¶ 4501
Overview
Scope of the chapter. A trust instrument governs the relationship among the settlor, the trustee and the beneficiaries for decades, and many of its provisions are written with the expectation that someone will one day disagree about them. Three kinds of clause try to decide in advance how that disagreement will be handled. An arbitration clause sends the dispute to a private tribunal instead of a court. A no-contest clause, sometimes called an in terrorem clause, forfeits or reduces the interest of a beneficiary who challenges the instrument or takes other proceedings the settlor wished to discourage. A forum clause names the court, or the jurisdiction, in which any proceeding must be brought. Each clause rests on a different body of law, and each is enforceable in some jurisdictions and to some extent. This chapter examines them in turn and then considers how they work together, with mediation, fee and confidentiality provisions, as one dispute-resolution design.
Why settlors use them. Settlors who use these clauses usually give the same reasons. Trust litigation is slow and expensive, and its cost is paid from the trust fund the settlor meant for the family. It is public, so that the family's assets, its quarrels and sometimes its medical and personal history appear in court records. It divides families, because a contest between siblings over a parent's trust is rarely only about money. And it places decisions about a family's arrangements in the hands of a judge who may have little experience with trusts of the kind involved. The California Law Revision Commission, recommending the 2008 revision of California's no-contest statute, described the policies that support such clauses as respecting a transferor's control over the use and disposition of his or her own property and avoiding "the cost, delay, public exposure, and additional discord between beneficiaries" that litigation over an estate plan brings. Donkin v. Donkin, 58 Cal. 4th 412, 424–25 (2013) (summarizing the Commission's report).
The countervailing policy. Against these reasons stands the principle that a trust is enforceable by its beneficiaries and that someone must be able to hold the trustee to account. The Commission's report said that "a person should have access to the courts to remedy a wrong or protect important rights," and, in the court's summary of it, emphasized that "important public policy interests support judicial supervision of an executor, trustee, or other fiduciary." Id. at 425. The irreducible core of trusteeship examined in chapter 5 is the background against which every dispute clause must be read (see supra ¶ 570.06). A clause that channels disputes to a competent and impartial tribunal, or that discourages unfounded challenges, is consistent with that core. A clause that leaves no one able to enforce the trust is not.
Relation to other chapters. Earlier chapters touch these clauses from particular angles. Chapter 5 identifies them as provisions that limit the manner of enforcement without eliminating it (see supra ¶ 570.06). Chapter 24 discusses no-contest clauses as a companion to disinheritance and conditional gifts (see supra ¶ 2480.02). Chapter 26 examines the representation of minor, unborn and unascertained beneficiaries, including in arbitration (see supra ¶ 2670.07). Chapter 29 places the arbitration clause within the family governance structure (see supra ¶ 2960.04). Chapter 2 examines firewall statutes and the constitutional limits on exclusive-jurisdiction provisions (see supra ¶ 260). The model clauses collected in chapter 46 draw on the provisions offered here (see infra ch. 46).
Sources. The Texas, Arizona and California decisions discussed in full were read in the full text published by the Caselaw Access Project. The Florida, Arizona, Nevada, South Dakota, New Hampshire, Delaware and Wyoming statutes were read on the legislatures' own websites; the Texas Property Code sections were read in a published compilation of the official text; California Probate Code sections 21310 and 21311 were read in a published compilation and in the text quoted by the California Supreme Court. The offshore statutes are cited in the editions discussed in chapter 2 and in the companion volume, Lighthouse on Asset Protection.