Avoiding Family Disputes with Cox Law Office
Rule number one in estate planning is do not invite family disputes. In planning the administration of your estate, the last thing you want to happen is for a family dispute to arise. A recent case involves a family trust drafted in which rule number one was not followed. The consequences were disastrous. A physician, whom we will call Doc, and his wife, Margie, established a family trust to accomplish their estate planning objectives. So far, so good.
Doc died, and Marjorie followed him. Their son, whom we will call Junior, was designated in the trust to serve as trustee upon the deaths of Doc and Margie. The beneficiaries of the trust who would receive distributions of the trust assets upon the death of Doc and Margie were Junior and his sister, Rita. Although Doc and Margie had established their trust document, they had not arranged for all of their assets to flow into the trust upon their deaths automatically. Their failure to do so created a stumbling block in the smooth administration of the trust estate. We routinely meet with our clients after all trusts are created and provide them with detailed instructions to transfer the assets in their various financial accounts into the trust.
Because Doc and Margie did not make arrangements for their financial accounts to transfer into the trust during their lifetimes or to transfer automatically upon their deaths, it was necessary to open an estate in the county where Margie, the second spouse to die, lived. Rita was a resident of that county and, therefore, was authorized to open the estate and transfer the financial accounts into the trust by court order. Once the funds had been transferred into the trust, Junior, as trustee, could distribute them between himself and Rita in accordance with the trust’s terms.
It is in the dealings between Junior and Rita that our story takes a sad turn. Friction developed between them. Rita did not agree with Junior’s intended plan for distributing trust assets, and Junior did not agree to follow Rita’s expectations. It is here that the provisions of the trust agreement are critical. Regrettably, the person who drafted the family trust document provided that any dispute between the trustee and a beneficiary would be resolved by arbitration. Arbitration, as you probably know, is a process whereby an individual designated by the parties in dispute or designated by the court listens to the argument of each party as to the disputed issue and determines which party’s position shall prevail.
In this case, that meant that every dispute between Junior and Rita would be resolved by a formal hearing before a person appointed by the probate judge administering the estate. The arbitrator would issue a ruling resolving every disputed matter. As one can imagine, there is no end to the number of possible disputes between two siblings that might arise. When drafting planning documents, our office does not include arbitration provisions. Family jealousies and sibling rivalries tend to occur in the best of families after a loved one has passed away. A provision in a family trust that expressly provides for the arbitration of disputes only serves to encourage and facilitate conflict.
Now back to the saga of Junior and Rita – when the first disagreement arose, Junior read the trust agreement and found the language providing for arbitration of disputes. Junior then filed a court action to arbitrate the dispute, and the judge refused to intervene. Not to be sidelined by that decision, Junior then filed an action in federal court to enforce the arbitration. The federal court determined that this was a state court matter and could not be resolved in the federal system. The litigation over enforcing the arbitration clause in the trust document is back in state court. It is unknown when it will end and how much money will be spent on attorney fees.
We advise our clients to include a provision in their trust documents, which we call the no-contest clause. That provision states that, in the event of a family dispute over the administration of the trust, a family member who wishes to challenge a trust provision is excluded as a beneficiary and therefore receives no distribution. It is incredible how often family members decide to cooperate under those circumstances.
