Wills and Trusts

Wyatt, Tarrant & Combs, LLP


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Agent Authority to Enter Arbitration Agreements within Nursing Home Admission Forms – Updated

By Mary Elizabeth Anderson

Problems with arbitration agreements and nursing homes are not new, and whether an agent acting under a power of attorney can bind the principal to an arbitration clause when admitting the principal to a nursing home was the subject of an eReport article in February 2014.

On May 15, 2017, the Supreme Court of the United States (the “Supreme Court”) entered an opinion that reversed in part and vacated in part a Kentucky Supreme Court decision regarding an agent’s authority to enter into nursing home arbitration agreements.

The Kentucky Supreme Court consolidated three cases to determine “whether, based upon the language of the particular power-of-attorney instrument, an arbitration agreement was validly formed between the respective nursing home facility and the resident whose interests were thereby affected.” In two of the cases, Wellner and Clark, the court determined the agreements were not valid because Continue reading


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Effects of limitations on Crummey Withdrawal Rights: in terrorem clauses and Mandatory Arbitration provisions

What is the effect of a mandatory arbitration and in terrorem clause on Crummey rights? In CCA 20120826 an issue was whether purported withdrawal rights were sufficient to create a present interest. The CCA states:

To be a present interest, a withdrawal right must be legally enforceable. For example, if a trust provides for withdrawal rights, and the trustee refuses to comply with a beneficiary’s withdrawal demand, the beneficiary must be able to go before a state court to enforce it. See Cristofani v. Commissioner, 97 T.C. 74 (1991); Restatement of the Law of Trusts § 197 (Nature of Remedies of Beneficiary); Bogert, Trusts and Trustees Vol. 41, § 861 (Remedies of the Beneficiary and Trustee).

As a matter of public policy, the federal courts are the proper venue for determining an individual’s federal tax status, and the federal courts are not bound by the determinations of a private forum (such as Other Forum) concerning such status. Alford v. United States, 116 F.3d 334 (8th Cir. 1997). Likewise, as a matter of public policy, a State court will not take judicial notice of a private forum’s (or group’s or sect’s) construction and determination of State law pertaining to a trust agreement, such as the Trust in this case. Cite 2. These determinations are strictly within the purview of the State courts. Cite 3; Cite 4.

Under State law, a trust clause may prohibit a beneficiary from seeking civil redress. Cite 5. Although the State legislature made a public policy decision to allow a beneficiary to make certain inquiries without fear of risking forfeiture, these “safe harbors” are not relevant here. Cite 6.

Under the terms of the Trust in this case, a beneficiary cannot enforce his withdrawal right in a State court. He may only press his demand before an Other Forum and be subject to the Other Forum’s Rules. Notwithstanding any provisions in the Trust to the contrary, the Other Forum will not recognize State or federal law. If the beneficiary proceeds to a State court, his existing right to income and/or principal for his health, education, maintenance and support will immediately terminate. He will not receive any income or principal for his marriage, to buy a home or business, to enter a trade, or for any other purpose. He will not have withdrawal rights in the future, and his contingent inheritance rights will be extinguished. Thus, a beneficiary faces dire consequences if he seeks legal redress. As a practical matter, a beneficiary is foreclosed from enforcing his withdrawal right in a State court of law or equity.

Withdrawal rights such as these are not the legally enforceable rights necessary to constitute a present interest. Because the threat of severe economic punishment looms over any beneficiary contemplating a civil enforcement suit, the withdrawal rights are illusory. Consequently, no annual exclusion under § 2503(b) is allowable for any of the withdrawal rights. See Rev. Rul. 85-24, 1985-1 C.B. 329; Rev. Rul. 81-7, 1981-1 C.B. 474.

Is the ruling correct? In Rev. Rul. 83-108 notice was not given in the year of the gift at all, but rather was given in the next year. No notice is arguably a greater obstacle to the exercise of withdrawal rights than mandatory arbitration or an in terrorem clause. On the other hand, may a cut off of rights be so substantial as to de facto limit a purported withdrawal right?

