What Is a Nonjudicial Settlement Agreement?
A nonjudicial settlement agreement is usually a document signed by a trustee and one or more beneficiaries of a trust that allows the beneficiaries to adjust the administration of a trust and its assets. Because it is not approved by a judicial proceeding, it is called "nonjudicial" and is usually faster and cheaper than going to court. Beneficiaries and trustees often do not wish to go to court because it’s publicly accessible and may damage relationships. Of course, confidentiality is not guaranteed, but it can be preserved by allowing the private details of administration, such as the value of assets at the time of the trust’s creation, to remain private.
A nonjudicial settlement agreement does not, in and of itself, change the terms of the trust. A trust can be modified by the terms of the trust or by the parties agreeing to modify the trust’s terms. The most important aspect of whether or not a nonjudicial settlement agreement is permissible is that none of the terms of the agreement violate a "material purpose of the trust." Determining what constitutes a "material purpose" of a trust requires special attention from a lawyer to each situation. However , the trust’s specific language often used to define a material purpose must be considered.
For example, saying that a trust shall distribute income annually to someone at a certain age creates a material purpose of a trust that the trust shall make distributions to the beneficiary annually once they reach that age. Otherwise, without that language, the beneficiary with the power to take discretion over distributions may choose to distribute to the beneficiary every three years instead and delay a distribution as long as possible. The trustee has a fiduciary duty to act in accordance with the terms of the trust. A nonjudicial settlement that goes against that material purpose, which would be the matter of an estate dispute in court, is invalid. A court can also invalidate the settlement agreement if a term of the agreement violates a matter of public policy, such as when the settlement would result in the death of an owner of an LLC.
A nonjudicial settlement agreement among the beneficiaries does not have to be all of the beneficiaries, but it cannot materially alter the interest of any beneficiary who has not consented to the agreement or effectively disinherited a beneficiary who has not given their consent.
Legal Authority and Basis
Nonjudicial settlement agreements are only as good as the law authorizing them. For probate attorneys, the relevant law is the state statute authorizing nonjudicial settlement agreements. In Florida, the statute is found in the Florida Probate Code at F.S. 736.0207. At the national level the Uniform Trust Code (UTC) authorizes such agreements for trusts.
What’s a nonjudicial settlement agreement?
Section 736.0207, Florida Statutes, entitled "Nonjudicial settlement agreements," provides as follows:
- (1) Except as provided in subsection (3), if the terms of a trust are represented by multiple trustees, the trust may be modified or terminated, and an action to restrain, enforce, or modify the terms of a trust may be avoided, on the consent of all "qualified beneficiaries" and "interested persons," which terms are defined in s. 736.0103(15) and (16), respectively.
- (2) Unless expressly prohibited by the terms of the trust, or unless a fiduciary is material adversely affected, a trustee may enter into a nonjudicial settlement agreement with any beneficiary even though the settlement affects the amount or timing of distributions of income or principal to a beneficiary, and even though a beneficiary may be more adversely affected than another beneficiary.
- (3) A trust may not be terminated, and a fiduciary, other than a trustee, may not resign or be compelled to resign, prior to the termination of the trust, by the agreement of fewer than all of the persons beneficially interested in the trust and all other interested persons affected by the termination.
- (4) By consenting to or entering into a nonjudicial settlement agreement, a trustee or other fiduciary does not act outside the scope of authority granted in the trust instrument or otherwise.
Advantages of a Nonjudicial Settlement Agreement
It is no secret that litigation is not the best way to resolve differences that arise among beneficiaries or between beneficiaries and fiduciaries. When beneficiaries are arguing amongst themselves or with a fiduciary, the animosity affects the family dynamics and their mental well-being. Virginia has taken a long, hard look at this situation and has done a great job in creating a variety of ways to utilize nonjudicial revisions to resolve trust and estate disputes and problems. In short, a nonjudicial settlement agreement is a private agreement among interested persons that modifies or terminates the terms of the governing instrument. The advantages of nonjudicial settlement agreements include the ability to save time and reduce legal costs, the savings to the estate from eliminating court fees and expenses, the ease and privacy with which settlement agreements can be approved and the ability to be creative in resolving differences. Consider these specific advantages:
Typical Uses
As indicated above, nonjudicial settlement agreements are governed by SCT 525. They are binding on all parties and on the court unless the specific statutory requirements are met for an "objection" to be filed (SCT 525.14). We have outlined several areas, below, in which they commonly arise.
