We often imagine a Will as a simple document: list your assets, name beneficiaries, and your wishes are set in stone. For many, it’s (almost) that straightforward. However, Wills can sit on the shelf for years, and your assets may change significantly. What happens if your estate can’t deliver on all its promises? This can cause distress for those left behind, but understanding the rules helps ensure your legacy is managed smoothly.
Abatement
Abatement is the order in which gifts are paid out if there’s not enough money or assets in the estate to satisfy every bequest. These rules can have unintended consequences if your Will isn’t carefully drafted.
To understand abatement, let’s first look at the different types of gifts you might make in a Will:
- Specific Gifts: Precisely identified items. Think “my handcrafted 1 carat diamond ring to my daughter Alice”. The key is that the item is unique and identifiable.
- Demonstrative Gifts: A general gift payable from a specific fund or source. For example, “$10,000 from my ANZ savings account to my son Ben.” If the fund falls short, it may be paid from the general estate.
- General Gifts: Typically a sum of money not tied to any particular source. For instance, “$5,000 to my niece Chloe”. This can come from any available funds.
- Residuary Estate: What’s left after all debts, taxes, funeral costs, and all the above gift types are paid. Often the largest share, it is typically given to one or more key beneficiaries, e.g. “I give the residue of my estate to my husband, David”.
When promises outweigh assets
An estate’s first obligation is to pay all debts and expenses. If what’s left isn’t enough left to meet every gift, the law sets a strict order for reducing – or “abating” – them.
The general order of abatement, from first to be reduced to last, is:
- Residuary Gifts: First to be cut. These beneficiaries may receive less – or nothing – if funds are short.
- General Gifts: These gifts are reduced next, proportionally. For example, if two $5,000 gifts are promised and only $5,000 remains, each receives $2,500.
- Demonstrative Gifts: These are treated like general gifts once their specific source is depleted, but have slightly higher priority.
- Specific Gifts: The most protected. Your diamond ring or antique clock will only be sold to cover debts if all other assets are exhausted and there’s still a shortfall.
Imagine if, after paying debts, the estate only has the diamond ring and $7,500 cash in an everyday transactional account. Here’s how abatement would apply:
- Daughter Alice receives the diamond ring in full, as specific gifts are protected until absolutely necessary.
- Son Ben’s $10,000 demonstrative gift is treated as a general gift as the ANZ savings account has no funds to satisfy the gift, so this is reduced to $5,000.
- Niece Chloe’s $5,000 general gift is reduced to $2,500.
- Husband David (residuary beneficiary) receives nothing.
Why it matters
Abatement rules can lead to disputes or outcomes that contradict your true wishes, especially if you haven’t considered what may happen in a shortfall scenario. Falling asset values, unexpected debts, or long-term care costs can all impact the size of an estate.
A well-drafted Will, prepared by a lawyer, can help minimise these risks. Lawyers can future-proof your Will so it better reflects your intentions – even if your circumstances change.
How can we help?
For advice on drafting or reviewing your Will to ensure your legacy is protected, contact WRMK Lawyers’ experienced, friendly, life planning team.
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