Sandra D. Glazier on In Re Barbara A. Young Living Trust: Ademption and Abatement

“Ademption can occur when a specifically devised item no longer exists. Abatement generally occurs when there are insufficient assets to otherwise meet statutory allowance, administrative expenses and/or claims against an estate. Important to understanding the application of both of these principles is the ability to identify whether a bequest is specific, general, demonstrative or residuary in nature. Common law or statutory provisions may dictate how and when ademption will occur and in what order bequests will abate unless specifically overwritten by the terms of an operative instrument.”

“In the recent case of In re Barbara A. Young Living Trust, the Michigan court analyzed whether cash bequests to grandchildren in a specified amount represented a specific devise subject to ademption. At the time of grantor’s death, neither the trust nor estate (collectively the ‘Estate’) had any cash or other liquid assets from which the bequest might be satisfied. However, the Estate did hold sufficient real property interests that, if liquidated, could be utilized to satisfy the grandchildren bequest.”

Sandy Glazier provides members with her analysis of In Re Barbara A. Young Living Trust.

Sandra D. Glazier, Esq., is an equity shareholder at Lipson Neilson, P.C., in its Bloomfield Hills, MI office. She is a Special Advisor to the Committee on Law and Aging and a member of Michigan’s Probate Council. She was also the 2018 recipient of Bloomberg Tax’s Estates, Gifts and Trusts Tax Contributor of the Year Award and Trusts & Estates Magazines Authors Thought Leadership Award. Sandra concentrates her practice in the areas of estate planning and administration, probate litigation and family law.

Here is her commentary:

EXECUTIVE SUMMARY:

Ademption can occur when a specifically devised item no longer exists. Abatement generally occurs when there are insufficient assets to otherwise meet statutory allowance, administrative expenses and/or claims against an estate. Important to understanding the application of both of these principles is the ability to identify whether a bequest is specific, general, demonstrative or residuary in nature. Common law or statutory provisions may dictate how and when ademption will occur and in what order bequests will abate unless specifically overwritten by the terms of an operative instrument.

In In re Barbara A. Young Living Trust[i] the Michigan court analyzed whether cash bequests to grandchildren in a specified amount represented a specific devise subject to ademption. At the time of grantor’s death, neither the trust nor estate (collectively the “Estate”) had any cash or other liquid assets from which the bequest might be satisfied. However, the Estate did hold sufficient real property interests that, if liquidated, could be utilized to satisfy the grandchildren bequest.

FACTS:

With regard to ademption, MCL 700.2606[ii] provides that

  1. A specific devisee has a right to the specifically devised property in the testator’s estate at death and all of the following:
      1. (a) Any balance of the purchase price, together with any security agreement, owing from a purchaser to the testator at death by reason of sale of the property.
      1. (b) Any amount of a condemnation award for the taking of the property unpaid at death.
      1. (c) Any proceeds unpaid at death on fire or casualty insurance on, or other recovery for, injury to the property.
      1. (d) Property owned by the testator at death and acquired as a result of foreclosure, or obtained in lieu of foreclosure, of the security interest for a specifically devised obligation.
      1. (e) Real property or tangible personal property owned by the testator at death that the testator acquired as a replacement for specifically devised real property or tangible personal property.
      1. (f) Unless the facts and circumstances indicate that ademption of the devise was intended by the testator or ademption of the devise is consistent with the testator’s manifested plan of distribution, the value of the specifically devised property to the extent the specifically devised property is not in the testator’s estate at death and its value or its replacement is not covered by subdivisions (a) to (e).
  2. If an agent acting within the authority of a durable power of attorney for an incapacitated principal or a conservator sells or mortgages specifically devised property, or if a condemnation award, insurance proceeds, or recovery for injury to the property are paid to an agent acting within the authority of a durable power of attorney for an incapacitated principal or to a conservator, the specific devisee has the right to a general pecuniary devise equal to the net sale price, the amount of the unpaid loan, the condemnation award, the insurance proceeds, or the recovery.
  3. The right of a specific devisee under subsection (2) is reduced by a right the devisee has under subsection (1).
  4. For the purposes of the references in subsection (2) to a conservator, subsection (2) does not apply if after the sale, mortgage, condemnation, casualty, or recovery, it was adjudicated that the testator’s disability ceased and the testator survived the adjudication by 1 year.
  5. For the purposes of the references in subsection (2) to an agent acting within the authority of a durable power of attorney for an incapacitated principal, an incapacitated principal is a principal who is an incapacitated individual, an adjudication of the individual’s incapacity before death is not necessary, and the acts of an agent within the authority of a durable power of attorney are presumed to be for an incapacitated principal.

