The Order of Abatement in Wills - A MUST Know Due To Heavy Testing on the UBE / MEE!

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The Order of Abatement in Wills - A MUST Know Due To Heavy Testing!

Within the confines of Wills, there is a category of rules pertaining to the changes in the distribution of testamentary gifts.

One such rule is known as abatement which is defined as a reduction of legacies.  In brief, abatement refers to not giving effect to a gift so that a creditor or multiple creditors can be satisfied based upon their respective claims against the estate.  Sometimes, estates simply don’t have the resources to pay for the administration expenses, creditors’ claims and all of the bequests made by the will.

Before delving into the order of abatement - a crucial component of this rule - and a heavily tested area on the exam, we must first classify and define the various types of gifts made within a will.

A specific gift is as its name connotes which is defined as a gift of specific property, real or personal.  For example, “I devise Blueacre to my son James.”  Or, “I devise my blue Apple iPad to my cousin Denise.”  A demonstrative legacy is a gift of a general amount, however the testator designates a specific source from which this amount is to be paid from.  For example, “I devise a total of $5 million from the sale of my Apple stock, to my daughter.”  Note that there is 1) a general amount; 2) from a specific source.

In contrast, a general legacy is a general amount however there is no specific source from which the amount is to be paid.  For example, “I devise the sum of $30,000 to my cousin, Albert.”  Note that a source for this amount has not been named.

A residuary disposition, is a disposition of the residue of/from the estate.  This is a very common gift in a will.  “I give all the rest, residue and remainder of my estate to my grandchildren, then alive.”

Finally, an intestate property gift results from a part of the estate that for one reason or another cannot be disposed of via the provisions of the will and as a result, lapses into intestate property.  “Where partial intestacy results, such property shall be given to my friend Bill.”

The rule for abatement is as follows: If there are more claims against the estate than there are assets to cover all gifts made under the will, ABATEMENT occurs in the following order:   

A – Intestate and Residuary prop                    THEN
B – General legacies (pro rata)                        THEN
C – Demonstrative legacies (pro rata)             THEN
D – Specific gifts                                             AND ONLY THEN –
E – Items that qualify for the estate tax marital deduction

THE RULE OF THUMB – Start at the first type of gift listed above and then abate down said list. 

For example, assume that David’s will purports to give $25,000 to Fred, $25,000 to George and $50,000 to Irma. Unfortunately, after paying administrative expenses and creditors, there is only $50,000 left in the estate. There is only enough to pay half of the $100,000 that the will purported to allocate. Therefore, each of the general bequest beneficiaries will receive half of his or her share. Fred and George will each receive $12,500, while Irma receives $25,000. 

Demonstrative bequests get preference over general bequests if their sources are in the estates. For example, Sue’s will gave Barry “$10,000 from her savings account at A&B Bank.” If Sue’s account is still in her estate at her death, it’s assets will be used to pay Barry his $10,000 before it is used to pay other general bequests. If the account is no longer in the estate, then Barry’s bequest simply reverts to the status of a general bequest and it abates proportionately if there are insufficient assets to pay all general bequests.

Keep in mind the pro-rata portion of the order of abatement. Pro rata is a Latin term used to describe a proportionate allocation. It essentially translates to "in proportion," which means a process where whatever is being allocated will be distributed in equal portions. If something is given out to people on a pro rata basis, it means assigning an amount to one person according to their share of the whole.
Take that into account when determining the exact amount of the new gift amount.
Should you have any additional questions about the order of abatement, ademption, anti-lapse or another area of the UBE, please do not hesitate to contact us at PassYourBarExam@gmail.com.


GOOD LUCK!

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