How Using Specific Bequests Could Cost Beneficiaries their Inheritance

Sometimes even the best-laid plans do not work out. Most everyone has certain goals in mind for their estate plan, including detailed disposition of their assets upon death. Often, these goals reflect long-standing 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. The ideas may seem straightforward; however, these simple bequests can prove difficult, if not impossible, to implement 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. 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 the business 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 before 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 property could have been sold, destroyed, or otherwise disposed of. It matters not how or why the property no longer exists, only that it’s gone.

Let’s assume that instead of a business, Johnny’s mom plans to give him the Key West vacation home because he traveled there every summer for the mini-lobster season. Mom contracts to sell the property, intending to buy a larger home but dies before 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 the estate would have been made whole. A few states have moved to enact statutes that give the insurance proceeds to the beneficiary when the asset no longer exists.

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 that was sold. Yet others, like Virginia, carve out 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 planning documents and her death. If Johnny receives the business valued at $8 million and Sally receives the $1 million residuary, 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 an important one to consider when a client wants to make specific bequests.

Is there anything that can be done? Perhaps. Obviously, 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 be reimbursed for the value of the potential specific bequest from other components of the estate. It matters not whether the removal was intentional or unintentional. If the asset is gone, it’s gone. Sometimes even when the asset has changed substantially in character, the specific bequest could be considered 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 being treated unequally. 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.

Tereina Stidd, J.D., LL.M. (Tax)
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128
www.aaepa.com