When Will Gifts Fail: Ademption, Abatement and Lapse
Sometimes, the best laid plans of the testator simply don’t work out. Property gifted by a will may no longer be owned at the time of death. People who are to receive gifts may no longer be alive. Or, an estate may not have the funding to meet the will’s cash gift provisions.
In this presentation, we will discuss what happens when circumstances cause the fulfillment of a will provision to be impossible or impractical.
Ademption occurs when identified property is no longer in the testator’s estate at the time of death. It could have been sold, destroyed or otherwise disposed of during the lifetime of the testator. For example, let’s assume that a will provides that the testator’s 2018 Toyota Corolla is to be distributed to his daughter, Lisa. But, by the time the testator passes away in 2035, the Corolla has long been in the junkyard.
The rule in this case is simple. The gift adeems, which means that it becomes moot and irrelevant. The named recipient does NOT get reimbursed for the value of the potential gift from the other components of the estate. This applies whether the property was intentionally removed from the testator’s possession (such as, for example, if the testator gave the Corolla to someone else during his lifetime) or unintentionally removed (such as if the car was repossessed or died).
Ademption also applies if the specific bequest substantially changes in character. So, if Jane left a big block of marble to her son, Jerry, but she later chiseled a life-sized statue out of that block of marble, the gift would adeem and Jerry would get nothing.
An exception to this rule applies when the testator’s estate received insurance proceeds derived from the loss of the property. In some jurisdictions, these proceeds are payable to the beneficiary of the property if they are received by the estate representative. So, if our testator’s Corolla has been totaled weeks before his death, then in these jurisdictions, Lisa would be entitled to the auto insurance proceeds.
Ademption also does not apply to demonstrative bequests, wherein the testator names the source for a cash bequest. Even if the source is no longer in the testator’s estate upon death, the gift does not adeem. For example, if Sue’s will gives Barry “$10,000 from my savings account at A&B Bank,” this is a demonstrative bequest. If, by her death, Sue has closed the savings account at A&B Bank, the gift to Barry is still valid. It now retains the status of a general bequest as though the source had not been specified.
Sometimes, estates simply don’t have the resources to pay for the administration expenses, creditors’ claims and all the cash bequests made by the will. The rules of abatement allocate resources when they are insufficient to satisfy all gifts provided in the will.
The first type of bequest that fails in a small state will be residuary bequests. Residuary bequests give the remainders of assets after other gifts are allocated. If the estate is too small to pay for expenses and the quantified cash gifts, then there is no residuary estate. As such, the residuary bequests are moot and nullified.
Next, we look at general bequests, which are quantified cash gifts. These abate proportionately. Assume Joe’s will purports to give $25,000 to Fred, $25,000 to George and $50,000 to Irma. Unfortunately, after paying administrative expenses and creditors, there is only $50,000 left in the estate. There is only enough to pay half of the $100,000 that the will purported to allocate. Therefore, each of the general bequest beneficiaries will receive half of his or her share. Fred and George will each receive $12,500, while Irma receives $25,000.
Demonstrative bequests get preference over general bequests if their sources are in the estates. Going back to our example where Sue’s will gave Barry “$10,000 from her savings account at A&B Bank,” if Sue’s account is still in her estate at her death, it’s assets will be used to pay Barry his $10,000 before it is used to pay other general bequests. If the account is no longer in the estate, then Barry’s bequest simply reverts to the status of a general bequest and it abates proportionately if there are insufficient assets to pay all general bequests.
When a beneficiary dies before the testator, the gift fails, or “lapses.” When a specific, demonstrative or general bequest lapses, the lapsed gift simply becomes part of the residuary estate. So, if Jane’s will leaves $25,000 to her neighbor, Don, and the rest of her estate to her friend, Pauline, and Don predeceased Jane, the $25,000 would be part of the residuary estate and would go to Pauline as part of that residuary.
When a residuary bequest lapses and there is no backup or co-beneficiary, the residuary will be distributed under the rules of intestacy (which is the series of rules under which the estate of someone with no will is distributed). Because the rules of intestacy don’t always represent the wishes of the testator, it is best practice to name a backup beneficiary. For example, a residuary bequest may name “my children who survive me, or, if no children of mine survive me then my grandchildren who survive me.” If no named residuary beneficiary is alive, then those assets are simply not provided for by will; hence the necessity for the rules of intestacy to step in.
To avoid lapse in cases where the testator would likely be averse to the result of the lapse, all states have anti-lapse statutes. These prevent lapse where the predeceased beneficiary was a relative and is survived by issue (which means children, grandchildren, etc.). In such case, the anti-lapse statutes provide for substitution of the deceased beneficiary’s issue to take the gift instead of the beneficiary himself.
For example, assume that Melinda’s will leaves $25,000 to her son, James. James, however, predeceases Melinda. Instead of James’ gift lapsing, it is presumed that Melinda would have wanted James’ gift to go to James’ children, since those children are also Melinda’s close relatives (they are her grandchildren). As such, anti-lapse rules allow James’ gift to instead be distributed to his children (in equal shares).
Different states have various definitions for what degree of relative qualifies for anti-lapse benefits. All agree that where the beneficiary is not related to the testator, the gift would lapse. In our earlier example, where Jane’s gift to her neighbor Don lapsed, Don’s being survived by children would not trigger the anti-lapse rules because there is no reason to assume that Jane would have wanted Don’s children to benefit from her estate. Don was her neighbor, but she does not necessarily have a relationship with his children.
All states also agree that the anti-lapse provisions would apply where the initial beneficiary is the child of the testator. Between the cases where the predeceased recipients are the children of the testator and strangers, states vary. Some states (for example, Texas and Louisiana) extend the predeceasing beneficiaries to descendants of the testator’s parents, thereby capturing brothers and sisters and their offspring. In Connecticut and New York, on the other hand, the line stops at the siblings, thereby excluding nieces and nephews. Some states even go so far as to apply anti-lapse rules where the predeceased beneficiary was any degree of blood relative of the testator. Examples of such dates include Massachusetts, Missouri and Nebraska.
While ideally will provisions would be carried out in accordance with their terms, things don’t always work out as anticipated. The rules of ademption, abatement and lapse seek to govern these scenarios in a manner that is consistent with public policy and the likely intent of the testator.