The single most significant paradigm shift shaping the day-to-day reality of estate planners today is not the latest incarnation of our federal transfer-tax system; it’s the “non-probate revolution,” which refers to the use of non-probate assets to opt out of our state operated system of probate administration. If you ask the average estate-planning professional why he or she thinks it’s a good idea to “avoid probate,” the costs, delays and lack of privacy inherent to our state operated system of probate administration will likely top the list. As real as those concerns may be in uncontested probate proceedings, they take on epic proportions if litigation breaks out.
In fact, I would argue estate litigation poses a much greater risk to family wealth than the focus of much estate planning today, which is taxes. Today, the vast majority of estates owe no estate tax at all. By contrast, the potential wealth-destroying risk posed by estate litigation is exponentially greater and widespread. According to a study cited by the WSJ in a piece entitled When Heirs Collide, it’s a risk that actually impacts close to 70% of all families:
Roughly 70% of families lose a chunk of their inherited wealth, mostly due to estate battles, according to research conducted over two decades by the Williams Group, a San Clemente, Calif., firm that helps families avoid such conflicts.
Until fairly recently most estate-planning professionals (and their clients) assumed there was nothing you could do to improve the process for adjudicating estate disputes once they broke out, all you could do was focus your planning energies on prediction and prevention. However, we all know there are some disputes that simply cannot be prevented, no matter how hard we try or well we plan. We aren’t doing our jobs as counselors if we don’t plan for that risk.
Statutory Authorization of Mandatory Arbitration Clauses in Wills & Trusts:
So what’s to be done? Think mandatory arbitration. In Florida there are no jury trials in contested probate or trust proceedings, so these cases lend themselves to privately funded and managed alternate dispute resolution or “ADR” mechanisms, including mandatory arbitration. The trouble with arbitration clauses in wills and trusts is that historically it was unclear if a client could impose mandatory arbitration on the beneficiaries of his or her estate/trust. In Florida this uncertainty was statutorily eliminated in 2007 with the adoption of F.S. 731.401, expressly authorizing mandatory arbitration clauses in wills and trusts, as I previously reported.
Mandatory Arbitration Clauses Respond to what Matters Most to Our Clients:
Mandatory arbitration clauses respond directly to the issues our clients most want us to focus on as planners. WealthCounsel’s 7th Annual Industry Trends Survey looked at the business challenges faced by estate-planning professionals in 2013 and provided insight into what motivates clients to engage in planning. According to the survey the top two reasons families engage in estate planning revolve around privatizing the wealth-transfer process (i.e., “avoid probate”: 59%), and the threat of inheritance disputes (i.e., “minimize discord among beneficiaries”: 57%). In my opinion, the single most powerful tool we have as planners responding directly to both of these concerns is the mandatory arbitration clause. These clauses privatize the dispute-resolution process and minimize discord caused by an overworked and underfunded public court system.
Mandatory Arbitration Clauses are Already Integral to the Wealth-Management Landscape:
The fine print of your clients’ brokerage or investment account customer agreements will almost always contain a clause that says he or she agrees to resolve any future disputes through mandatory arbitration, largely through the forum operated by the Financial Industry Regulatory Authority, Wall Street’s self-regulatory organization, known as FINRA. (For a typical example see this Fidelity brokerage agreement.) If arbitration clauses make sense for resolving disputes involving your clients’ investment accounts, why don’t they also make sense when it comes to resolving disputes involving their estates and trusts? (Yes, I’m looking at you corporate trustees!)
Opting out of our overworked and underfunded public court system:
By privatizing the dispute-resolution process the parties can, to the extent permitted by F.S. 731.401 (and there are limitations), opt out of the structural limitations inherent to an overworked and underfunded public court system that asks our judges to carry thousands of cases at a time.
The case-load figures we see in our larger counties may be appropriate for uncontested proceedings, but when it comes to that subset of estates that are litigated, these same statistics (confirmed by personal experience) make it glaringly clear to me that we aren’t doing our jobs as estate planners if we don’t anticipate — and plan accordingly for — the structural limitations inherent to an overworked and underfunded public court system. One important aspect of that kind of planning should be “privatizing” the dispute resolution process to the maximum extent possible by including mandatory arbitration clauses in all our wills and trusts.
Arbitration may not be perfect, but at least you get some say in who’s going to decide your case and what his or her minimum qualifications need to be. And in the arbitration process (which is privately funded) you also have a fighting chance of getting your arbitrator to actually read your briefs and invest the time and mental focus needed to thoughtfully evaluate the complex tax, state law and family dynamics underlying these cases (a luxury that’s all but impossible in a state court system that forces our judges to juggle thousands of cases at a time with little or no support). If you have any real-world personal experience litigating large estate cases in our underfunded and overworked state court system, it’s this point that’ll likely tip the scale for you in terms of recommending arbitration clauses. It does for me.
Sample Arbitration Clauses:
Sample clauses are often the best way to understand in concrete terms how a general concept gets applied in the real world. At my firm we use the Lawgic drafting software (which is excellent), and rely on their form of arbitration clause (which I helped develop).
Two of the Florida attorneys instrumental in passage of Florida’s statute expressly authorizing arbitration clauses in wills and trusts, Bruce M. Stone and Robert W. Goldman, also co-authored a 2005 ACTEC article providing sample arbitration clauses entitled Resolving Disputes with Ease and Grace.
And last but not least, another drafting resource is AAA’s Wills and Trusts Arbitration Rules and Mediation Procedures. AAA provides a sample arbitration clause of their own and their rules help flesh out the issues you can expect to come up in this kind of arbitration proceeding. Here’s an excerpt from the introduction to the AAA rules:
Every year billions of dollars are administered by executors and trustees. Wills, transferring property to beneficiaries, are the most frequently used instruments, but family trusts, charitable trusts, and commercial trusts are growing in use and scope. Occasionally, disputes arise over whether those funds are being properly administered and whether the governing will or trust is being interpreted correctly by the fiduciary. . . . Many of these disputes can be resolved by the use of mediation or arbitration, processes that provide parties with an alternative means to resolve their disputes. . . . Arbitration is an effective way to resolve these disputes privately, promptly, and economically, utilizing as the arbitrator a lawyer or lawyers with substantial experience in the area of wills, trusts and estates.
. . . The AAA Wills and Trusts Arbitration Rules and Mediation Procedures provide that the arbitrator, at his or her discretion, may provide for the protection of unrepresented parties, including the use of a guardian ad litem to represent any minor, incapacitated, or unborn beneficiary . A written reasoned award is required under the AAA Wills and Trusts Rules. Testators or settlors can require that future disputes be arbitrated by inserting the following clause into their wills and trusts in most jurisdictions.