For beneficiaries of an estate, the terms ‘legacy’, ‘devise’ and ‘bequest’ used in legal documents can be confusing. Sharon Crosby, associate in Lodders’ private client practice, explains what these terms mean and the differences between them.
What are the differences between legacies, bequests and devises?
During the probate process, executors (those named in the will to be responsible for managing the deceased’s estate) and beneficiaries (those who will inherit from the deceased’s estate) are often confused by certain new terminology, including the likes of ‘legacies’, ‘devises’ and ‘bequests’. But there are specific meanings for these terms:
• a bequest is a gift of personal property made by a will other than land, such as an item of jewellery or a car
• a devise is a gift by will of real property, such as a house
• a legacy also refers to gifts of personal property but is more widely used to cover all types of gifts, including property, personal items and cash
There are different types of legacies, and the type can affect the order of priority for payment, the rights a beneficiary has, and whether there are any costs to bear. It can also make a difference to whether a gift actually takes effect as the testator(s) (the person(s) making the will) intended.
Issues can arise where a will includes legacies, but the testator’s estate has diminished over time, meaning there may not be enough assets left in the estate to pay all the legacies.
What types of legacy are there?
There are various types of legacy:
• A will can list personal possessions, property, specific bank accounts or investments, and state who will receive these. These are specific legacies.
• A will may also list set amounts of money that the testator wants to leave to different individuals or charities. These are pecuniary legacies.
• The will should also say who is to receive the residuary estate. This consists of any assets left after the payment of the legacies and estate liabilities.
When acting for clients on the distribution of an estate in-line with a will, we pay most liabilities, such as funeral costs, debts owed at the date of death, and administration expenses, from the residuary estate. If there is not enough money left in the residuary estate to pay these debts, then we take them from the fund for the pecuniary legacies. These pecuniary legacies then reduce proportionately. This means that beneficiaries might still receive some cash from the estate but less than the testator intended.
Ultimately, if all the residuary estate and the fund for the pecuniary legacies is used up and there are still debts to pay, executors will need to use the assets that have been specifically gifted to individuals to settle the estate liabilities. This might mean selling a property, with the beneficiary receiving only what is left of the sale proceeds.
What issues can occur when distributing legacies?
A will can change the order of payment of debts, so executors should take care to make sure they understand the order of priority.
For example, a gift of a property might be subject to an outstanding mortgage. This means the beneficiary needs to be able to repay or take over that mortgage. Gifts may also be subject to inheritance tax, with the beneficiary having to pay any tax attributable to that asset.
Assets in the will but not in the estate
Further complications can arise with specific legacies when the asset referred to in the will is not part of the testator’s estate when they die. In these circumstances, the wording of the will is crucial:
• For example, a will may state that a beneficiary is to receive “my house known as 1 New Road”. If the testator does not own 1 New Road when they die, and there is no alternative referred to in the will, then the gift will fail, or adeem.
Ordinarily, the will speaks from death. This means that a beneficiary will receive the asset that fits the description in the will when the testator dies:
• For example, “all my shares in Big Business plc”, might have been 1,000 shares at the date of the will, but if it was 100 shares at the date of death, then this is what the beneficiary will receive. This is because the wording is general in nature.
However, if the asset is clearly identifiable as something owned by the deceased at the date of the will, this is what the beneficiary receives. If it is no longer part of the estate then again, the gift fails, and the beneficiary receives nothing:
• For example, the will might say “I leave my car” to a named beneficiary. This would refer to the specific car owned by the testator at the date that the will was made. If the testator owned a Ford Fiesta at the date of the will, but a Rolls Royce at the date of death, then the beneficiary would receive no car. The testator no longer owned the specific car referred to in his will. Compare this with: “I leave any car that I own at the date of my death” to a beneficiary. In this example, the beneficiary would receive the Rolls Royce. The difference between this situation and the more general wording referred to above is very subtle and executors should take care and seek professional advice if there is any doubt about a legacy.
Clearly the wording of a gift can make a significant difference:
• For example, a testator may decide to make a gift of “my Rolex watch” to a beneficiary. If he does not own a Rolex watch on death then the gift adeems. However, if the will were to say “I give a Rolex watch” to a beneficiary, then even if the deceased did not own such a watch, the executors would need to buy one from the estate funds to fulfil the legacy.
Complications could also arise where the nature of the assets has changed:
• For example, where companies have amalgamated, and shareholdings have changed as a result.
Care should also be taken where a sum of money is to be paid from a particular fund. The executors may need to pay the money from other assets if that fund no longer exists or is insufficient to fulfil the amount gifted.
Dealing with estates where there are complications with the payment of debts, or the possibility that legacies might be reduced, executors should seek professional advice to make sure they are distributing the estate correctly.
Sharon Crosby is an associate in the Private Client team at Lodders, and a specialist in estate administration, wills, probate, lasting powers of attorney and Court of Protection work.
This article originally published on The Gazette read it here.