Unconscionability in the law of trusts.

AuthorHorton, David

This Article claims that trust law should recognize the unconscionability defense. It begins by noting the symmetry between trust and contract defenses and the growing consensus among courts and scholars that trusts are contracts. It sketches the leading rationales for why courts enforce promises between private actors: the theories that free exchange allows parties to maximize welfare and exercise free will. It then argues that neither concept justifies upholding a contractual term if informational defects prevent one party from observing that it sharply deviates from her ex ante desires. It asserts that the unconscionability doctrine strikes down contractual terms that suffer from precisely that defect.

The Article then explains how the unconscionability doctrine could serve the same purpose in trust law. It discusses why the policies underlying freedom of testation depart from those behind freedom of contract and provide less support for a laissez faire regime. It then challenges the unarticulated but intuitive notion that controls in the trust-creation process are sufficient to align an instrument's text with a settlor's intent. It reveals that corporate fiduciaries, trust mills, and a revitalized do-it-yourself movement have spawned "procedurally suspect" trusts: those created without attorney involvement and laden with complex terms. It then examines three common but controversial "substantively suspect" terms--exculpatory, no contest, and arbitration clauses--and shows how a trust-specific unconscionability doctrine would improve outcomes in cases.

INTRODUCTION I. UNCONSCIONABILITY IN CONTRACT LAW A. Rationales for Freedom of Contract B. Standard Form Contracts C. The Unconscionability Doctrine II. UNCONSCIONABILITY IN TRUST LAW A. Rationales for Freedom of Testation B. Unconscionability in Trust Law 1. Procedural Unconscionability 2. Substantive Unconscionability C. Counterarguments III. APPLYING THE DOCTRINE A. Exculpatory Clauses and Other Pro-trustee Provisions B. No-Contest Clauses C. Arbitration Clauses CONCLUSION INTRODUCTION

Even with the recent economic downturn, Americans will bequeath hundreds of billions of dollars a year for the next half-century--the largest wealth transfer in history. (1) As critics continue to condemn probate as slow, (2) expensive, (3) and "quite public," (4) trusts are now a staple of most estate plans. Yet after years of relative stasis, the law of trusts is suddenly in flux. In 2006, the United States Supreme Court opened federal courts to a broad spectrum of trust litigation. (5) The recently published Restatement (Third) of Trusts and Uniform Trust Code--ambitious projects that have reshaped doctrine more than merely summarized it (6)--have ushered in "a moment in time when our ideas about what a trust is, what it is for, and how to operate it are under consideration and, indeed, are changing meaningfully." (7)

One defining characteristic of this reassessment has been trust law's absorption of principles from contract law. In the last decade, scholars and courts have begun conceptualizing the trust as a "deal": a private agreement between the settlor and the trustee to manage the corpus. (8) To be sure, trust law and contract law do not overlap completely. For example, remedies for breach of trust differ from those for breach of contract. (9) Nevertheless, the analogy between trust and contract yields three important points. First, like contract law, trust law consists primarily of default rules (10)--rough estimates of how most parties would choose to resolve a given contingency. (11) Because default rules are guesses about the parties' wishes, the parties can freely modify them. (12) Second, as in contract law, not all trust law is default. A select cluster of trust rules--for example, the requisites of trust formation, or the necessity that trustees owe enforceable duties--cannot be overridden. These immutable rules are too vital to the institution of trust to be displaced. (13) Third, trust instruments, exactly like contracts, will be economically efficient. Because a trust is a "voluntary transaction between competent adults, ... [it] carries a presumption of Pareto optimality." (14) Thus, unless fraud or coercion taints the drafting or execution of the trust, and subject to the proviso that the parties cannot displace immutable rules, courts should not regulate this aspect of private ordering.

