What is a Non-Judicial Settlement Agreement?
A non-judicial settlement agreement is an agreement among the beneficiaries of a trust that is aimed at conserving the trust property and administrative costs, accelerating or preventing disputes among beneficiaries and applying or waiving noninterference provisions in a trust. It is defined by the law as "a written agreement" that is "entered into by any persons interested in a trust" that is "either before or after the time when serving notice would be required if a petition were presented to a court" in connection with a judicial proceeding concerning the trust. See Cal. Prob. Code, § 2810 .
The section of the California Probate Code concerning non-judicial settlement agreements contains a list of the types of matters that can be settled by a non-judicial settlement agreement. See Cal. Prob. Code, § 2810, subd. (b). The purpose of a non-judicial settlement agreement is to avoid the time and expense of a court proceeding, including discovery, trial, and post-trial proceedings, such as appeals and motions for reconsideration. In addition to overcoming the costs associated with litigation and the delays that can typically attend a court proceeding, a non-judicial settlement agreement has the advantage of enabling interested parties to resolve trust matters amongst themselves, with the guidance of their respective legal representatives, if necessary or desired.
When is a Non-Judicial Settlement Agreement Beneficial?
The ability to resolve residual trust and estate issues without the time and expense of litigation (particularly where the beneficiary consent is obtained) is a significant advantage of non-judicial settlement agreements. In fact, many of the issues addressed in non-judicial settlement agreements might not even be subject to judicial approval, but rather are typically left in the hands of the trustee and the beneficiaries, who can easily and more efficiently push these matters to settlement.
The fact that the parties can avoid the potential delays associated with the required timing of notice to beneficiaries and the Court, as well as the necessity of court approval, makes for a far more efficient settlement process than if the issues were to be resolved by way of judicial proceedings. This aspect becomes crucial when time is of the essence, i.e., in situations where investments must be sold or invested in a timely manner or real estate needs to be sold in a reasonable period of time. Often the sale of real estate or other assets on the open market must occur contemporaneously with the settlement of the remaining issues – a complicated blurring of boundaries often only addressed by way of judicial settlement proceedings. Significant interviewing or estate asset valuation costs can be avoided by reaching settlement on these issues through mediation and non-judicial settlement agreements.
The flexibility involved in the negotiation process of non-judicial settlement agreements, as compared to the rigidity of court supervised settlements, is another aspect to keep in mind in deciding the appropriate vehicle to follow for resolution of the matter. Non-judicial settlement agreements can address hundreds of issues or simply eliminate potentially unintended consequences of a holdover trustee or a prior distribution by a deceased trustee. Simple changes to distributions and distributions techniques can be made prospectively, without the same degree of court formality required in a judicial settlement.
Legal Prerequisites and Limitations
The prerequisites for the creation of a non-judicial settlement agreement are statutory in nature. The most comprehensive discussion of the capacity and authority of interested persons to enter into a non-judicial settlement agreement is set forth in Uniform Trust Code Section 111. There is no limitation in the UTC on who may serve as a party to the agreement, beyond the requirements that the party be an "interested person," and that the party have legal authority to act on the matter in which the interested person is proposing to act.
Legal Restrictions Affecting Non-Judicial Settlement Agreements
The limitations both directly and indirectly applicable to a non-judicial settlement agreement are set forth in UTC Section 111:
Capacity to Contract
In the absence of any preemptive statutory provision, a non-judicial settlement agreement is subject to the capacity requirements and contractual restrictions applicable to a conventional contract. The right to contract is generally governed by the law of the state selected by the parties in forming the contract or, in the absence of a selection, by the law of the place where the contract was executed. The Texas Probate Code requires the signature of at least two witnesses on a will or other instrument that is to be probated (T.P.C. Section 59). In contrast to the terms of the non-judicial decision statute, the statutory requirement for the signing of a witness establishes that the statutory intent in the form’s design is that it is not intended to be a will substitute but rather a trust substitute. Thus, the Legislative Council has recognized that the T.P.C. does not impose contractual restrictions on these transactions as if they were testamentary substitutes, even though the instrument might be considered as constituting an informal will. Because the statutory intent of the non-judicial settlement statute is that the parties to the process are acting consensually for the common benefit, the fact that some of the parties might be incapacitated, feel pressured into proceeding, or otherwise lack the capacity to contract under other applicable Texas law does not affect the validity of the voluntary acts of the others participating in the process.
