Real, Personal and Intangible Property
A person’s property, or assets, can be divided into two broad categories: real property and personal property (sometimes referred to as immovable and movable property[1]). A property’s classification affects the way its title is transferred, the cost and type of insurance that can protect it, how it passes through an estate (and, sometimes, to whom it may be transferred), how it is taxed and more.
Real property includes land and any fixtures to land, such as ponds, canals, and roads. It also includes formerly movable objects that have been permanently affixed to the land, such as homes, other buildings, and machinery.[2] Any property not considered real property is personal property. Personal property is generally movable and may be tangible or intangible. Tangible personal property includes all personal property that can be held or felt, such as cars, furniture, clothing, and jewelry. Intangible personal property includes items of value that confer rights, but have no physical substance, such as patents, inventions, copyrights, negotiable instruments, money orders, bonds and shares of stock.[3]
All types of property may be disposed of by will. Real property disposed of by will may also require a new deed or other documentation to clear the title after transfer. Intangible property transferred by will, such as stock or bank accounts, may need new account or asset titles as well.
Tangible property may be disposed of by a general statement in the will giving all or certain classes of property to a specific person or persons. It is also possible to dispose of individual items of tangible property through a list in the will.
Most states have authorized the creation of personal property lists or memoranda for the transfer of items of tangible personal property which is incorporated by reference into the will. This memorandum may be created by the testator without the formalities for creating or amending a will and may be changed as necessary or desired.[4] The will should reference the memorandum and perhaps even identify its place of storage or something else that leaves no doubt as to its role and the testator’s intent.
Probate and Non-Probate Property
A will is only effective to transfer property that becomes part of the probate estate. This includes most property held solely by the testator, such as real estate whose deed names the testator as sole owner, her tangible and intangible personal property (such as clothing, cars, jewelry, furniture, boats, and other personal items), along with her bank accounts, stocks, cash, and other assets. It also includes real property held by the testator as “tenants in common” with another. A tenancy in common is created when property is transferred to two or more owners, or co-tenants, and no intent is shown to provide a “right of survivorship” to either at death. Because neither party has a right of survivorship, each can sell, gift or otherwise dispose of her share. When one co-tenant dies, her share becomes part of her probate estate, which means that it can be transferred by will.[5]
However, many other forms of ownership or co-ownership cause property to pass by “operation of law” to another at death. In these cases, the property does not become part of the probate estate and so is unaffected by a will. These include:
Joint tenancies
In a joint tenancy, multiple people share property with rights of survivorship. Upon the death of one joint tenant, the remaining tenants automatically “inherit” the deceased tenant’s share.[6] Therefore, an ownership interest in real or personal property as joint tenant with right of survivorship transfers to the survivor outside of probate. A will provision that purports to dispose of a share of a joint tenancy is ineffective.
Tenancy by the entirety
In many states, a conveyance of real property jointly to a married couple creates a presumptive third form of concurrent ownership, the tenancy by the entirety.[7] This presumption can only be rebutted by evidence that there was agreement between the spouses to hold the property in another way.[8] Like a joint tenancy, a tenancy by the entirety grants the surviving spouse a right of survivorship. Thus, an ownership interest as tenant by the entirety is a non-probate asset that transfers at death to the surviving spouse by operation of law.
Community property
In community property states (which include mainly western and southwestern states),[9] spouses can hold real and personal property as community property. While spouses who hold community property may give their one-half interests in community property to whomever they choose, if a married testator holding community property doesn’t name a beneficiary, the property passes to the surviving spouse by operation of law.[10]
Some community property states[11] allow spouses to choose to hold property as community property with right of survivorship.[12] In these states, when the first spouse dies, the survivor receives automatic ownership of the property.
Assets in Trust
If a testator created a living trust, any of the testator’s property which has been transferred to the trust prior to death is not included in the probate estate.[13] States may require that the trust assets be disclosed to the probate, typically to facilitate taxation or protect the rights of creditors. For example, in Florida, “the trustee must file a notice of trust with the court of the county of the settlor’s domicile and the court having jurisdiction of the settlor’s estate.” However, the property is not subject to distribution through probate and is unaffected by the provisions of the testator’s will.[14]
Beneficiary Designations
Any asset or property owned by a person in her individual name, but which passes by contract at death, is also a non-probate asset.[15] This includes life insurance and qualified retirement plans, such as 401(k) or 403(b) plans, and Individual Retirement Accounts that contain beneficiary designations. These assets may still become part of the estate if the testator names her estate as beneficiary, where the named beneficiaries are dead or where the beneficiary designation fails for whatever reason.
Totten Trusts, Transfer on Death and Pay on Death Accounts
A bank account owned by a testator in her name, but which is designated as “in trust for” a beneficiary does not become part of the probate estate. Though not technically trusts, these are sometimes called “Totten trusts” after the New York case, Matter of Totten,[16] that discussed them. They pass by operation of law outside of probate unless the designated beneficiary is deceased at the time of the testator’s death.
