Sometimes we provide for gifts in our Will or other testamentary documents without thinking about the debt that is on the asset or what happens to it. This often comes up when someone wants to gift real estate to others, since real property tends to be purchased through financing.

Generally, we look to the express provisions of a deceased person's Will or Trust to determine his or her intent with respect to gifts that are made. California Probate Code Section 21102 provides as follows:

(a) The intention of the transferor as expressed in the instrument controls the legal effect of the dispositions made in the instrument.

(b) The rules of construction in this part apply where the intention of the transferor is not indicated by the instrument.

(c) Nothing in this section limits the use of extrinsic evidence, to the extent otherwise authorized by law, to determine the intention of the transferor.

In addition, where property is subject to a mortgage or debt, a specific gift of that property will be transferred and remain subject to that mortgage and debt, as provided in California Probate Code Section 21131, which states:

A specific gift passes the property transferred subject to any mortgage, deed of trust, or other lien existing at the date of death, without right of exoneration, regardless of a general directive to pay debts contained in the instrument.

To avoid this outcome, it is important for you to specify whether the debt on the property is to be paid off prior to the transfer, i.e., should the debt be "exonerated". Moreover, if your estate is not large enough to fully exonerate the debt, you may also need to think about which of your other gifts can be cut back and in what sequence they should abate.

When a person dies with excessive amounts of debt or there are lots of expenses related to the administration of his or her estate, certain gifts laid out in the deceased person's Will or Trust may need to be reduced. There's a specific sequence in which the gifts get cut back, and California Probate Code Section 21402 provides the sequence:

(a) Shares of beneficiaries abate in the following order:

(1) Property not disposed of by the instrument.

(2) Residuary gifts.

(3) General gifts to persons other than the transferor’s relatives.

(4) General gifts to the transferor’s relatives.

(5) Specific gifts to persons other than the transferor’s relatives.

(6) Specific gifts to the transferor’s relatives.

(b) For purposes of this section, a “relative” of the transferor is a person to whom property would pass from the transferor under Section 6401 or 6402 (intestate succession) if the transferor died intestate and there were no other person having priority.

For details on specific versus general gifts see this earlier blog post.

The abatement applies to debts, expenses, and the satisfaction of gifts from high to low priority; however, it does not apply by default to how estate taxes get apportioned.

Often a client may have grand ideas about giving gifts to certain family members and friends, without considering the fact that the assets they want to distribute at the time of their death may be insufficient to satisfy all of the gifts.

For example, a client may create his or her Will or Trust at a time when he or she is wealthy, but pass away at a time when much of the estate has been depleted for the client's care. It is therefore, important to consider the sequence in which the client may want gifts fulfilled to ensure that those that are most important to the client have the highest likelihood of being distributed to the chosen recipient.

Occasionally there's a need to analyze the types of gifts that a deceased person describes in his or her Will to figure out which ones should be given priority. This problem usually arises when the estate does not have enough assets to fulfill all of the gifts described in the deceased person's Will. California Probate Code Section 2117 identifies six types of gifts, and it provides as follows:

At-death transfers are classified as follows:

(a) A specific gift is a transfer of specifically identifiable property.

[For example, "I give my car to Sammy."]

(b) A general gift is a transfer from the general assets of the transferor that does not give specific property.

[This one is a bit confusing, but it would be something like, "I give a gift of a new Rolex watch to Linda." This would require the executor to purchase such a watch and give it to Linda. On the other hand, if the Will said, "I give my gold Rolex watch to Linda," this would be considered a specific gift.]

(c) A demonstrative gift is a general gift that specifies the fund or property from which the transfer is primarily to be made.

[For example, "I give $10,000 to Bob from my Wells Fargo Money Market Savings account."]

(d) A general pecuniary gift is a pecuniary gift within the meaning of Section 21118.

[Probate Code Section 21118(b) describes a "pecuniary gift" as a "transfer of property made in an instrument that either is expressly stated as a fixed dollar amount or is a dollar amount determinable by the provisions of the instrument." An example would be, "I give $3,000 to Steve."]

(e) An annuity is a general pecuniary gift that is payable periodically.

[For example, "I give $1,000 per month to Mark for the next 60 months."]

(f) A residuary gift is a transfer of property that remains after all specific and general gifts have been satisfied.

[For example, "I give the residue of my estate to my son, Carl."]

The distinction between residuary, general, and specific gifts is important when a deceased person's estate is inadequate to fulfill all of the contemplated transfers. In general, specific gifts are given the highest priority, general gifts are given the next level of priority, and residuary gifts are given the lowest level of priority.