Sometimes your situation changes after you make your will. Perhaps your financial situation has changed, you have acquired new assets or disposed of old ones, or your circumstances have simply changed to the point that your will no longer accurately reflects your wishes.
Circumstances and property changes can affect the ability of your executor to fulfill your wishes after your death. In this post, I will discuss a variety of situations that can affect the inheritance of your heirs.
Ademption by Extinction
In a previous post, I discussed the possibility that a bequest could lapse—that is, there could be property with no heir. Ademption by extinction is the opposite of lapsing; there is an heir with no property.
Ademption by extinction occurs when there is simply no property to give. So, for example, if your will provides that your son is to inherit your 1956 Ford Mustang but you sell it prior to your death, it is not available for him to inherit.
To fully understand when an ademption by extinction may occur, you must first have an understanding of the different types of bequests. There are four different types of bequests:
- The specific bequest: A specific bequest is a bequest of a specific piece of property—for example, “my 1956 Ford Mustang,” “my baseball card collection,” etc.
- The demonstrative bequest: A demonstrative bequest is a bequest of general benefit, payable from a specific source—for example, “$10,000 from my checking account,” “$20,000 from the sale of my GE stock,” etc.
- The general bequest: A general bequest is a bequest of a general benefit, such as a dollar amount from no specific source—for example, “$10,000 to my son Jerry.”
- Residuary bequest: A residuary bequest is a bequest of the remainder of the estate—that is the part of the estate not otherwise disposed of by the will.
Ademption by extinction may only occur with respect to specific bequests. If there is not a bequest of a specific piece of property, there cannot be ademption by extinction.
Courts, however, have a bias against ademption by extinction and will often do whatever they can to avoid this result. Some courts, for example, will allow the beneficiary to receive property procured by the sale of the specific bequest. Others will classify the bequest as a general bequest, thereby allowing the estate to purchase the property in order to distribute it.
The potential property changes that may occur after the execution of a will are innumerable. Courts will nonetheless do what that they can—without reforming the will—to avoid an ademption by extinction.
Ademption by Satisfaction
Ademption by satisfaction can occur with both general and demonstrative bequests. Ademption by satisfaction occurs when gifts the testator made to the beneficiary during his or her life are counted against the beneficiary’s later inheritance.
As I discussed in an earlier post, however, there is a presumption that lifetime gifts made after the execution of a will are not meant to constitute an advancement of inheritance. Consequently, ademption by satisfaction will not occur without the explicit intent of the giver of the gift.
Exoneration of Liens
While not directly related to the issue of post-will execution property changes, many people question how their mortgage will affect their children’s inheritance. So, for example, what happens if a testator leaves his home to his children when there is still an outstanding mortgage on the property?
At common law—the judge-made law the United States inherited from England—the testator’s estate would pay off the mortgage. Property would be taken from other parts of the estate to satisfy the lien.
The Uniform Probate Code, on the other hand, provides that the beneficiary will take subject to the mortgage. Arkansas, however, has not adopted the Uniform Probate Code and so still follows the common law rule. This is something worth considering while making your estate plan.
Abatement occurs when property is taken from other parts of the estate to satisfy a general bequest. Abatement generally occurs when there aren’t enough assets in the estate to satisfy all the gifts made in the will, which can easily occur when the claims of creditors deplete the estate prior to the distribution to heirs.
Absent contrary provisions in the will, debts and expenses will be paid out of the estate in the following order:
- If there is a partial intestacy, property will first be taken out of the intestate property;
- Out of the residuary estate;
- Out of general bequests;
- Out of specific bequests.
For purposes of abatement, demonstrative bequests are treated as specific bequests to the extent of the value of the specific property, and as general bequests to the extent of any excess.
So, for example, if a will states, “$25,000 to my daughter to be paid from the proceeds of the sale of my GE stock,” but the GE stock is only worth $15,000 at the testator’s death, the bequest would be treated as a specific bequest as to the $15,000, and as a general bequest for the remaining $10,000.
Property Changes and Planning
For these reasons, it is important to have a clear understanding of yours assets and liabilities when making your will. Because of potential property changes, it is also important to keep your estate plan up to date to ensure that the probate court does not have to cancel some gifts to your heirs to satisfy others.