Sometimes even the best laid plans don’t work. Most people have certain goals in mind for their estate plan, including the detailed disposition of their assets upon death. Often times, these goals reflect long-term plans to reward the beneficiary for his dedication to work or even fulfill his promise to provide certain assets to the beneficiary. Ideas may seem straightforward. However, these simple wills can be difficult, if not impossible, to enforce if the assets no longer remain in the estate, or if the value of the asset changes significantly 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 recovery of the asset. Sometimes, changes in assets and their values occur over time. This article explores what happens when an estate plan includes a gift and circumstances change such that the specifically devised property is no longer owned or significantly changed in value, with potentially catastrophic and unintended consequences.
Specific gifts offer an easy way to achieve estate planning goals. Suppose Johnny’s mother left a will and left him a $1 million business. She also left the remainder of her $1 million estate to her daughter, Sally. Each child will receive approximately an equal share of the mother’s estate. If Johnny’s mother sold the company and then died before her will was updated, in states that follow the common law doctrine of dismissal, Johnny would receive nothing. For those unfamiliar with the term, the exception occurs when certain property given to the beneficiary no longer exists upon the death of the donor. The property could have been sold, destroyed, or otherwise disposed of. It doesn’t matter how and why the property no longer exists, just that it’s gone.
Let’s say instead of a business, Johnny’s mother plans to give him a Key West vacation home because he’s been traveling there every summer for baby crab season. My mom contracts to sell the property, intends to buy a bigger house but dies before closing. Although the contract is executory, the principle of equitable transfer considers the buyer the owner of the home from the moment the contract becomes enforceable. Even in this scenario, the set will was fulfilled and Johnny again lost his inheritance.
To illustrate this point further, suppose Johnny’s mother wants to give her diamond ring to Johnny’s sister, Sally. Just before my mom died, a thief stole a diamond ring. The personal representative files a claim against the mother’s insurance and the estate collects the proceeds of the insurance. You might assume that Sally will receive the proceeds instead of the diamond ring. In most states that recognize the exemption, the specific device will be credited by amortization, even though the insurance proceeds will be received by the estate. Sally had no recourse, although the estate would have been complete. Some states have moved to enact laws that award insurance proceeds to a beneficiary when the asset no longer exists.
Some states, such as Florida, will consider the testator’s intent to determine if there is an appropriate alternative. Other states, such as Wisconsin, have attempted to abolish the statute of limitations by way of extinction by giving beneficiaries the credit of the purchase price of the asset that was sold. However, others, such as Virginia, withhold certain types of assets, such as stock certificates. Thus, if a new company purchases the shares of the old company which was the subject of a particular design and issues a new share, then this specific will will not be fulfilled and the beneficiary will take the new share in place of the old. Still others, such as Californians, are actively striving to avoid extinction whenever possible.
Now, let’s flip the scenario back to the original example in which Johnny receives the work and Sally receives the remaining estate. I suppose the work is highly valued between the time my mother signs her estate planning documents and her death. If Johnny receives the $8 million business, and Sally gets the remaining $1 million, Johnny receives many multiples of what Sally does. This was clearly not the mother’s intention, but most countries would never have intended in this situation because the documentation was clear. This example highlights an extreme consequence of skewed planning, but an important one to consider when a client wants to make certain commandments.
Is there anything that can be done? Maybe. Clear wording indicating what should happen if the asset is no longer on the estate, or if an asset is valued significantly, helps keep the beneficiaries full. In most states, if a particular organ fails because it has been outsourced, the intended beneficiary has little or no recourse and will not be compensated for the potential specific will value from the other components of the estate. It does not matter whether the removal was intentional or unintentional. If the original is gone, it is gone. Sometimes, even when the asset changes significantly in nature, a specific will may be considered vested. In other cases, if the given design is much higher than the value of all other assets combined, children who were supposed to have equal treatment will end up treating them unequally. It is important to take care of specific inheritances and ensure that all possibilities for the asset are considered and appropriate modifications are included as part of an overall ownership plan.
Terina Stead, JD, MA (tax)
Associate Director of Education
American Academy of Estate Planning Lawyers, Inc.
9444 Balboa Street, Suite 300
San Diego, CA 92123
Phone: (858) 453-2128