Saad Dawabshe, 31, his wife, Reham, 27, and their 18-month-old son Ali were killed in the attack when settlers set on fire their home in the village of Duma in Nablus in July 2015.
Their firstborn son, then four-year-old Ahmad, was the sole survivor and sustained severe burns to over 60 percent of his body.
On Sunday, the Central District Court in Lod (known as al-Lydd to Palestinians) approved a plea deal between the settler's lawyers and the state prosecutor's office under which he was cleared of the murder conspiracy charges.
As part of the plea bargain, the suspect - whose name has been withheld - pleaded guilty to conspiring to commit a crime motivated by racism.
The indictment was modified to specify the crime as arson, and not murder, as had originally been the case.
Under the deal, the settler, who was a minor at the time of the attack, would not serve more than five years in prison in connection with the murder.
He is still facing charges in relation to three other ideologically motivated incidents, including the torching of a Palestinian taxi in Kafr Yussuf, the burning of a warehouse in Aqraba and vandalism in Beit Safafa.
"This deal proves the complicity of the Israeli judiciary in this horrible crime," Nasr Dawabsheh, a spokesperson for the family, told Anadolu Agency.
"This deal is unfair and encourages the settler gangs to commit more crimes," he warned.
Last July, the Lod District Court released the defendant to house arrest, less than two months after it threw out several of his confessions because they were allegedly extracted under extreme duress by interrogators of the Shin Bet security service.
Israeli security agency Shin Bet believes it has the primary suspect in the Dawabsheh attack, a settler by the name of Amiram Ben Oliel, under arrest. His investigation is ongoing.
Dawabsheh said the family would pursue all legal measures to bring the perpetrators to justice.
"We do not trust the Israeli judiciary but we are forced to pursue all legal measures before Israeli courts before going to international courts to bring the perpetrators to accountability," he said.
"The International Criminal Court (ICC) does not accept cases unless all legal measures are pursued before local courts," he said.
SOURCE: AL JAZEERA