How to Draft a Non-Judicial Settlement Agreement
To draft a valid non-judicial settlement agreement the following steps may be followed:
1. Parties to be included as signatories. To begin, the parties should consider which parties (if any) need to be included as signatories to the agreement. Parties need not be all current beneficiaries. The agreement may include some or all of the following:
(a) current beneficiaries;
(b) former beneficiaries;
(c) beneficiaries whose interests are currently undetermined; and/or
(d) fiduciaries.
2. Information for the drafting attorney. The drafter will need to receive from the client the following information to assist in drafting:
(a) full legal name and address of each party;
(b) relationship of each party to the trust; and
(c) capacity of each party to sign (trustee, beneficiary, both).
- Subject matter. The parties should advise the drafter of the specific subject matter of all issues to be considered and/or resolved by the agreement.
- Non-binding provisions. The parties should also advise the drafter whether it is desired that provisions be included in the agreement which are non-binding/inapplicable to certain beneficiaries. For instance, provisions may be included in the agreement that apply only to spouses of current beneficiaries who are not current beneficiaries themselves, individuals under a certain age, etc.
- Provisions to be included. The drafter should be provided with information regarding all personal property, financial accounts, real property, income, distribution rights, formulas, classifications and other language of existing instruments that the parties desire to clarify, amend, or change. The drafter will then conclude that the following information will need to be included in the agreement:
(a) date of the trust instrument being amended;
(b) name of the trust acting as the Grantor;
(c) date of the non-judicial agreement being executed;
(d) name of the trustee of record;
(e) name of each fiduciary and their business address;
(f) names of all current beneficiaries;
(g) names of all former or presently unknown beneficiaries;
(h) name of advisor;
(i) name of party acting as drafter of the agreement, if someone other than the trustee;
(j) name of party making amendment;
(k) language clarifying which laws govern the agreement;
(l) general statement concerning trust terms to be amended or modified;
(m) renunciation of rights to all provisions of the trust instrument(s);
(n) recitals stating grantor’s intent to amend or modify trust;
(o) specifics concerning assets to be administered by trustees;
(p) provisions to be added to the trust instruments;
(q) provisions to be deleted;
(r) provisions regarding current beneficiaries and their interests;
(s) provision concerning identifications of, or methods for identification of, future and possibly presently unknown beneficiaries;
(t) ratification of actions taken by trustees and beneficiaries;
(u) a covenant requiring cooperation of parties;
(v) a provision specifying which parties will be entitled to attorneys’ fees and costs in the event of a dispute (if any);
(w) tax saving provision requiring each party to report original value of trust property and to pay his/her own tax liability on such property;
(x) language placing burden of proof on person challenging validity of agreement;
(y) provision enabling agreement to be enforced by any party when intended to benefit all parties; and
(z) a provision assuring that the agreement will not, when possible, effect any present third party beneficiaries (to the extent such parties would be entitled to notice under California Probate Code section 21611).
6. Other information needed by the drafter. The drafter will then need to have the following information to complete the agreement:
(a) amount of trust assets;
(b) period of time to accept proposal;
(c) detailed information regarding all assets of the trust;
(d) current book value of real estate;
(e) affidavits from real property appraisers;
(f) costs of administration;
(g) attorney fee requirements;
(h) current tax attributes of the trust; and
(i) current taxes and trust return.
Typical Situations that Require a Non-Judicial Settlement Agreement
There are a variety of scenarios where non-judicial settlement agreements are commonly used and found. Below are a few examples from the contexts of estate planning, family law and business disputes.
Planning an Estate
One example of a situation where a non-judicial settlement agreement may be used is in estate planning. A common strategy in estate planning is to have your children as joint tenants on the title of your real estate. When you pass away, the property is transferred to your child by operation of law. A non-judicial settlement agreement can eliminate the concern over whether or not an action will be instituted or an order entered to provide for a transfer on death pursuant to a list. In other words, the children you selected to take your property on your death could sign a non-judicial settlement agreement to agree that when you pass away the property will be transferred to your grandchild or to a trust for their benefit.
