Abatement is the reduction of some or all of the gifts in an estate because there are insufficient assets to cover all the gifts. The courts have established a hierarchy of gifts such that not all gifts will abate equally. For example gifts of specific real property will be abated last and specific testamentary gifts that a power of attorney for property disposes of under the Substitute Decisions Act, 1992 are protected. The following is a list of the priorities:
- Residuary personalty;
- Residuary real property;
- General legacies, including pecuniary bequests from the residue;
- Demonstrative legacies (bequests from the proceeds of a specific asset or fund not forming part of the reside);
- Specific bequests of personalty; and then
- Specific devises of real property.
The frequent concern for clients is keep assets “out of the estate” to avoid probate fees (and for other reasons) but by doing so they might be creating an insolvent estate which a testator usually does not intend. If the testator provides for cash or in specie legacies and the liquid assets are in RRIFs, life insurance with beneficiary designations and real property with specifically named bequest or held in joint tenancy with right of survivorship then the monetary legacies run the risk of not being paid. We strive to ensure that our clients are made aware of these consequences to ensure that their gifts are not all for naught; however, too often this planning takes place with the assistance of the client’s other advisors without a proper review of the overall estate plan. A reminder to clients from time to time of the potential impact of this kind of planning would serve them well.
Lesson Learned: when assisting with estate planning ensure that sufficient assets have been left in the estate at the time of the plan and with changes to the plan over time not only to cover debts but also all intended legacies.
Until next time