Family Settlement Agreements Explained
A family settlement agreement is a contract amongst family members or heirs to settle and resolve any disputes before they must be decided by a court of law or after a court has issued a judgment. Family Settlement Agreements are commonly used in the context of disputes over a decedent’s estate. We see them embraced when the decedent died with or without a Will. The concept is that by resolving the dispute by settlement, costs can be avoided where litigation is not necessary given the full cooperation of the decedent’s family. Given the trauma of the loss of a loved one, both emotionally and financially, family members do not want to see the additional cost and expense of litigation. Add to that the unknown outcome from a judge who knows nothing about the family. It is often an easy choice for family members to agree to settle . These agreements are not uncommon where an estate or inheritance dispute involves a suit to account, a caveat to a will, a claim against the estate for personal services rendered to the decedent, or a wrongful death/inheritance claim involving some type of decedent’s injury. A Family Settlement Agreement is an agreement between all of the parties which in effect ignores the Last Will and Testament so that the family can decide for themselves how they want to divide the assets (as opposed to using their lawyer to argue about the terms of the Will). It reflects the decisions of the family. These agreements are a voluntary contract amongst the family members (as opposed to some decree by the Judge). The family members usually agree on the basis to ignore the Will (or agree to a different disposition) because it would not be practical for them (or the estate) to litigate over such a small sum; i.e. the cost of litigation may be more than the value of the claim. By agreement, the family settles their respective family claims against each other without the necessity of filing a lawsuit.
Pivotal Components of a Family Settlement Agreement
As the name implies, a family settlement agreement is a deal made by all of the parties to a matter that is put in writing and signed by each of the parties or their attorneys. Each particular agreement is drafted to fit the specific case and the particular needs of the parties. Most of them however, include standard language that identifies the names of the parties entering the agreement, identifies the agreement as being a full and final settlement of all issues, finds that it is in the best interest of the parties and their children, addresses the terms of child support/health insurance/other expenses, divides the property, divides the debt, makes an award of counsel fees, and provides that any orders pending at the time that the agreement is signed will be dismissed upon entry of the final judgment incorporating the agreement.
Conventional Uses of a Family Settlement Agreement
Family settlement agreements facilitate the amicable resolution of estate and trust disputes amongst family members. Once rejected alternatives have been exhausted (e.g., mediation and arbitration), resorting to obtaining a family settlement agreement can offer a preferable means of achieving finality to a dispute.
Examples of scenarios in which a family settlement agreement could be reached include:
Inheritance Disputes: Family settlement agreements may be reached to settle inheritance disputes between parties who have standing to object to a will or a codicil (i.e., interested parties who are either signatories to a will/codicil or intestate heirs under Pennsylvania law).
Division of Family Business Assets: Family settlement agreements may be utilized to divide family business assets, sometimes pursuant to a prior shareholder agreement. For example, two brothers may enter into a family settlement agreement that divides a family business into two separate business entities pursuant to that prior agreement.
Dividing Family Heirlooms: Often disagreements arise amongst family members regarding the disposition of family heirlooms. A family settlement agreement may be reached to divide certain assets, after which the family can agree to permit others to have contact with those assets.
Indemnification Claims and Distribution and Deferred Compensation Agreements: Sometimes agreements can be reached between family members to alter pre-existing distribution and deferred compensation agreements to resolve indemnification claims arising out of those agreements.
Property Settlements: Family settlement agreements could potentially resolve property or real estate disputes between family members, where real estate is owned in tenants in common fashion.
No matter what the issue at hand may be, oftentimes a family settlement agreement is a good alternative to protracted litigation among family members.
Clinical Considerations to Be Aware Of
It provides full clarity on the terms of the agreement. Given the complex nature of family settlements, it is important that all parties have a clear understanding of their respective rights and obligations. A carefully drafted family settlement agreement ensures that each party is on the same page.
