Are Gifts and Bequests Better in $ or %? It Depends
Written by Craig Wisnom
Posted on Jul 31, 2017
When clients come to us to prepare a Will or Revocable Trust, some have a long list of potential beneficiaries, including charities, family, and friends. One of the common questions we get is “How shall I divide up my assets? Percentages? Specific Accounts? Dollar amounts?” The answer depends on the client’s specific intent for each gift because there are pros and cons to the options.
As a very general rule, dollar amounts (“pecuniary” is the term of art) work best for smaller gifts, and percentages or fractions are best used for the “major” beneficiaries. Gifts of specific assets (“I leave my Wells Fargo brokerage account to my daughter Donna”) are only appropriate in limited situations. Here are some of the factors to consider:
1. Generally, fixed pecuniary gifts are paid off the top of the estate.
So if a Will says I leave $10,000 to the University of Arizona Foundation, $10,000 to the Community Foundation for Southern Arizona, and $10,000 to my cousin Alex, and everything else gets divided between my two beloved children, then if the estate ends up with only $32,000 for distribution, the charities and cousin get all their money, and each child only gets $1,000. Of course, if the estate has $1,000,000, the specific beneficiaries get their $10,000, and each child gets almost $500,000.
2. Beneficiaries that get fixed gifts aren’t entitled to full accountings, but every percentage beneficiary is.
In the above example, the charities and cousin Alex are entitled to see the portion of the Will which names them, but as long as they get their $10,000, they don’t get to see any of the accounting of the Trust or estate, because it doesn’t impact their rights. By contrast, if these same charities were instead to receive 1% of the total estate, they would be entitled to a complete accounting and could not be paid off until administration was complete because every dollar paid out or received impacts their amount, even if it’s small. It’s easy and efficient for a trust or estate administrator to pay off small beneficiaries completely early on so their gifts are satisfied and they are not part of the process. Additionally, family members may not like the local charity to know how much money each individual received as an inheritance!
In some situations, clients like to combine specific dollar amounts with fractions. For instance, they might say ABC CHARITY gets $10,000, or 1% of their estate, whichever is less. This way, if the size of their estate declines drastically and unexpectedly, ABC CHARITY doesn’t get everything, but as long as they get at least $10,000, they have no additional rights for information in the administration.
3. You do not need to list specific assets in your Will or Trust, unless there is a specific item or account you want to go to a particular individual or organization. If people simply want their estate divided equally among three beneficiaries, they do not need to specify all the accounts and properties they own, they can simply divide the general estate in thirds. It can be appropriate if someone really wants, say, the Minnesota lakehouse to go to their niece, for it to be a specific asset distribution. However, if you want your estate to go equally to two beneficiaries, it doesn’t work well try to carve up specific assets of equal value going to them directly. Over the course of a person’s life, assets are bought, sold, and replaced, and the relative value of assets can go up or down. Trying to predict how each asset will end up is impossible.
4. Ultimately, there needs to be a distribution for the “residue” under your trust or estate. Even if you think you’ve covered every asset as either a specific gift or dollar amount, there always can be other assets in your estate, including things you forgot about or acquired after you first drew up your Will or Trust. If this “residue” is going to more than one beneficiary, then it can be divided equally among the multiple beneficiaries, or you can specify different fractions or percentages.
So, to summarize, specific dollar amounts work best for small gifts, designations of specific assets should be used sparingly, and your most important beneficiaries will show up in a fraction or percentage of the residue of your trust or estate.
Figuring out HOW MUCH of a percentage or a dollar amount each beneficiary should receive is entirely up to you, and the lawyer is not all that helpful in that regard. The final answer is not something that can be derived from concrete calculations. Ultimately, you get to decide which people or which charities should receive $5,000 or $100,000 or 15% or 100% based on what they have meant to you or the legacy you would like to leave. However, understanding these options can help you make decisions in a manner that will fulfill your wishes and result in an estate administration that runs as smoothly as possible.