Modification of a Trust
Common terms that are modified via a nonjudicial settlement agreement is a change in trustee, amendment to income and principal distribution provisions, designating and/or compensation for a successor trustee, correcting an inconsistency in the trust document, removing or adding beneficiaries, extending the duration of a trust (subject to certain limitations), and early termination of a trust or a partial early termination (such as the termination of a beneficiary’s subtrust under a separate document).
Termination of a Trust
Trusts may be terminated for waste/futility (i.e. costs of litigation and accounting likely to exceed potential benefits derived from trust property) or by the express terms of a trust. A nonjudicial settlement agreement may be used to terminate or partially terminate a trust to further its various purposes and to the benefit of trust beneficiaries.
Modification of a Divorce Decree or Separation Agreement
To the extent that the respective trust beneficiaries and/or their parents are adjusting the divorce settlement/decree, it is appropriate to use a nonjudicial settlement agreement to ensure compliance with the divorce decree or separation agreement terms as they pertain to trusts. In ORS 130.550, the statute provides that a court shall distribute trust property according to the divorce decree, subject to certain exceptions that can be overcome if all parties agree and approve of the manner of distribution of that particular asset. It is not unusual to have a divorce decree that requires the transfer of trust property to a spouse that is not a "surviving spouse" as defined by the Oregon Trust Code.
Interpretation of a Trust
It is not uncommon for the provisions of a trust document to contain ambiguities that the court may need to clarify. Nonjudicial settlement agreements provide a way for interested people to agree to an interpretation of the trust document that is different than the codicil and is not appended to the codicil as an amendment to the trust document.
Trust Tax Matters
Tax issues may be handled outside of the court with a nonjudicial settlement agreement with the trust beneficiaries or trustees amending the trust to address the trust’s tax classification.
Practical Steps to Preparing a Nonjudicial Settlement Agreement
In order to create an effective nonjudicial settlement agreement, the parties must first identify the necessary parties to the agreement. To identify the parties, the drafter must consider what parenthetical language applies to the trust that the parties wish to modify. For example, if the trust is a "revocable", "irrevocable", or "grantor", "non-grantor", the drafter will want to identify who those parties are and include legal descriptions, if necessary, in the body of the agreement. It is not helpful to list the parties as "grantor" or "trustee". Listing the parties in the body of the agreement as "My Father", "My Mother", "Brother", "Sister", and "My Dear Friend’s Name", will ensure the trust and agreement are easily identifiable in the future. Next, the drafter of the nonjudicial settlement agreement will draft the terms of the agreement. As written , the Uniform Trust Code provides for 5 specific provisions that may be modified by consent. Other terms may include: 1) Terms relating to the administration of the trust; 2) The appointment of a representative to protect the interests of an incapacitated trustee; 3) Assembly of a bond; and 4) Determination of any question of construction or interpretation under the trust. If the trust was created before July 1, 2003, the drafter will need to check the language of the trust for jurisdiction. If a Federal Court is being used to grant jurisdiction, the drafter should seek a consent of the United States Attorney General if the trust property may be deemed part of the federal estate. The drafter will also need to check if there is any legal description on the property warranting further requirements. Lastly, the nonjudicial settlement agreement should be accompanied with a consent and certificate. This will have a clause stating the consent of everyone involved in the agreement to the changes and the change to the trust. After the drafter has created the agreement and added the necessary consent, the drafter will need to ensure the signatures are notarized before filing the agreement with the clerk of the court or other body.
Potential Issues or Drawbacks
A significant potential challenge to using nonjudicial settlement agreements is that the law imposes numerous limitations on the scope of issues that can be settled. Even if the governing law on nonjudicial settlements agreements in a particular state is broad, the law regarding the particular issue may be limited. In other words, even if the general law allows for a broad range of issues to be addressed by a nonjudicial settlement agreement, the law regarding a specific issue may not allow for settlement of the issue. For example, some laws not only restrict the type of issues that may be settled to certain specifically enumerated types, but also may expressly prohibit the settlement of certain specific issues, such as the compensation of fiduciaries under the Uniform Prudent Investor Act or the submission of a question of law to a court under the Uniform Declaratory Judgments Act. In some jurisdictions in Texas, the law restricts the scope of nonjudicial settlement agreements to the administrative matters of a trust, which has a very limited definition. At least one case from the United Kingdom concluded that agreements governing the administration of a trust would be unenforceable at common law if not accepted by the court. Such a case would likely not be recognized in Texas under the Texas Trust Code.
