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Trust Law/Level VIII · Trusts of the world/8.3 Running a trust/Lesson 6

Disputes, litigation and mediation

Why trust disputes arise, the time limit for contesting a revocable trust, the remedies and costs rules of the Uniform Trust Code, and how mediation and arbitration clauses are treated.

Education, not legal advice. Trust law changes from country to country and state to state, and the right structure depends on your situation. Anything you sign should be drafted or reviewed by a qualified lawyer where you live.

The lean path

The cheapest, lowest-tax, simplest and most private route the law allows, best first. Each step names the rule it rests on and the condition that keeps it lawful.

  1. A trustee can shorten the contest window cheaply by sending the trust copy and §604 notice: under Maine’s UTC a contest must then come within 120 days, not three years after death. Catch: the model brackets these periods and states vary them.
  2. Mediate before suing: a neutral helps the parties settle confidentially, and the result can be recorded in a binding nonjudicial settlement agreement (UTC §111). Catch: mediation may not suit suspected fraud or serious power imbalance, and nothing binds until signed.
  3. Arbitration clauses can cut litigation cost: Florida enforces trust arbitration provisions except for disputes over validity (Fla. Stat. §731.401), and Texas enforced one in Rachal v. Reitz (2013). Catch: other states differ, and appeal from an award is limited.
  4. Weigh costs first: a court may award fees and costs against another party or from the trust as justice and equity require (UTC §1004), shrinking every share. Catch: fees do not automatically follow success, so a winning claim can still cost more than it recovers.
  5. Watch the time bars: a claim generally expires one year after a report that adequately disclosed it and stated the time allowed (UTC §1005). Catch: a beneficiary receiving such a report must act within that year or lose the claim.

MaterialsUniform Trust Code §§604, 1001 and 1004 as enacted in a state, such as Maine Revised Statutes title 18-B, free on the legislature’s websiteThe trust instrument, especially any clauses on dispute resolution, arbitration or no-contestRachal v. Reitz, 403 S.W.3d 840 (Tex. 2013), free on CourtListener

Wonder

  1. How long does someone have to challenge a trust that was revocable when the settlor died?
  2. Who pays the lawyers when a trust dispute goes to court?
  3. Can a trust document require beneficiaries to arbitrate instead of going to court?

Explore

  1. Trust disputes often involve people who are also grieving or estranged, which can make them especially painful. Common subjects include a trustee’s accounts and reports, decisions to distribute or withhold money, requests to remove a trustee, and challenges to the trust itself on grounds such as lack of capacity or undue influence. In US states that adopted the Uniform Trust Code (UTC), about 36 plus the District of Columbia, a beneficiary’s information rights come mainly from §813 (lesson 4.3.7). This lesson describes how disputes are handled under the model UTC and in examples of state law; it does not suggest how any dispute should be pursued or settled.
  2. UTC §604 limits the time to contest the validity of a trust that was revocable at the settlor’s death. In the model text, as enacted in Maine, a person may sue within the earlier of three years after the settlor’s death or 120 days after the trustee sent them a copy of the trust instrument and a notice of the trust’s existence, the trustee’s name and address, and the time allowed to sue; the model brackets these periods, and states vary them. After the death the trustee may distribute under the trust’s terms and is generally not liable for doing so unless it knows of a pending contest, or a potential contestant gives notice and sues within 60 days. A beneficiary of a trust later held invalid must return distributions.
  3. Under UTC §1001, a trustee’s violation of a duty owed to a beneficiary is a breach of trust. To remedy a breach that has occurred or may occur, a court may compel the trustee to perform its duties, enjoin a breach, order the trustee to pay money or restore property (often called a surcharge), order an accounting, appoint a special fiduciary, suspend or remove the trustee, reduce or deny compensation, void an act, impose a lien or constructive trust, trace property, or order other appropriate relief. A loss in value alone is not a breach. Claims are subject to time limits, such as those in UTC §1005 (lesson 2.3.7).
  4. In US litigation each side usually pays its own lawyers, but trust cases have their own rule. Under UTC §1004, in a judicial proceeding involving the administration of a trust, the court, ‘as justice and equity may require’, may award costs and expenses, including reasonable attorney’s fees, to any party, to be paid by another party or from the trust. The section does not require fees to follow success or bad faith; the court has discretion. Fees paid from the trust reduce what is left for every beneficiary, including those not involved in the dispute. States may enact different wording.
  5. Mediation is a process in which a neutral mediator helps the parties reach their own agreement; it is usually confidential and non-binding unless they sign a settlement. Some families use it to deal with long-standing tensions, for example in blended families, but it may not suit every case, such as suspected fraud or a serious imbalance of power. Arbitration is different: an arbitrator decides the dispute, usually with limited appeal. Some trust instruments require it. Their enforceability against beneficiaries varies by state, because beneficiaries do not sign the trust.
  6. In Rachal v. Reitz, 403 S.W.3d 840, decided on 3 May 2013, the Supreme Court of Texas held that an arbitration clause in an inter vivos trust was enforceable against a beneficiary who sued the trustee. It reasoned that a beneficiary who accepts benefits under the trust and sues to enforce its terms shows assent to the arbitration provision, under the doctrine of direct benefits estoppel. Courts in other states have reached different results, and some states address trust arbitration clauses by statute, so the law of the governing state matters. Agreements reached through mediation are sometimes recorded in a nonjudicial settlement agreement under UTC §111 (lesson 8.3.5).

Key facts

  • Under UTC §604 as enacted in Maine, a revocable trust can be contested within the earlier of three years after the settlor’s death or 120 days after the trustee’s notice; states vary the periods.
  • Under UTC §1001, remedies for breach of trust include compelling payment or restoration of property, an accounting, suspension or removal, and reducing or denying the trustee’s pay.
  • Under UTC §1004, a court may, as justice and equity may require, award costs and reasonable attorney’s fees to any party, paid by another party or from the trust.
  • In Rachal v. Reitz (Tex. 2013), the Supreme Court of Texas enforced a trust’s arbitration clause against a beneficiary who sued to enforce the trust, relying on direct benefits estoppel.
  • Mediation is a confidential, usually non-binding process in which a neutral helps the parties agree; arbitration produces a decision by the arbitrator.
  • Whether a trust’s arbitration clause binds beneficiaries depends on the governing state’s case law and statutes.

Exercise nine, six, three, one

9CollectList up to 9 features of trust disputes described in this lesson or in a published case or state statute you are reading (some sources give fewer), such as the issue in dispute, the time limit, the remedy sought and how costs were dealt with.
6ClusterSort them into 6 categories: accounts and information, distributions, removal of a trustee, validity of the trust, costs and fees, and mediation or arbitration.
3DistillReduce the 6 categories to 3 groups: disputes about how the trust is run, disputes about whether the trust is valid, and rules about how disputes are resolved and paid for.
1CrystallizeWrite 1 sentence explaining, in your own words, why fees paid from a trust in a dispute can affect beneficiaries who took no part in it.

Fact check

Dates, figures and claims checked against the published sources listed below.

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