You have meticulously created your estate plan to ensure that it includes and addresses all of your most important assets (accounts and property). You have reviewed your asset list repeatedly, and everything seems to be accounted for. But what if you have forgotten something? Are you willing to update your plan every time you acquire a new asset? Americans own a lot of stuff. Taking stock of your tangible and intangible possessions when creating an estate plan can be a tall order. Some assets may be overlooked and end up in what is called the residuary estate.

A residuary estate can be created intentionally or unintentionally and may include valuable assets. This clause is included in all complete wills or trusts, and directs that any leftover assets in your estate go to a residuary (i.e., backup) beneficiary. You can even name multiple residuary beneficiaries in your estate plan, including your family members and favorite charities.

The Residuary Estate

The ordinary meaning of the word residue is “a leftover part or remnant.” In estate planning, residue has a special meaning, referring to the portion of a deceased person’s assets that remain after all debts and taxes have been paid and all specific gifts have been made to beneficiaries.

Wills and trusts are sometimes designed to distribute specific assets to specific beneficiaries. An example of this might be a specific gift of money to your church or preferred charity, or the pearls you inherited from your Great Aunt Mable going specifically to your daughter.

Sometimes, assets slip through the cracks and are not assigned to a specific beneficiary or explicitly given to a beneficiary. Other times, clients wish for their beneficiaries (usually their family, friends, and loved ones) to split their estate evenly. This desire is very common, as most clients do not know the kind, quantity or variety of assets will be when they pass, and wish for their trusted helpers to make those decisions later.

Borrowing from our example above, after your Fiduciary (your Independent Executor or Trustee) has made the specific gift of money and given your daughter Great Aunt Mable’s pearls, everything else left in your estate (including your house, vacation home, bank accounts, investments, and collection of Spiderman comics, among other things) comprise the residuary estate—think of them as “leftovers” or “everything else” in an estate plan.

This can happen for a few different reasons:

• The assets were not considered valuable enough to be explicitly included in a will or trust and may have been deliberately excluded. For example, the average American home has thousands of items, and about one in 10 homes also includes off-site storage rental. It may not make sense to mention specific items in an estate plan that just amount to clutter.
• An asset was accidentally left out of a will or trust. When making an estate plan, certain assets may simply be overlooked. Assets obtained after a will or trust was created are likely not explicitly mentioned in these documents. Assets that should have a named beneficiary (such as a payable-on-death account or life insurance policy) but fail to name one may also end up in the residuary estate.
• The character of specific property has changed. This can happen when a will or a trust identifies an asset for a specific gift, such as your house, and is identified by its street address. However, in the time since signing the will, you have sold the house. Since you no longer have that specific house to give away anymore, the proceeds from the sale of the house become part of the residuary estate and are distributed according to the terms of the residuary clause.
• A beneficiary predeceases the testator/trustmaker. If a will, trust, or account names a beneficiary but the beneficiary passes away before the person who created the will or trust passes away, the assets have the potential to become part of the residuary estate if no other beneficiary is named to receive these assets.

The residuary estate does not necessarily consist of worthless scraps a person did not plan for. Residuary assets such as financial accounts that lack named beneficiaries can be quite valuable, and multiple small assets can be valuable in the aggregate. In some cases, the residuary estate could be the most significant part of an estate.

Naming Multiple Residuary Beneficiaries

Wills and trusts often name multiple beneficiaries to operate as backups to the primary beneficiaries. They can also name residuary beneficiaries if all other beneficiaries named in the will or trust cannot receive the assets. Naming multiple remainder beneficiaries may be used as part of a strategy to equalize remaining assets and avoid conflicts between survivors. If a family has multiple children, for example, but just one is the residuary beneficiary, that person could end up with a larger share of the estate than their siblings.

Since the size of a residuary estate can change over time as assets increase in value, debts accrue, and beneficiaries pass away, a residuary beneficiary could be in line for a windfall—or next to nothing. Family members are unlikely to fight over scraps. If the residuary estate is valuable, however, it could have competing claims.

It is not unprecedented for a family to discover a high-worth asset such as artwork or sports memorabilia that belonged to a late relative but was not part of their estate plan. It is also possible that an asset not thought to be valuable turns out to be worth a great deal of money. In all but the most harmonious families, this could set the stage for infighting and maybe even estate litigation. Residuary beneficiaries have the same rights as other beneficiaries in many states—including the right to challenge a will and request an accounting of estate assets.

If there is the potential for confusion or conflicts among your family members, having clear instructions, such as defined percentages, can help to minimize the risk of contest to your estate plan. Additionally, family conflicts over residuary assets may be avoided by gifting the residue to charitable organizations. Naming a charity as the residuary beneficiary allows you to support your favorite cause while prioritizing your loved ones in your estate plan. Charity gifts are tax-deductible and can help minimize your estate’s potential tax liability.

Residuary assets can also be divided among charities, family members, and other beneficiaries such as family friends and business partners. However, depending on the size of the residuary estate and the number of beneficiaries, estate residue divided among many beneficiaries could result in tiny gifts for each. Many residuary beneficiaries can also add to estate administration costs, as the executor, personal representative, or trustee must parse the various assets and beneficiaries. Thus it is important to discuss your plan with an experiences estate planning and probate attorney to ensure each gift will truly benefit your chosen beneficiary.

Forgetting something? Talk residual gifting with an estate planning attorney.

To discuss these and other factors that can affect your residual gifting strategy, reach out and schedule a time to talk to one of our estate planning attorneys. Nielsen Law PLLC provides family-focused estate and business planning to individuals and families in Austin, Round Rock, Cedar Park, and the Central Texas area. For more information, and to learn about our firm, please contact us. We look forward to working with you.