Abatement 101: Which Beneficiaries Bear the Brunt of a Reduced Gift?

June 10, 2011
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I asked my young kids today if they knew what “abatement” was.  They replied, “Yes, Daddy, it’s the bottom floor in our house where all our toys and boxes and other stuff is!”

To avoid the stigma of negligent parenting, I explained to them that within the estate planning context, abatement is the forced decrease of a beneficiary’s share of an estate.

Abatement mainly applies where there are unanticipated changes in the value of your estate after you sign your will, but you make no accompanying adjustment to your estate plan in time.  It is yet another reminder that estate planning should not be viewed as a “one-and-done” kind of a deal.

To clarify all of this, let’s define some terms and work through an example.

Probate:  Assets and Obligations

Settling an estate through probate is a fairly lengthy process of implementing the following familiar formula:  Assets less liabilities = remaining estate.  To get this right, the executor or personal representative first gathers the assets, pays off the obligations next, and finally gives the beneficiaries what’s left.

After the assets are found and obligations are paid, one of three results can occur:

  1. There is a remaining estate to be distributed.
  2. There is no remaining estate left.
  3. There is a remaining estate, but not enough to satisfy all of the gifts listed in the will.

If the third case occurs, then gifts to at least one beneficiary must obviously be reduced.  Now technically, any reduction goes directly against what is written in the will, and probate courts usually do what it can to avoid any changes in the document at all.  However, all states have laws that allow courts to “abate” (which essentially means “reduce”) gifts in case the third result listed above results.

An Example Applying Abatement Principles

So how do we know which beneficiary takes the hit?  Let’s provide an example to help us answer this question.

“A” dies, leaving a will with the following gifts, which represented his entire estate:

  • My diamond wedding engagement ring to my daughter B (present value = $100,000).
  • $100,000, from my XYZ bank account, to my son C.
  • $100,000 to Charity D.
  • All of my remaining estate to my daughter E (present value = $100,000).

In addition, A had a $50,000 life insurance policy payable to his estate that was bought to pay for all his probate expenses, debts and taxes.  However, due to some unanticipated losses after A executed his will, the policy did not cover all of his obligations.  There is a $20,000 debt remaining.

From whose share(s) do we take the $20,000?  Should it come from the cash designated to Charity D, since it is not a family member?  Should a portion come from C’s share since his amount is stated in cash?  Should all four each have $5,000 deducted from their shares?

The easy answer is that the court follows whatever the will says about the question.  But what if the will is silent on the issue?  Then state law takes over.

Types and Priority of Gifts

In general, state law recognizes four different kinds of gifts.  Let’s briefly describe each:

  • Specific Gifts – Particular assets or gifts paid from a specific source.  The diamond ring to B would be a specific gift.
  • Demonstrative Gifts – Gifts (usually in cash) paid from a specific source, but if that source is inadequate, the general assets of the estate make up the difference.  The gift of cash from XYZ bank to C would be a demonstrative gift.
  • General Gifts Gifts which are not specifically described or do not come from a specific source.  The cash gift to Charity D would be a general gift.
  • Residual Gifts – The remaining assets after specific, demonstrative and general gifts are given out.  The gift of the remaining estate to E would be a residual gift.

When the will is silent, most states abate gifts in some form of the following sequence:

  1. Residual gifts
  2. General gifts
  3. Demonstrative gifts
  4. Specific gifts

In other words, all residual gifts must be exhausted to satisfy any obligations before general gifts can be tapped, and so on.

This priority order makes sense because courts traditionally favor clauses in documents with specificity over more general ones.  Additionally, as illustrated below, depleting residual and general gifts first can further help the court adhere closely to the decedent’s stated instructions and possibly avoid abatement altogether.

In our example, all of A’s beneficiaries are being given gifts valued at $100,000.  The gift of the ring to B can be viewed as a specific form of a general $100,000 gift.  The gift of cash to C from a specified source also provides more particularity than the gift to Charity D.

Finally, paying the deficit out of E’s gift has the benefit of the court not having to alter the will at all.  While the present value of E’s share would drop to $80,000, this amount is still in keeping with A’s gift of his “remaining estate”.

Therefore, the residuary gift to E would be abated by $20,000.

Conclusion

I’m not sure that my kids fully appreciated my valuable lecture regarding this estate planning consequence (“But Daddy, shouldn’t you distinguish this from ademption and exoneration?”).  However, I’m sure we can all appreciate the overall point:  Be sure to actively watch your own situation so that your final wishes can be implemented “unabated”.

 Abatement 101: Which Beneficiaries Bear the Brunt of a Reduced Gift?
 Abatement 101: Which Beneficiaries Bear the Brunt of a Reduced Gift?

Scott

Scott R. Zucker, Esq. is the owner of The Zucker Law Firm PLLC, located just outside the Capital Beltway in Annandale, within five miles of the City of Fairfax, the county seat of beautiful Fairfax County, Virginia. The firm focuses mainly on estate planning services for Virginia, Maryland and Pennsylvania clientele, and seeks to do so in an affordable and approachable way. People interested in learning more can contact Scott by phone or email.

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