(Courtesy of Haas & Zaltz) Even those individuals who have not yet created an estate plan have certain goals in mind regarding their legacy. They may have had conversations with their loved ones regarding what they want to happen, including discussing detailed disposition of their assets upon death. Often, these goals reflect plans to reward a beneficiary for their devotion to the business or even to follow through on a promise to gift a particular asset to a beneficiary.
When an individual creates a plan like this, it may seem straightforward; however, these “simple” bequests can prove difficult, if not impossible, to implement for a variety of reasons. For example, if the assets no longer remain in the estate, or if the value of the asset changes substantially between the time the documents are signed and the death of the donor, the fiduciary administering the decedent’s estate or revocable trust may not be able to implement the plan as intended. Sometimes circumstances such as medical expenses require the sale of an asset prior to death, resulting in ademption of the asset. Sometimes changes in the assets and their values occur with the mere passage of time. This article explores what happens when an estate plan includes a specific gift and circumstances change such that the estate no longer owns that specifically devised asset or its value has changed drastically and the potentially catastrophic and likely unintended consequences that follow.
Specific gifts present an easy way to accomplish estate planning goals. Let’s assume that Johnny’s mother left a will leaving him her business, Fran’s Flowers, worth $1 million. She left the remainder of her estate, also worth $1 million, to her daughter, Sally. Each child would receive an approximately equal share of mom’s estate. If Johnny’s mother sold the business and then died prior to updating her will, in states that follow the common law doctrine of ademption, Johnny would receive nothing. For those unfamiliar with the term, ademption occurs when specific property given to a beneficiary no longer exists at the death of the donor. The testator may have sold or otherwise disposed of the property. It matters not how or why the property no longer exists, only that it’s gone.
Let’s assume that instead of her business, Johnny’s mom plans to give him her Aspen, Colorado vacation home because he travels there every winter for ski season. Mom contracts to sell the property, intending to buy a larger home, but dies prior to closing. Although the contract is executory, the doctrine of equitable conversion deems the purchaser the owner of the home from the moment the contract becomes enforceable. Even in this scenario, the specific bequest was adeemed and Johnny again loses out on his inheritance.
To further illustrate the point, assume that Johnny’s mom wants to give her diamond ring to Johnny’s sister, Sally. Shortly before mom’s death, a thief steals the diamond ring. The personal representative makes a claim against mom’s insurance and the estate collects the insurance proceeds. You might assume that Sally would receive the proceeds in place of the diamond ring.
In most states that recognize ademption, the specific devise would be adeemed by extinguishment, notwithstanding the estate’s receipt of insurance proceeds. Sally would have no recourse, although receipt of the insurance proceeds made the estate whole. A few states have moved to enact statutes that give the insurance proceeds to the beneficiary when the asset no longer exists, but that’s not universal.
Some states, like Florida, will look to the testator’s intent to determine if a suitable replacement exists. Other states, like Wisconsin, have attempted to abolish the doctrine of ademption by extinction by awarding beneficiaries the balance of the purchase price of an asset sold prior to death. Yet others, like Virginia, have enacted statutes that carve out what happens with specific types of assets, such as stock certificates. Thus, if a new company buys the stock of the old company that was the subject of a specific devise and issues new stock, that specific bequest would not have been adeemed and the beneficiary would take the new stock in place of the old. Still others, like California, actively seek to avoid ademption whenever possible.
Now, let’s flip the scenario back to the original example in which Johnny receives the business and Sally receives the residuary estate. Assume that the business appreciates substantially between the time mom signs her estate plan and her death. If Johnny receives the business valued at $8 million and Sally receives the $1 million residuary estate, Johnny receives many multiples of what Sally does. Obviously, this was not mom’s intent, but most states would never get to intent in this situation because the documents were clear. This example highlights an extreme result of planning gone awry but represents an important consideration whenever a client wants to make specific bequests.
Is there anything that can be done? Perhaps. Clear drafting that indicates what should happen should the asset no longer be in the estate, or if an asset appreciates substantially, help keep the beneficiaries whole. In most states, if a specific devise fails because it has been adeemed, the intended beneficiary has little or no recourse and will not receive the value of the intended specific bequest from other components of the estate.
It matters not whether the removal was intentional or unintentional. Once the estate no longer holds the assets, that’s the end of the inquiry. Some states consider a specific bequest of an asset that has changed substantially in character adeemed. In other situations, if the specific devise appreciates well above the value of all the other assets combined, children who were supposed to have equal treatment would end up with unequal treatment.
While we often say that fair does not necessarily mean equal in estate planning, most individuals design their estate plans to treat their beneficiaries fairly and would loathe having the plan altered by outside factors. It’s important to take care of specific bequests and ensure that you consider all the possibilities for the asset and include appropriate adjustments as part of a comprehensive estate plan.
To learn how to protect you and your family visit www.haaszaltz.com or call (845) 425-3900. You can also email them at [email protected].
