The Virginia Supreme Court recently held in Boyle v. Anderson, that a Trust is not a contract. Therefore, the Trustee could not enforce the arbitration clause against the Trust’s beneficiaries.
For background, the Grantor, Strother R. Anderson, created an Irrevocable Trust to be divided among three (3) surviving family members upon his death. The Trust contained a standard arbitration clause, for “any dispute that is not amicably resolved, by mediation or otherwise.” One of the Trust beneficiaries filed a complaint alleging the Trustee/Co-Beneficiary (and family member), alleging breach of fiduciary duties as Trustee. The Trustee moved to enforce the Trust’s arbitration clause seeking alternate dispute resolution to save on legal fees to protect the Trust assets and avoid unnecessary judicial intervention – this action also honored the intent of the grantor. The circuit court denied the Trustee’s motion, and she appealed.
The appeal turned on whether the trust could qualify as a written contract or agreement under either the Virginia Uniform Arbitration Act (VUAA), or the Federal Arbitration Act (FAA). The Court held that a trust does not qualify as a contract or agreement explaining three (3) key differences between a contract and a trust:
- A contract is formed with an offer, acceptance, mutual agreement and consideration. A trust does not depend on the beneficiary’s agreement, and a Trust is a gratuitous not requiring consideration;
- Parties to a contract act freely on behalf of their own interests. Trustees owe a fiduciary duty to the beneficiaries not to themselves.
- There is no division of a property interests in a contract. A trust is an entity (not an agreement), which holds legal title, and the beneficiary has “equitable” title in an expected division of the property (“anticipated inheritance”).
Therefore, the Court declined to enforce the arbitration clause in the decedent’s trust as it does not satisfy the elements of a contract. The Court also noted that beneficiary’s action against a trustee is properly brought as a claim for breach of fiduciary duty, not as a breach of contract – as the Virginia Supreme Court made clear, a trust is not a contract!
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