Pecuniary Gifts

A pecuniary gift is a gift of money via a testamentary instrument, i.e. a will or a trust. For example, a testator could write in their will or trust, "I leave $25,000 to the YMCA" or "I give $50,000 to my cousin Bob Miri." 

Clients often like to designate an individual or entity as a pecuniary beneficiary because of a particular affinity for the person or its cause. It is worth noting that there is an estate tax deduction when leaving a pecuniary gift to a tax-exempt charity although that is usually a secondary factor. A problem can arise if a pecuniary gift is so large such that it disrupts the orderly distribution of the estate. Hence, I advise clients to be mindful of life's financial fluidity when making a large pecuniary gift. Clearly there is nothing wrong with leaving a large sum of money to a person, it is just that there can be unexpected complications that arise from this.

Assume John Doe, an unmarried man without any children, wishes to leave his 3 nephews $100,000 each and the residue to his niece.  When the trust is initially funded, John has $400,000 in liquid assets and an $800,000 home located in Campbell, CA. John writes these provisions into his trust with the intent to primarily benefit his niece, as she is the residual beneficiary. Since the niece is the residual beneficiary, she will inherit whatever is left after the three $100,000 gifts have been satisfied. 

Yet prior to his death and a short time after writing the trust, John incurs substantial debt as he failed to procure medical insurance despite the provisions of the Affordable Care Act. He has to spend months in the hospital because of complications from a surgery. Ultimately John's medical bills amount to $900,000 when he passes away. Whereas John's estate lacks the liquidity to satisfy the three $100,000 gifts, the trustee is then obligated to sell the home in order to satisfy said specific gifts to each nephew. 

The reason for the home's liquidation is because of the law of abatement, i.e. the reduction of testamentary gifts. California's abatement law is found in Probate Code § 21402. The abatement law says that specific gifts are abated last, meaning the niece, as the residual beneficiary, bears the brunt of the abatement.

The end result is that the niece inherits zilch because there is nothing in the estate after the specific gifts have been satisfied. That is, the sale of the home causes the gross estate to be worth $1,200,00 and $900,000 is deducted from that to account for John's medical bills. The remaining balance is $300,000 and each nephew receives $100,000 from such, leaving a grand total of $0 for the residual beneficiary. A better solution for John would have been to allocate percentages in order to preserve the niece's inheritance. In such case, the trust would have said that each nephew receives a 1/12 of the estate and the niece receives 3/4 of the estate, instead of using a specific gift and residual beneficiary formula.    

Abatement

A person's estate cannot distribute more than what one owns at death. This is the rough testamentary equivalent of the phrase "don't write a check that you cannot cash." If a person's will devises too much, a process known as abatement occurs.  In short, abatement is "the reduction of testamentary gifts." Black's Law Dictionary 8th ed. (West Group, 2004). 

For example, assume that in 1999 Thomas wrote a will which devised (a) a gift of $50,000 to his brother Bernardo, (b) $75,000 to his friend Fred and (c) the rest, known as the residue, to his neighbor Ned. When Thomas wrote his will, his estate consisted of $300,000 in a bank account and an unencumbered home in Los Altos, CA. However, economic difficulty soon confronted Thomas. He repeatedly invested in many failed start-ups in Silicon Valley. By the time Thomas passed away in 2013, his estate consisted of only a $60,000 bank account which lacked a pay-on-death beneficiary. His Los Altos home had been earlier foreclosed on. Thus, Thomas's estate clearly lacked the necessary liquidity to fullly satisfy the gifts he made in his will.

The issue then is how are the gifts abated, i.e. what is the priority of satisfaction. The default California law is found in Probate Code § 21402. It lists the order of abatement as follows: 

(1) Property not disposed of by the instrument.
(2) Residuary gifts.
(3) General gifts to persons other than the transferor’s relatives.
(4) General gifts to the transferor’s relatives.
(5) Specific gifts to persons other than the transferor’s
relatives.
(6) Specific gifts to the transferor’s relatives.

From the above example, (a) is considered a specific gift to a relative so it would be (6), (b) is considered a specific gift to a non-relative so it would be (5) and (c) is considered a residual gift so it would be (2). Hence, the residual beneficiary, Ned, would receive nothing as there would be no items left following the distribution of the specific gifts. For Fred, since he lacked priority in regards to Bernardo as he was a non-relative, his gift would be abated in favor of Bernardo. Whereas the estate consisted of $60,000, the first $50,000 of which would be allocated to satisfy the bequest to Bernardo. The remaining $10,000 would be allocated to Fred.

The problem of abatement is usually an issue where the testator devises large monetary gifts. Many people are actually cash-poor even though they might be asset-rich. Americans typically aspire to make their money work for them, thereby their money will be invested in various endeavors. Thus, a specific gift of $25,000 might not seem problematic at first blush but ultimately could prove disruptive if the estate is cash-poor.  

