What happens when will gifts no longer match the estate

By Richard C. Wilson

Start with the exact gift language and a current asset list. Put sale records, account statements, loan documents and beneficiary information beside the will. Identify the question that needs attention: missing property, a deceased beneficiary, a lifetime transfer or insufficient assets.

Research notice: Based on primary sources linked below. The legal examples use Minnesota statutes. Other states differ. Ask an estate attorney to review the complete will, ownership records and transaction history before deciding how a gift should be distributed.

In Minnesota, for example, the will construction rules discussed below apply unless a contrary intention is found. Other states differ. Read each example with the will's actual wording, including directions elsewhere in the document.

Specifically devised property sold before death

For a review of missing property and unpaid proceeds, use the guide to what a will controls.

Gather the original gift description and records showing what happened to the asset. Identify the seller, purchaser, outstanding balance and person who received payment. Keep condemnation papers and insurance correspondence with the same file.

Sales, mortgages and recoveries during incapacity

In Minnesota, for example, absent a contrary intention, specified transactions involving specifically devised property can give its beneficiary a general money gift under the following conditions and exceptions. Other states differ.

• The property was sold or mortgaged by a conservator or guardian, an agent acting within the authority of a durable power of attorney for an incapacitated principal, or a revocable trust's trustee during the settlor's incapacity.
• Alternatively, a condemnation award, insurance proceeds or recovery for injury to the property was paid to one of those persons acting in the specified capacity.
• The money gift equals the net sale price, unpaid loan amount, condemnation award, insurance proceeds or injury recovery. Reduce that entitlement by any right the beneficiary has to remaining specifically devised property and protected proceeds under the same statute.
• For an agent, incapacity requires impairment for reasons other than minority that leaves the principal without sufficient understanding or capacity for personal decisions. The principal must also be unable to meet personal needs for medical care, nutrition, clothing, shelter or safety, even with appropriate technological and supported decision making assistance.
• For a trustee, use the trust instrument's definition of incapacity. If the trust is silent, use the statutory definition just described. An incapacity finding need not occur during the principal's or settlor's life.
• The protection ends if the principal's or settlor's incapacity ceases after the transaction and that person survives for one year. For conservator or guardian transactions, an adjudication ending incapacity and survival for one year after that adjudication are required.
• For a specific gift in a will, trustee protection also does not apply when both of the following conditions hold. The trust distributes all assets held at death outside the settlor's estate. The devised property's initial transfer into the trust preceded incapacity.

Bring the power of attorney, conservatorship or guardianship records, or complete trust instrument to counsel. Include records of incapacity, any later recovery and the transaction itself. Ask counsel to review the entitlement and its reduction together.

Securities after corporate changes

In Minnesota, for example, absent a contrary intention, a securities gift includes qualifying additional securities when the testator owned securities matching the will's description at execution. The additional securities must be owned at death and acquired afterward because of ownership of the described securities. Other states differ.

The qualifying categories are:

• Securities of the same organization acquired through action initiated by that organization or a successor, related or acquiring organization. Securities acquired by exercising purchase options are excluded.
• Securities of another organization acquired through merger, consolidation, reorganization or another distribution by the organization or a successor, related or acquiring organization.
• Securities of the same organization acquired through a reinvestment plan.

Cash distributions before death are excluded from the gift.

Collect statements showing the original holding, subsequent corporate actions and holdings at death. Keep purchase option transactions and cash distributions separately identified for the attorney's review.

A beneficiary's death and a failed residuary share

Begin with the named beneficiary's relationship to the person who made the will, the survival language and the relevant death records. For a group gift, bring the wording describing the group and information about each intended recipient.

When descendants can take a deceased beneficiary's place

In Minnesota, for example, absent a contrary intention, substitute descendants can take when the deceased beneficiary was the testator's grandparent or a lineal descendant of a grandparent. The beneficiary must have been dead at execution, failed to survive the testator or been treated as having predeceased the testator. Other states differ.

The substitute descendants must survive the testator by 120 hours. Descendants of equal degree take equally. When degrees differ, more remote descendants take by representation. The rule includes someone who would have taken under a class gift if living, whether death occurred before or after execution.

Keep the exact words of the individual or class gift with the family and survival records. Ask counsel to compare the named beneficiary's relationship, the descendants' degrees of kinship and the evidence of survival before identifying substitute recipients.

