Part 3 of a 3- part series on estate administration shortcuts. View part 2 of the series.
A Family Settlement Agreement, or FSA, is a wonderful way to resolve an estate dispute after someone dies. It just needs a bit of careful handling to be successful.
To understand how and why an FSA works, you need to know a few basics about the law, especially as it relates to wills.
How Do Wills Work?
When a decedent dies with a will, Texas law does not require that the will be offered for probate. A will that is not probated does nothing – it does not pass title to property or the right to possession to property. A court must confirm that a will is valid or admit it to probate before the will has any effect.
When a decedent dies without a will, then Texas law provides who will receive the property as an heir. A court must determine who is a rightful heir.
You can see where this is going. After a decedent dies, there is either a scheme in the decedent’s will or in the law for distribution of the decedent’s estate. But what if the distributees – either the will beneficiaries or the heirs at law – do not like the scheme? Can they agree to an alternate distribution plan?
Of course, they can. Cue the Family Settlement Agreement.
How Do Family Settlement Agreements Work?
In an FSA, the beneficiaries under a will can agree not to admit the will to probate, or to admit a will that was not the decedent’s most recent will. They can agree to admit the will to probate but to change the dispositions provided under the will. They can even agree who will serve as personal representative.
If there was not a will, then in an FSA the decedent’s heirs can agree on how the decedent’s assets should be distributed.
FSA’s are often used to resolve controversies. The parties could have a dispute over the validity of a will or an interpretation of a provision of the will, who will serve as executor or administrator, or asset distribution.
An FSA should only be used if there is a legitimate controversy that is being resolved, otherwise the IRS might decide the agreement triggers the imposition of a federal gift tax on the transfers.
Once an agreement is reached, it should be reduced to writing and signed by all of the necessary parties. That, of course, brings up another question: who are the necessary parties? If the FSA is changing a will, then all of the beneficiaries must sign it. If the FSA is not to probate a will or regarding an intestate estate, then the parties must be all of the beneficiaries under each will not being probated and all of the decedent’s intestate heirs.
An FSA can even replace a formal probate proceeding, if the agreement is sufficient to transfer all of the decedent’s property.
Common Roadblocks on the Way To A Family Settlement Agreement
So what are the pitfalls of an FSA? There are several.
Third parties, such as banks, will probably not go along with the FSA terms unless the FSA has been approved by a court. So, while an FSA may render a formal probate unnecessary, it may not eliminate all court interaction.
An FSA is a contract. It is prudent to have an attorney draft the FSA contract.
The last pitfall is the inherent liability involved if a minor or incapacitated adult is a necessary party, and that person’s share is reduced by the FSA.
That aside, it is easy to see why Family Settlement Agreements are highly favored in the law.