What Is a ‘Residuary’ Estate?

Sometimes lawyers use words and people don’t know what they mean.  We’ll get carried away explaining complicated legal concepts, ideas, laws, or the beauty of the work we’ve done for clients, only to forget we never defined our terms and the client has no idea what we are talking about.  One common example in estate planning is the “residuary estate” or “residuary clause”.  This blog will address both what that is its relevancy in your estate plan. This is also partially inspired by an article from earlier this year entitled  “How to Write a Residuary Estate Clause in a Will” from yahoo! although be wary as it has some mistakes.

You can also find the definitions of other common terms here:  https://galligan-law.com/common-estate-planning-terms/

The residuary estate is also known as estate residue, residual estate and can also be referred to trust residue or trust estate in that context. It simply means the assets left over after final debts and expenses have been paid and specific distributions are made. It is the general, catch all beneficiary designation of the estate plan.  For the purposes of this blog I’ll talk about it in a will, but it applies to trusts as well.

I’ll use myself as an example.  Let’s say that my wife and I have wills.  The wills don’t control all of our assets, as things like life insurance and retirement plans will be distributed directly to named beneficiaries.  The wills leave everything to the other upon the first of us to die.  If spouse is already deceased (let’s assume I survive because it’s my blog), then I may leave $10,000 to a friend, $50,000 to a charity, my pet to the trustee of a pet trust, a favorite book to my brother and the rest goes to my kids.

In my estate, my executor would pay my final debts and expenses (funeral, medical, final bills, etc), and make the specific distributions which are the money to the friend, charity, pet to the trust and book to my brother.  Whatever is left is the residuary estate, and that’s what goes to my kids.

Now, that assumes competent estate planning.  I would arrange the beneficiaries of my life insurance and retirement plans to coordinate with my wills and other assets to flow through my will because I want them to go to the beneficiaries of the residuary estate.  However, the residuary estate clause of the wills can be disrupted, either deliberately or unintentionally, by common mistakes often made without advance planning.

Here’s some examples of how that happens:

  • You forget to include appropriate assets in your plan to generate the residuary estate.
  • You have accounts that naturally pass outside of the will (e.g. life insurance and retirement) and the beneficiaries aren’t coordinated with the will.
  • You use too many transfer on death designations which take property away from the residuary estate. (This is a very common mistake)
  • If you acquired new assets after making the will that disrupt the flow and plan.
  • Someone named in the will dies before you or is unable to receive the inheritance you left for them.
  • You don’t do your own advanced long-term care planning and the assets which would create the residuary are all spent.
  • You lose the value of the residuary estate to the creditors of the beneficiaries or to the government if a beneficiary is using government benefit.
  • The will has inequitable tax planning that requires the taxes owed on my distributed outside of the will to be paid from the residuary estate.

Speak with an experienced estate planning attorney to determine how to structure your estate plan and assets to ensure the residuary estate and other assets go to the beneficiaries you wish while avoiding the pitfalls.

Reference: yahoo! (Dec. 4, 2022) “How to Write a Residuary Estate Clause in a Will”

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What is a Lady Bird deed?

Enhanced life estate deeds, also called Lady Bird deeds, can be a great tool to transfer ownership of real property at death. Texas estate planning uses them heavily to convey real property without the need for probate.

Florida Today’s recent article entitled, “Real estate transfers: Is a ‘Lady Bird deed’ right for me?” explains that Lady Bird deeds are a type of life estate deed designed to automatically transfer property ownership upon the death of the original owner to another individual. However, they don’t require the original owner to give up use, control, or ownership of the property while alive.  The article is written for Florida law and differs a bit from our Texas experience, so I’ll focus on the Texas version of the Lady Bird deed.  Lady Bird deeds are also used in some other states, such as West Virginia, Michigan and Vermont.

The beneficial receiver of the property upon death doesn’t get any immediate rights or ownership interests in the property, although they do get a vested interest. The Lady Bird deed is rendered obsolete if the original owner sells or conveys the property in their lifetime. However, if the original owner passes away, the property subject to the Lady Bird deed is automatically conveyed to the beneficial recipient without needing to pass through probate.

With a traditional Life Estate deed, the original owner must give up control when adding a beneficial recipient. This means the original owner is prohibited from selling, conveying, or encumbering the property without explicit consent from the beneficial recipient. The original owner also can’t change or end a traditional Life Estate deed without consent from the beneficial recipient.

Conceptually, a Lady Bird deed basically adds a beneficiary designation to your real property.  Like life insurance pays to a beneficiary when you die, the property goes to the named beneficiary when you die.  It is often also a good alternative to immediately transferring real property to beneficiaries.  See here for more ideas as to why:  https://galligan-law.com/is-transferring-the-house-to-children-a-good-idea/

Here are the benefits of a Lady Bird deed:

  • Properties can be conveyed at death without having to pass through probate.
  • The original owner remains in full control of the property while they’re alive.
  • Using and recording the deed doesn’t impact the current owner’s homestead protection, exemptions or mortgage on the property.
  • Any property subject to a Lady Bird deed doesn’t violate Medicaid’s five-year look-back period, avoids Medicaid recovery and isn’t subject to gifting taxes or penalties, since the beneficial owner doesn’t immediately possess any ownership rights.
  • An agent under a sufficiently powered Power of Attorney can create one, which isn’t the case with transfer on death deeds.
  • Preserves step-up in basis compared to immediate gifting of real property

Here are the downsides of a Lady Bird deed:

  • Don’t necessarily help in irrevocable trust planning.
  • Married estate plans incorporating marital trust or bypass trust planning need immediate trust ownership as opposed to receiving property when both spouses pass.

A Lady Bird deed can be an effective tool to transfer property outside of probate. For example, we often created revocable living trust estate plans.  To avoid probate, the trust needs to become the owner or recipient of much of your property.  The easiest way for the residence to avoid probate is to use a Lady Bird Deed (taking advantage of all of the above benefits) naming the trust as the death beneficiary of the deed.  This way, the property goes to the trust upon death without probate, and the Trustee can sell it, distribute it to your beneficiaries, or whatever the trust directs.

In the case of a married couple, we often use a combined approach of creating a right of survivorship agreement between the spousal property owners reserving the enhanced life estate in the survivor.  This means the spouses own the property while both alive, the survivor receives the property automatically without probate and becomes the owner when one spouse dies, and the survivor gets the enhanced life estate to avoid probate at their death.

As a fun final fact, I have read multiple explanations for how the Lady Bird deed got its nickname.  The article references that President Lyndon B. Johnson used one to convey property to his wife, Lady Bird Johnson, and the technique became associated with her name.  I’ve also read that a law school professor used the Johnson family as his example when explaining enhanced life estate deeds, and thus they became associated with the family name. Regardless of the origin, the name is memorable for a frequently used, versatile estate planning tool.

Reference: Florida Today (June 9, 2023) “Real estate transfers: Is a ‘Lady Bird deed’ right for me?”

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