In a perfect situation, a deceased person’s estate would correspond exactly with the gifts as set out in his or her last will and testament. However, it is sometimes the case that the assets of an estate are insufficient to pay all of a testator’s debts, as well as all gifts set out in his or her will, or where the object of a specific bequest no longer exists at the time of the testator’s death.
In the former situation, the principle of abatement would apply to the distribution of the estate to beneficiaries, meaning that the gifts set out in the testator’s will are reduced rateably and in order depending on the type of bequest. If the estate has insufficient assets to pay the testator’s debts, it would be insolvent and the legacies described in the testator’s will would be unable to be paid. If there are assets leftover after payment of debts, but they are not sufficient to fully satisfy all gifts, then some or all of the gifts will abate.
If the testator’s will does not specifically provide for the order in which gifts are to abate, the order of abatement of bequests is as follows:
- Residuary personalty.
- Residuary real property.
- General legacies, including pecuniary bequests from the residue.
- Demonstrative legacies, meaning bequests from the proceeds of a specific asset or fund not forming part of the residue.
- Specific bequests of personalty.
- Specific devises of real property.
The abatement of gifts in each category will occur in equal proportions so that no single beneficiary will be made to bear the full burden of the abatement.
Ademption occurs when a specific legacy in a testator’s will cannot be satisfied due to the lack of existence of the property that was the subject of the bequest. When a specific gift adeems, it fails, and the beneficiary will not receive the gift.
In Ontario, there are a number of statutory provisions that affect the doctrine of ademption, including ss. 20 and 22 of the Succession Law Reform Act, R.S.O. 1990, c. S.26 that permits a will to operate on substituted property, and s. 36 of the Substitute Decisions Act, 1992, S.O. 1992, c. 30 (the “SDA”) which provides that ademption does not apply to property disposed of by a guardian under the SDA.
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Last week, Jason Allan blogged on the principle of ademption. I thought I’d take the opportunity blog on the similar, but distinct, principle of abatement.
Whereas ademption refers property devised in a Will ceasing to exist at the date of death, abatement refers to the reduction of legacies that occurs when, after payment of debts, there are insufficient assets in the Deceased’s estate to satisfy all of the gifts provided for in the Will in full. As a result, absent a contrary intention in the Will, the beneficiaries will receive their bequests at a reduced amount, if at all.
The type of legacy provided for in the Will determines the order in which the gifts will abate. The order of abatement is as follows:
- First, residuary personalty;
- Second, residuary real property;
- Third, general legacies, which include pecuniary bequests from the residue;
- Fourth, demonstrative legacies, which are bequests from the proceeds of a specific asset or fund, such as a bank account, which does not form part of the residue;
- Fifth, specific bequests of personalty; and
- Sixth, specific devises of real property.
The assets at each level will abate rateably until they have been exhausted, at which point the assets at the next level will start to abate.
Keep this in mind when planning your clients’ estates. I recently had a case where the assets in the estate were a home and some bank accounts. Because of debts, the cash assets ended up being exhausted. At the end of the day, one beneficiary walked off with a $250,000.00 home. The others got nothing. One wonders if this is what the testator had intended.
Have a great day!