Where a failed gift goes

In Minnesota, for example, absent a contrary intention and subject to the substitute descendant protection and survivorship limits discussed here, a gift outside the residue that fails for any reason becomes part of the residue. Other states differ.

That rule does not itself award replacement money for missing property.

In Minnesota, for example, when the residue is left to two or more people, a failed residuary share passes to the other residuary beneficiaries in proportion to their interests in the remaining residue. A contrary intention displaces this default, and the substitute descendant protection and survivorship limits apply. Other states differ.

Keep the specific gift and residuary language together when asking about a failed gift. Ask counsel to identify which provision applies before preparing a proposed distribution.

Which gifts shrink first when assets fall short

In Minnesota, for example, estate shortfalls ordinarily reduce gifts in the following order, without preference between real and personal property, subject to elective share provisions and the alternative directions and adjustments below. Other states differ.

1. Property not disposed of by the will.
2. Residuary gifts.
3. General gifts.
4. Specific gifts.

Within each class, reductions are proportional to what each beneficiary would have received on full distribution. A general gift charged on particular property or a fund is treated as specific to that property's value. It is general to the extent the property fails or is insufficient.

The will's stated reduction order controls instead. An alternative order also controls when necessary to preserve the testamentary plan or a gift's express or implied purpose. If a preferred gift is sold or used during administration, appropriate adjustment or contribution from remaining interests achieves the reduction.

Prepare a list of gifts, assets and administration transactions for counsel. Flag any gift charged against particular property or a fund, and identify any preferred gift already sold or used. Use the probate administration guide for procedural questions.

Review the debt on a specific gift separately

Put the loan and security documents beside the exact gift clause and any directions to pay debts. Include the balance and security records as of death. Ask counsel to review those records alongside the estate's proposed reductions and identify which documents govern the debt.

Lifetime gifts and a gift under the will

In Minnesota, for example, absent a contrary intention, a lifetime transfer satisfies a will gift in whole or part only if one of three written directions or acknowledgments exists. Other states differ.

• The will directs deduction of the lifetime gift.
• The testator states in a contemporaneous writing that the transfer satisfies the will gift or that its value must be deducted.
• The beneficiary acknowledges in writing that the transfer satisfies the will gift or that its value must be deducted.

For partial satisfaction, use the value when the beneficiary first receives possession or enjoyment, or at the testator's death, whichever occurs first. If the beneficiary fails to survive the testator, satisfaction still applies under the substitute descendant and failed gift rules unless the testator's contemporaneous writing provides otherwise.

Gather the transfer documents and any accompanying letters or acknowledgments. Ask counsel to review both the writing and the valuation point before preparing a distribution proposal.

Review property acquired by the estate after death

Separate the property owned at death from property acquired by the estate afterward. Record each later acquisition, its date and the supporting documents. Ask counsel to compare those records with the will's provisions for the passage of property.

Accounts, personal property lists and undisposed property

Compare the will's gift clauses with account agreements, securities registrations and any separate personal property list.

Check accounts and securities registrations separately

For securities registered in beneficiary form, use the joint ownership and transfer on death guide. Bring the registration records and any cancellation notice for counsel to review with the will.

Review any separate personal property list

Bring any separate personal property list, all versions of the will and any codicils to the review. Keep the item descriptions and intended recipients together. Use the will changes guide for related questions.

Property not disposed of by the will

For distribution questions, use the intestacy and family ownership guide. For a referenced trust, consult the pour over will glossary entry.

Separate reviews for formula gifts and a surviving spouse

Use the surviving spouse inheritance rights guide for that review. Take tax formula clauses to the federal estate, gift and GST tax guide, and consult the state guides for questions about another state's gift classifications.

Common questions

Resources to check out

• Minnesota: Missing specific gifts and protected proceeds: Read the primary text on remaining property, unpaid proceeds and transactions involving incapacity.
• Minnesota: Gifts to beneficiaries who die first: Check the statutory text on substitute descendants and survivorship wording.
• Minnesota: Which gifts shrink when assets are insufficient: Review the reduction order, alternative directions and administration adjustments.
• Minnesota: Stock gifts after corporate changes: Examine the additional securities categories and exclusions.