Family Settlement Deed- Why, When And How It Is Formed
Family Settlement Deed- Why, When And How It Is Formed

What is a Family Settlement?

According to the Halsbury’s Law of the United Kingdom, 4th Edition, Volume 18, paragraph 13, the concept “Family Settlement” or “Family Arrangement” refers to an agreement made by members of the same family with a view to preserving the family property or compromising disputed or doubtful right. Family settlement can also mean an agreement formulated by members of the same family to preserve the peace of the family without necessarily approaching a court. To make the agreement legal, it is important that the family members draft the agreement in form of a deed, ensuring that it features the term “family agreement” in the deed.

Owing to the importance of family settlement, this article will look at its objective, advantages, as well as, essential requirements. Without further ado, let’s set the ball rolling.

Important Conditions To Form A Family Settlement Deed

The following are the important conditions that must be fulfilled before a family settlement deed can be effectuated:

  • There must be a rival claim or disputes between family members which would be settled by allocating the properties equitably among the claimants.
  • The dispute may not necessarily be in respect of Property alone, other areas of consideration are assets, shares, claims, family feuds, and rights enjoyment with regards properties, among other areas
  • The dispute could also be a prolong threat against a family member or a situation where family members cannot meet physically.
  • It could also be a controversy, assertions, rival claims, denials or a genuine dispute.

Most family disputes would have been resolved amicably without leveraging a family settlement deed, but for the personal ego of individual family members. The law is very clear on the issue of family settlement. It is not meant to massage the ego of a single-family member but for the general interest of the family.

Other important conditions to consider are that the family settlement must be:

  • Honest
  • Bonafide
  • Voluntary
  • Not be induced by undue influence or coercion, and fraud.
  • The family members must have interest, claim or an antecedent title.

 

REASONS A FAMILY SETTLEMENT DEED SHOULD BE ENTERED-

The following are the reasons why a family settlement deed should be drafted:

  • For the preservation of peace
  • For the preservation of Property
  • To avoid unnecessary litigation
  • For the preservation of family honor

 

BENEFITS OF PREPARING A FAMILY SETTLEMENT DEED

The following are the benefits or advantage of effectuating a family settlement deed;

  • A family settlement is not regarded as a transfer of right hence, the issue of capital gains tax won’t even arise.
  • A family arrangement is not a gift
  • Provision for clubbing is not applicable
  • The family’s wealth will be distributed equally instead of a few members of the family highjacking the wealth.
  • Ensuring goodwill amongst family members

 

REGISTRATION AND STAMPING-

A family settlement deed can be orally or in form of a written document. Preparing the deed should not be for allocating future titles to members of the family, but it should be a record of the agreement between the parties involved to avoid hazy notion later in the future.

Depending on the contents of the family settlement deed, it may or may not be stamped and registered. The contents should be scrutinized to determine whether to stamp and register the document.

However, for a collateral purpose, it may be stamped but not registered. If it is not properly stamped and registered, then the family settlement deed cannot be considered for any purpose. Regardless of the situation, the purpose can be determined from the circumstances concerned.

A Court will overlook trivial issues and then rule in favour of a family settlement. In order, not to unsettle a settled dispute, estoppel is applied into service. If the family settlement is made orally, then registration is not required. Otherwise, registration is required in a written family settlement deed.

An unregistered family settlement deed cannot be tendered as evidence before a court of competent jurisdiction. A clear distinction should be made between the family settlement deed and a new document prepared to amend the terms and recitals of the family settlement deed.

In such situation, the new document will not extinguish any immovable property right but will be used to inform the court of a change in the deed, hence it does not fall in the purview of the Registration Act 1908 (Section 17(2)), and may not be registered.

The new document cannot be presented as evidence in a law court. In addition, if a family settlement deed that was supposed to be registered is not registered, the document would operate as an estoppel against the family members that want to take advantage of the deed.

According to section 2(15), schedule 1, article 45 r/w of the Stamp Act, a decree of partition is required to be stamped since it is an instrument of partition. However, a family settlement deed that divides the family properties does not require stamping. Conversely, an oral family settlement deed is not a partition instrument intended to divide the family property, hence does not require stamping and registration.

The Supreme Court held that the terms which apply to compromises in the case of strangers cannot directly apply to compromises in cases involving family settlement deed.

A family settlement deed is governed by special laws which is unique to them. The court also held that family settlement deed made orally does not require registration, except when reduced into writing.

