You have meticulously created your estate plan to ensure that it includes and addresses all of your most important assets (accounts and property). You have reviewed your asset list repeatedly, and everything seems to be accounted for. But what if you have forgotten something?
Americans own a lot of stuff. Taking stock of your tangible and intangible possessions when creating an estate plan can be a tall order. Some assets may be overlooked and end up in what is called the residuary estate. A residuary estate can be created intentionally or unintentionally and may include valuable assets.
You can include a clause in your will or trust directing that any leftover assets in your estate go to a residuary (i.e., backup) beneficiary. You can even name multiple residuary beneficiaries in your estate plan, including your family members and favorite charities.
The Residuary Estate
The ordinary meaning of the word residue is a leftover part or remnant. In estate planning, residue has a special meaning, referring to the portion of a deceased person’s assets that remain after all debts and taxes have been paid and gifts have been made to beneficiaries.
Wills and trusts are designed to distribute specific assets to specific beneficiaries. Typically, a will or trust directs that assets such as real estate, personal property, and financial accounts be divided among named beneficiaries.
Sometimes, assets slip through the cracks and are not assigned to a specific beneficiary or explicitly given to a beneficiary. These assets comprise the residuary estate—think of them as “leftovers” or “everything else” in an estate plan. This can happen for a few different reasons:
The assets were not considered valuable enough to be explicitly included in a will or trust and may have been deliberately excluded.
For example, the average American home has thousands of items, and about one in 10 homes also includes off-site storage rental. It may not make sense to mention specific items in an estate plan that just amount to clutter.
An asset was accidentally left out of a will or trust
When making an estate plan, certain assets may simply be overlooked. Assets obtained after a will or trust was created are likely not explicitly mentioned in these documents. Assets that should have a named beneficiary (such as a payable-on-death account or life insurance policy) but fail to name one may also end up in the residuary estate.
A beneficiary predeceases the grantor
If a will, trust, or account names a beneficiary but the beneficiary passes away before the grantor passes away, the assets may become part of the residuary estate if no other beneficiary is named to receive these assets.
The residuary estate does not necessarily consist of worthless scraps a person did not plan for. Residuary assets such as financial accounts that lack named beneficiaries can be quite valuable, and multiple small assets can be valuable in the aggregate. In some cases, the residuary estate could be the most significant part of an estate.
Naming Multiple Residuary Beneficiaries
Wills and trusts often name multiple beneficiaries to operate as backups to the primary beneficiaries. They can also name residuary beneficiaries if all other beneficiaries named in the will or trust cannot receive the assets.
Naming multiple remainder beneficiaries may be used as part of a strategy to equalize remaining assets and avoid conflicts between survivors. If a family has multiple children, for example, but just one is the residuary beneficiary, that person could end up with a larger share of the estate than their siblings.
Since the size of a residuary estate can change over time as assets increase in value, debts accrue, and beneficiaries pass away, a residuary beneficiary could be in line for a windfall—or next to nothing. Family members are unlikely to fight over scraps. If the residuary estate is valuable, however, it could have competing claims.
It is not unprecedented for a family to discover a high-worth asset such as artwork or sports memorabilia that belonged to a late relative but was not part of their estate plan. It is also possible that an asset not thought to be valuable turns out to be worth a great deal of money.
In all but the most harmonious families, this could set the stage for infighting and maybe even estate litigation. Residuary beneficiaries have the same rights as other beneficiaries in many states—including the right to challenge a will and request an accounting of estate assets.
To avoid confusion and conflicts about how the residuary estate should be divided among multiple beneficiaries, a will or trust should contain detailed instructions, such as stating the percentage of the residue each beneficiary will receive.
Family conflicts over residuary assets may be avoided by gifting the residue to charitable organizations. Naming a charity as the residuary beneficiary allows you to support your favorite cause while prioritizing your loved ones in your estate plan. Charity gifts are tax-deductible and can help minimize your estate’s potential tax liability.
Residuary assets can also be divided among charities, family members, and other beneficiaries. However, depending on the size of the residuary estate and the number of beneficiaries, estate residue divided among many beneficiaries could result in tiny gifts for each. Many residuary beneficiaries can also add to estate administration costs, as the executor, personal representative, or trustee must parse the various assets and beneficiaries. Review your instructions and ensure each gift will truly benefit your chosen beneficiary.
Forgetting something? Talk residual gifting with an estate planning attorney.
To discuss these and other factors that can affect your residual gifting strategy, reach out and schedule a time to talk to one of our estate planning attorneys.