The agreement can be enforceable as a contract by any party, whether a lawyer is involved or whether there is no attorney. If all parties understand the agreement and are in agreement on all material terms, an attorney may not be essential to the drafting process.
The agreement can provide for the waiver of spousal support or waiver of alimony. In certain circumstances, a party may be waiving important rights that will be binding in the future. A family law attorney can give sound advice as to the ramifications of each decision and how to best advance a client’s rights and interests.
The agreement can provide for the resolution of a complex business valuation. It is not uncommon for a business that is the subject of divorce litigation to require a full forensic accounting. Both parties can agree in advance to engage an independent forensic accountant and the respective fees that each party will be required to pay. Alternatively, they can agree to allow a judge to appoint a neutral forensic accountant.
The agreement can clarify whether life insurance policies have recourse for child support, alimony or equitable distribution. A divorce settlement agreement must address the status of the marital property. The agreement should identify whether any of the property is obtained post-matrimonial tort, whether it can be encumbered for purposes of taxes, or if proceeds can be paid to a trust.
The agreement can address which vehicle has a loan or lien. Often an automobile is purchased during the marriage. A spouse may be carrying the debt. It is important that the terms of the loan are satisfied and that the proper ownership documents are transferred.
The agreement can prevent litigation over possession of furniture, household items, personal items, artwork or personal items. In some D.J.’s determine which party can keep certain personal property through the equitable distribution process. It is common for this issue to be a contentious matter. In a family settlement agreement, the parties can decide which items they want to keep.
The agreement can identify awards of equitable distribution, alimony and child support. It is important that a family settlement agreement clearly identify what award has been made to each party. Any ambiguities will need to be resolved by the parties or the court. The result is additional litigation.
The agreement can provide for joint physical custody. A family settlement agreement can establish the terms of parental responsibility. There may be an exact schedule for the parties to share time with the child. Alternatively, the agreement can establish a joint physical custody arrangement where the parties have their role in deciding how to best care for the child.
Three parties can sign the family settlement agreement. The family settlement agreement can be signed by three parties. In accordance with N.J.S.A. 2A:34-2.1, parties can provide consent by certified execution of the agreement without court approval.
Neither party can claim that they did not know or understand the agreement. It is important that due diligence be done to insure that each party understands the terms of the agreement. An attorney is best equipped to insure that each party fully understands the terms of the agreement.
The process sufficiently insures that a party is not being taken advantage of and is receiving a fair deal. The appearance of an attorney and independent forensic accountant provides clear evidence to all parties that there was someone looking out for their best interest. This will reduce the likelihood of future litigation.
All required disclosures were completed. A family settlement agreement is a highly complex document. Parties need to make full and fair disclosure of all assets and income.
Sample Family Settlement Agreements
Family settlement agreements are widely used by family members of decedents to divide an estate. In many cases the estate is settled by a single family settlement agreement. In other cases, there are multiple family settlement agreements and/or limited purposes family settlement agreements. The following is a list of recent family settlement agreements described by the Court:
Juzwiak v. Pleasant Meadow Farms, Inc., 17 -1961 La. App. 1st Cir. 1/2/18, 242 So. 3d 1127.
Trial court judgment adopting a limited purpose family settlement agreement ordering parties to file an accounting of their status with respect to funds held in a bank account that were subject of a prior judgment. Judgment affirmed.
CRC, L.L.C. v. Micro Board Processing Inc., 18-0370 (La. App. 4 Cir. 10/10/2018)
Trial court judgment setting aside a family settlement agreement. Judgment affirmed.
In Re Succession of Toledano, 18-0169 (La. 11/07/2018)
Trial court judgment approving final accounting and distribution of funds per family settlement agreement. Judgment affirmed in part, reversed in part, and remanded.
In Re Succession of LaFleur, 17-1331 (La. App. 4 Cir . 11/7/2018)
Trial court judgment approving payment of certain expenses by the liquidators of the succession pursuant to a family settlement agreement. Judgment affirmed.
