A common question I receive is, “What should I include in my Will?”. However, this question can be misleading since, in most cases, everything you own will go into your Will. The more pointed question is, “How should I distribute the assets in my Will?”
So: What Should I Include in my Will?
So, what is a Will? Generally, a Will is a legal document that describes how you would like your property and other assets to be distributed after your death. As a note, due to the legal complexities in creating a valid Will, I would strongly recommend that you speak with an attorney to help ensure that the Will accurately reflects your wishes and is executed properly.
You will find that when first discussing your Will with an attorney, the attorney will need to know what you own, your immediate living family members, and how you would like your estate to be distributed.
Wills, Distributions, and Bequests
The way you make distributions in your Will is through a legal mechanism known as a “bequest”. The three most common types of bequests are:
Specific Bequests,
General Bequests, and
Residuary Bequests.
Specific Bequests include leaving a specific item or fixed amount of money to a particular person or organization. Examples include a specified car, house, artwork, or a monetary amount from a specified account.
General Bequests typically include a monetary amount of money that is not tied to any specifically named asset in your estate. The most common example is a monetary amount from an unspecified source (i.e. I give the sum of one-thousand dollars in cash to John Smith).
A Residuary Bequest is how the remainder of the estate is to be divided (after specific and general bequests have been made, and all debts have been satisfied).
You might be asking yourself, why is there a distinction between these bequests and why do they matter?
Bequests and Debt
One of the more prominent reasons there is a distinction between bequests is due to debts that the estate must pay, be it taxes, credit card debt, attorney fees, or otherwise. As a matter of law, all qualified debtors must be paid prior to the distribution of any assets, and the order from which the debts from the estate are paid relies on the bequest. The residuary is first to lose their share of the estate, then General Bequests, and then last, Specific Bequests.
An example might better illustrate how these bequests work in practice. Let’s assume that Mr. Smith recently passed with a Will. After an accounting of his estate, Mr. Smith’s only asset is an account from “Central Trust Bank” worth $150,000.00.
In his will, Mr. Smith stated that:
I give the sum of $50,000 in cash from my Central Trust Bank account to MICHAEL WILLIAMS.
I give the sum of $50,000 in cash to DAVID JOHNSON.
I give all of the residue of my estate to MARY BROWN.
Line 1 would be Specific Bequest since Mr. Smith specifically stated which account Mr. Williams was to be receiving money from. Line 2 would be a General Bequest since, while there is a monetary amount, it does not specify the source of the funds. Line 3 would be a residual bequest since Ms. Brown is receiving the remainder of the estate.
Based upon the value of his estate, it appears as if each heir will receive $50,000 from Mr. Smith’s estate (both Mr. Williams and Mr. Johnson would receive $50,000 each, leaving a remainder amount of $50,000 for Ms. Brown). However, let’s also assume that Mr. Smith had a debt of $75,000.
Mary Brown is the first to lose her inheritance since she is in the residuary. Since the residuary does not have sufficient funds to pay off the full amount of the debt, the remaining balance must be paid by the General Bequest, which has enough money to pay off the remaining amount. Had the General Bequest been insufficient, then the specific bequest would also have lost money as well. Regardless, given the debt, the new breakdown of assets would look like this:
$50k to MICHAEL WILLIAMS
$25k to DAVID JOHNSON
$0 to MARY BROWN
While that may seem unfair, there are caveats and limitations to Specific and General Bequests. Let’s assume the same fact pattern, but this time our decedent won the lottery prior to passing. Instead of $150,000 in the Central Trust Bank, there is $1,500,000. Even if we include the $75k debt from above, the new breakdown of assets would look like this:
$50k to MICHAEL WILLIAMS
$50k to DAVID JOHNSON
$1,325,000 to MARY BROWN
Since Mary Brown is entitled to the residual, she gets anything left over from the estates assets which were not specifically or generally bequeathed.
Another interesting example is if, prior to his death, Mr. Smith moved money from his Central Trust Bank account to a different bank. In the scenario where the $150,000 is in a new bank, the breakdown of assets would look like this:
$0 to MICHAEL WILLIAMS
$50k to DAVID JOHNSON
$25k to MARY BROWN
Specific bequests are just that, specific. If the account, car, house, artwork, etc., from a specific bequests no longer exists, then the beneficiary is no longer entitled to it. Here, since there is no longer a Central Trust Bank account, Michael Williams gets nothing. David Johnson would receive his general bequest of $50,000, and Mary Brown would receive the residual of $100,000, minus the debt, leaving a total of $25,000.
As you can see, while the concept of bequests may seem unnecessary at first, they can have rather large implications when it comes to planning your estate. It is important for the individual who is writing their will to understand not only who is getting which asset, but how they are getting those assets as well.
