A downside of the U.S. legal system is that it is relatively easy to bring a frivolous lawsuit with little consequence to the party suing. Meanwhile, the one being sued has to waste time and money to defend a baseless lawsuit. Because of this reality, a substantial component of our legal advice focuses on helping clients make choices that reduce the likelihood of conflicts and discourage parties from pursuing court action. A good example of this involves counseling clients regarding trusts. Lawsuits by trust beneficiaries are common and expensive, so we have developed various tactics to minimize the risks of trust litigation, such as the ones discussed in this post.
Unfortunately, under liberal pleading and discovery standards in the U.S., plaintiffs only need to provide minimal allegations in support of their claim in order to proceed to the next stage of litigation. Plaintiffs are incentivized to pursue a lawsuit because even if a court throws out the case, the plaintiff only suffers dismissal and has to pay their own legal expenses. However, by suing, they may have gained something by forcing the defendant to spend time and money to defend the litigation and only be able to take advantage of the situation and extract a costly settlement.
With trusts, it is not unusual for beneficiaries to sue for personal, rather than legal reasons. They see a lawsuit or the threat of one as a way to gain some advantage, have someone capitulate to a demand, or simply because of intra-family conflicts separate from the trust. As a result, it is good practice to expect and prepare for the possibility of a suit by anyone. These steps can help:
One of the first and easiest ways to lower the risk of trust litigation, or will contests, is to document and record everything you do. Do not rely on oral understandings or promises. If one party is being given money, write down what the money is for and any terms and conditions. For example, is it a loan that will be paid back, a gift, or payment for services? If a promise is made to provide funds for a specific purpose, that should be specified in the trust documents or the money should come from outside the trust. Even if other beneficiaries are aware of the loan/gift, it can cause problems later if it is not clearly documented. It can also help for the attorney to keep comprehensive contemporaneous notes during the drafting process regarding the reasons the grantor included certain provisions in the trust.
Often, individuals will set up one trust for the family. There are benefits to this such as that it requires only one trustee and tax return and may reduce fees. However, if there are multiple beneficiaries, all of them potentially have the right to sue if they have a complaint about the trust. It also leads to more friction as beneficiaries may take sides or one party tries to take advantage of other ones. By having a separate trust for each beneficiary, a beneficiary can only sue about their own trust.
In choosing a trustee, it is important to pick someone with common sense, good judgment, and an understanding of your wishes. An independent trustee is usually best, although it is more expensive because of third-party trustee fees. Choosing family members as trustees can be problematic since personal relationships can lead to conflicts and litigation. However, in some instances, it may be fine to have relatives act as trustees, provided certain protections are included in the trust. An attorney can advise regarding selecting a trustee and alternates who are less likely to cause controversy among beneficiaries.
The trust can include a provision requiring disputes to be mediated in good faith and then arbitrated if still not resolved. The arbitration clause can set tight timeframes and expedited rules regarding pre-hearing discovery. ADR is often less costly and time-consuming than litigation and is also private, which may be important for many clients. An arbitrator can even be permitted to award costs, including attorney’s fees, to the prevailing party in any potential arbitration, which further reduces the likelihood of frivolous claims, defenses, and counterclaims. An arbitration award is final and binding with limited rights to appeal the decision to a court of law.
In our next post, we’ll discuss additional tactics that can reduce the risks of trust litigation, but it is essential to get skilled legal advice to determine what is best for you. We talk with clients about their needs, goals, and family circumstances to craft solutions customized to their unique situations. If you need assistance with a trust or estate plan, contact us for a consultation.
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