You’ve carefully crafted your estate plan, ensuring it encompasses all your significant assets—both accounts and property. You’ve reviewed your asset list multiple times, confident that nothing has been missed. But what if something has been overlooked? How do you know you have the ideal number of beneficiaries in your will or trust?
The truth is, Americans accumulate a vast array of possessions over their lifetimes. Taking inventory of both tangible and intangible assets when designing an estate plan can be overwhelming, and it’s easy for something to slip through the cracks. These overlooked assets often end up in what’s known as the residuary estate. A residuary estate can form either intentionally or unintentionally and may include valuable assets that haven’t been explicitly addressed.
To safeguard these assets, you can include a clause in your will or trust that directs any remaining assets in your estate to a designated residuary (or backup) beneficiary. You can even name multiple residuary beneficiaries, such as family members or favorite charities, ensuring that your entire estate is handled according to your wishes. But how do you determine what’s the ideal number of beneficiaries in my will or trust?
The Residuary Estate
In everyday language, the word “residue” refers to what’s left over or remains after something is removed. In estate planning, however, “residue” has a specific meaning: it refers to the portion of a deceased person’s assets that remains after all debts, taxes, and specific gifts to beneficiaries have been addressed.
The Residuary Estate Continued
Wills and trusts often specify how certain assets should be distributed to specific beneficiaries. They may direct the division of assets like real estate, personal property, and financial accounts among named heirs. However, some assets may not be explicitly assigned to a beneficiary or included in the plan. These unallocated assets make up what is known as the residuary estate—the “leftovers” or “everything else” in an estate plan. This can occur for several reasons:
- Deliberate Exclusion: Some assets may not have been deemed valuable enough to be explicitly included in a will or trust. For example, with the average American home containing thousands of items—and about one in ten homes also renting off-site storage—it may not make sense to list every single item in an estate plan, especially if they are considered clutter.
- Accidental Omission: It’s easy for certain assets to be accidentally left out of a will or trust. This can happen with assets acquired after the estate plan was created or with assets that were simply overlooked. Additionally, assets that should have named beneficiaries, like payable-on-death accounts or life insurance policies, may end up in the residuary estate if no beneficiary is specified.
- Predeceased Beneficiary: If a will, trust, or account names a beneficiary who passes away before the person who created the document, the assets intended for that beneficiary may revert to the residuary estate if no alternate beneficiary is named.
The residuary estate isn’t just a collection of forgotten or worthless items. It can include valuable assets, such as financial accounts without named beneficiaries, and smaller assets that collectively add up to a significant value. In some instances, the residuary estate may even represent the largest portion of an estate.
Naming Multiple Residuary Beneficiaries
Wills and trusts frequently designate multiple beneficiaries, including backup beneficiaries to the primary ones, and often name residuary beneficiaries to receive any remaining assets if the primary and backup beneficiaries are unable to do so. This raises the question: What’s the ideal number of beneficiaries in my will or trust?
Naming multiple residuary beneficiaries can be a strategic way to balance the distribution of remaining assets and prevent conflicts among surviving family members. For example, in a family with several children, if only one child is named as the residuary beneficiary, they could potentially inherit a larger share of the estate than their siblings, which could lead to disputes.
The size of a residuary estate can fluctuate over time as assets appreciate, debts accumulate, and beneficiaries pass away. As a result, a residuary beneficiary might receive a substantial windfall or, conversely, very little. While family members are unlikely to contest minor assets, a valuable residuary estate could attract competing claims.
It’s not uncommon for families to discover high-value assets, such as artwork or sports memorabilia, that weren’t included in the original estate plan. Additionally, assets initially thought to be of little worth might later turn out to be quite valuable. In all but the most harmonious families, this could lead to infighting and possibly even estate litigation. In many states, residuary beneficiaries have the same rights as other beneficiaries, including the right to challenge a will and request an accounting of estate assets.
To avoid confusion and conflict over how the residuary estate should be divided, it’s essential for a will or trust to include detailed instructions, such as specifying the percentage of the residue each beneficiary will receive. Understanding what’s the ideal number of beneficiaries in my will or trust can help in planning these details.
One way to prevent family disputes over residuary assets is by gifting the residue to charitable organizations. Naming a charity as the residuary beneficiary allows you to support a cause you care about while still prioritizing your loved ones in your estate plan. Charitable gifts are tax-deductible and can help reduce your estate’s potential tax liability.
Residuary assets can also be divided among charities, family members, and other beneficiaries. However, depending on the size of the residuary estate and the number of beneficiaries, dividing the residue among many recipients could result in small, less impactful gifts. Additionally, having many residuary beneficiaries can increase estate administration costs, as the personal representative or trustee must manage the distribution of various assets. It’s important to carefully review your instructions and ensure that each gift will genuinely benefit your chosen beneficiaries. In short, consider what’s the ideal number of beneficiaries in my will or trust when making decisions.
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 an attorney who can walk you through the process.
