Even with a comprehensive estate plan, it’s likely you’ll have some assets in a residuary estate. Like the sediment at the bottom of your glass after you finish a fine wine, an estate plan may also leave some residue.
This residue takes the form of assets left over after your executor has paid the estate’s debts, taxes and other expenses and distributed specific bequests of money or property. To avoid unintended consequences, include instructions in your will about how your residuary estate should be distributed.
How is a residuary estate created?
A residuary estate may be created intentionally or unintentionally. Why would someone do so intentionally? Most people accumulate a lot of assets, both large and small. Providing for the distribution of every asset — including all household furnishings, vehicles, electronics, clothing and jewelry — may not be desirable. You may want to make specific bequests of certain valuable heirlooms, such as leaving a diamond necklace to your daughter. But it isn’t necessary — or even possible in many cases — to specify a recipient for all your “stuff.”
Some assets may end up in your residuary estate unintentionally. This can happen if you inadvertently leave an asset out of your will or trust. Failure to name a beneficiary for assets such as life insurance policies or payable-on-death bank accounts can cause those assets to end up in your residuary estate. Another possibility is that the beneficiary of an asset dies before you and you neglect to name a contingent beneficiary.
Unlike the sediment in the wine glass, the residuary estate isn’t something to be discarded. Assets in your residuary estate can be highly valuable — in some cases even more valuable than the other parts of the estate.
If your will doesn’t designate one or more beneficiaries for your residuary estate, then that portion of your estate will likely go through probate and the probate court will determine how those assets should be distributed according to your state’s laws of intestate succession. In other words, those assets will be distributed as if you died without a will. (See “Understanding the laws of intestate succession” at X.)
How should your residuary estate be managed?
To avoid unintended consequences and ensure that your assets are distributed according to your wishes, consider including a residuary clause in your will. This clause provides for your estate’s residue to be distributed to one or more beneficiaries, which may include family members or other loved ones, or even charitable organizations.
The residuary clause should be designed carefully to avoid unintended consequences or conflicts among your heirs. The residuary estate may be small or very large, and its value may fluctuate dramatically over time. Suppose you name one of your children as beneficiary of your residuary estate. If that portion of your estate grows unexpectedly large, that child may end up with a larger share of your estate than his or her siblings. A better approach may be to distribute a specified percentage of the residue to each beneficiary.
Another option, if you have a trust, is to create a pour-over will. A pour-over will ensures that your trust is properly “funded” by providing that any leftover or overlooked assets are automatically poured (transferred) into the trust when you die. This ensures that all of your assets are distributed according to the terms of your trust, and nothing is left to the devices of the probate court or the laws of intestate succession.
Any questions?
As you’re putting together your estate plan, ask your estate planning advisor about managing your residual estate. There are several options for handling your estate’s residue, but overlooking these assets isn’t one of them. Failure to provide instructions for the disposition of your residuary estate can lead to undesirable — and in some cases, disastrous — consequences.
Sidebar: Understanding the laws of intestate succession
If you fail to leave instructions for the disposition of your residuary estate, those assets will likely be distributed according to your state’s laws of intestate succession. Every state has intestacy laws that determine who will inherit your property if you die without a will, trust or other legally binding document that provides for the distribution of your assets.
These laws vary from state to state, but generally they establish the order of priority under which assets will be transferred if you don’t have a will or trust or if your estate plan fails to provide for those assets. A typical sequence is your:
- Surviving spouse,
- Biological and/or adopted children,
- Grandchildren,
- Surviving parents,
- Siblings,
- Siblings’ descendants (nieces and nephews), and
- Grandparents’ descendants (aunts and uncles).
If none of these heirs exist, your assets may be transferred to the state.
Keep in mind that “nonprobate” assets generally don’t pass via intestate succession. This includes property held in a trust as well as life insurance policies, payable-on-death bank accounts and retirement accounts that go to a named beneficiary.