Abatement of gifts is an issue that can be anywhere from unimportant to extremely important, depending on individual circumstances. The amount of your wealth is not what makes the difference.
Abatement occurs when debts and expenses of administration must be paid. The law does not assume that all of your beneficiaries must share the debts and expenses equally. The money has to come from somewhere. So, whose shares pay what amounts?
This might already be a little confusing. Here is a simple situation to make the point:
Suppose your will says, “I leave my home to Allan and everything else to Beth.” This simple expression does not tell us whether you intend Allan and Beth to receive an equal value or not. We know nothing about the worth of the home, nor do we know the value of everything else.
To keep it simple, let’s say the home is worth $300,000, and everything else is worth $300,000. You intend to treat Allan and Beth equally.
Note that the respective values can change a lot over time, and while the intent at the time of making the will is to treat Allan and Beth equally, later changes in value can make the disposition very unequal. For now, let’s assume the values never change. Equality is assured… or is it?
The answer is, “Definitely not.” At the time of passing, if you have debts, other than a mortgage or lien on your home, the law assumes you want Beth to pay all of them out of her share. Similarly, the law assumes you want Beth to pay all of the expenses of estate administration out of her share.
Let’s assume your home is paid for. You have $5,000 in credit card debt; $30,000 in medical bills related to your final illness; and $15,000 in funeral expenses. $5,000 will be required to pay an attorney and other expenses of estate administration.
Beth pays all of these. That’s $55,000. The net result is Allan receives $300,000 in value from your estate, and Beth receives $245,000.
Instead of medical bills being only $30,000, let’s assume they were $350,000. In this case, we now have a total of $375,000 in debts and expenses. Beth’s share is exhausted. There remains unpaid indebtedness of $75,000. Allan’s home must be sold. Assuming no closing costs, he’ll receive $225,000 after the creditors are all paid.
As you can see, this is what happens with simple estates. Imagine what’s involved as giving becomes a little more complicated. Now, you can appreciate how rules of abatement can adversely impact even the simplest plan.
The failsafe approach to treating a group of beneficiaries equally is to avoid bequests and devises when possible. Treat your entire estate as the residue and leave it in fractional shares or percentages.
The simplest example is, “I leave everything to Allan and Beth in equal shares.” Notice that now, there’s no distinction between the type or description of property between the 2 recipients. They get exactly the same thing. In addition, later changes in the value of specific property will not affect the value that both Allan and Beth will receive.
Bequests, devises and residue are important concepts when it comes to abatement. All of these are gifts made in your will, but devises hold a higher status than bequests. Bequests hold a higher status than the residue.
Devises are gifts of real property outside of the estate’s residue. Bequests are gifts of personal property outside of the residue. The residue is everything which remains after all bequests and devises are made.
As you can see, Texas law places a higher status on real property than personal property. There’s probably not a great reason for this distinction. However, it’s the rule.
The best way to understand how bequests, devises and the residue are related comes from our simple example above. You can see that your will made a devise of your home to Allan, and it left the residue to Beth.
Since the devise to Allan enjoys a higher status than Beth’s residue, Beth gets stuck with the debts and expenses. As I stated above, if your intent is to treat Allan and Beth equally, the best way is to avoid the devise to Allan. Again, your will could simply state, “I leave everything to Allan and Beth in equal shares.”
If you can be satisfied with a will like this, it’s definitely the way to go. However, there might be compelling reasons which drive you to want to make some devises or bequests. A good example would be a bequest of money to your favorite charity – “I leave the sum of $10,000 to my church (we’ll keep the name generic), and I leave everything else to Allan and Beth in equal shares.”
Obviously, if you want to leave $10,000 to your church, there’s no way to avoid a bequest. By now, you know the law assumes that the church’s share will not be reduced by any of your estate’s debts and expenses until the residue is first exhausted.
The bequest to the church is a good example to lead into one more nuance – that is, whether a bequest (or devise) is specific or general. A gift (whether it is a bequest or devise) is specific if it can be satisfied without coming from other property. In our original example, the gift of the home to Allan is a special devise. The home is the gift, itself.
The gift to the church, on the other hand, is of money. It is a general bequest because it will have to come from other property in order to be satisfied.
The rule is that specific bequests and devises take priority over general bequests and devises.
Got it? Good!
There’s one final nuance. Intestacy.
Intestacy occurs when property of your estate is not disposed by your will. Intestacy is a real concern, but it is beyond the scope of this article. Here’s an example just to keep it as simple as possible: “I leave everything to my friend, Bob.”
This will fails to state what happens if Bob fails to survive you. Where does your stuff go? Actually, we’re not going to answer that question here, but now, you can see how intestacy occurs even when you have a will.
You’ve learned a heck of a lot if you’ve understood everything so far. So, without further ado, here’s Section 355.109 of the Texas Estates Code:
ABATEMENT OF BEQUESTS. (a) Except as provided by Subsections (b), (c), and (d), a decedent’s property is liable for debts and expenses of administration other than estate taxes, and bequests abate in the following order:
(1) property not disposed of by will, but passing by intestacy;
(2) personal property of the residuary estate;
(3) real property of the residuary estate;
(4) general bequests of personal property;
(5) general devises of real property;
(6) specific bequests of personal property; and
(7) specific devises of real property.
(b) This section does not affect the requirements for payment of a claim of a secured creditor who elects to have the claim continued as a preferred debt and lien against specific property under Subchapter D.
(c) A decedent’s intent expressed in a will controls over the abatement of bequests provided by this section.
(d) This section does not apply to the payment of estate taxes under Subchapter A, Chapter 124.
Did you see subsection (c)? This is your “out” if you don’t like the way Section 355.109 works.
In our original example (“I leave my home to Allan and everything else to Beth.”), I showed that one way to obtain equal treatment (if that’s the goal) is to remove the devise to Allen and instead, to leave everything to Allan and Beth in equal shares.
But what if you’d really prefer to leave the gifts like you had them in the first example? No problem. Your will could contain an optional provision overriding the default rule, like this:
I leave my home to Allan and everything else to Beth.
I direct that all gifts herein shall abate in proportion to their values.
Now, Allen pays half of the debts and expenses from his share, and Beth pays half from hers. (Just remember, the values can change later, and the result will vary.)
We can also add the special bequest of $10,000 to the church without any reduction for debts and expenses. Your will now reads:
I leave $10,000 to my church.
I leave my home to Allan and everything else to Beth.
I direct that all gifts herein, other than general bequests, shall abate in proportion to their values.
We’ve covered a lot, but there’s one more thing. What if there’s a mortgage on the home of say, $100,000? Section 255.301 of the Texas Estates Code provides:
NO RIGHT TO EXONERATION OF DEBTS. Except as provided by Section 255.302, a specific devise passes to the devisee subject to each debt secured by the property that exists on the date of the testator’s death, and the devisee is not entitled to exoneration from the testator’s estate for payment of the debt.
However, you can change this result if you like. Section 255.302 states:
EXCEPTION. A specific devise does not pass to the devisee subject to a debt described by Section 255.301 if the will in which the devise is made specifically states that the devise passes without being subject to the debt. A general provision in the will stating that debts are to be paid is not a specific statement for purposes of this section.
Using our example, Allan will have to pay the $100,000 mortgage on the home all by himself unless your will states other property should be used to pay it.
These are just a few of the limitless possibilities when it comes to planning for abatement of gifts. This article should not be understood to suggest that altering the statutory rule is always a better approach. It’s only better when it accomplishes a purpose that the statute’s default rules cannot. Once you decide on your goal, the trick is to use the proper tools to achieve it.