Succession of Jones, 17-0590 (La. App. 1st Cir. 10/31/2018)
The trial court found that a family settlement agreement was unenforceable against heirs who did not sign the agreement. Judgment reversed.
Kennon, McGuire, Ainsworth & Noel, L.L.C. v. Mississippi Lumber Co., L.L.C., 2018 – 345 (La. App. 1st Cir. 10/5/2018)
Judgment approving a family settlement agreement, rendering a family settlement agreement concerning the award of royalties based on the sale of land irrelevant. Judgment affirmed.
Kennon, McGuire, Ainsworth & Noel, LLC v. Mississippi Lumber Co., L.L.C.,2018 -349 (La. App. 1 Cir. 4/29/18)
Trial court judgment refusing to enforce family settlement agreement to settle dispute concerning the property rights of the second husband and wife heirs of a deceased succession representative of an estate. Judgment reversed and remanded.
Succession of Kathy R. Allison, 18-750 (La. App. 5 Cir. 10/9/2018)
Trial court judgment approving and enforcing a family settlement agreement. Judgment affirmed.
Legal Effect and Enforceability
Family settlement agreements are legally enforceable as long as they satisfy certain contractual prerequisites. As with all contracts, parties to a family settlement agreement must have the legal capacity to enter into the contract, a lawful object, and valuable consideration. Because family settlement contracts are made in contemplation of death, a contract entered into in contemplation of bankruptcy (such as a family settlement agreement with an insolvent debtor) may not be enforceable.
Parties to family settlement agreements should be aware that the failure to comply with the formalities regarding a will does not affect the validity of a family settlement agreement. However, pursuant to Texas Probate Code Ann. § 444, a family settlement agreement that has the effect of altering the terms of a will or codicil, and is not executed in accordance with the statutory requirements for the execution of a will, is not effective to authorize the change unless it is filed and admitted to probate in solemn form or properly probated. Any such agreement may be probated as a Muniment of Title to the land of the decedent. See Id. § 42. Further, a family settlement agreement subject to any condition that has not been performed at the time of probate as Muniment of Title is improper and should not be approved by the Court. See In Estate of Smith, 107 S.W.3d 3, 7 (Tex. App.—Austin 2003, no pet.). Adult parties to a family settlement agreement have the authority to enter into binding agreements without the approval of the probate court. However, if a minor beneficiary is a party to the family settlement agreement, the probate court must approve the agreement because minors do not have capacity to contract. See Harcan. v. State, 495 S.W.2d 880, 883 (Tex. Civ. App.—Fort Worth 1973, writ ref’d n.r.e.).
Pros and Cons
As with anything, there are advantages and disadvantages at play that are worthy of consideration. For this section, we’ll explore the benefits and drawbacks of entering into a family settlement agreement.
Benefits
The most significant advantage, of course, is avoiding courtroom litigation on the matter. How many times have inexperienced attorneys tried to go to court on a matter only to encounter a judge who refuses to hear the case because the matter is an issue that has been decided by the entire family? This frequently happens in cases where the issues sought to be decided are more about "who gets what" rather than "who did what to who." If a judge is on the bench, the presumption, statistically, is that there is a high likelihood the judge will end up siding with somebody on one side of the family or another . That’s not to say that family members who feel wronged will agree to take less than they feel they deserve, in most cases they will not, but if the family members come to an understanding of "who gets what" in advance, a lot of the headaches that can come later on in life are simply avoided.
Drawbacks
In some cases, it will be necessary for the judge to rule on a matter due to circumstances outside of the family members’ control. Family members may be just as unrepresented in the next generation. Over time, as the next generation interacts with each other, a certain level of friction may begin to develop. In some of these cases, it will be necessary for the next generation to fight in order to get a piece of what they feel they deserve. So not always, but sometimes, families may find themselves spending a lot more money in legal fees fighting over a property that may not even be worth what is being paid in legal fees.