What Is an Estate Settlement Agreement?
The estate settlement agreement is a widely used and accepted method for the final settlement of a decedent’s estate. The estate settlement agreement usually follows the decedent’s appointment of personal representative, the completion of the personal representative’s standard duties and reporting , and the distribution of the assets.
The settlement agreement is designed for the purpose of relieving the personal representative of his or her liability for acts done in his or her capacity as personal representative. The unknown claim provision protects the personal representative against claims which might relatively suddenly arise after distribution of the property to the distributees. The release exonerates the personal representative from personal liability for acts done in his or her capacity as personal representative. The release also is intended to preclude any lawsuits based upon any matters which might have come up before the closing date, barring the distributees from asserting claims against the personal representative based upon personal dealings separate and apart from the administration of the estate.
Essential Elements of an Estate Settlement Agreement
An estate settlement agreement includes a variety of key elements, covering a number of essential issues that need to be resolved during the estate settlement process.
Asset Distribution
The settlement agreement should include, in as much detail as possible, a distribution of assets. A list of all the assets and their approximate value should be created, and any item in dispute should be clearly labeled as such. Family heirlooms or other personal effects are often the most complex items to distribute, as the personal value can vary from person to person. When discussing what to do with these belongings, consider who in your family might enjoy or appreciate each item.
Debt Closure
In many cases, individuals will have outstanding debts when they pass away, including credit card bills, mortgages, personal loans, auto loans and business debt. The estate settlement agreement should include a list of the debts that need to be addressed, and how those debts will be settled (i.e. paid in full, paid over time through installment payments, negotiated down, etc.). It’s also a good idea to outline how any debt collections that may occur after the death are to be handled.
Executor Responsibilities
Your estate settlement agreement should include a description of what will be expected of the executor throughout the settlement process, as well as a list of any changes that will be made to the executor’s job as part of the settlement. For example, the executor may not have been the one responsible for handling the finances of the estate, but it is likely that person would take on that responsibility once the process begins.
One of the most important duties of the executor during the estate settlement process is filing taxes. Your estate settlement agreement should outline the executor’s responsibilities when it comes to not only personal returns, but also on estate tax returns and, if applicable, gift tax returns.
It’s also important for an estate settlement agreement to list what happens after the process is complete. Who will hold the copy of the estate settlement agreement? Will it be filed somewhere? Payable-on-death instructions may also need to be included in your estate settlement agreement, depending on what is appropriate for your situation.
Creating an Estate Settlement Agreement
The majority of estate settlement agreements are drafted by litigants in the course of settling an estate. Once an estate has been settled, and with it all claims between the beneficiary and the fiduciary, it is formalized in a written agreement, signed by the parties, and then presented to the court for approval. The agreement is referred to a master or special referee for consideration. The master or referee is charged with the responsibility of reporting to the court and making recommendations concerning approval of the settlement agreement. This process is predicated upon a clear understanding by the parties of the material terms and conditions of the agreement together with a well-founded belief that the agreement represents the best possible resolution.
In settlement conferences, considerable time is spent before court in negotiating the terms of the agreement. At the conclusion of those negotiations, and upon reaching the parameters of an agreement, the drafting process may commence. It should be noted, however, that in most instances, attorneys on both sides of the case are engaged in the drafting process, often prepared by their clients. The least ideal situation is drafting a settlement agreement which requires approval by a court, when the agreement has been drafted solely by the attorneys representing the parties to the agreement. This is because the drafters may try to justify and validate the agreement without knowing the personal circumstances of the beneficiary. It is critical that whatever the intent of the parties is, there is a clear and unequivocal expression of the beneficiary’s desire, as well as an adequate explanation of the motivation of the fiduciary, in order to substantiate the purported purpose of the agreement. Because the court’s approval is necessary for the agreement, the question will inevitably arise from the court, what was the beneficiary’s motivation for entering into the agreement, and what is the fiduciary’s motivation for its proposals? In the process of drafting settlement agreements, both parties should realize that they may be called upon to present their positions, if necessary, at a hearing, in support of their agreement.
Very often, the parties involved in the drafting process do not have that opportunity, and the attorneys become the spokespersons for the parties. If the beneficiary has a claim against the assets of the estate, then that general information should be included in the agreement. The beneficiaries should include in the agreement the terms and conditions of resolution of the claim along with any other claims the beneficiary may have against the fiduciary. In such cases, the beneficiary is the party benefiting from the settlement. Presumably, that beneficiary understands whether a claim exists, or whether one could reasonably exist. Whatever the circumstances from which the proposed agreement arises, the parties should not overlook the necessity of filing the agreement with the court for its approval. If another beneficiary exists who has not entered into a settlement agreement, or for whom the fiduciary seeks a determination that the beneficiary’s interests should be divested, then obviously that beneficiary should be notified and afforded an opportunity to oppose the agreement. If the agreement is reached with the knowledge of an unborn or unascertained beneficiary, then the provisions of the Pennsylvania Orphan’s Court Rule that apply to those beneficiaries should be followed. Such rules provide for notice and any objection to be filed by such parties.
