In a previous blog, we discussed a situation where a Will and a Trust have inconsistent terms regarding who would receive property, and which of these documents would control, and why. In another blog article, we addressed what would happen if a Beneficiary passed away before the person who wrote the Will. The latter article included the concept of “lapsed” gifts and the anti-lapse statue, which are briefly summarized again below. This article addresses a different, but related issue. What happens when a gift is made in a testamentary document, but the gift no longer exists? Your Aunt bequests property to you, but that property was sold, destroyed, or exchanged for other property before she died. The rules that provide for resoling these issues are referred to as Lapse, Ademption, and Abatement. We will discuss how each one works.
To understand these legal concepts, we must first define a few terms that will decide how they apply. These terms help us understand the type of gift being offered, because, depending on the type of gift, the rules may be applied differently.
TYPES OF GIFTS
- Specific Gifts. A specific gift is a gift described precisely in your Will. “I
leave to my daughter Sarah my 1999 Harley Fatboy.” Or, “I leave to my son
Daniel my Picasso painting.” The gift can be easily identified and
distinguished from all other property in the estate. - General Gifts. A general gift is to be paid out of the general assets of the
estate. “I leave to my friend Gavin Banek $100,000.” General gifts are
almost always gifts of money.
- Demonstrative Gifts. A demonstrative gift lies between the specific and the general. It is usually a gift of money, but from an identified source. “I leave to the Human Fund $500,000, to be paid from the proceeds of the sale of my home.”
- Residuary Gifts. Residuary gifts are essentially the left over property in an estate that is not specifically accounted for in the Will. “I give the remainder of my estate, including any personal and real property, to my spouse.”
With those definitions, we now move to the concepts of Lapse, Ademption, and Abatement.
LAPSE
When a beneficiary dies before the Deceased (Testator), the gift fails. This is
lapse. With a specific, demonstrative or general gift, the lapsed gift simply
becomes part of the residuary estate.
If the gift is residuary, and there is no one listed to receive the residual estate when this person passes, it will be distributed under the state intestacy rules.
ANTI-LAPSE STATUTES
To avoid lapse, all states have anti-lapse statutes. These are intended to prevent the
heirs of a deceased beneficiary from being disinherited. In simple terms, the anti-lapse statute assumes that the person making the Will would want his daughter’s children to have the gift that was designed for her, rather than to be divided equally among her siblings. A more detailed discussion of Lapse and anti-lapse statutes can be found in the June 17, 2020 blog article: “What Happens When a Beneficiary Passes?”
ADEMPTION
Ademption addresses the opposite problem: when the beneficiary is alive, but the property is no longer in the estate. Ademption only occurs when specific property is intentional removed by the Testator before she passes. (Note the emphasis on the words: only specific property and only that which was removed by the Testator.)
For example, assume that the Will provides for “my son Daniel to receive my Picasso painting.” But before she passes, she gives the Picasso painting to her daughter Sarah. Or the painting is sold or destroyed. In this case, the gift to Daniel adeems. He does not get the Picasso or the value of the Picasso. He may get other assets if bestowed in the Will, but that potential gift is now gone, and he does not receive it. The gift adeems.
An exception to this rule is when the property has been recently destroyed, and insurance proceeds exist to recoup the loss of the property. If, in our example above, the Picasso painting was destroyed by fire and was insured, Daniel would be entitled to the proceeds.
As noted above, ademption does not apply to demonstrative gifts. Where Testator names the source for a cash bequest, (e.g. a specific bank account), if the source is no longer in the estate, the gift does not adeem, it merely become a general gift as though the source had not been specified. Also note that if the property is stolen, or sold by someone other than the Testator, the gift will not adeem.
ABATEMENT
Abatement occurs when the estate lacks sufficient funds to make the designated gifts. As ademption applies to specific gifts, abatement applies to the remaining types: General, Demonstrative, and Residuary. If the estate doesn’t have the assets to pay for the administration expenses, creditors’ claims, and all the cash bequests made by the Will, adjustments must be made. This is abatement.
The application of abatement follows the type of gift. First, residuary gifts fail, or are reduced to the amount necessary to pay the estate’s debts. Next, general gifts are reduced, or abated proportionally. If the Will provides for general gifts of $75,000 to Daniel and $25,000 to Sarah, and the estate only has half that amount, i.e., $50,000, Daniel would receive $37,500 and Sarah would receive $12,500. (Don’t feel bad for Sarah, she got Daniel’s Picasso.) Next, demonstrative gifts would be abated. If only $5,000 remains in an account specified for a $100,00 gift, then that is all the beneficiary would receive.
The rules above may provide you with food for thought on how you designate gift in your estate plan. Contact CASHMAN LAW today for a free consultation to see how we might assist in drafting or updating your estate plan, or understanding how the language of an existing plan may affect your rights to a bequest.
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