The law is clear in that a family settlement deed cannot extinguish any immovable property right, hence it does not fall in the purview of the Registration Act 1908 (Section 17(2)), and may not be registered.

There any court verdict which recognizes the oral partitioning of properties between family members cannot be registered or executed on a stamp paper.

While a partition instrument which causes a change of legal rights with respect of a property divided among family members requires registration in line with Section 17(1)(b) of the Registration Act of 1908, writing which recorded that a partition has earlier been made is not a will but a factual statement, hence does not require to be registered.

Furthermore, a family settlement deed filed for furnishing the court with information for change of names must be compulsorily registered and can be tendered as evidence in a law court.

CASE STUDY

In Tek Bahadur v. Debi Singh and Ors.

The court considered the validity of the family settlement deed. The bone of contention was whether the family settlement deed should be compulsorily registered or not in accordance with section 17. The court upheld the validity of an oral family settlement deed but ruled that registering the deed is necessary only when the terms of the deed are reduced into writing.  A clear distinction should be made between the family settlement deed and a new document prepared to amend the terms and recitals of the family settlement deed.

 

DRAFT COPY OF A FAMILY SETTLEMENT DEED

Below is a draft copy of the deed of family settlement which contains the necessary requirements of the document.

                              FAMILY SETTLEMENT DEED 

This Deed of Family settlement is made at …………….. on this day ……… of……year of ………….. between the following family members

The details of the owners of the property and the details of the property are as provided below;

1.…………………..

2 ……………………

3 ……………………

The specific terms for the distribution of the properties shall be as provided below

1 …………………..

2 ………………….

3 ………………….

Overall terms conditions of the settlement

1 …………………

2 …………………

3 ………………….

 

ASPECT OF TAXATION OF FAMILY SETTLEMENT-

On the Transfer of property as provided under Section 2 (47) and Section 45(4) of the Income Tax Act, 1961. The court ruled that taxation on capital gains cannot be used on property that is obtained by family arrangement. Properties that are given under family arrangements cannot be considered as transfer and cannot be for capital gains. The liability to pay the capital gain tax cannot apply as provided in Section 45 of the 1961 Income Tax Act.

In the case between B.A. Mohota Textile Traders Pvt. Ltd and DCIT (Bombay High Court). The question was on the attraction of capital gains because there was no transfer as it was only a family arrangement. The settlement of the contention in the family based on the distribution of the property does no not in any way constitute a transfer. In such cases, no liability of capital gain should be established. The court ruled that the validity of a family arrangement cannot be judged based on whether the family members in the dispute that do claim a certain right to the property had, in any case, a legal right to such a property.

In Section 45 of the Transfer of Property Act, the family arrangement is not included. Moreover, the family arrangement is a partition which is automatically excluded from tax. Therefore, family arrangement consists of the settlement of shares, distribution and re-distribution of rights which cannot be taken as a transfer and cannot be taxed.

Capital gain can only occur if there is a transfer and where the transfer is absent, there cannot be a tax levy.

In accordance with Section 45(2A) of the Act, in the case that a person had in the previous year perfected a transfer in interest and securities to another and where there was a gain from the transaction, then a tax levy will be placed on the profit made because it is the income of the owner of the property and not income from a deposit.

 

DEED OF FAMILY SETTLEMENT BETWEEN THE HEIRS OF A DECEASED

This family settlement Deed is made at ……. On this ……. Day of….. 2018, between the heirs of

A …….. namely (i) B, widow of A, (ii) C son of A, (iii) D daughter of A, (iv) E son of F, the predeceased second son of A, (v) G widow of the third son of A.

Whereas, the said A died intestate at ….. on ….. leaving movable and immovable assets, as described in the schedule provided below.

And whereas the parties in the family have agreed that the contention between them should be brought to a resolution and all aspect of litigation should be eliminated.

Now this deed is witnessed as follows:

Based on the agreement and in consideration of the subject matter, the parties in this settlement deed have agreed that the property of the deceased which is the estate be shared among the heirs whose names are listed below:

2.

3.

4.

The members of the family who are the parties in the settlement hereby declare that have adopted the independent advice which has been provided by their individual advocates and that there is no ambiguity in the deed.

In witness whereof, the members of the family of the deceased who are the parties in this family settlement deed have subscribed to this agreement on the date of this deed in writing.

The Party of the first part herein is allotted the schedule ‘A’ mentioned property

The party of the second part is herein allotted the schedule ‘B’ mentioned property.

Witnesses,

1.

2.

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