Many laws also require the unanimous consent of the parties to a nonjudicial settlement agreement. If there are two or three or a larger number of parties to the agreement, the consent of each party may be difficult to obtain. Similarly, while most laws regard a no-contest clause to be a violation of public policy and not enforceable, the laws regarding no-contest clauses vary widely and it might not be possible to enter into a nonjudicial settlement agreement where a no-contest clause is prohibited. In some jurisdictions, the law may go so far as to make the beneficiary an interested person when a no-contest clause goes unresolved, and a no-contest clause that is too broadly worded might go unresolved as violating public policy.
Examples and Case Studies
Utilizing nonjudicial settlement agreements can significantly simplify the handling of trust and estate disputes. To illustrate this, let’s consider an example where four adult siblings discovered that their late father’s estate had a secret ledger. As the children of a prominent businessman, they learned that their father had been hiding a significant portion of his wealth from their mother and their family for decades. This discovery was made six months after their father’s passing, and they realized that several family members and individuals had been entrusted to carry out various duties on behalf of their father. Under such circumstances, all four siblings were reluctant to trust the appointed person(s) or their mother. On one occasion, one sibling was handed an envelope while visiting her mother. Believing it to be a letter, she opened it only to find that it contained a check in the amount of $100,000, which she promptly returned. Each time their mother would request for a check to be written, one or more of the siblings would question the legitimacy of the request. After much deliberation, they decided to enter into a nonjudicial settlement agreement. While it did not replace a traditional will contest, it provided a forum for them to address their differences more quickly and less expensively than a court proceeding while ensuring that the wishes and directions of their father were being followed. In another situation, a decedent had made a large estate gift to a university. As part of its gift acceptance policy, the university undertook a rigorous review of the decedent’s family to ensure that they were aligned with the school’s values and interests. The university eventually discovered that at least one relative of the decedent had experience in managing a very large family foundation. As a gesture of goodwill, the president of the university invited the decedent’s family to meet with the school’s private staff. The family was very pleased with the outcome and thanked the president for making those arrangements. The university is hopeful that they will be able to recruit family members onto the board of directors of the decedent’s estate and to have them fill out membership applications for the university’s alumni association. In yet another scenario, a family owned a duplex with a parking lot. One son used this property as part of his business. When his father passed away, this son decided that he needed sole authority over these assets because his siblings were interested in perhaps selling the duplex. Although he was not alone in wanting his father’s assets, he had the money to buy out his family, which he did.
Helpful Tips for Nonjudicial Settlements
A couple of strategic tips to ensure a successful nonjudicial settlement agreement:
(1) Documentation is Key, and Transparency is a Must. It is essential that the parties carefully document the nonjudicial settlement agreement and then commit the terms to writing. The resulting document can take the form of a stand-alone instrument or, more likely, should be incorporated by reference in the underlying governing document(s). This is particularly important since the nonjudicial settlement agreement will modify the governing document(s), and any additional terms will become binding on the association. Thus the terms of the nonjudicial settlement agreement should be clear, specific and complete. To ensure weighty binding effect, the settlement agreement should clearly show a direct reference to the provisions of the governing documents that have been modified, together with a clear statement of how the governing documents have been amended or changed. Keep in mind that under the HOA Act, the provisions of the governing documents that have been modified by the nonjudicial settlement agreement must also remain consistent with the CCIOA allowances.
(2) Be Cognizant of the Agents’ Authority and Coordinate with the Association’s Legal Counsel (If any). The HOA Act provides that a party may sign as a designated agent and may execute the nonjudicial settlement agreement on behalf of the association (as long as the statutorily defined conditions precedents are met). CCIOA provides that a nonjudicial settlement agreement executed by a designated agent will be enforceable only if the principal actually acknowledges the existence and contents of the settlement agreement. Thus , when the nonjudicial settlement agreement is executed by a designated agent, it is critical that, before the execution, the principal, or the board of directors, approves the substance of the agreement. Additionally, when CCIOA applies, only those designated agents with actual authority to execute settlement agreements on behalf of the association will bind the association. ((C.R.S. 38-33.3-317(1))
Designated agent(s) should take care to consider the limits on their authority to ensure that they do not overstep and obligate the association to unfavorable or illegal terms. As a best practice, designated agents should always coordinate with the association’s legal counsel and should closely collaborate with the association’s legal counsel when the association has common interest community real estate. This coordination is particularly important when the nonjudicial settlement agreement will dictate the association’s financial obligations. When there is a question as to whether or not the nonjudicial settlement agreement will be in the best interests of the association, the association’s designated agent(s) should consult legal counsel before execution.