What is a Non-Judicial Settlement Agreement?
A non-judicial settlement agreement is a binding agreement in a Trust or Estate matter that generally does not require the intervention of the Court. In essence, a non-judicial settlement agreement is a contract among interested parties. The main difference between a judicial and non-judicial settlement agreement is that the non-judicial agreement does not require involvement of the Court. In New Jersey, the non-judicial settlement agreement must be authorized by statute, and a former estate administration statute has been incorporated into the New Jersey Uniform Trust Code under Title 3B:31-64.
The purpose of the non-judicial settlement agreement is to provide the flexibility, without the necessity of the Court, for interested parties to modify the language of the Trust or Will as follows:
- Appoint or remove a trustee;
- Direct or prevent the exercise of a power of appointment;
- Determine a question of interpretation;
- Consent to a particular action by the trustee;
- Direct the trustee to refrain from performing a particular act;
- Determine any natural person’s father and/or mother;
- Relinquish a power of appointment;
- Consent to decant , amend, or revoke a trust;
The form and content of the Non-Judicial Settlement Agreement may follow a simple format that includes the following:
- Title of the document;
- Names of the parties -the settler, the trustee, and the beneficiaries;
- Name of the trust and date of the trust document;
- Citation to specific statute authorizing the document;
- Specific identification of the subject(s) of the document; and
- The specific directives of the agreement (for example:
Two examples: A non-judicial settlement agreement is helpful when there is a desire to make small or minor amendments to the document to avoid litigation in court. For example, language in the Trust document might need to be amended because it is found to be an error and/or ambiguity. Perhaps the trustee wishes to resign and someone agrees to serve as successor trustee (e.g., family member or family lawyer) without having to go to Court and incur defeat the purpose of the non-judicial settlement agreement.
Benefits of a Non-Judicial Settlement Agreement
The primary advantage of a non-judicial settlement agreement is that it can be performed without the burden and costs associated with obtaining a court order. Unlike courts, where the procedures and protocols can be very time consuming, a non-judicial settlement can be drafted and executed quickly once all parties have reached an agreement.
Courts are used when trust representatives and interested persons cannot agree on issues of trust administration. Unfortunately, litigating over trust issues can create distrust amongst trusts and estate beneficiaries which could lead to major issues in the long run. If a court order is required, it could take months or years for a decision to be made. A non-judicial settlement on the other hand, can usually be obtained in a matter of weeks or even days.
It is not unusual for beneficiaries and other interested persons to agree to allow a trustee to make certain distributions. Many times a trustee will seek a court order to approve certain distributions. However, if all beneficiaries agree and consent to certain distributions, it makes sense to avoid the court process and save time and expense. A non-judicial settlement can also provide relief from the trouble and expense of defending against a dispute.
Non-judicial settlements provide entities such as personal representatives, trustees and conservators with more flexibility to modify the terms of a trust, retirement account, estate, etc.
Unlike court supervised settlements, a non-judicial settlement is not public, creating a layer of privacy surrounding the affairs of the beneficiary or decedent. In some instances, parties may elect for a non-judicial settlement for that very reason.
When to Use a Non-Judicial Settlement Agreement
This non-judicial settlement agreement statute is great in all of those circumstances, but it is particularly valuable in probate and trust cases. Many people are reluctant to file a will in the probate court for fear that it will create family discord (this is particularly true of blended families where children or grandchildren may be disinherited). The ability to settle the issues privately under a non-judicial settlement agreement is a huge deterrent to all of these potential problems, and we are seeing many of them across the state.
In a non-judicial settlement agreement, it is not necessary for any of the devises to agree. Therefore, in the above example, the first wife can go ahead and agree that the will is valid, nothing is changing with regard to her child, or her children or other grandchildren, are then entitled to 100% of the estate, because there is nothing anyone can do to undermine that agreement. So the three children collectively can have 50%, the two grandchildren can receive 25%, and the will is valid so that the one child of the second wife can receive 25%. As a probate lawyer, I have essentially created the same result as if this were a big, litigated fight, and it took me four days of mediation to do that.
The same can be said with partner disputes. I am currently involved in a situation with two partners where the partnership is not a family business, but private parties, and they cannot agree on how to distribute assets. It is easy for me to just get all of the parties to sit down with me (instead of the probate court), and we can just make an agreement about how the assets need to be divided, and then I can prepare it and submit it to the court.
