ARBITRATION CLAUSES IN WILL OR TRUST

NEW YORK RULE ON ARBITRATION FOR PROBATE DISPUTES

The idea of using quasijudicial means to settle disputes is as old as the country itself. More specifically arbitration is a method that parties utilize that is usually cheaper, quicker and often with much less formality, yet still adheres to principles of fundamental fairness. George Washington famously included a proviso in his will that outlined a method to arbitrate certain disputes in the execution of his will. Certainly this was no minor matter, as President Washington was perhaps the wealthiest landowner in Virginia and by extension maybe the wealthiest American at the time.

In today’s dollars, President Washington would be worth an estimated half a billion dollars, succeeded by perhaps only President John F. Kennedy’s wealth. By the time of President Washington’s passing in 1799, arbitration was already well established in the United States. New York no longer permits arbitration in the context of a dispute over a last will and testament, as it would unconstitutionally interfere with the power of the Surrogate’s Court to adjudicate disputes involving the disposition and transfer of property of decedents, the administration of estates and probate of wills. Matter of Jacobovitz, 58 Misc. 2d 330 (Nassau County, 1968). The same cannot be said of arbitration clauses in trust documents. There is much diversity of treatment of arbitration clauses found in trust documents, with New York taking a middle of the road approach to interpretation and enforcement of arbitration clauses in trust documents. That principle, however, only applies to the application of the transfer of property via an individual’s last will and testament. It does not apply to the mediation and adjudication of disputes in trust documents controlled by New York law.

TRUSTS NOT LIKE WILLS

Given that an increasing number of trusts function similar to multinational corporations with the transfer of some or all of their assets to different jurisdictions to receive better tax rates and trustees as well as the larger system to administer the estate receiving annual fees for their services it is not surprising that trusts are beginning to use arbitration more and more often to manage disputes. Under New York law there has been a definite favoring of arbitration disputes when the dispute involves a third party to the trust. In one relatively recent case, the Surrogate’s Court took the approach that third parties, more particularly third party beneficiaries of a trust, had to voluntarily submit to the jurisdiction of the Court. In Matter of Blumenkratz 14 Misc. 3d 462 (Sur. Ct. Nassau County, 2006). In the event that the third party did not consent to the jurisdiction of the Surrogate’s Court, the Federal Arbitration Act controls.

At the same time, there is case law that indicates that if a particular arbitration clause would call into doubt the ability of a Court or even outright oust the jurisdiction of the Surrogate’s Court to adjudicate what are core judicial functions over trusts, such as judicial accounting. Estate of Proceeding for the Appointment of a Guardian for Charlotte Radcliffe, N.Y. L.J., July 20, 2007, at 36 (Sur. Ct. N.Y. County July 20, 2007). New York Courts have upheld arbitration awards in trusts even when a core judicial function was implicated, such as a determination that the trustee breached their fiduciary function, as longs as the Court retained the right to review such determination de novo.