In light of this, many people who write a will often use percentages instead of set amounts when listing beneficiaries. This provides flexibility in case the testator's financial situation changes post-execution of their will. Still, the testator might not be comfortable with a percentage because 50% of an estate might be worth more than a specific gift of say $75,000 years later. From personal experience, I have seldom seen large monetary gifts listed in a will although it occasionally pops up. On balance, I think percentages are desirable because it is easier administratively. When the person passes away, the proverbial pie is split up according to the will and the process is complete. Whereas with a specific monetary gift, assets must be marshaled to satisfy the bequest. 

Probate Terms

Probate law has certain terms that have specific legal meanings to them. The following are some of those terms.

Abatement 

Definition: The reduction of testamentary gifts. Black's Law Dictionary 8th ed. (West Group, 2004).

Example: John Negligent decides to leave $50,000 in his will to his friend Larry Appleton with the balance, known as the residuary, to his other friend Homer Thompson. When John wrote his will, his estate was worth $500,000 in liquid assets. However, when John passed away, due to his profligate spending, his estate was only worth $30,000. California laws on abatement say that Larry is entitled to the remaining $30,000, not Homer. Prob C § 214029(a). However, the default rules of abatement can be altered in a will. Prob C § 21400. 

Ademption 

Definition:  Property that was listed in the person's will that is not in his or her estate at the time of their death. Black's Law Dictionary 8th ed. (West Group, 2004).

Example: John Negligent states in his will that his friend James Rodgers is to receive his prized red Ferrari 308 GTS, which was featured in the movie National Lampoon's Vacation. (I have watched that movie about a thousand times now). John then sells his Ferrari to pay off his credit debt and passes away in a tragic hot air balloon accident shortly thereafter. John's gift of the Ferrari to James is therefore adeemed. James will then need to prove, in order to inherit replacement property from John's estate, that there is no sufficient proof to conclude that John intended for the gift to fail. Estate of Austin (1980) 113 CA3d 167. For example, James will argue that John sold the car because he intended to pay off his credit card rather than avoid having James inherit his Ferrari.

Beneficiary

Definition: "A person to whom a donative transfer of property is made or that person's successor in interest." Prob C § 24.

Example: John Negligent leaves, in trust, a beach home in Santa Cruz for his nephew Bobby Smithson.

Class gift

Definition: A gift to all individuals matching the description of the class. Black's Law Dictionary 8th ed. (West Group, 2004).

Example: John Negligent writes a will and leaves his entire estate to his "nieces." When John write his will, he has 4 nieces but at the time of his death he has only 1 niece. Since the devise was to a class of members, rather than individuals, the remaining niece is entitled to inherit the entire estate rather than split the estate with the heirs of the predeceased nieces.

In contrast, a gift made by Katherine Moore in her will to "Carrie D. Griffin and her sister, Anna M. Davis, equally divided" was found not be a class gift.  Estate of Moore (1955) 135 CA2d 122. Thus, Anna could not inherit the entire gift even though Carrie had predeceased Katherine.

Creditor

Definition: "One to whom a debt is owed." Black's Law Dictionary 8th ed. (West Group, 2004)

Example: John Negligent runs over a defenseless old lady in the Santa Cruz mountains on a dark and stormy night. The old lady's family sues sues John for wrongful death and wins. While on appeal, John passes away due to an unforeseen traffic accident. The victim's family is a creditor of John's estate and may assert a creditor's claims during John's probate.

Decedent

Definition: "A dead person." Black's Law Dictionary 8th ed. (West Group, 2004)

Example: Self-explanatory. I will avoid making a potshot at a recently deceased celebrity.

Disclaimer

Definition: "Any writing which declines, refuses, renounces, or disclaims any interest that would otherwise be taken by a beneficiary." Prob C § 265

Example: Homer Thompson is the first named beneficiary of John Negligent's large estate, his uncle. However, Homer has enormous credit card debt and multiple judgments against him. Rather than have his creditors inherit his uncle's estate, Homer disclaims his interest in John's estate so that it transfers to the second named beneficiary. For reference, this is legal. Prob C § 283.

Executor

Definition: An individual nominated in a will to be appointed by the probate court to administer the estate of the decedent's death. Black's Law Dictionary 8th ed. (West Group, 2004).

Example: John Negligent nominates in his will that Freddy Freebird to be the executor of his will. 

Fiduciary

Definition: A person who is required to act for the benefit of another person, on all matters within the scope of their relationship; one who owes to another the duties of good faith, confidence and candor. Black's Law Dictionary 8th ed. (West Group, 2004).

Example: An executor hires an attorney to handle a decedent's probate. The executor is a fiduciary for the decedent's estate and the attorney is a fiduciary for the executor.

Heir

Definition: Any person, including the surviving spouse, who is entitled to take property of the decedent by intestate succession under this code. Prob C § 44. 

Example: Harry is married to Wendy but the couple decides never to have kids. Harry passes away in a tragic rafting accident on the Colorado River in Arizona. At the time of his passing, Harry did not write his will. Wendy is considered Harry's heir. 

