DE JULIO DEL 2013

Probate matters often breed disagreement among a decedent’s beneficiaries. Rather than battling out the issues in court (and thereby distributing a large portion of the estate to lawyers), a useful resolution is a Family Settlement Agreement.

1. Validity

All interested parties may agree not to probate a will, and/or to divide property among themselves contrary to the provisions of a will. As long as the agreement does not defeat the rights of creditors or other parties, it is valid and enforceable. In fact, “such adjustments by contract are favored by the law and the courts, and are not deemed to be an unwarranted interference with the jurisdiction of the court or against public policy. On the contrary, public policy favors them.” Stringfellow v. Early, 40 S.W. 871 (Tex.Civ.App.--1897, no writ).

The theory is that since Texas Probate Code §37 provides that title vests immediately in the devisees under a will--subject to the payment of debts, “the beneficiaries of an estate are free to arrange among themselves for the distribution of the estate and for payment of expenses from that estate.” Pitner v. United States, 388 F.2d 651, 656 (5th Cir. 1967).

2. Necessary Parties

All “interested parties” must sign a Family Settlement Agreement. An “interested party” has been defined to mean anyone having a pecuniary interest in the estate. Biddy v.

Jones, 475 S.W.2d 321 (Tex.Civ.App.--Amarillo 1971, writ ref’d n.r.e.). However, a

beneficiary need not be a party to the agreement if the beneficiary’s rights are not affected by the agreement itself. In addition, an executor who is not also a beneficiary is not an interested party. If minors are interested parties, they must have a guardian sign for them or an attorney ad litem appointed to represent them. If a charitable organization is an interested party, notice must be given to the attorney general, who shall be a party to the suit. TEX. PROP. CODE ANN. § 123.002 and TEX. PROB. CODE ANN. § 10A.

3. Court Approval Required?

Family Settlement Agreements do not need to be filed with or approved by the probate court unless:

1. The court appointed an ad litem for minors or contingent beneficiaries;

2. A trust is being modified or terminated without the consent of all the parties;

3. The guardian of the estate of an incapacitated person is a party; or

4. The dependent administrator or executor needs court approval.

Sometimes, however, the parties may wish to file the agreement of record. For example, if real estate is involved, it may be wise to file the agreement in the deed records of the county where the real property is situation to aid a future title examiner.

4. Tax Considerations

Family Settlement Agreements can alter the characterization of separate and community property and the amount of property passing to a surviving spouse and to other beneficiaries. Before entering into any such agreement, it is important to consider the tax effects of the arrangement, if any.

a. What happens to the marital deduction?

If the surrender or assignment of property pursuant to the terms of the agreement is a “bona fide recognition of enforceable rights of the surviving spouse,” then the marital deduction will be available. Treas. Reg. § 20.2056(c)-2(d)(2). However, the IRS does not allow the deduction if property passes to the surviving spouse as a result of a staged or otherwise non bona fide contest. Not surprisingly, no marital deduction is allowed for amounts originally passing to the surviving spouse under the will, but passing to others as a result of a Family Settlement Agreement. The amount of the marital deduction is determined by the actual amount passing to the surviving spouse under the settlement agreement.

b. What about gift taxes?

The IRS deems property transferred from one person to another a gift subject to gift tax unless it was a bona fide business transaction free from any donative intent. Intra family settlements are not bona fide transactions unless the claims are bona fide and settled on an economically fair basis.

5. The Shepherd Case

Shepherd v. Ledford, 962 S.W.2d 28 (Tex. 1998), also suggests an alternative to formal estate administration, although one that may have limited application. Of course, it is also essential that any family settlement agreement be carefully drafted and properly prepared in order to be enforceable and to accomplish its intended purpose.

One of the issues before the court in the Shepherd case was the standing of the decedent’s common-law wife to bring a medical malpractice suit on behalf of the estate for which no administration was pending. Although the decedent owed more than the minimum two debts when he died, there was uncontroverted evidence that by the time of trial all debts had been paid. The evidence also showed that the decedent owned no real property and had no children, and, therefore, his personal estate vested immediately in his surviving spouse pursuant to Texas Probate Code § 38(b)(2). The surviving spouse had made an agreement with other family members permitting her to take the minimal assets of the

decedent’s estate as his only heir. The court held that on the facts of the case and because of the family agreement no formal administration was necessary, and the surviving spouse had standing to bring a survival claim on behalf of the decedent’s estate as his heir. See Shepherd, 962 S.W.2d at 33-34; see also Pitner v. United States, 288 F.2d 651, 656 (5th Cir. 1967) (approving no administration when the devisees under a will make an agreement to distribute the estate and pay the bills); In re Estate of Hodges, 725 S.W.2d 265, 267 (Tex. Civ. App.-Amarillo 1986, writ ref’d n.r.e.); Estate of Morris, 577 S.W.2d 748, 755-56 (Tex. Civ. App.-Amarillo 1979, writ ref’d n.r.e.).

X. WHO INHERITS WHEN THERE IS NO WILL?

A person’s “heirs” are those persons, including the surviving spouse, who would inherit property under the laws of decedent and distribution if the decedent died without a will. Those persons are described in the Texas Probate Code § 38 and § 45, but the following are some of the most common scenarios:

A. Spouse alive, and all surviving descendants of Decedent ARE