There are no issues regarding attorney’s fees, because the agreement itself would take care of that. So the benefit in mediation (with the use of a non-judicial settlement agreement) is that these situations can easily be dealt with, and resolved without need for a court hearing, litigious expense, and court involvement – which are all what people really want to avoid when possible.
Key Terms of a Non-Judicial Settlement Agreement
Non-judicial settlement agreements must contain certain key elements to be effective. One of the most common requirements is for a non-judicial settlement agreement to be consistent with the express terms of the governing instrument. In other words, the non-judicial settlement agreement can’t change the express terms of the governing instrument. In the case of a trust, such an agreement might provide that the trustee can sell a particular piece of real property owned by the trust without the necessity of court approval. However, such provision cannot provide that the trustee can sell all real property owned by the trust to the sole beneficiary without court approval because such a provision is inconsistent with specific language contained within a typical trust which provides that specific court approval of the sale must be obtained before real property can be sold by a trustee.
Another common element is the agreement cannot violate any policies contained in the state’s probate code. Typical policies that give rise to a "violation" include those that are meant to protect third parties such as petitioner’s or creditors with respect to the creditor’s rights against the assets of the estate. As noted above, a non-judicial settlement agreement cannot modify the terms of the instrument under which the trustee inherited. A non-judicial settlement agreement can be used to "compromise" a contested trust accounting. A fiduciary may use a non-judicial settlement agreement to obtain a release of its liability. A fiduciary getting a release cannot do so with the expectation that it will be able to come back to the beneficiaries later and seek a reformation of the release when an adverse situation arises. A non-judicial settlement agreement may be completed without notice.
Legal Issues and Concerns
Non-Judicial Settlement Agreements (NJA’s) can be an important factor in simplifying the administration of a trust or a probate estate. However, they can also expose unsuspecting Intermediaries to liability if they are not properly crafted and executed. This is particularly true if the NJA purports to transfer assets that are not actually owned by the trust or estate, or that are subject to a specific devise. It is essential for both the Trustee and the Intermediary to understand the legal context of the action being agreed upon in the NJA, and to develop a clear understanding of all of the underlying facts that brought about the need to enter into the NJA.
California Probate Code Section 2112 provides that any person or entity may petition for court approval of a NJA. However, NJA’s are not something that has been carefully legislated. Rather, the statute was enacted in response to a particular case. As a result, there is not a lot of authority regarding the scope of the statute, and there are many areas of law that need to be taken into consideration before entering into an NJA. Improperly executed NJA’s have been successfully challenged. The case of Estate of Mehl, 213 Cal.App.4th 1030 decided the issue of whether a NJA can modify an existing trust or estate if it makes a distribution that is different from the terms of the trust or will. The Court did not allow this to happen, and allowed the challenged gifts to be upheld despite the prior NJA. There are many other issues related to the entry of a NJA that need to be considered. For example, will the NJA bind subsequent beneficiaries, or will it be subject to being overturned by future beneficiaries? What if the petitioners do not have the unanimous consent of all interested persons? Will the NJA create a new obligation on a beneficiary that is subject to a constructive trust? If so, will the beneficiary know about their new legal position? This is particularly important for any trust beneficiary that will receive property subject to a constructive trust. Will the NJA modify the beneficiaries’ rights without their knowledge? If one person petitions to strike down a provision of a will , will it impact all beneficiaries who were disinherited due to that provision? Will it create an obligation to recapture assets that could be subject to further tax?
These are just some of the questions that need to be raised when an NJA is being proposed. Since there are no cases where an attorney was sanctioned pursuant to Cal. Pr. Code ยง17211, it’s clear that whoever is petitioning for a NJA would have to be incredibly egregious to fall into a trap of such severity that the law punishes them as such. This does not mean that an attorney can be lazy and operate under the premise that he would simply have to be grossly negligent for band practice to expose themselves. Rather, these rules are in place for a reason: the successful prosecution of a suit to "unwind" the NJA can be very expensive. Although the attorney is not going to be responsible for the costs, the beneficiaries will almost certainly demand it be paid out of their distribution. Unfortunately, even with an NJA in place, there is no guarantee that the beneficiaries are going to actually receive that money. As a result, attorneys will generally have to advise their clients that they are not guaranteed payment, and there is a real risk that they may be left empty handed.
