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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Protecting Inheritance from Child’s Divorce

Parents are often (maybe not always) excited when their children marry.  It’s exciting to see their adult child find a spouse, build a home, settle down and maybe think about grandchildren down the road.  However, even if the parent adores the person their child loves, it’s wise to prepare to protect our children with our plans now, says a recent article titled “Worried about Your Child’s Inheritance If They Divorce? A Trust Can Be Your Answer” from Kiplinger.  After all, things happen and sometimes relationships don’t go the way we expect.  Protecting inheritance through prudent planning will keep the inheritance with your child if they divorce.

With the federal estate tax exemptions so high (although that may change in the very near future), planners were able to focus on other concerns in estate plans, not just taxes.  A more applicable concern for most people was how well your children will do, if and when they receive their inheritance.

Some people recognize that their children are at risk. They worry about potential divorces or a spendthrift spouse. The answer is estate planning, and more specifically, a well-designed trust. By establishing a trust as part of an estate plan, you can better protect inheritance.

If an adult child receives an inheritance and commingles it with assets owned jointly with their spouse—like a joint bank account—depending upon the state where they live, the inheritance may become a marital asset and subject to marital property division, if the couple divorces.  This is the reason these types of trusts are so important. It’s like putting the toothpaste back into the tube, you put these assets back into a protected trust once it’s owned by the child.

If the inheritance remains in a trust account, or if the trust funds are used to pay for assets that are only owned in the child’s name, the inherited wealth can be protected. This permits the child to have assets as a financial cushion, if a divorce should happen.

Placing an inheritance in a trust is often done after a first divorce, when the family learns the hard way how combined assets are treated. Wiser still is to have a trust created when the child marries. In that way, there’s less of a learning curve (not to mention more assets to preserve).

Here are three typical situations for protecting inheritance:

Minor children. Children who are 18 or younger cannot inherit assets. However, when they reach the age of majority, they legally can. A sudden and large inheritance is best placed in the hands of a trustee, who can guide them to make smart decisions and has the ability to deny requests that may seem entirely reasonable to an 18-year-old, but ridiculous to a more mature adult.  You can also set a more reasonable age for the beneficiary to take over their trust, such as 25 or 30.

Newlyweds. Most couples are divinely happy in the early years of a marriage. However, when life becomes more complicated, as it inevitably does, the marriage may be tested and might not work out. Setting up a trust after the couple has been together for five or ten years is an option.

Marriage moves into the middle years. After five or ten years, it’s likely you’ll have a clearer understanding of your child’s spouse and how their marriage is faring. If you have any doubts, talk with an estate planning attorney, and set up a trust for your child.

Estate plans should be reviewed few years, as circumstances, relationships and tax laws change. A periodic review with your estate planning attorney allows you to ensure that your estate plan reflects your wishes and that it is protecting inheritance for your loved ones.

Reference: Kiplinger (April 16, 2021) “Worried about Your Child’s Inheritance If They Divorce? A Trust Can Be Your Answer”

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