Grandma, bless her soul, was a generous lady. She wanted to name each grandchild in her will so that they would know how special each of them was to her. So, one day she decides to create her will with an on-line program. Keeping things simple, her will stated:

  • All tangible personal property to granddaughter Sydney (estimated value $10,000);
  • Home (worth $200,000 – no mortgage) to granddaughter Regan;
  • Checking Account to grandson Max ($50,000); and
  • Residue to grandson Luke ($75,000).

She knew the grandchildren would split everything equally. Grandson Luke was nominated as her personal representative. Luckily, the will was signed and witnessed properly because the next day, Grandma passed away.

So where do we start? Let’s assume things go smoothly and Luke is appointed personal representative. His job is to gather the probate assets (anything owned in Grandma’s individual name that does not transfer to someone pursuant to a beneficiary designation). Items 1-3 are probate assets.

Next, he will pay all debts and expenses. What’s left is called the residue. In this case, Grandma had no debt so everyone receives the items and amounts stated. The problem is that Grandma assumed everyone would split the items equally. Unfortunately, no one is legally obligated to do so. To make Grandma’s wishes come true, it no longer is a “simple” solution because, to alter the will, one or more of them would have to disclaim what they were to receive (be treated as if he or she predeceased Grandma). Alternatively, they could all agree to “modify” Grandma’s will by entering into a settlement agreement. What a hassle, not to mention the additional expense!

Commonly, I run into clients who name one child as sole beneficiary on an account to make it “easy” for that child to distribute the account to siblings at the parent’s death. The child is not required to share the account. If the child were to divvy it up after receiving it, any amounts in excess of $14,000 (or $28,000 if the beneficiary is married) per sibling would constitute a taxable gift. The child recipient would have to file a gift tax return to report the taxable portion of the gift. To avoid this result, the child would have to disclaim the asset.

OK, but let’s go back to Grandma. What if she died with credit card debt of $20,000? Estate assets – Liabilities = Residue. This would mean that Luke’s share is reduced by that liability and he would receive $55,000 instead of $75,000.

To make matters worse, if Grandma’s debt exceeds the amount left as residue, then the personal representative would have to follow a pecking order of using some of the other specific gifts to pay those expenses. There are special rules which protect the home from being used because it is considered an exempt asset and will distribute free and clear of creditor claims (other than a mortgage). Just think of the situation where estate beneficiaries don’t get along…it’s not pretty.

Moral of the story? What seems like “simple” planning usually creates a headache later. Grandma should have discussed her wishes with her estate planning attorney. That would have shown the grandchildren how special they were!