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Your will can sometimes be seen as your final words to your loved ones. You may want to set out specific gifts to the people who you cherish most or who have helped you out during your lifetime. But as in life, you need to make sure you can actually afford or are able to make these gifts on your death.
Perhaps you want to leave a small token of affection to a family member or friend, such as a special painting you own, or maybe it is something a bit more extravagant such as your collector car or even an entire bank or investment account. In considering whether to leave a specific asset to a beneficiary, you need to consider what would happen if you don’t actually own that asset on your death.
Maybe you sold your collector car as you got older, or maybe the bank account you had earmarked for a beneficiary was closed and the proceeds transferred to another account. In these instances, unless you have provided for an alternative, the gift of the car or the bank account is said to have “adeemed,” and since you don’t own the asset on your death, the beneficiary will receive nothing, despite what your will may say.
Even if the specific gift is in existence at the time of your death, you need to consider whether you actually have the power to make this gift. That is, do you actually own the asset you wish to give: What if that earmarked bank account was actually held joint with right of survivorship with another beneficiary? By right of survivorship, the co-owner of the bank account would automatically receive the bank account in its entirety, again resulting in no gift left for the beneficiary named in your will. Or what if the asset is held through a corporation or in a trust rather than directly in your name? Special language or steps may then be needed in order to leave a valid gift.
If you are worried that a specific asset may or may not be owned by you at your death, you can always consider leaving a specific amount of money to a beneficiary. After all, who doesn’t love cold, hard cash?
Leaving cash legacies may seem simple, but they can pose their own problems. First, you need to consider how these legacies will be funded. You may be feeling very generous leaving several legacies to some of your friends, but what if all of your assets are held jointly with your surviving spouse? What if all your life insurance policies and registered plans are designated directly to your children?
If there are no assets that flow through your estate because they pass outside by right of survivorship or via a beneficiary designation, then your estate will not be able to actually fund these cash legacies.
The amount of the cash legacies need to be considered as well. One gift to a friend may not seem like too much money, but if you have a lot of friends and several cash legacies, this can quickly add up! When the estate does not have sufficient assets to pay all legacies, “abatement” takes place, meaning the gifts under the will are reduced to pay for this shortfall in the estate. Abatement of gifts occurs in the following order:
Because the residue of the estate is used first to pay for any shortfall, your residue could be completely exhausted in order to fund any cash legacies made under your will. You could be in a position where your cash legacies to your friends may be paid out in full at the expense of your “main” residuary beneficiaries, who may be your close family members.
Leaving gifts under your will is one of your final ways to show your loved ones how much they mean to you and to create a lasting legacy, but ultimately requires a careful consideration of a number of issues. But just as they teach us that we shouldn’t spend money that we don’t have during our lifetime, it is equally important to remember you can’t gift what you don’t have on your death.
Stephanie Battista is a Partner at O’Sullivan Estate Lawyers. She practices exclusively in estate and trust law, focusing on all aspects of estate planning and estate administration in order to provide clients with sound and helpful legal advice. She advises clients on their succession plan including wills, trusts, powers of attorney and domestic contracts. She also advises executors, trustees, and attorneys on their duties and obligations, and provides guidance through the complexities of the estate administration process as well as estate and trust accounting. This article originally appeared in the O’Sullivan Estate Lawyers blog. Used with permission.
Notes and Disclaimer
Content © 2022 by O’Sullivan Estate Lawyers LLP. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited. Used with permission.
The foregoing is for general information purposes only and is the opinion of the writer. It is not intended to provide specific personalized advice on any individual situation, including, without limitation, investment, financial, legal, accounting or tax advice. Before taking any action involving your individual situation, you should seek legal advice to ensure it is appropriate to your particular circumstances.
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