Michelle Tucker, CPA/PFS/CFP®/JD

Loss of a Spouse

A family settlement is a legally binding agreement (or contract) made among your heirs and/or beneficiaries regarding the distribution of your estate.


Family Settlements: Estate Planning

What is a family settlement?

Legally binding agreement

A family settlement is a legally binding agreement (or contract) made among your heirs and/or beneficiaries regarding the distribution of your estate.

Since they are legal documents, family settlement agreements are subject to several restrictions. For example, they are generally not enforceable against a party if that party does not have the legal capacity to contract. If the family settlement affects the rights of minors or incompetent persons, a legal guardian generally must be appointed to represent the interests of such persons. It may be necessary to appoint a guardian to represent the interests of unborn or unascertained beneficiaries as well. In addition, these agreements bind only the contractual parties (e.g., the parties whose signatures appear on the settlement agreement). An heir or beneficiary who does not enter into the agreement may challenge any subsequent distribution unless the settlement is made for his or her express benefit. Finally, family settlements are usually subject to the Statute of Frauds. This means that the agreement must be in writing, or it will not be enforceable.

Example:  You die leaving all of your property to your three children in equal shares under your will. Your property includes income-producing property. Your children are in different income tax brackets. Your children present your will to probate along with a written settlement agreement that redistributes the property in unequal shares in order to take advantage of the lower income tax bracket of one of your children.

Caution:  Settlement agreements (as with all contracts) are governed by state law. Rules relating to family settlements vary from state to state. Be sure to check whether such settlements are valid and how they should be executed in your state.

Resolution of will disputes

A family settlement is one way of resolving a dispute over the provisions of your will. The probate court has the power to reject the settlement, but the court probably will accept it if all parties have agreed to the settlement and there is no evidence of coercion. Courts usually give great deference to family members' attempts to resolve disputes among themselves.

May help avoid probate

A family settlement can actually be used to avoid probate (the court-supervised process of administering your estate). In this case, the family distributes property pursuant to the agreement without probating the estate.

Caution:  Using a family settlement to avoid probate is probably not advisable, or even possible, when real estate is involved. In addition, when minor or incompetent beneficiaries are involved, family settlement may not be available.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2024.