When mapping out your estate plan, you may come across the term “residuary estate.” In simple terms, a residuary estate is any part of your estate that hasn’t been distributed to your heirs through a last will and testament. Also referred to as estate residue or residual estate, it simply means assets that are left over once your will has been read, assets have been distributed to your heirs and any final expenses have been paid. Proper estate planning can help you avoid leaving residual assets behind.
A financial advisor can help you select a structure for your estate that accomplishes your goals.
A will is a legal document that allows you to name guardians for minor children and spell out how you want your assets to be divided among your heirs when you die. But it’s possible that not all of your assets will make it into your will for one reason or another. Any assets that aren’t included in your will or distributed through a trust automatically become part of your residuary estate when you pass away.
So how is a residuary estate created?
It can happen intentionally or unintentionally. For example, when you draft your will you may state that you want certain assets left to certain individuals. But you could also include a residuary estate clause outlining what should happen to any other assets that have not already been named in the will. In this case, you’re creating a residuary estate intentionally but planning ahead for it in the creation of the will.
Residual estates can also be created without advance planning. For example, your heirs may be left to deal with a residuary estate if:
Assets that are designed to have a named beneficiary but lack one can also be included in the residuary estate. So, for example, if you set up a payable on death account at your bank but fail to add a beneficiary to it, any funds in the account would get lumped in to the residual estate.
When a residuary estate exists, that can complicate the probate process for your heirs. Any unclaimed or otherwise overlooked assets would be distributed according to state inheritance guidelines, after any estate taxes, outstanding debts or final expenses have been paid.
Having an example to follow can make understanding residual estates easier. Say that you’re married and you have one adult child. You draft a will leaving your marital home, the furnishings in it and two vehicles to your spouse. You include a residuary clause stating that all of your other assets are to be passed on to your child.
If your spouse were to pass away before you, any assets you set aside for them in your will would become part of the residuary estate. The entirety of the residual estate, along with the items you already designated for your adult child, would go to them once you pass away.
Now, what if you draft a will but don’t include a residuary estate clause? In that scenario, anything that you didn’t specifically leave to someone in the will becomes subject to the probate rules of your state. Your assets would then be distributed to your heirs at law the same way they would if you were to die intestate. Heirs at law are the people who are legally recognized by the state to inherit your assets, including your spouse, children, parents, siblings and other relatives.
A trust is a legal entity that allows you to transfer assets to a trustee. This trustee is responsible for managing those assets on behalf of the trust beneficiaries according to your wishes. You may want to establish a trust if you have a larger estate, have a special needs beneficiary you want to plan for or want to create a legacy of charitable giving.
As with a will, it’s possible to have a residuary beneficiary of a living trust. This person would receive any property or assets transferred to the trust that were not designated for specific beneficiaries.
Defining residuary estate with a trust is easier than it is with a will, as the only property that’s considered is what’s already been transferred to the trust. If you’ve taken the time to set up a trust properly, you’ve likely already made provision for each beneficiary you want to be included and which assets they should receive. You could still run into issues, however, if a named beneficiary passes away and you haven’t named anyone as a residuary beneficiary.
It’s possible to write a residual estate clause into your will. If you’ve already drafted a will, you may need to add a codicil or draft a new will to replace the old one. The clause itself is fairly simple and should contain wording along the lines of:
“I wish to leave the remainder of my estate to…”
You’d then name the person you’d like to inherit your residuary estate. Keep in mind, however, that if you’re naming multiple persons it’s important to specify what percentage of the estate they each get.
Say you’re divorced and you want to leave $50,000 in cash to your parents and the remainder of your estate to your two children. In your residuary clause, you could specify that you’d like each child to receive an equal share of your remaining assets. Otherwise, you could be setting the stage for family conflicts between heirs after you pass away.
Talking to an estate planning attorney or a financial advisor can help you determine how to word a residuary clause and what assets to include. Your financial advisor can also discuss whether you need additional estate planning vehicles, such as a revocable living trust.
A residuary estate is something you may need to plan for when creating a will or trust. Fortunately, it’s fairly easy to do so by including the proper wording in your will and trust documents. Taking time to plan for residual assets can help to eliminate confusion and stress for your loved ones when the time comes to divide your estate.
Photo credit: ©iStock.com/kali9, ©iStock.com/i_frontier, ©iStock.com/Nastco
Rebecca Lake, CEPF®Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She's worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children. Rebecca also holds the Certified Educator in Personal Finance (CEPF®) designation.
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