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Family Settlement Agreement under Texas Law

A Family Settlement Agreement (FSA) is the term used for an agreement reached by all of the heirs as to how an estate should be distributed.

Oftentimes, an FSA is used to overcome the effects of a poorly drafted will. In other cases, it is somewhat like a magic wand for resolving probate disputes. There are few ills a properly drafted FSA cannot cure.

For instance, suppose a man dies with a second wife, but with children from his first wife. His will leaves everything to his children. The second wife claims a one-year family allowance, and the right to live in the man’s spacious and valuable home until she dies. She has that right, under Texas law. However,she is not really happy, because she knows she cannot afford to continue to live in the home, and would rather move near her own children, but if she did, she would have no place of her own to live. The children are not happy because the home is the most valuable asset of the estate, and they want to sell it now. Enter the family settlement agreement. The children and the wife can sit down together and agree that, in lieu of the family allowance and life estate, the wife can receive an annuity from the estate which would be sufficient to allow her to maintain a modest home near her own children. The children are now free to sell the home, use a portion of the proceeds to purchase the annuity, and distribute the entire estate.

A family settlement agreement is solid gold in probate court. The Court does not even have authority to approve or disapprove it. All the parties sign it, it is filed with the Court, and it acts both as a binding and enforceable contract. If properly drafted, it’s excellent protection against future liability and claims brought by heirs who spent their inheritance much faster than they ever thought they would (and now that they think about it, they really should have gotten more).

I have used family settlement agreements to quickly wrap-up cases that gave every indication of becoming nasty, protracted battles that would have made no one but me and the other lawyer happy. Actually, that is a myth. Most attorneys, myself included, hate cases where we can see our client is going to be unhappy at the other end, no matter how much money we might earn off their unhappiness. That is why I am such a fan of family settlement agreements. There is a much higher possibility that my client, and everyone else involved, will feel that justice was done.

Of course, all legal tactics, no matter how good, do have a downside. What are the downsides to a family settlement agreement?

  • First, they require the agreement of ALL the heirs.

If you have one heir who is, for example, strung out on drugs, but living in his great aunt’s house, and not willing to do anything which would enable a sale of the home, the other 19 heirs cannot come together without him and sign a family settlement agreement. Instead, you will most likely end up with a dependent administration, where the judge may or may not allow you to take estate funds to make badly needed repairs before offering the house for sale, at a price which must first be approved by the judge, and in the meanwhile, you will need a bond, and will need a formal appraisal, and will need to file accountings and . . you get the idea. All for want of the signature of one miscreant with a 1/32 share of the estate.

  • A second downside, is that if you give up something that you are clearly entitled to in a family settlement agreement, it may be seen as a gift for tax purposes.

A widow with a community estate worth 4 million cannot, for example, enter into a family settlement agreement with her children in which she changes her husband’s will to leave his half of the property directly to their children, thereby saving her heirs over $700,000 in taxes. Well, she can give her children one half of the property. And the court will allow it And it will be binding on her and the children. But it will not be binding on the IRS, and the taxes will still be owed. HOWEVER, if the same widow has a step child who was disinherited, and the will was made recently under circumstances which could arguably constitute undue influence then a reasonable agreement to surrender part of the inheritance to the step child most likely would be binding on the IRS, but that is going beyond the scope of this blog.

Suffice it to say, if you are probating or administering a taxable estate where the decedent did not invest in any tax planning, you will want to explore all your options.

All of this is not to say you should enter into a family settlement agreement in which your interests are not fairly represented. However, if you have an attorney, and a good idea of how the issue would come out, and what the costs might be without an agreement, they can not only save you a lot of money and time, but sometimes a family settlement agreement may also help you maintain a good, or at least a bearable, relationship with the other potential heirs. Or sometimes not.

In any case, you should have your own attorney review a proposed family settlement agreement before you sign. You may have rights you are not aware of.

If you would like to see an attorney to discuss a family settlment agreement, please contact my office:

Please call my Woodland office and set an appointment.

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