Transfer of the Residue of the Estate
No matter how detailed a Will is, it is unlikely that a testator will be able to list out every single specific item they own and outline how those items are to be allocated. This is because an estate is usually made up of a few significant assets and numerous less significant assets, which nevertheless, taken together, do not make up an insignificant sum.
This is where it is important to understand the role of the residue of the estate, referred to also as “residuary estate”.
What Is Residuary Estate?
Residuary estate refers to everything that is left over in an estate after payment of all debts, expenses and specific gifts.
Payments required prior to the residuary estate being calculated may include:
A testator can decide how the residuary estate is distributed in a Will.
What happens if there are insufficient funds in the estate to cover expenses?
If the entirety of the estate must be applied to debts and liabilities, there may be little to no residue left in the estate.
If the debts and liabilities exceed the funds available in the estate, then there will be no residue, and the estate may be deemed insolvent. In this case it is likely that the Bankruptcy Act 1966 (Cth) would apply.
What if there is no Will?
If there is no Will, there may still be a residuary estate.
This is calculated by working out what is left over after the above debts and expenses are paid off – noting, of course, that in this case there would be no deductions made for specific gifts.
The residuary estate would then be dealt with under the applicable intestacy laws.
How is residuary estate covered in a Will?
Residuary estate can and should be covered in a Will by inserting a residuary estate clause. This clause determines to whom the residue of the estate is to be allocated.
Clauses can be drafted in flexible ways to reflect the testator’s wishes, especially where the testator wants to leave the residue of the estate to a number of different beneficiaries.
The distribution might be expressed in terms of a percentage. For example, that A receives 40%, B receives 30% and C receives 30% of the residuary estate.
It can also be distributed in absolute monetary terms in order of priority. For example, A first receives up to $20,000 of however much is available from the residuary estate. If there are funds left over, B then receives up to $15,000 from the funds available. Again, if there are funds left over, C receives up to $15,000 from the funds available, and so on.
How is a residuary estate clause beneficial?
There are a number of reasons why having a residuary estate clause may be beneficial:
- It ensures that the Will provides instructions covering the whole estate;
- Creating allocations of the whole estate in advance helps to avoid conflict between beneficiaries;
- It saves the testator from having to make an overly lengthy inventory of smaller-value items;
- It covers items which the testator may have forgotten to include in specific terms;
- If the testator acquires further assets after the Will has been executed, these may automatically form part of the residuary estate;
- A residuary estate clause is easily incorporated into a Will;
- Without a residuary estate clause, the testator puts themselves at risk of partial intestacy;
- A residuary estate clause may be drafted in flexible ways;
- If a beneficiary dies before a testator, the property which would otherwise have gone to that beneficiary might be allocated according to the residuary estate clause, rather than intestacy principles.
It is important to be aware that, notwithstanding the provisions of a given Will, the Succession Act 2006 (NSW) allows claims to be made by certain “eligible persons” as defined in the act, which may alter the distribution to the beneficiaries.
Accordingly, the above information is of a general nature only. To understand the application of residuary estate principles to your specific matter, please contact our offices.