Similarly, designations on accounts such as “pay on death” or “transfer on death” are often used to transfer bank and investment accounts to a beneficiary at death without the need for probate. A transfer on death deed may also be executed and recorded for real property, allowing its transfer to a beneficiary at death without the need for a joint deed or probate.[17]
Types of Property Transfers
The primary purpose of a will is to gift property at the testator’s death. Note that gifts of real property are sometimes called “devises” and gifts of personal property or money are sometimes called “bequests,” but both are included in the term “gift.” There are four main types of gifts that can be made through a will:
- Specific Gift: A specific gift is “a gift of a particular thing or of a specified part of the testator’s estate so described as to be distinguishable from all others of the same kind.”[18] It may be a unique painting or piece of jewelry, or land that is specifically described in the will. Only delivery of the particular item described satisfies the gift.
An example of a specific gift would be “100 shares of IBM Class B Stock” or “the painting The Persistence of Memory by Salvador Dali.” In each case, it is clear what item is to be gifted.
- General Gift: A general gift “is not limited to any particular fund or thing, [and] does not direct the delivery of any particular property…”[19] It may be satisfied out of the general assets of the testator’s estate, and it does not consist of a particular thing subject to precise identification. It does, however, specify a quantity or amount to be paid, of money or other personal property.[20] An example of a general gift would be “$10,000 dollars.” The gift is of a certain value, presumably payable from any source.
- Demonstrative Gift: A demonstrative gift lies between a specific and general gift in terms of particularity. Like a general gift, a demonstrative gift is a certain sum of money, stock, or other property, but unlike a general gift, it is payable out of an identified fund, property, or security. An example of a demonstrative gift might be “$5,000 payable from my Bank A checking account” or “$50,000 worth of stock from my Investment account number 0100000.” While there is no specific item to be delivered, there is a specific amount or value to be delivered from a source.
- Residuary Gift: A residuary gift is made of all or part of the balance of the estate, after all other gifts have been satisfied and all charges, debts, and costs have been paid.[21] An example of a residuary gift would be “all of the rest, residue, and remainder of my estate to my son” or “50% of the balance of my estate to Keene Hospital.”
All four types of gifts are valid, and any given will may contain one, some or all of them. The practical distinctions among them manifest themselves where the estate cannot satisfy all of them or they fail for whatever reason, and priorities must be allocated. This brings us to the discussion of when gifts fail – the rules of ademption, abatement and lapse.
Ademption
Ademption occurs when a testator lists a specific gift in the will, but at the time of death the testator does not own the item, or the item is no longer part of the estate. In this situation the gift is said to be “addeemed.” Ademption only applies to specific gifts.
Ademption comes in two general categories: ademption by extinction and ademption by satisfaction.
Ademption by extinction occurs when an item to be devised is no longer a part of the testator’s estate at death. For example, where a testator sold her home prior to death, a gift of the home through the will was addeemed by extinction.[22]
Ademption by satisfaction occurs when an item to be devised is given by the testator to the beneficiary during life, in satisfaction of the devise. The doctrine is designed to prevent a beneficiary, who has received the intended gift, from receiving an additional gift at the testator’s death where that was not the testator’s intention.[23] Imagine, for example, that a testator leaves “my house” to her daughter in her will. Years later, the testator gives her current house to the daughter and buys a new house. When she dies, the provision will be subject to ademption by satisfaction because she gave her house to her daughter. Although she had another house when she died, the intent of the gift appears to have been satisfied by the lifetime house gift.
Because ademption by extinction is viewed as a harsh outcome, in that the testator’s intended gift is thwarted, some states have enacted anti-ademption statues. These statutes provide that the estate administrator can or must substitute equivalent property for specific gifts no longer in the estate, particularly where an agent or someone acting under power of attorney disposed of the specific property prior to death. State law may also require proceeds from the sale of specifically gifted property or insurance proceeds from the destruction of the specifically gifted property to be given to the intended recipient of the gift.
In Oregon, for example, devises do not fail as a result of “the encumbrance, destruction, damage, sale, condemnation or change in form of the property specifically devised” unless the intent under the will is that the devise fail, or if the testator during her lifetime gave “property to the specific devisee with the intent of satisfying the specific devise.”[24] In Alabama, the anti-ademption statute has been interpreted to give the specific devisee of real property the outstanding balance on the mortgage after sale.[25]
It should be noted that general gifts do not adeem. If a testator makes a will giving a general gift of $10,000 to a nephew upon death, and the estate cannot cover it with cash, the gift will not necessarily fail. Instead, other assets from the estate may be sold so that the gift of $10,000 can still be made to the nephew.
Demonstrative gifts likewise do not adeem. If the purported source of the demonstrative gift is not in the estate, the demonstrative gift is still filled as a general gift from the rest of the estate. So, if a will provides a gift “of $10,000 to Joe, from my bank account at First Bank,” and at the time of death, the account at First Bank had been closed, Joe is still entitled to $10,000 from the estate as though it were a general gift.
Abatement
Abatement occurs when a testator’s estate is insufficient to satisfy all debts and testamentary gifts. In such cases, gifts to be paid under the will may be reduced or eliminated, including a gift to a beneficiary which the estate is insufficient to pay.[26] In the absence of a statute addressing abatement, when the estate is insufficient to satisfy estate debts and bequests, the residuary gift abates first since, if there are insufficient assets to cover debts and gifts, there is nothing left for the residuary estate.
