When designating the distribution of an estate to beneficiaries, there are basically two levels of gifting. The first tier of gifts is known as "specific gifts". The second tier is known as "the residue". Specific gifts are those items that are particularly described and set apart for a particular beneficiary. The item can be personal property, real property or cash. The residue is what is leftover after specific gifts are distributed and debts, taxes, and administrative expenses are paid.
When a client tells me that he or she wants to divide the estate between two or more persons, I sometimes advise the client to use percentages instead of dollar amounts. The following story illustrates what can go wrong when dollar amounts are specified instead of percentages. An elderly widow with no children had an estate worth around $40,000. It had been at that value for several years so she figured it would be around that value when she passed away. She wanted to leave her BFF (best friend forever) half of the estate and then divide the rest equally between her church and her favorite charity. She had a will prepared that gave her BFF $20,000 and stipulated that whatever was left after payment of expenses (the residue) would be split between the church and the charity. As it turned out, the elderly widow's sister passed away and shortly thereafter the widow passed away. The widow's sister left her $100,000 and it was paid to the widow's estate.
The widow's estate was now worth around $140,000. Even though the widow's intent was to give her BFF half of her estate, the BFF only got $20,000 because that is what the will stated. The church and the charity divided the remaining funds which, after expenses, netted them approximately $57,500 each. On the other hand, if the widow's estate had dwindled down to only $25,000, the BFF would have received $20,000 (well over half of the estate) and the church and charity only $2,500 each. The best way to approach the situation would be a simple stipulation that the estate would be divided 50% to the BFF, 25% to the church and 25% to the charity. That way, the overall plan of distribution would have been preserved. Of course, when a person wants to make a gift of a certain amount of money, regardless of its proportionate value, the dollar amount should be spelled out.
Another important consideration when making specific gifts is the possibility that the subject of a specific gift may not be in the estate at the time of death. I've seen particularly harsh results when a person gives a particular piece of real estate to one child and the residue of the estate to another child. If the property is sold before death, the child who was supposed to get the real estate will likely end up with nothing. Careful drafting of the estate plan can avoid this result and still achieve the client's goal.
© 2013 by Marlene S. Cooper. All rights reserved.