With regard to abatement, MCL 700.3902[iii] provides

  1. Subject to subsections (2) and (3) and except as provided in section 2301(3) or 2302(1)(b)(iv), distributees’ shares abate, without a preference or priority between real and personal property, in the following order:
    1. (a) Property not disposed of by the will.
      (b) Residuary devises.
      (c) General devises.
      (d) Specific devises.
  2. For purposes of abatement, a general devise charged on specific property is a specific devise to the extent of the value of that specific property and, upon the failure or insufficiency of the property on which the devise is charged, a general devise to the extent of the failure or insufficiency. Abatement within each classification is in proportion to the amount of property each beneficiary would have received if full distribution of the property had been made in accordance with the terms of the will.
  3. If the will expresses a different order of abatement, the will controls. If the testamentary plan or the devise’s express or implied purpose would be defeated by the order of abatement stated in subsection (1), the distributees’ shares abate as found necessary to give effect to the testator’s intention.
  4. If the subject of a preferred devise is sold or used incident to administration, abatement shall be achieved by appropriate adjustments in, or contribution from, other interests in the remaining assets.

Further, when insufficient assets exist for satisfaction of statutory allowances, MCL 700.2405[iv] provides

  1. If the estate is otherwise sufficient, property specifically devised shall not be used to satisfy rights to homestead allowance or exempt property. Subject to this restriction, the surviving spouse, fiduciaries or others that have the care and custody of minor children, or children who are adults may select property of the estate as homestead allowance and exempt property.

Key to the analysis and determination of beneficial rights under MCL 700.2606, 700.3902, and 700. 2405 is an understanding of what constitutes a specific as opposed to a general or residuary devise. Language utilized to describe the bequest and where a bequest appears within an operative instrument may be indicative of intent.

In In Re Barbara A. Young Living Trust, cash bequests to grandchildren appear under a section of the Trust entitled “Specific Distributions of Trust Property”. This section distinguishes the grandchildren bequest from the residuary bequest to grantor’s children. Also important to the court’s analysis was the fact that the bequest was specific in amount as opposed to source.
The Trustee claimed that because the Estate had no cash at the time of grantor’s death, the devise to the grandchildren should fail and be treated as adeemed.

    1. Under the doctrine of ademption, a “testamentary gift of testator’s specific real or personal property is adeemed, or fails completely, when the thing given does not exist as part of his estate at the time of his death”. More specifically described as “ademption by extinction,” this doctrine has been further explained as follows:
    1. If property which is specifically devised or bequeathed remains in existence, and belongs to testator at his death, slight and immaterial changes in its form do not operate as an ademption; but . . . [t]he real question is, whether the specific property is in existence at the death of the testator, and whether testator then owns the interest which may pass under his will. If the property which is described in the will is not in existence, or does not belong to testator, at his death, the legacy fails.[v]
  • Sometimes whether a bequest is specific, demonstrative or general may depend upon state law and/or the language utilized (e.g. when grantor leaves all tangible personal property to be divided amongst a class of beneficiaries, varying jurisdictions may treat such a bequest differently). The more specific (as opposed to generalized) the description, the greater the likelihood the bequest will be treated as specific or demonstrative as opposed to general. Leaving a narrowly defined and specifically identified item or collection will more likely be treated as a specific devise (e.g. grantor specifically identifies and devises his collection of antique pocket watches as a bequest to a beneficiary or class of beneficiaries). Regardless, the grantor’s intended treatment may be deemed determinative.[vi]

