In popular imagination, probate is divorce court for dead people, with similar drama and expense. More often probate is like watching paint dry. Family settlement agreements are one reason why.
Rather than litigate, Texas encourages family to negotiate. On death, title vests immediately in your beneficiaries (if you left a Will) or heirs (if you did not). They are free to change your plan of distribution. They can also, legally, suppress your will, and agree not to probate it. At some point, it’s their money, not yours.
Avoid probate, or embrace it
Family settlement agreements can be set aside for fraud. Full asset disclosure is the best policy. Sometimes probate is necessary to gather enough information. In those cases, settlement follows probate rather than avoids it. Court approval of the settlement is always available but not always required.
Avoid funding a trust
Beneficiaries can agree not to fund a trust. If Dad wrote his will in 1980, he probably included a bypass trust to minimize the estate tax burden on Mom’s death. The exclusion amount then was only $161,000. That same bypass trust may be downright silly in 2020, with an exclusion amount today well over $10 million. Rather than fund the trust and bear the expense of funding and administration, the trustee and beneficiaries may agree to instead distribute the money directly to family.
Beware the taxable gift
When an agreement shifts value from one beneficiary to another, the result can be a taxable gift, with the tax payable by the donor rather than the donee. The burden falls on the one who gave up the money, not the one who received it. There are significant exceptions enabling transfers without taxation, including i) compromise and settlement of threatened estate litigation and ii) conforming distributions to decedent’s original intent. An unhappy family can sort things out tax-free, and so can the happy one if all they do is clean up Mom’s mistakes and do what she wanted.
For complete relief, every distributee of Decedent’s estate must join the agreement. That can mean all family and maybe a trustee, but not necessarily the executor or creditors. When a charity is involved, the Texas Attorney General must receive notice. Court approval is usually required for minor beneficiaries, although virtual representation by a parent is authorized for certain trust settlements.
Circular 230 disclaimer
This article was not intended or written to be used, and it cannot be used by the taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer.
Family settlement agreements belong in every probate lawyer’s toolbox. They are equally useful for happy and unhappy families, simple and complex problems, and modest and taxable estates.