Turney P. Berry
Louisville, Kentucky


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Arbitration Provisions

Arbitration Provisions

Is a trust provision requiring that the trustee and beneficiaries submit to binding arbitration enforceable on the beneficiaries?  Not in California, held the California Court of Appeals in Diaz v. Bukey, 125 Cal.Rptr.3d 610 (Ca. App. Ct. 2011).  The court followed an Arizona decision which it summarized as follows:

In Schoneberger v. Oelze (2004) 208 Ariz. 591, 96 P.3d 1078, the court construed an arbitration provision in a trust substantially similar to that involved here. We find its reasoning persuasive. In Schoneberger, two trust beneficiaries filed separate, but similar, lawsuits against the settlors and trustees of the trusts asserting claims of breach of trust, conversion and fraudulent concealment, mismanagement and dissipating trust assets. Among other relief, each beneficiary demanded an accounting.

Defendants answered, denied the allegations of wrongdoing and alleged that the beneficiaries’ claims were subject to mandatory arbitration under the Arizona arbitration statute. The defendants asserted the arbitration clauses in the trust documents constituted provisions in a written contract requiring arbitration, and although the beneficiaries were not signatories to the trusts, they were nevertheless obligated to arbitrate as third party beneficiaries. Alternatively, they contended the beneficiaries were equitably estopped from objecting to arbitration as they were affirmatively seeking benefits under the trusts. The beneficiaries opposed defendants’ motion to compel arbitration. They argued the arbitration provisions in the trusts were unenforceable because the trusts were not contractual agreements. They also asserted that, as nonsignatories to the trust documents, they had never agreed to arbitrate their claims against the defendants.

In Schmitz v. Merrill Lynch, 939 N.E.2d 40 (Ill. App. 2010) the trustee entered into a “client relationship agreement” with an investment advisor that contained an arbitration provision.  The provision did not bind the beneficiaries because the beneficiaries were not contractually bound to the investment advisor.

In Rachal v. Reitz, 2013 Tex. LEXIS 348 (2013), the could held that an arbitration clause in trust was enforceable against non-signatory beneficiaries.  A.F. Reitz established a trust for the benefit of his son, John, and appointed himself as initial trustee and Hal Rachal Jr. as successor trustee. After A.F. Reitz died, Rachal became trustee of the trust.  John sued Rachal as trustee alleging breach of fiduciary duty by failure to account and looting of the trust for personal gain. The trustee moved to compel arbitration of the suit under the arbitration provision in the trust. The trial court denied the motion and the trustee appealed.

On appeal, the Texas Court of Appeals sitting en banc (with four dissenting justices) affirmed on the grounds that: (1) the trust document did not satisfy the requirement for a valid contract; and (2) the settlor’s intent does not transform the trust into a contract to arbitrate between the successor trustee and the beneficiary.

The Texas Supreme Court reversed the Court of Appeals and held that the arbitration clause was enforceable, on the grounds that:  (a) Texas courts enforce the settlor’s intent over the objections of the beneficiaries that disagree with the trust terms; (b) The Texas Arbitration Act applies to written “agreements”, and the Texas legislature could have limited the Act to “contracts” and did not do so, therefore the legislature intended to include all agreements and not just contracts; (c) the Act does not define “agreements”, but the common definition is a manifestation of mutual assent; (d) mutual assets to an arbitration provision exists where a non-signatory party has obtained or is seeking substantial benefit under an agreement through the doctrine of “direct benefits estoppels”; (e) deemed assent exists here through direct benefits estoppels because the trust beneficiary did not disclaim his interest in the trust, did not challenge the validity of the trust, and attempted to enforce his rights under the trust and sought the benefits provided to him under the terms; (f) a valid underlying contract is not required to apply direct benefits estoppel; (g) the claims in this case were within the scope of the arbitration provision, which required arbitration of “any dispute of any kind involving this Trust or any of the parties or persons connected herewith”; and (h) the other trust provisions that exonerate the trustee from liability do not defeat the arbitration provision which applies “notwithstanding anything herein to the contrary” and could apply where a claim is filed in court and the direct benefits estoppel doctrine does not apply (which presumably would mean only claims by non-beneficiaries under the court’s reasoning).

Turney P. Berry

Louisville, Kentucky