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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What follows is a revised edition of this morning’s blog which inadvertently created confusion between the principles of Abatement and Ademption. I apologise for any confusion caused by the initial version.
On Monday, I blogged on the payment of debts of an estate and the steps that an estate trustee ought to take to protect him or herself from any personal liability. Today’s blog is a sequel of sorts (it would have been posted yesterday but a Groundhog Day tie-in was too good to resist).
The issue today is Ademption and Abatement, words that will only be found in a law dictionary. Ademption occurs when a specific gift of personal or real property in a Will is no longer in existence at the date of death, in which case the gift fails. If specific legacies of cash can be partially satisfied (as detailed below) from the funds remaining in the estate after payment of debts, then there is an Abatement of such legacies.
For greater clarity, where there are debts to be paid, the residuary beneficiaries take the hit first. If the debts can be paid and still leave something in the residue, than the specific cash legacies can be paid in full. However, when the residue is exhausted by the payment of debts, and there is a shortfall between the amount remaining and the amount required to fully fund the specific cash legacies, the principle of abatement dictates that these legacies are reduced on a pro rata basis.
The situation gets considerably more complicated if an executor is faced with a cash poor estate and a Will that contains combinations of cash legacies, gifts of real estate, gifts of personal property, and gifts of personal bank accounts (sometimes called general or demonstrative legacies). In such a case, good legal advice is critical.
David M. Smith
David M. Smith – Click here for more information on David Smith.
What happens when the gift you were promised under a Will is disposed of before the testator’s death? The answer is that it depends on how the gift was disposed.
According to the principle of “ademption,” where there is a bequest of a specific item under a Will and that item no longer exists at the testator’s death or is no longer part of his estate at the time of his death, the gift is forfeited or “adeems.” Quite simply, you don’t get the gift.
However, a beneficiary who is disappointed to learn that a promised gift no longer exists must consider how the gift was disposed. More specifically, who disposed of the gift and for what reason.
Under Ontario law, if the gift was disposed of by a guardian of property or an attorney acting under a power of attorney, as the beneficiary of that gift, you are not necessarily out of luck. Section 36 of the Substitute Decisions Act (the “Act”) provides that a beneficiary of an adeemed gift is entitled to the equivalent value of the proceeds from the disposition of the gift out of the residue of the deceased’s estate. This is known as an anti-ademption clause.
The Act sets out corresponding duties on guardians and attorneys for property to determine whether the incapable person under their care has a Will and if so, to determine the provisions of the Will.
As with most rules, there are exceptions to the anti-ademption clause, including the following:
If the guardian or attorney had to dispose of the property to comply with her duties;
If the testator, while alive, gave the gift to the beneficiary (an ademption by satisfaction);
and If there is no contrary intention expressed in the Will. For instance, a clause which states that a beneficiary is not to receive any payment out of the residue in the event the gift is no longer in the testator’s estate at the time of death.
For a judicial consideration of the ademption rules, the Ontario Court of Appeal’s decision in McDougald Estate v. Gooderham [2005 CanLII 21091 (ON C.A.)] is worth reviewing. The decision offers an evaluation of the anti-ademption clause in the context of a sale of an incapable person’s property by her attorneys for property.
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