An heir is basically a person's next of kin.

Intestate

Definition: A person who has died without a valid will. Black's Law Dictionary 8th ed. (West Group, 2004). 

Example: Irwin decides to write a will but can only locate 1 witness, his neighbor, to sign his type-written will. On the way home from having his will countersigned by his neighbor, Irwin is run over by a pizza delivery guy. Irwin has died intestate because a type-written will requires 2 witnesses. Prob C §6110.

Issue

Definition: All his or her lineal descendants of all generations, with the relationship of parent and child at each generation being determined by the definitions of child and parent. Prob C § 50.

Example: Harry and Wendy, a married couple, have two children, Sonny and Denise. Denise then gets married and has a child, Gwynn. Harry then passes away in an unforeseen blender accident. Harry's issue would be considered Sonny, Denise and Gwynn. 

Lapse

Definition: A devise to a beneficiary that fails because the beneficiary has either predeceased the testator or has failed to live until a certain point in time. Black's Law Dictionary 8th ed. (West Group, 2004).

Example: Thomas devises to Bobby his home in Los Altos, CA free and clear, 650 Rosewood Court. Bobby unexpectedly passes away before Thomas succumbs to mortality. Bobby's inheritance is a nullity because he has failed to survive Thomas, namely the gift has "lapsed." 

Minor

Definition: An individual under 18 years of age. Fam C §6500.

Example: Self-explanatory   

No Contest Clause

Definition: A clause in a will or trust that disinherits a beneficiary should they contest a will or trust. Black's Law Dictionary 8th ed. (West Group, 2004).

Example: Thomas writes in his will that his son, his sole heir, shall only receive $10,000 of Thomas' $1,000,000 estate. The remainder of the estate will go to Thomas' drinking buddy Barney. The will also contains a no contest clause which states that Thomas will forfeit his $10,000 inheritance if he chooses to pursue litigation in hopes of overturning the will for whatever reason.

Pretermitted Child

Definition: A will, made by a parent, that fails to account for a child.  Black's Law Dictionary 8th ed. (West Group, 2004).  

Example: Harry writes his will in 2000. In 2002, Harry marries Wendy and they have a child named Doris in 2004. In 2011, Harry passes away after toppling a vending machine after he tried to grab the last Diet Mountain Dew from it. Doris is a pretermitted child because Harry's will does not account for her. In light of this, Doris may be able to claim an intestate share of Harry's estate.

The companion to a pretermitted child case is the pretermitted spouse, in which the husband fails to account for the wife in his will.

Residuary

Definition: A residuary gift is a transfer of property that remains after all specific and general gifts have been satisfied. Prob C §21117(f).

Example: Thomas pens a will with the following stipulations (1) $15,000 to my Uncle Buck (2) $20,000 to my neighbor Al Bundy (3) my Honda Accord to my friend Larry Appleton and (4) the residual to Pancho Villa. When he dies Thomas' estate has (1) $100,000 in cash (2) $300,000 in Exxon Mobil stock (3) a home in Beverly Hills, CA (4) a Honda Accord and (5) a Rolex Oyster Perpetual. 

Villa, as the residual beneficiary is entitled to $65,000 in cash, all the Exxon Mobil stock, Thomas' house and his watch. 

Rule Against Perpetuities 

Definition: A nonvested property interest is invalid unless one of the following conditions is satisfied: 

(a) When the interest is created, it is certain to vest or terminate no later than 21 years after the death of an individual then alive or (b) The interest either vests or terminates within 90 years after its creation. 

Example: William Randolph Hearst, the media baron, wrote in his 1951 will that his trustee was to operate his business, which is estimated to be worth billions of dollars, as long as they see fit and without time limit. Due to the rule against perpetuties, the trust is expected to last until 2040. Hearst v Ganzi (2006) 145 CA4th 1195. The reason for this is because by 2040, the trust will have failed to vest or terminate within 21 years of Hearst' death and it will be 90 years since the trust's creation.

Testator
 
Definition: A person who has made a will.Black's Law Dictionary 8th ed. (West Group, 2004).
     
Example: Pretty sure an explanation is not needed here.

Trustee

Definition: One who, having legal title to property, holds it in trust for the benefit of another and owes a fiduciary duty to that beneficiary. Black's Law Dictionary 8th ed. (West Group, 2004). 

Example: Thomas writes a trust and leaves property to his son Samuel. However, since Samuel is a minor, Thomas entrusts the property to Theo to hold in trust until Samuel becomes an adult.

The list of duties a trustee owes a beneficiary are expansive and there is significant liability involved with this undertaking.

Trustor (or Settlor)

Definition: One who creates a trust. Black's Law Dictionary 8th ed. (West Group, 2004). 

Example: Every trust has three components, a trustor (or settlor), the person who creates the trust, the trustee, the legal owner of trust property and the beneficiary, the equitable owner of the property.