Common Estate Settlement Issues
An executor who has not been instructed carefully and completely may get away from the direction of the instructions. The instructions must be obeyed, but the rules of executor choice and change of executor may be less than clear. It is not unusual for a seasoned estate attorney to be called upon to correct executor errors which can be corrected if early in the case. This takes considerable time and effort – especially if property has been moved and appraised by an inexperienced appraiser so as to spawn value arguments.
Confusion arises because the provisions of the will do not match the provisions of a prior trust that has not been revoked or changed or is incomplete. The drafting of the will should have been submitted to the drafting attorney who prepared the prior trust and obtaining the correct signature – a common mistake is not obtaining the signature of the trust’s independent lay trustee. Another frequent error is failing to obtain the signature of the testator on the trust change prior to death. This mistake renders the change ineffective and the confusion is not easily cleared.
Insurance – some insurance agents have withheld the insurance policies from the executor without good cause. The insurance contract is a valid one and subject to the discharge of the executor. Sometimes the insurer will offer to pay the death claim only if the executor will release all claims against the insurance company – whether valid or invalid. Since the executor is bound to serve without personal gain, as a fiduciary. Only the attorney for the executor should be entering into settlement agreements.
Some lawyers will attempt to disentail the executor from power by an incorrect argument that the executor has been "disabled" by virtue of a disability or incapacity. The rules of law are clear that bankruptcy, criminal conviction, divorce or seizure of estate do not disable an executor. In addition, the dissolution of the marriage does not affect the validity of the will provision.
The Executor and Estate Settlement
After the death of a loved one, you may suddenly find yourself in the situation of being named the executor or personal representative of an estate. If you have never been through the estate settlement process before you are probably unaware of the duties and responsibilities associated with being an executor or personal representative. Lacking such knowledge, you may not realize that even if you were not specifically named as executor in the decedent’s Will or otherwise, you very likely hold the legal designation of "personal representative" under Florida law. Florida law makes executors and those similarly situated subject to a host of rules and requirements and failure to properly comply with these rules and requirements may expose you to personal liability. You may not know that certain requirements must be strictly followed when incurring expenses , selling estate assets, and distributing estate assets. Distributing assets too soon, for example, may create potential future liability for you and the surprise liability may be significant. Similar issues can arise if real property is sold at a discount or valuations and/or appraisal fees are not obtained. Executors and other personal representatives generally have a fiduciary duty to all beneficiaries and creditors to act in the best interest of the estate. Though you should not be expected to know everything about being an executor at your loved one’s passing, it is imperative that you hire someone who has the expertise necessary to help you fulfill your duties. Hiring a professional who is experienced, such as a CPA, or probate lawyer to work with you as you settle the estate can help protect you from personal liability, future claims, and major headaches.
Legal Issues Within Estate Settlement Agreements
In addition to the non-legal considerations explained above, there are also legal considerations that should be taken into account in an estate settlement agreement. To the extent possible, these should be resolved before entering into the binding agreement, although the same principles (res judicata and collateral estoppel) may apply whether the agreement is reached before or after litigation.
The question of jurisdiction is important to the enforceability of a settlement agreement. A person whose domicile was allegedly changed in order to confer jurisdiction over the Surrogate’s Court should beware of claims that the change was invalid for purposes of the equitable relief sought in a settlement agreement. This is especially so in view of the strong policy of the state of legal residence of the decedent to apply its own law and adjudicatory rules in an overall scheme for protecting the state’s citizens and fulfilling its obligations to them (and to other states who have reciprocal statutes).
It is also important to note that in most courts outside the five boroughs of New York City, including Nassau, the Surrogate Court is not vested with subject matter jurisdiction over issues of construction arising under wills as to ownership interests in property. Due to the avoidance of subject matter jurisdiction, the approach followed by most Surrogates in Nassau is to require parties to a dispute regarding title matters to submit to binding arbitration, an approach that has been upheld in Town of Hempstead v Corbett, NYLJN 5/19/04 P. 22 col 1 (citing Matter of Davidson, NYLJ 10/4/96 P. 27 col 1 [Sur Ct, Brooklyn]; Matter of Appel, NYLJ 5/15/91 P. 28 col 4 [Sur Ct, Bronx]). Where the parties to an estate settlement agreement agree that a court proceeding will not resolve a construction issue, and that they will instead go to arbitration, such an agreement is enforceable outside the Surrogate’s Court (see Matter of Mackay, NYLJ 8/30/99 p. 30 col. 3 (Surrogate Brusco, Dutchess County)). Notably, however, the Thirrd Department has not upheld a Surrogate’s undertaking to submit a construction issue to arbitration in an agreement entered into by a judge who is not a surrogate (as compared with a Surrogate’s private contract of this nature not connected with a case pending before him). Matter of MacClary, 269 AD2d 215, app dismissed 94 NY2d 919.