When entering into a non-judicial settlement agreements with a client, we recommend advising the client of the risks involved. The consideration paid to the attesting witness could impact his or her testimony later in an attempt to challenge the NJA. When representing the trust, the client could change the terms of the NJA at any time without the attorney’s consent. Where authorized by the terms of the trust or the law, the attorney can require the client to pay the costs of filing the NJA with the Court, including bonds, filing fees, publication services, conservator and guardian fees (if any), and executor fees. Finally, see if the NJA can be slightly altered to consider the fact that clients may be expecting to be paid even after signing the non-judicial settlement agreement.
How to Draft a Non-Judicial Settlement Agreement
Before drafting a non-judicial settlement agreement amongst the interested parties, the following elements should be considered:
- Do not create any conditions in the agreement that purport to limit the statutory authority of a trustee, an agent under a power of attorney or an executor of a decedent’s will, for example, if there are pending, ongoing or contemplated tax controversies between the IRS and the estate of a decedent;
- Include a recitation of the exact provisions of the applicable statute under which the nonjudicial settlement agreement is being entered into (e.g., Delaware’s Protective Provisions for Non-Judicial Settlements of Trusts) with a heading or caption to the statute. Certain jurisdictions may require that a recitation of the statute be contained within the agreement or as an exhibit, appendix or attachment to the nonjudicial settlement agreement in order for the parties to avail themselves of the provisions of the applicable statute. As always, refer to specific State law requirements;
- Identify the parties to the agreement, as well as the section of the statute under which the agreement can be made (if applicable), as well as a broad grant of authority;
- Make certain that all parties to the agreement have capacity to execute the agreement. If a capacity issue exists on the part of one or more parties to the non-judicial settlement agreement, it is best to obtain a court order approving the settlement of the dispute, so that the settled issues will be binding on the incapacitated party, as a matter of law, through a court approved settlement;
- Make certain that the appropriate parties sign the agreement. If the aggrieved party is a minor, or is deemed incapacitated under the applicable law, make sure that the stipulation is signed by a legal guardian or conservator. Also, if the aggrieved party is under the age of 18, a legal guardian ad litem approval may be required. If the aggrieved party is dead, make sure that the appropriate parties entitled to act in her or her stead pursuant to the relevant laws execute the nonjudicial settlement agreement;
- Where applicable, obtain a consent order, by all parties involved, approving the form of settlement agreement at issue, so that all parties are bound by the terms of the agreement, as a matter of law;
- While not required, consider giving notice to the interested parties of the terms of the nonjudicial settlement agreement. This is particularly true outside of trust matters, where a third party, such as a bank, broker, accountant, etc., is a party to the settlement. It may also be appropriate to give notice to a non-party such as the IRS in a tax matter; and,
- Although it is not always required, consider having a third party mediator assist with the drafting and resolution of settled issues that involve numerous parties. The parties may find that the assistance of an independent mediator is needed to function as a "referee" in the event that one or more of the parties to the agreement cannot agree on all of the terms of the nonjudicial settlement agreement.
Common False Beliefs Regarding Non-Judicial Settlement Agreements
Although non-judicial settlement agreements can greatly simplify the use of directed trusts, they are not the universal solution to every problem. Here are three myths that are commonly associated with these agreements:
Myth: A non-court settlement agreement is the best way to appoint a trustee for an even-handed trust.
Truth: This use of a directed trust makes sense when the directions are likely to come from a single trust beneficiary (or a small group of beneficiaries), but not when multiple beneficiaries have different ideas about how future distributions should be made. In such cases, there is no obvious solution to how the trust will be administered on behalf of a single beneficiary. In such a case , a corporate fiduciary may be the best choice.
Myth: A non-court settlement agreement is an appropriate way to move nonqualified assets into a trust that will exempt them from creditors.
Truth: If the original owner was the grantor of the trust, the assets have never been in the trust and the transfer could be challenged as a fraudulent transfer. If this is not an issue (for example, the original owner was not the grantor of the trust), nonetheless it is not clear that the new trust would provide adequate creditor protection since it is not long-term in nature. A much better creditor protection solution is a DAPT (which is a long-term trust) or an LLC.
Myth: Non-court settlement agreements can be used to transfer noncontributing assets out of a credit shelter trust.
Truth: The IRS disallowed a transfer of such assets (unlike the transfer of an income interest) in PLR 201309048.