might provide that an individual receive a bequest only if he or she had reached a certain age, graduated from college or some other condition precedent was
present, so too an instrument might have an agreement to mediate and arbitrate as a condition precedent to the receipt of a benefit under the instrument. This seems to “fit” into a normal
bargained for consideration arrangement which should be enforceable regardless of the “fairness” of the consideration.
Summary and Conclusions
The level of legal disputes involving trust and estate matters is significant. In some cases, the legal system itself (such as requiring the
commencement of a lawsuit in order to have an instrument admitted to probate as a decedent’s Will) aggravates the conditions for such disputes to arise. Avoiding bitter and protracted
litigation among family members almost always will a desired goal of a property owner. It seems that using certain mechanisms, such as using a trust governed by the laws of a jurisdiction,
such as Alaska, to transmit wealth, may reduce the risk of such litigation on account of the enforcement of forfeiture clauses if a beneficiary undertakes certain action. However, some
property owners will not wish to use such a harsh “stick” to avoid protracted litigation. Rather, they will wish the parties to settle disputes through good faith mediation and/or
arbitration. Also, the consensus among commentators appears to be that mediation and arbitration usually are far preferable to court litigation but that there is no practical way to cause
potential litigants to participate in such alternative dispute resolution absent their agreement or absent a statute that will enforce a mandate under the instrument the will be subject to the
litigation. Also, such a statute apparently cannot be used to enforce mediation or arbitration with respect to the validity of the document itself. However, it seems that inducing the use of
mediation and/or arbitration can be effected either by using a forfeiture provision or conditioning the grant of a beneficial interest by requiring a binding agreement by the party to
mediation or arbitration.
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