The concept of "res judicata" encompasses "a claim which was part of a final determination or judgment in a prior action." Those who enter into a settlement agreement are at risk of some other party in the action asserting the settlement agreement as res judicata or as collateral estoppel in a future action. The matter which was decided in the first case must have been "(a) between the same parties and (b) in respect of the same subject matter" as the second case. Kremer v Chem. Constr. Corp., 52 NY2d 259 (1981). It may appear, on initial analysis, that there would be no risk of a later challenge, since there may be no further proceedings involving the parties. However, this is not necessarily true.
Consumers of legal services and practitioners should be aware of the relatively new phenomenon of estates that are "settling their tax affairs" before settlement of all estate litigation. For example, IRS Form 706 (estate tax return) may be filed well before litigation or settlement of the estate is complete, but final payment of estate taxes is not due until nine months after the decedent’s date of death. This period is sometimes extended to fifteen months, and could be extended further to twenty-one months if agreed to by the IRS and the Executor. However, in that period of time, issues concerning the administration of the estate may be clarified or changed through the entry of an agreement between the beneficiaries or through an agreement by the beneficiaries to allow the fiduciary to administer the estate as set forth in the agreement.
Note that tax payers have the right with respect to appeals, to the United States Court of Federal Claims, the United States Court of Appeals for the Second Circuit, and the United States Tax Court, to file a petition for review within ninety days of the mailing of the notice of deficiency or a notice disallowing the claim for credit or refund (26 USC 6512). Even if the ninety day period has expired, the taxpayer may file a claim for credit or refund (26 USC 7422 (a)) within three years after the later of the time the return is filed or the tax is paid. In 26 USC 6324, the U.S. tax lien attaches to all property and rights to property, whether real or personal, belonging to the taxpayer. The tax lien does not reach gifts made after the filing of the estate tax return, but included in the gross estate, nor does it reach gifts of specific property made in lieu of particular bequests. It is important to also note that the Virginia Plan (i.e. Virginia Code 64.1-196.2) will have no effect with respect to the exemption of estate and inheritance taxes under 15 USCA 2210 (f) where a trust, in which the decedent created a power of appointment for the benefit of the spouse, is funded by the decedent’s estate.
The forces that delay or prevent the settlement of an estate are manifest in the recent decision of In re O’Gara, 2 Misc 3d 160 [Sur Ct, Nassau, Dec. 29, 2003], where the retaliation effect of a single beneficiary of a decedent’s trust after the passing of the decedent’s spouse has continued litigation for an extended period in two counties, Nassau and Suffolk. While the idea of a settlement agreement might have appeared very attractive to the fiduciaries who have spent a great deal of time and money complicit in the retargeting of other parties who have already settled, these same fiduciaries cannot be expected to accede to terms that do not protect their own interests. Unfortunately, when such self-interest and conflict of interest arise, suitors for the terms of a settlement agreement are far better advised to attempt to come to the court of the fiduciaries’ choice for approval of the agreement, or to come with more than the praise of their own accomplishments.
The Advantages of a Properly Drafted Estate Settlement Agreement
The most important thing to know about Estate Settlement Agreements is that they create certainty in the administration of the estate. These agreements can save time, money and most importantly, diminish or even eliminate family conflict.
I have been able to use these agreements to settle Will contests before litigation is commenced. In other words we have an "agreement" between all interested parties before we have to go through all the costs and delay’s associated with filing a Will contest in Surrogate’s Court.
Why does this type of agreement work so well?
By referring to an extensive list of documents that are provided to the executor, the agreement sets forth and creates certainty with regard to what assets are owned by the estate and where they are located.
Are there any shortcomings?
If you are just starting with the estate settlement process , then an Estate Settlement Agreement probably does not make sense. If you and the family members start off on the right foot, you could ultimately agree to an Estate Settlement Agreement. But those situations are rare and all too often once the Will is submitted to Surrogate’s Court the family members are at odds with one another. If the estate is contested you should probably consult with an experienced Probate attorney who drafts these documents and helps you negotiate an Estate Settlement Agreement.
While these cases are very fact specific, I have found that the more difficult the estate, the more the parties appreciate the Estate Settlement Agreement. We have had clients tell us that (without a written agreement) the executor would not have been able to satisfy various beneficiaries of the estate.