Nevertheless, despite this shared foundation, trust and contract diverge in a notable way. Contract law recognizes the defense of unconscionability: a potent exception to the tenet that courts should permit unfettered exchange. Unconscionability, which applies most often to standard form contracts, (15) lets courts void clauses that are both procedurally unconscionable (nonnegotiable and buried in fine print) (16) and substantively unconscionable (grossly unfair) . (17) Although the rule has a centuries-old pedigree, (18) it has also long been criticized. Scholars decry the amorphousness of using "fairness" as a legal criterion (19) and the paternalism of overriding a party's voluntary choice to sign an agreement. (20) Recently, however, behavioral economics has provided a new understanding of the doctrine. (21) Under this view, the rule applies where informational defects in the contracting process cause terms to deviate sharply from what one party would have chosen with better information. The procedural unconscionability prong isolates terms that may suffer from informational flaws; the substantive unconscionability element employs "unfairness" as a rough proxy for detecting terms to which the party would not have agreed had she been aware of them. Clauses that depart from an informed party's ex ante preferences will neither be efficient nor foster the party's free will. (22) By striking down these terms, the unconscionability doctrine serves vital purposes. (23)

Trust law has no analogue. Although trust and contract share defenses such as fraud, duress, mistake, illegality, incapacity, impossibility, and undue influence--not to mention the same intent-seeking mode of interpretation (24) unconscionability exists only in contract. In some ways, this is surprising. Trust rules evolved, in part, from probate, where judges play an active role. (25) One would expect to find a doctrine that empowers courts to evaluate a term's "unfairness" within the same body of law that allows courts to adjust a trustee's compensation if it "is unreasonably low or high." (26) Unconscionability, which restricts transferor autonomy, would also seem more at home within the narrow confines of trust than the free-for-all that is contract. Trust law, unlike contract law, limits dead hand control through the rule against perpetuities. (27) Trusts, unlike contracts, cannot be "capricious"; thus, a settlor cannot require the trustee to annihilate valuable property or construct a wistful statue (28)--objectives that the settlor could accomplish through contract law during life. (29) But even though trust law defers less often to transferors' wishes, it is agnostic about procedural and substantive "fairness."

On the other hand, we do not think of trusts as being susceptible to procedural or substantive defects. An attorney meets the settlor, memorializes her wishes, and revises the instrument if necessary. These circumstances--a far cry from take-it-or-leave-it standard form contracting--seem to foreclose settlor complaints about the execution process or the instrument's language. As the Illinois Supreme Court noted while rejecting an elderly widow's claim that her trust's irrevocability clause should be invalid because her attorney never discussed it with her, "[i]f such a contention had merit very few modern legal instruments could withstand attacks." (30) Likewise, because beneficiaries receive the windfall of an inheritance, they also seem to lack the right to object to procedural or substantive unfairness in the accompanying trust instrument. Perhaps for these reasons, no judge or scholar of whom I am aware has ever suggested that trust law embrace the unconscionability doctrine.

In this Article, however, I make exactly that claim. More and more, trusts are being created by unrepresented settlors who seldom grasp the instrument's nuances. This sea change is a product of three factors. First, institutional trustees dominate the market for medium and larger estates. These corporations sometimes condition their willingness to act as a fiduciary on the settlor acquiescing to their standard trust instrument (31)--a practice that is indistinguishable from adhesive contracting. Second, on the other side of the spectrum, millions of blue-collar and middle-class Americans have turned to "trust mills": companies run by nonlawyers who create low quality boilerplate instruments. (32) Third, next-generation do-it-yourself books and software have fueled a recent "boom in homegrown estate planning." (33) Accordingly, a more diverse cross-section of society is using trusts, "including esoteric trusts," (34) but "increasingly without aid of legal counsel." (35)

The contents of trusts are changing, too. The cost of working with an institutional fiduciary is often a broad exculpatory clause (36) or authorization for the trustee to use the trust's corpus to defend itself in litigation. (37) As the New York Surrogate's Court recently put it, the result has been instruments that give corporate trustees "almost unlimited powers with a minimum of obligations." (38) Similarly, mill trusts resemble standard form contracts more than testamentary instruments. To try to seem as sophisticated as lawyer-drafted documents, mill trusts can be up to one hundred pages long and include sweeping no-contest clauses and arbitration clauses. (39) Settlors almost certainly have no inkling that these provisions exist--let alone that they seriously erode beneficiaries' rights. Thus, informational defects belie the...

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