Family Settlement Agreement Made Prior to Testator’s Death Invalid

On March 6, 2024, the Iowa Court of Appeals found that a family settlement agreement was invalid. The agreement was executed prior to the testator’s death and two of the signers had predeceased the testator. The court found that a family settlement agreement is not binding on the heirs of the deceased beneficiaries. It also found that beneficiaries must wait until their interest vests and cannot prematurely disclaim an inheritance by entering into a family settlement agreement. 

Facts

Lorraine and Cloy Schultz owned farmland in Clayton, Allamakee, and Fayette Counties. They did not co-own any farmland; the ground was owned either by Cloy or Lorraine. In 1998 they executed mirror-image wills that gave a surviving spouse a life estate with the remainder interest being held by their four children equally. Blaine, one of their children, farmed the ground with Cloy. Cloy died sometime before 2003.

In July 2003, Lorraine went to her lawyer with Blaine and changed her will. In the 2003 will, Lorraine gave Blaine four times the acres compared to her other three children. Lorraine also entered into a sixteen-year farm lease with Blaine around this time. Rent was $70 per acre per year.

The three other children did not know of the 2003 will until 2014. In the summer of 2014, all four children and Lorraine met with an attorney to see if the 1998 will could be restored. The attorney met with Lorraine individually and determined that she did not have the testamentary capacity at that time to change her will. The lawyer suggested that all four children enter a Family Settlement Agreement (FSA). The four children chose to enter into an FSA where they agreed to “execute all necessary documents to see that the property [Lorraine] has at the time of her passing is divided equally among us.”

Lorraine died in January 2019. Two of her children, including Blaine, predeceased her. Lorraine’s 2003 will was submitted to probate, along with the FSA agreement. Lorraine’s daughter Annette was appointed executor. Annette began to rent the farmland to her family for $100 per acre per year. She also paid her husband $50,000 from the estate for land improvements in the waterways, terraces, and fence lines. 

In April 2021, Annette filed the final report for Lorraine’s estate. In the proposed distribution, she followed the distribution scheme of the FSA. Each child or their heirs received 25%. Blaine’s children objected to the distribution and challenged the validity of the FSA. They argued that they did not sign the FSA and therefore could not be bound by it. They also filed an objection claiming Annette’s lease of the farmland and payment to her husband constituted impermissible self-dealing.

A trial was held. After the trial, the district court ruled that the FSA was “valid and binding upon [Blaine’s] heirs.” The court ordered distribution pursuant to the FSA. On the issue of executor self-dealing, the court found the rent was “appropriate” and retroactively approved the rental price and payments to Annette’s husband. Blaine’s children appealed both rulings.

Opinion

The court of appeals found that the FSA was invalid. While FSAs are allowed under Iowa law, “FSAs cannot bind hypothetical or contingent beneficiaries, who take an interest only after the original beneficiaries disclaim their interests or die.” The court further found that beneficiaries can only enter into an FSA “after the will is admitted to probate” since a beneficiary cannot disclaim an interest that has not vested. Finally, a court will only enforce an FSA where all the heirs of the estate have joined and signed the FSA.

The court found the FSA invalid for two reasons. The first reason was that the living children could not disclaim an interest they did not yet have. The second reason was that Blaine’s children were not parties to the FSA and therefore not all beneficiaries had joined and signed the FSA. The court reversed the district court’s determination that the FSA was valid and remanded the question of whether the 2003 will was valid to the district court. 

On the issue of self-dealing, the court of appeals affirmed the district court’s ruling that no impermissible self-dealing occurred. Both the rent and the payment to Annette’s husband were “self-dealing transactions that required court approval.” The district court retroactively approved the transactions in its ruling. While the court of appeals found that there was “thin” support for the district court’s ruling, its finding that rent was “appropriate” was enough to show the district court credited Annette’s testimony that the lan