What is a Family Settlement Agreement? FSA is a term used when referencing an agreement reached by all heirs about how an estate should and will be distributed. Many times, an FSA can be used to overcome the effects of an inadequately drafted will. In other instances, an FSA can be used for resolving a probate dispute. But ultimately, an FSA can cure the many effects of an indecent will.
For example, a man becomes deceased and has a second wife but has children from his first marriage. He has a will that states everything he has is left to his children. The second wife claims a one-year family allowance and the right to stay in the home where they resided together during their marriage, until she passes. Under Texas Law, she has the right to do so. However, she is unhappy because of the financial strain in which she will now endure due to his death and cannot afford the home. The woman would prefer to move closer to her children but would be without a home. The children of the man are unhappy because they feel the house is the most valuable asset of the estate, and they would prefer to sell it. This is where you would enter a family settlement agreement. The children and the wife can receive an annuity from the estate, which would be sufficient to allow the woman to maintain a modest home near her children. The children of the deceased are now allowed to sell the home, use a portion of the proceeds to purchase the annuity, and then distribute the entire estate.
The courts view a family settlement agreement as gold when dealing with probate matters. The courts do not have the authority to approve or deny an FSA. If all parties have signed the FSA and filed with the court, it then acts as a binding and enforceable contract. As long as the agreement has been properly drafted, it grants significant protection against future liability and/or claims brought forth by the heirs who will likely spend their inheritance much quicker than they thought, leaving them to believe they are due more than what was owed.
First things first, an FSA requires ALL heirs to adhere to an agreement. For example, you have one heir who is abusing illegal substances, living in their family member’s home, and not willing to do anything to enable a sale of the said home; the other ten heirs cannot decide to draft and sign an FSA without the other party involved. Meaning, you will most likely end up with a dependent administration, where a judge might let you take estate funds to make repairs that are mandatory before offering the house for sale at a price that will have to be approved by the judge. But, in the meantime, a bond is required, and you will need a formal appraisal, you will need to file accountings and more. All of this, for want of the signature, of one malefactor that is only owed 1/8th share of the estate.
A second downside would be that if in the FSA, you decide to forego an entitlement, it can later be seen as a gift for tax purposes. In other words, if you are probating or administering a taxable estate where the decedent did not invest in tax planning, you should be open to exploring other options that may benefit better at the end to all parties.
For example, if you are given an estate worth 2 million, you cannot enter into an FSA with your children to bypass the taxes owed on the property. This situation would not be binding with the IRS, and the children will then be responsible for the owed taxes. However, if there is a stepchild who was disinherited, and it can be proven that the will could constitute undue influence, then a reasonable agreement to surrender part of the inheritance would most likely be binding with the IRS.
It’s best to only enter into a family settlement agreement if your interests are fairly represented. However, if you have an attorney and a good idea of how it could all pan out, an FSA can help you save money and maintain a good relationship with the other potential heirs.
In any case, you should consult with an attorney to review any settlements before you sign. There may be rights you are unaware of that you have. The attorneys at Wilson Legal Group are prepared to aid you in your family matters and have extensive knowledge when dealing with settlement agreements. Please call our office today for a free consultation.