It is often hard to estimate how much you will have left when you pass away. What might seem like a robust estate now can easily be reduced by years of medical expenses, long term care costs, and pharmacy bills. Some estates are reduced to the point of being insolvent, i.e., there are not enough remaining assets to pay outstanding bills. Other estates have enough assets to settle all debts but do not have enough to satisfy all of the distributions to beneficiaries under the estate plan. In the latter case, the rules of “abatement” apply.
California Probate Code Section 21402 provides an “order of abatement” based upon certain categories of estate plan gifts.
The first category to abate is “property not disposed of by the instrument.” This confusing language refers to a situation where an estate plan only references specific assets to be distributed and the decedent died owning additional property that was not described. For example, Gwen might have an estate plan that leaves her shoe collection to her sister and her musical instruments to her brother but does not have a “residuary clause” directing how the rest of her estate – cash, investments, real property, automobiles – shall be distributed. A professionally drafted estate plan will always include a residuary clause but many “do-it-yourself” estate plans fail to include this basic estate planning device.
The second category to abate is “residuary gifts.” For example, Gwen’s estate plan might leave specific gifts of her shoe collection to her sister and her musical instruments to her brother and then have a “residuary” clause directing the rest of her estate – cash, investments, real property, automobiles – to be distributed in equal shares to her children.
The third category to abate is “general gifts to persons other than the transferor’s relatives.” “General gifts” are gifts of general property such as cash. “Relatives” under the Code Section refers to the intestate heirs of the decedent, i.e., those who would inherit had there not been an estate plan. For example, Gwen’s estate plan might include a general gift of $50,000 to her brother. If Gwen has children, her brother would not be considered a “relative” under the Code Section since her children – and not her brother – would inherit from her if she died without an estate plan.
The fourth category to abate is “general gifts to the transferor’s relatives.” For example, Gwen might have a clause in her estate plan that leaves $100,000 cash to her son, Kingston. Under the Code Section, Kingston would be considered a “relative” since he would inherit from her if she had died without an estate plan.
The fifth category to abate is “specific gifts to persons other than the transferor’s relatives.” This would include Gwen’s gift of her shoe collection to her sister and her musical instruments to her brother if she has children. (Gwen’s sister and brother would not be considered “relatives” under the Code Section due to the fact that if she had died without an estate plan, her intestate heirs would be her children and not her brother or sister.)
The sixth category to abate is “specific gifts to the transferor’s relatives.” For example, Gwen might leave her pocket watch to her son, Apollo. Such a specific distribution would fit into this category.
While these are the default rules to abatement, the estate planning document can override these rules and provide for a different order of abatement. However, it is difficult to identify whether an estate will be insufficient to distribute all of the gifts that the testator intended to make. It is therefore good practice to review the types and amounts of gifts in your estate plan periodically to make sure that your estate will likely be sufficient to satisfy all of your intended bequests.
KRASA LAW, Inc. is located at 704-D Forest Avenue, Pacific Grove, California, and Kyle may be reached at 831-920-0205.
Disclaimer: This article is for general information only. Reading this article does not establish an attorney-client relationship. Before taking action on any of the information presented in this article, you should consult with a competent attorney who is licensed to practice law in your community.