Your will can sometimes be seen as your final words to your loved ones. You may want to set out specific gifts to the people who you cherish most or who have helped you out during your lifetime. But as in life, you need to make sure you can actually afford or are able to make these gifts on your death.
Perhaps you want to leave a small token of affection to a family
member or friend, such as a special painting you own, or maybe it
is something a bit more extravagant such as your collector car or
even an entire bank or investment account. In considering whether
to leave a specific asset to a beneficiary, you need to consider
what would happen if you don't actually own that asset on your
death.
Maybe you sold your collector car as you got older, or maybe the
bank account you had earmarked for a beneficiary was closed and the
proceeds transferred to another account. In these instances, unless
you have provided for an alternative, the gift of the car or the
bank account is said to have "adeemed", and since you
don't own the asset on your death, the beneficiary will receive
nothing, despite what your will may say.
Even if the specific gift is in existence at the time of your
death, you need to consider whether you actually have the power to
make this gift. That is, do you actually own the asset you wish to
give: what if that earmarked bank account was actually held joint
with right of survivorship with another beneficiary? By right of
survivorship, the co-owner of the bank account would automatically
receive the bank account in its entirety, again resulting in no
gift left for the beneficiary named in your will. Or what if the
asset is held through a corporation or in a trust rather than
directly in your name? Special language or steps may then be needed
in order to leave a valid gift.
If you are worried that a specific asset may or may not be owned
by you at your death, you can always consider leaving a specific
amount of money to a beneficiary. After all, who doesn't love
cold, hard cash?
Leaving cash legacies may seem simple, but they can pose their own
problems. First, you need to consider how these legacies will be
funded. You may be feeling very generous leaving several legacies
to some of your friends, but what if all of your assets are held
jointly with your surviving spouse? What if all your life insurance
policies and registered plans are designated directly to your
children? If there are no assets that flow through your estate
because they pass outside by right of survivorship or via a
beneficiary designation, then your estate will not be able to
actually fund these cash legacies.
The amount of the cash legacies need to be considered as well. One
gift to a friend may not seem like too much money, but if you have
a lot of friends and several cash legacies this can quickly add up!
When the estate does not have sufficient assets to pay all
legacies, "abatement" takes place, meaning the gifts
under the will are reduced to pay for this shortfall in the estate.
Abatement of gifts occurs in the following order:
i. the residue of the estate;
ii. general gifts (such as a cash legacy);
iii. any demonstrative gifts or specific gifts that aren't real property; and
iv. any specific gifts of real property.
Because the residue of the estate is used first to pay for any
shortfall, your residue could be completely exhausted in order to
fund any cash legacies made under your will. You could be in a
position where your cash legacies to your friends may be paid out
in full at the expense of your "main" residuary
beneficiaries, who may be your close family members.
Leaving gifts under your will is one of your final ways to show
your loved ones how much they mean to you and to create a lasting
legacy, but ultimately requires a careful consideration of a number
of issues. But just as they teach us that we shouldn't spend
money that we don't have during our lifetime, it is equally
important to remember you can't gift what you don't have on
your death.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.