Changes in the Distribution of Testamentary Gifts (Abatement, Exoneration of Liens, Ademption)

Question 1

What are the 5 categories of testamentary gifts?

Answer 1

1. Specific Gift
2. Demonstrative Legacy [a general amount, but the testator designates a specific source from which the amount is to be paid from.
3. General Legacy [a general amount]
4. Residuary Disposition
5. Intestate Property

Question 2

What is abatement?

Answer 2

Abatement occurs when there are more claims against the estate than there are assets to cover all the gifts made under the will.

Absent language in the will to the contrary:

Order of Abatement:

1. Intestate and Residuary Property
2. General Legacies [pro rata]
3. Demonstrative Legacies [pro rata]
4. Specific Gifts

Question 3

What is ademption?

Exclusions?

Answer 3

Failure of a gift.

Ademption only applies to specific gifts.*

If the specific gift is not in the estate at the time of death, the beneficiary doesn’t get it. It doesn’t matter why it’s not there.

Instead of adeeming, a demonstrative legacy turns into a general legacy.

Three Exclusions to ademption: (the beneficiary gets)

1. Insurance Proceeds for lost, damaged, or destroyed property, to the extent they are paid after death. [must be for the specific gift]
2. Proceeds received under an executory contract, to the extent they are paid after death.
3. Proceeds from a guardian or conservator’s sale of specifically bequeathed property, to the extent they can be traced.

Note: all these exceptions must relate to the specific gift for the beneficiary to get the $.

Question 4

What happens if a will makes a specific gift of property that has a lien on it? Does the beneficiary take the property subject to the lien?

(Exoneration of Liens)

Answer 4

Common Law Rule: The beneficiary is entitled to have the lien exonerated [meaning the encumberances are discharged by money from the residuary estate].

New York RULE: Liens on specifically devised property are NOT exonerated UNLESS the will *specifically* directs exoneration of the particular property.

Examples:

1. I direct that my executory pay all my just debts out of my residuary estate right after my death. Result: Too vague, does NOT exonerate.
2. I direct that my executor pay my debts on my blackacre property with residuary estate… This is good.

Question 5

What classification are gifts of shares of stock in publicly traded corporations?

Do they adeem?

Answer 5

If the gift language says “my 5 google shares,” this is a specific gift. Thus it will adeem if it is not there at the testator’s death.

If the language says just “5 shares of google stock,” this is treated as a general legacy – think of them as just a proxy for value

Question 6

What classification of gifts are shares in closely held corporations?

Answer 6

Shares in closely held corporations are specific gifts regardless of whether the language “my” is used.

They will adeem.

Question 7

What effect do stock splits have on gifts of stock?

Answer 7

Act as if the new shares were also specifically gifted.

Irrelevant whether public, closely held, or “my” is included.

e.g. T bequeths “100 shares of Centex stock” to C. After the will is executed Centex stock splits 2-for-1 and T owns 200 shares of Centex at his death. All 200 shares go to C. (treated as general gift for ademption purposes, and specific for purposes of stock splits)

Question 8

What type of gift is:

“I have $50,000 to be paid from the proceeds of the sale of my google stock.”

Answer 8

This is a demonstrative legacy. It’s not a transfer of stock so don’t think of it in the stock analysis!

Question 9

A will gifts:

My 50 shares of IBM stock.

What happens if IBM is taken over by Google and Google gives IBM SHs new Google stocks as compensation?

Answer 9

The google stocks take the place of the IBM stock in the specific gift, and do NOT adeem [directly traceable to the specific gift].

This is a change in form, not substance.