    1. [T]he nature of a legacy as specific, general, or demonstrative is to be determined in accordance with the intention of the testator, which is to be gathered not merely from the language of those clauses establishing the particular gift in question alone, but from the will as a whole, and the circumstances surrounding the testator at the time of its execution.
    1. . . . A general legacy is one which is payable out of the general assets of the testator. A legacy is specific when it is the testator’s intention that the legatee shall have the very thing bequeathed and not a corresponding amount in value. A demonstrative legacy partakes of the nature of both a general and a specific legacy. It is a gift of money payable out of a particular fund in such a way as to evince the testator’s intent not to relieve his general estate from payment of the legacy in case the particular fund fails. The distinction between demonstrative legacies and specific legacies is that in the former the primary intention is that the legacy be paid in any event, even though the designated source fails, while in the latter the main intention is that the legacy be paid by the delivery of the identical thing, and that thing only, and in the event that at the time of the testator’s death such thing is no longer in existence, the legacy will not be paid out of his general assets. In determining whether a legacy is specific or demonstrative, the intention of the testator is of primary importance, and in ascertaining his intent the court may consider not only the particular bequest in question, but the language of the entire will, together with the circumstances surrounding the testator at the time it was executed, including his relation to the legatees.

      * * *

      A specific legacy is a gift of a specific thing, or of some particular portion of the testator’s estate, which is so described by the testator’s will as to distinguish it from other articles of the same general nature. A specific legacy differs from a general legacy in that it is not intended by testator to be paid out of his estate generally, but is to be paid solely by delivering to the beneficiary the specific thing given by will, as distinguished from a designated value, quantity, and the like.[vii]

    COMMENT:

    While the Michigan appellate court held that the probate court erred when it determined the specified cash bequest to the grandchildren was “specific bequest” (as opposed to a “general” or perhaps “demonstrative” bequest), it also held that because of grantor’s intent and the nature of the bequest, the devise was not subject to ademption.

    Though not discussed, the issue of abatement would require the same type of analysis engaged in by the court if there had been insufficient assets in the Estate to meet statutory allowances, costs of administration or claims against the Estate. In essence, by finding that the grandchildren’s bequest was a “general” bequest, had to be satisfied before the residuary was funded. This resulted in diminishment of the residuary in order to satisfy the grandchildren’s bequest and liquidation of the Estate’s real property interests in order to satisfy the “general” bequest.

    Had the real property interests been specifically devised to the children (and no other assets comprised the Estate at the time of grantor’s death), then the specific devise of the real property would have trumped the general bequest to the grandchildren, and the real property would not have needed to be liquidated to satisfy the grandchildren’s bequest.

    Understanding (i) the distinctions between the different categories of bequests, (ii) where and in what order such bequests are located within an instrument, and (iii) the potential implications of statutory default provisions, can lead to better-crafted instruments which more clearly identify the grantor’s intent as to what is to happen when a specific asset no longer exists and the order in which bequests are to abate.

    HOPE THIS HELPS YOU HELP OTHERS MAKE A POSITIVE DIFFERENCE!
    – Sandy Glazier

    SOURCE:
    LISI Estate Planning Newsletter #2962 (May 23, 2022) at http://www.leimbergservices.com. Copyright 2022 Leimberg Information Services, Inc. (LISI). Reproduction in Any Form or Forwarding to Any Person Prohibited – Without Express Permission. This newsletter is designed to provide accurate and authoritative information regarding the subject matter covered. It is provided with the understanding that LISI is not engaged in rendering legal, accounting, or other professional advice or services. If such advice is required, the services of a competent professional should be sought. Statements of fact or opinion are the responsibility of the authors and do not represent an opinion on the part of the officers or staff of LISI.

    CITATIONS:

    [i] In re Barbara A. Young Living Trust, Mich App unpublished per curiam decision 355309 (4/21/22).
    [ii] UPC 2-606.
    [iii] Similar in effect to UPC 3.902.
    [iv] Similar in effect to UPC 2-405.
    [v] In re Barbara a. Young Living Trust, supra at *4. internal citations omitted.
    [vi] Id.
    [vii] Id. at *4-5, internal citations omitted