Divorce Settlement
A non-judicial settlement agreement can be used to enforce a divorce settlement agreement that did not contain the steps to enforce the agreement . For example, where one party does not turn over certain assets in the divorce settlement agreement, where the other party has a non-enforceable right of first refusal to buy the property such that if the asset is turned over in the divorce then the other party has the right to buy it back, where one party is to take a debt but they do not comply because either colluding with the creditor to not honor the family court order or because the creditor gave the wrong information to the party seeking to take the debt.
Business Disputes
As described above, a non-judicial settlement agreement can be used to enforce a settlement agreement that is not explicit and clear about the steps required to carry out the settlement agreement. It can also be used in business disputes to settle a dispute with an owner that is leaving the business. This has been particularly helpful for clients who own their own business and have an owner who is involved in the divorce. It can also be helpful where the family business is being fought over in the divorce litigation.
Drawbacks or Pitfalls of a Non-Judicial Settlement Agreement and How to Prevent Them
Despite their utility, non-judicial settlement agreements are often misunderstood and poorly drafted. While such agreements typically have numerous advantages, they also come with certain limitations that are often overlooked or poorly addressed. If left unaddressed, these pitfalls can result in extensive litigation, loss of trust and, potentially, estate plan failure.
Non-judicial modification: Since non-judicial settlement agreements are not court documents, any third parties who are required to act pursuant to the agreement (such as trustees) are not bound to the agreement and are free to disobey it or refuse to take action they would otherwise have been obligated to take. An example of such an agreement is a non-judicial binding settlement agreement, which is an agreement usually agreed upon after a trust or will contest but before a judgment on the merits is entered. Such agreements are not supported by evidence in the record and are only somewhat persuasive. Additionally, certain jurisdictions (including those governed by the UTC) do not recognize non-judicial agreements involving trusts.
No rights of third parties: Non-judicial settlement agreements purporting to bind third parties, including beneficiaries under trust and other instruments, generally fail, with courts refusing to insert or modify language in a will or trust to reflect the intent of a non-judicial settlement agreement. A recent case involved a non-judicial settlement agreement that purported to modify and amend a decedent’s will, purportedly releasing dower and allowing a pre-marital agreement to be admitted to probate. The Court of Appeals found the court could not accept the petition because it was based on the terms of the non-judicial settlement agreement, which itself was an untested agreement made without written consent of the parties. Also, a court may refuse to enforce a binding non-judicial settlement agreement if some subsequent circumstances have occurred that render the agreement inappropriate. For example, the death, incapacity, or incapacity of one of the signatories. Such occurred in another Minnesota case, when one of the parties to a settlement agreement died around the time the court was set to review the agreement. The court refused to approve and enter the settlement agreement as an order, and instead ordered a three-day trial on the underlying relative’s petition to revoke letters testamentary that contained allegations amounting to a request for removal of the personal representative.
Who signs the agreement: There are many instances in which persons other than the fiduciary will need to sign a non-judicial settlement agreement. The question is whether that person must first be removed from the fiduciary office or whether such removal can be couched as part of the same pleading that incorporates the settlement agreement.
Duties of successor fiduciary: It is important to recognize the legal duties of a fiduciary, which are different from those of a party to a contract. While parties to a contract have an implied duty to act in good faith to perform their part of the agreement, fiduciaries have an affirmative duty to act in the best interests of the people whose assets they control. If a fiduciary has been dismissed from his office, only to see a conflict between him and the successor fiduciary, the successor fiduciary may have an ethical obligation to notify the probate court.
Silent non-signatories: A silent non-signatory can still be bound to a non-judicial settlement agreement. It is always best practice to at least confirm whether or not interested third parties will agree to be bound by the settlement agreement.
Is a Non-Judicial Settlement Agreement Right for Your Situation?
Determining whether a non-judicial settlement agreement is right for you will depend on your unique circumstances. Even if you do not think a non-judicial settlement agreement is right for you , consult with your attorney to ensure you are not waiving your legal rights.