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Tuesday, July 6, 2010

What happens if the gift to a beneficiary no longer exists?

When a testator leaves a gift to a specific person in his Will, but that gift is no longer owned by the testator when he or she dies, what is the executor of the Will supposed to do about that gift? This is known as "ademption".

The answer to this question is surprisingly complex. One factor to be considered is why the testator does not own the asset. Has he or she disposed of it? Was it destroyed? Does it still exist but has changed so that it no longer fits the description in the Will? Did the testator make a mistake and name something he or she didn't own in the first place?

Another factor to consider is whether the beneficiary in question gets something else to replace it. This is based partly on the question of why the testator no longer owns the asset, and partly on whether the Will says anything about replacing an adeemed gift.

The general rule when talking about something small, say a set of tools or a piece of jewelry, is that if the item cannot be located, the beneficiary doesn't get anything to replace the gift. Make sure you read the Will carefully though, because it may direct something else.

What if the asset in question is much bigger and more valuable? At this point, the question is probably going to have to be answered by a judge. It doesn't mean there are two sides who are fighting over the answer; it just means that everyone acknowledges that there are specialized legal concepts in play that an executor can't deal with, so a judge is being asked for assistance.

One question that will be raised is whether the gift is a general gift or a specific gift. A specific gift is something like "pay my son $1,000 from account number 12345 at the Bank of Montreal". A general gift would be something like "pay my son $1,000 from my accounts at Bank of Montreal". If account number 12345 is no longer in existence, with the specific gift the son is out of luck and will get nothing. A specific gift will adeem if it doesn't exist in the form the Will mentions. With the general gift, he could still get his gift, because the general gift will not adeem. The exact wording of the Will is important.

Let's say a testator leaves her daughter her house at 10 Apple Street. When the testator dies, she no longer has a house at 10 Apple Street because she sold it and bought a new house at 11 Peach Street. In my opinion, the gift of 10 Apple Street would adeem. However, if the gift to the daughter was "whatever residence I own", the gift would not adeem and the daughter would inherit the house on Peach Street.

The question can get even more complicated. What if the testator left her daughter the house at 10 Apple Street, but the house had burned down, and the testator had put the insurance proceeds in the bank? Could the beneficiary get the insurance proceeds instead? Would it make a difference if the house burned down before the testator died or after she died?

A mistake that happens often that will result in ademption of a gift is a person giving away something in the Will that actually belongs to his or her corporation and not to him or her personally. An individual cannot give away property that is owned by a corporation, even if that individual owns the entire corporation.

The cases I've looked at are very fact-specific so it can be hard to generalize about what would happen in any given estate. One thing that is changing though is that the courts are focusing more on trying to come up with a result that fits the intentions of the testator. This means the courts will look for ways to save an adeemed gift if they can.

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