Probate's Alka-Seltzer: The Family Settlement Agreement
A Family Settlement Agreement (FSA) is an agreement signed during the probate or trust administration by all of the heirs and persons receiving real estate or personal property from an estate. The contract sets forth how an estate's property should be distributed differently from how the deceased wanted it to go. Most of the time, a decedent's will be probated exactly as it reads. Sometimes it is handy for the executor to have an FSA in the executor's pocket, however.
An FSA can be used to overcome the effects of a poorly drafted will or mistakes. Others have called the family settlement agreement a magic wand for resolving probate disputes. There are few probate ills a properly drafted FSA cannot cure.
Examples: (1) A decedent’s will leaves out the ability of the executor to perform his or her duties for the estate without buying an expensive bond. Or the executor cannot sell land without going through getting a court order. Most properly drafted wills and trusts allow for executors to serve without a bond and without going to court to authorize sales of property. A simple FSA is drafted that has all the heirs agree that no bond is necessary, and if necessary, the executor can sell the land without going through a court. A bond is meant for protection and so long as all the heirs sign the agreement and the agreement is not unfair, the probate court usually does not care about those issues.
Assume Dad’s will make a simple mistake. It gives two sons, A and B, a section of ground for each, but gives each son the wrong acreage. Blackacre has a great bass pond on it, and Whiteacre is great deer hunting land with plenty of cover. A is a hunter and B is an avid fisherman. But in Dad's will, A gets Blackacre while B gets Whiteacre. The sons are disappointed when they see Dad’s will. Each got what the other wanted. A and B are the only heirs, so they agree in a Family Settlement Agreement to swap ground. While they could perhaps trade the ground after the probate, there might be different tax consequences to a trade of real estate.
Suppose a husband and wife are each in a second marriage. Both have adult children from first marriages. Husband dies first, his will leaves everything to children. Under Kansas law, the second wife can claim a family allowance -- $50,000 and the use of the house, which is claimed as her homestead. However, Wife does not like western Kansas and she would rather live near her children in Missouri. If she moves, she loses the family allowance, her homestead, and has nothing to show for the marriage and the move to Missouri. Husband’s children are unhappy because the home is on a 160-acre tract of irrigated farmland, the most valuable asset of the estate. In a family settlement agreement, the children and the second wife can agree that, in lieu of the family allowance, the wife can receive annual payments from the estate for X years sufficient to allow her to purchase a modest home near her own children. The children can sell the farm home and irrigated land, use a portion of the proceeds to purchase the annuity that guarantees the wife’s annual payments. The remainder of the estate is distributed.
The probate judge does not have to approve or disapprove of the agreement. Because the document is a contract, if all the heirs at law (and persons who are not heirs but who get something from the estate) sign the agreement, and it otherwise meets the other requirements of a valid contract, it is filed with the Court and is a binding agreement. The probate judge is primarily concerned that if there are debts against the estate that the available funds pay the debts. Otherwise, the judge has no chips in the FSA matter unless the agreement is very unfair to someone or there are later claims of undue influence or coercion.
An FSA also protects against heirs who spend their inheritance and think they should have gotten more. (They signed the agreement; they cannot renege on the agreement after the fact.) Most FSA's have a provision in them preventing appeals as part of the deal.
Moreover, perhaps the decedent cut out one of the children from his will and that child is threatening to fight the probate of the will. He will allege Dad was incompetent at the time the will was made. If the will is determined to be invalid, the probate reverts to an intestate probate (administration of the property without the guidance of a will). That changes everything. The heirs to the will must decide whether the better part of valor is a nasty probate fight and defending Dad’s will against the outcast son, or a family settlement agreement that includes everyone.
The key is using the FSA at the right time. The decedents will be determined in a testamentary document is entitled to be followed. However, if it isn't practical, then an FSA is available. In any case, you should have your own attorney review a proposed family settlement agreement for you before you sign. You may have rights you are not aware of.