Monday, August 8, 2011

Specific Bequests: Potential Ademption Problem

Trusts and Wills often provide that a particular asset pass to a certain beneficiary. Such a bequest is a “specific bequest” in that it is satisfied only by receipt by the beneficiary of the specific, particular property identified in the Trust and Will. For example, a person leaves “100 shares of my Apple, Inc. stock to my daughter, Kathryn.” What happens if at the time of death, the decedent or his or her Trust no longer owns any Apple stock? Generally speaking, if specifically bequeathed property, such as the Apple stock in this example, is not in the decedent’s Trust or estate at the time of death, the bequest is adeemed, the bequest fails and the beneficiary receives nothing. This is known as “ademption”, namely the failure of a bequest because the property is no longer in the decedent’s Trust or estate at the time of his or her death. In this example, Kathryn would receive nothing. It is essential that if the decedent does not wish the bequest to adeem, the Trust or Will must clearly indicate this intent. An example of such stated intent would be:

“In the event I no longer own any shares of Apple, Inc. at the time of my death, this bequest shall not adeem but my daughter, Kathryn, shall receive in cash an amount equal to the closing value of 100 shares of Apple, Inc. as of the date of my death or as of the most recent trading day preceding my death.”

Other questions could arise even with the inclusion of the above language. For example, what if Apple, Inc. or its assets are acquired by a separate corporation prior to the date of death in such a fashion that the corporate entity Apple, Inc. no longer is in existence on the date of death? Does the bequest then adeem, or does Kathryn receive in cash an amount equal to 100 shares of the corporation that acquired Apple or its assets? Again, the Trust or Will needs to clearly state the intent of the decedent in the event of such contingencies.

Contrast this with a general bequest of a specific dollar amount such as where the Trust or Will provides for a bequest of “Thirty-five Thousand Dollars ($35,000.00) to my daughter, Kathryn.” In this latter situation, it makes no difference whether the decedent still owns any Apple stock or not as the general bequest of Thirty-five Thousand Dollars ($35,000.00) to Kathryn will be satisfied out of the cash or liquid assets of the Trust or Estate or by the sale of other general assets of the Trust or Estate. However, although Kathryn would receive the general bequest of Thirty-five Thousand Dollars ($35,000.00), she would not share in any appreciation (or depreciation) in the value of Apple, Inc.

Accordingly, it is important that an estate planner insure that the client fully understands the pros and cons of providing for a specific or a general bequest. It is most important that the client’s Trust and Will clearly state his or her intent so that such wishes and desires are not defeated by future events arising after the Trust and Will is executed but prior to the date of death.

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