What is a Legacy in a Will
A legacy is term used to describe a gift – that is, something which is specifically assigned to an individual and named as such in a Will. This could be a fixed sum of money or an item of personal property that you wish to see gifted to a family member or close friend, or it could be a specific charitable legacy listed as a donation.
What are the three types of legacy?
As mentioned above, a legacy is the same as a gift which is directly outlined in a legal document – and there are three different types of specific legacy that tend to be left.
- Specific legacies – gifts of specified assets, such as property, jewellery like an engagement ring, car, artwork etc.;
- General legacies – gifts of a specific sum of money, such as ‘£2,000 to each of my grandchildren’ or ‘£10,000 to my friend John Doe absolutely’; and
- Demonstrative legacies – gifts of a particular quantity or amount that is payable out of a particular fund, such as ‘£10,000 to my daughter from my current account with X bank’.
With this in mind, there’s an order that needs to be followed when distributing an estate:
- Specific legacies; followed by
- General / demonstrative legacies; followed by
- Residuary estate.
What if there is not enough money to pay legacies in a Will?
What happens when an estate is in a position where it has insufficient funds to pay all the legacies left in a Will, either because the funds no longer exist at the date of death, or because some or all of them have been used to pay off outstanding debts and liabilities?
If there aren’t enough funds left in an estate to pay all the legacies in full after the debts and liabilities have been met, the legacies must be ‘abated’. This means that the legacies will need to be reduced proportionately. However, abatement will happen in the reverse order compared with how they are usually distributed, as follows:
1. Residuary estate
If there isn’t enough to pay the specific and general legacies, then the residuary beneficiaries won’t receive anything.
2. General / demonstrative legacies
If there isn’t enough to pay the specific and general legacies, then the beneficiaries of the general legacies won’t receive anything. Alternatively, if there are some funds available after the specific legacies are made, the beneficiaries of the general legacies will receive a proportionate amount instead (see below).
A demonstrative legacy is considered a hybrid – in its nature, it’s a general legacy, however it’s to be taken out of a specific fund / particular part of the estate. HMRC has issued guidance on this point, particularly that any demonstrative legacies will not abate with the general legacies until after the particular fund(s) are exhausted. This means that any demonstrative legacies will be paid in priority to general legacies.
3. Specific legacies
These gifts are prioritised when distributing assets. As you can see, giving a specific legacy to a beneficiary (or beneficiaries) may make it more likely that they’ll receive it.
Let’s look at an example of abatement in its simplest form. Assume that there are five general legacies of £2,000 to each of five grandchildren in a Will (£10,000 in total) made free of tax. However, after payment of debts and liabilities, the net estate available for distribution only comes to £8,000, meaning that there’s a shortfall of £2,000. There is nothing left for the residuary beneficiaries so they would receive nothing and the general legacies for each of the five grandchildren would then need to be abated i.e., each legacy amounts to one fifth of the total sum of the legacies, so each grandchild instead receives one fifth of the sum that is available for distribution, which is £1,600.
Abatement shouldn’t be confused with ademption, which is where a specific gift left in a Will (e.g. a gold necklace or a collection of artworks) is no longer around at the Deceased’s death (e.g., it’s been sold). Most of the time, these gifts will just fail unless alternative provision has been included in the Will.
A pecuniary legacy refers to a fixed amount of money. This kind of cash legacy can be attributed to named individuals or more broadly, for example leaving a specified amount to each child or grandchild according to family relations.
When considering pecuniary legacies it is important to have an eye to the question of Inheritance Tax. Gifting before death may be possible to avoid Inheritance Tax implications.
Are legacies free of inheritance tax?
A gift is likely to be exempt from inheritance tax if the individual presenting the gift survives for more than seven years after the money was gifted.
Gifts made as charitable donations and those which are gifted to a spouse or civil partner are also exempt from Inheritance Tax.
If the value of an estate exceeds the Inheritance Tax threshold then Inheritance Tax will be payable. Whether or not a legacy is subject to Inheritance Tax depends on the precise drafting of the Will. Care needs to be taken.
What is the difference between a legacy, a devise and a bequest?
While all three of these terms are used to depict a type of specific legacy, they all refer to different types of gift.
A devise is a gift of property such as a house or estate; a bequest is a personal item such as a piece of jewellery or a specific item; a legacy is a broader term which encompasses any type of gift be it cash legacy, personal item, or property.
Help with planning your distributing legacies
As you can see, it’s crucial that your current Will is kept under review to ensure that it still reflects the current size of your estate, and the gifts that you are leaving still form part of your estate. For example, we recommend that our clients look at their Wills every couple of years. Most of the time, individuals want to leave their residuary estate to their main beneficiaries (often their spouse or children), but if there aren’t enough funds available when they die, they may find that their loved ones end up with less than was intended, if anything.
If you’d like any help or advice on the legal issues around on how legacies in a Will should be distributed, or any other queries relating to your Will, Probate or an estate you may currently be dealing with, please don’t hesitate to us on 0330 912 8338.