Most people see a last will and testament simply as a vehicle for distributing their property after they are gone. But a properly drafted will must also address the more technical details of the probate process. For instance, who will pay for the expenses incurred in administering your estate? Even relatively simple matters must deal with certain basic expenses, including attorney’s fees, payment of a probate referee for any required appraisals, filing fees with the probate court and preparation of tax returns. If you have any enforceable debts at the time of your death, the estate must find a way to pay those as well.
The Importance of the Residuary Estate
A last will and testament generally distributes property in two ways. The first is through a specific bequest naming the property and beneficiary, e.g. “I give my jewelry to my daughter, Mary Smith.” The other is through your residuary estate. As the name implies, this is the “residue” or leftover property that is not distributed through specific bequests. In theory, you could use one form of distribution exclusively. You could make specific bequests of all property and leave no residuary estate, or, vice-versa, make no specific bequests and leave everything to the residuary estate.
The latter option-leaving everything to your residuary estate-is not an uncommon estate planning practice. Leaving nothing to the residuary estate, however, is generally inadvisable. This is because a last will and testament typically directs the executor to pay all normal estate administration expenses from the residuary estate before making a final distribution to the named beneficiaries. If there’s nothing (or not enough) in the residuary estate to pay these expenses, then the money must be found in the specific bequests.
Consider the Estate of Smith, whose property includes a house valued at $100,000, furniture valued at $5,000, and a checking account with a $20,000 balance. If Smith’s will makes specific bequests of all these items-say, the house and furniture to his sister and the checking account to his brother-then there’s nothing left in the estate to pay administrative expenses. Let’s say those expenses come to $10,000. In order for Smith’s executor to settle the estate, he must deduct the necessary funds in proportion to each sibling’s inheritance. That’s easy enough to do with a liquid asset like a checking account. But how does one “deduct” part of a house? It would be necessary either to sell the house, giving the sister the remainder of any cash proceeds, or the sister could advance the necessary cash to the executor to pay the estate’s bills. Either way, the executor and heirs are left with a headache that Smith probably didn’t intend to cause.
Equity in Estate Planning
It’s also important to consider how payment of expenses might alter what you think is an equitable distribution of your property. Suppose Smith decided to leave all his property to his residuary estate with his sister as the sole beneficiary. Smith also took out a life insurance policy, worth roughly the same as his home and bank account, and named his brother as beneficiary. This way both siblings would be equally provided for, right? Not necessarily. While this estate plan simplifies things for the executor, who now has ample funds to pay expenses, the sister may get short-changed. This is because the life insurance policy is not an estate asset. Smith’s brother is not obligated to pay any share of the estate administration expenses from his life insurance proceeds (although he could certainly offer to do so). All expenses are deducted from the sister’s inheritance from the residuary estate.
This is just a simple hypothetical scenario. Your own estate planning may be far more complex in terms of the assets and individuals involved. Even if you think you’ve come up with a fair distribution of assets, it’s easy to overlook issues like how to pay for inevitable estate administration expenses. That’s why you should always work with an experienced San Diego estate planning attorney who can walk you through all the details of a last will and testament and help avoid any later confusion. If you have any questions or concerns, please call the Law Office of Scott C. Soady at 1-858-618-5510.