The general gift abates before the demonstrative gift, assuming the purported source of the gift is still in the estate. If the source is not in the estate, the gift had the same status as the general gifts. Within the same category of gifts, each beneficiary bears a pro rata burden of the abatement, unless the testator clearly expresses an intent to prefer one bequest over another.[27]
So, for example, where a will gifts “$20,000 to Jane, $30,000 to Phil and $50,000 to Debbie,” but the estate has only $50,000 after debts, each would receive only half the gift. Jane would receive $10,000, Phil would receive $15,000 and Debbie the remaining $25,000.[28]
Specific gifts are not subject to abatement. Either the specifically referenced gift is in the estate, and it is given to the beneficiary, or it is not, and it adeems.
Lapse and Anti-Lapse
The final concept affecting gifts of property at death is the concept of lapse. Lapse occurs when a beneficiary dies before the testator or before the time of the property distribution under the will. The general rule in such a case is that the gift lapses and becomes part of the residuary estate. The gift does not necessarily go to the heirs of the gift beneficiary.
However, where the recipient is closely related to the testator, there is a presumption that the testator would have wanted the property distributed to the beneficiary’s surviving heirs (since they are also heirs of the testator). Therefore, states have enacted “anti-lapse” rules which apply when the pre-deceased beneficiary was closely related to the testator.[29] In such cases, the lapsed gifts go to the beneficiary’s heirs instead of back into the residuary estate.
All states have passed anti-lapse statutes, although they differ in the relationship between the testator and beneficiary that they require. While some states apply anti-lapse only when the beneficiary is a child or grandchild of the testator, some provide for anti-lapse even when they are less closely related.
Note that bequests to spouses are not subject to anti-lapse statutes. If the spouse predeceases the testator, then the gift to the spouse fails and the gift goes to the testator’s heirs (who are often the heirs of the beneficiary spouse as well, in any case).
[1]South Central Bell v. Barthelemy, 643 So.2d 1240 (LA 1994).
[2] For example, see People v. Church, 57 Cal. App. 2d Supp 1035 (Sup Ct 1943).
[3] See, for example, 41 CFR 102-36.40 “Disposition of Excess Personal Property.”
[4] See, Alaska Statutes section 513; Nevada Revised Statutes section 133.045; Code of Virginia 64.2-400.
[5] United States v. Craft, 535 U.S. 274, 279-80, 122 S.Ct. 1414, 152 L.Ed.2d 437 (2002) (citing to 7 R. Powell & P. Rohan, Real Property § 50.01[1] (M. Wolf ed.2001).
[6]Taylor v. Canterbury, 92 P.3d 961 (Colo. 2004).
[7] In Re Kelly, 316 B.R. 629 (D. Del. 2004).
[8] Capital Bank v. Barnes, 277 SW3d 781, (Ct. App. Mo. 2009).
[9] Louisiana, Arizona, California, Texas, Washington, Idaho, Nevada, New Mexico, and Wisconsin. Alaska allows spouses to designate real estate as community property.
[10] See, for example,Estate of Murphy, 15 Cal.3d 907 (S.Ct.Cal. 1976).
[11] Arizona, California, Nevada, and Wisconsin.
[12] See Texas Estates Code Chapter 112, sections 112.001-112.052, which allows the creation of a “survivorship agreement” between spouses.
[13] See, e.g., “Living Trust,” The Superior Court of California, County of Santa Clara, retrieved from http://www.scscourt.org/self_help/probate/medical/living_trust.shtml#exempt
[14] Florida Statutes section 736.05055(1).
[15] See, for example, Probate for Inheritances, Fidelity Investments, retrieved from https://www.fidelity.com/life-events/inheritance/inheritance-basics/probate.
[16] See, Matter of Totten, 179 N.Y. 112 (NY App. Ct. 1904).
[17] See, Wisconsin Statutes section 705.15(1).
[18] 57 Am.Jur., Wills, section 1401, p. 935.
[19]Friedman v. Sabot, 205 Va. 318 (1964).
[20]Park Lake Presbyterian Church v. Estate of Henry, 106 So. 2d 215, 217 (Fla. 2d DCA 1958).
[21] Redfearn, Wills and Administration of Estates in Florida, 3rd Edition, Volume 1, Ch. 12, section 146, p. 233.
[22] See, Shriner’s Hospital, et al. v. Stahl, 610 S.W.2d 147 (1980).
[23] See, for example, Estate of Mikkelson, 211 NW 254 (Iowa 1926).
[24]Oregon Revised Statutes section 112.385.
[25]Bolte v. Robertson, 941 So. 2d 920 (Ala. 2006), interpreting Alabama Code §§43-8-225 et seq.
[26] Gionfriddo v. Palatrone 196 N.E.2d 162. (Ohio 1964).
[27] In Re Estate of Oberstar, 126 Ohio App. 3d 17. (1998).
[28] See Estate of Jenanya, 31 Cal.3d 703. (1982), interpreting California Probate Code section 752.
[29] Uniform Probate Code §2-605.