About Family Settlement Agreements in Texas
Family settlement agreements are used to resolve probate litigation without trial. They can help avoid litigation costs and uncertainty associated with trial.
Family settlement agreements can be used to resolve a number of probate disputes, such as will contests, will construction suits, claims and trust modifications, etc.
They can also be used to divide probate property as the heirs and other interested parties desire. In the case of a will, a question arises as to how persons can agree to a distribution of an estate that runs contrary to a decedent’s intentions. It is possible because under the Texas Estates Code, when a person dies leaving a will, all of the estate devised or bequeathed by the will immediately vests in the distributees, subject to payment of the decedent’s debts. Put another way, the law allows heirs to do enter into family settlement agreements given that they are able to transfer property as they see fit immediately after the decedent’s death.
A family settlement agreement is also useful in situations where there are multiple wills or where a will contest is contemplated by a heir.
Family Settlement Agreements are Favored in Texas
A family settlement agreement is a preferred alternative method of administration of an estate in Texas.
Section 154.002 of the Texas Civil Practice and Remedies Code defines the Texas public policy on family settlement agreements:
It is the policy of this state to encourage the peaceable resolution of disputes, with special consideration given to disputes involving the parent/child relationship, including mediation of issues involving conservatorship, possession and support of children, and the early settlement of pending litigation through voluntary settlement procedures.
The Texas courts have affirmed this preference for settlement agreements.
Requirements for a Family Settlement Agreement in Texas
Family settlement in Texas have to address three basic criteria:
- the decedent’s right to make a testamentary disposition,
- the beneficiaries’ right to convey their rights, and
- balancing those competing rights by requiring an agreement to an alternative distribution plan.
Texas law provides several requirements that must be met to establish a family settlement agreement in Texas. These requirements include that:
- The agreement does not have to be in writing, but the terms must be clear.
- All interested parties must agree to distribution.
- All interested parties must be over 18, as a minor could not be bound by a family settlement agreement.
If these requirements are met, all beneficiaries by signing the agreement are then estopped from challenging the agreement later on, and the agreement is enforceable as any other written contract.
It should also be noted that any claims of fraud or other challenges to the agreement by the parties have to be made within four years are they are barred.
The tax implications of family settlement agreements are particularly important.
Distributions that are different than those called for in the will and/or intestacy laws can trigger taxable gain.
Also, the terms of the agreement should include language to take advantage of exchange treatment, to lock in capital or ordinary gain or loss treatment were desired, and to maximize allowable deductions and credits.
Depending on how it is drafted, the family settlement agreement can also have significant estate and gift tax consequences.