Trust Could Force Beneficiaries to Arbitrate Rather than go to Court

Andrew Reitz set up a trust to benefit his sons, with an independent trustee. The trust document said that if there was a dispute between his sons and the trustee, it would be decided by a private arbitrator rather than a court.

When John Reitz, one of the sons, became unhappy with the trustee, he sued to have the trustee removed. The trustee argued that the suit should be thrown out of court, and decided by an arbitrator.

The dispute over who should decide the dispute went all the way to the Texas Supreme Court.

That court said the issue should go to an arbitrator. The judges ruled that (1) the trust should be handled according to Andrew’s clear intentions, and (2) it would be unfair to let John receive all the benefits of the trust, but ignore the one part of the trust he didn’t like.

If you set up a trust and you think there’s a chance that there could be disputes among the beneficiaries or between a beneficiary and the trustee, you might consider adding an arbitration requirement. Arbitration can be quicker and cheaper than a lawsuit, so money might be saved that could help the other beneficiaries. Also, arbitration is typically private while lawsuits are public, so arbitration could prevent an unhappy family’s internal disputes from being aired for all the world to see.

On the other hand, there can be disadvantages to arbitration as well. There are many procedural safeguards in a court proceeding that simply don’t exist when people go to arbitration.

Also, outside of Texas, it’s not always clear whether arbitration requirements in trusts are valid. A few courts have suggested that while arbitration requirements are valid in a contract, a trust isn’t a contract, and beneficiaries can’t be barred from going to court by a requirement in a document that they never signed.