What Is the Residue of Your Estate and Who Should Receive It?

The word “residue” appears in most wills, but it is not a term people commonly use outside estate planning.

The residue of your estate is what remains after the executors have paid the estate’s debts, funeral and administration expenses, tax liabilities and any specific gifts made under the will.

For many people, the residue clause determines who receives almost everything they own. It may include the net proceeds of the family home, bank accounts, investments, vehicles, personal belongings and other assets forming part of the estate.

Although it may look like a relatively short clause, it is often the most important distribution provision in the will.

What is included in the residue?

The residue is not a fixed list of assets.

It is the balance of the estate after the executors have completed the earlier parts of the administration.

For example, the executors may first need to:

• pay funeral and estate-administration expenses;

• repay mortgages, credit cards and personal debts;

• pay outstanding tax;

• meet the costs of maintaining or selling estate property;

• complete any specific gifts of money or belongings; and

• deal with any valid claims against the estate.

What remains after those matters have been dealt with becomes the residuary estate.

The value of the residue may therefore be quite different from the total value of the assets owned at death.

A person may own a valuable home but also have a substantial mortgage. Another estate may have significant investments but several large cash gifts to pay first. The residue is the net balance rather than the estate’s headline asset value.

Why is the residue clause so important?

A will may contain specific gifts, such as a sum of money to a grandchild or a piece of jewellery to a family member.

However, those gifts usually represent only part of the estate.

The residue clause deals with everything that has not been distributed elsewhere. It also provides a destination for assets acquired after the will is signed, provided those assets form part of the estate.

Without an effective residue clause, part of the estate may be left undistributed by the will and may need to pass under the intestacy rules.

A clearly drafted residue clause helps ensure that the entire estate is dealt with and that the executors know who should receive the remaining property.

Leaving the residue to a spouse or partner

A common provision in a straightforward will is to leave the residue entirely to a spouse or partner.

For a couple in a first relationship with the same children, that may reflect their shared intentions. Each person may leave everything to the survivor and then provide for the children if the survivor has already died.

Before using this structure, it is important to consider:

• whether either person has children from an earlier relationship;

• whether there is a contracting-out agreement;

• whether significant assets were brought into the relationship by one person;

• whether the surviving partner is able to manage the inheritance;

• whether any assets should be preserved for children or other beneficiaries; and

• whether the couple’s assets are owned personally, jointly or through a family trust.

Leaving the residue outright gives the surviving partner full ownership and control.

The survivor can spend the assets, sell them, give them away or change their own will. That may be entirely appropriate, but the effect should be understood before the will is signed.

Blended families require additional thought

In a blended family, leaving the entire residue to the surviving partner can create a risk that the deceased person’s children will not ultimately benefit.

The surviving partner may later enter a new relationship, make gifts, use the assets for their own needs or prepare a new will benefiting different people.

This does not necessarily involve wrongdoing. Once the assets have been inherited outright, they belong to the surviving partner.

Where the will-maker wants to provide for a partner while preserving some or all of the estate for children from an earlier relationship, alternatives may include:

• a life interest;

• a right to occupy the family home;

• an income interest;

• an immediate gift of part of the estate to the children;

• a testamentary trust; or

• different treatment of particular assets.

These arrangements require more detailed drafting and should be considered alongside relationship-property rights, jointly owned assets and any family trust.

Leaving the residue to children

Another common arrangement is for the residue to be divided equally between the will-maker’s children.

Although this sounds straightforward, the will should also address several related questions.

What happens if one child dies before the will-maker? Does that child’s share pass to their own children, or is it divided between the surviving siblings?

At what age should a young beneficiary receive the inheritance?

Should the trustees be able to use money for the beneficiary before that age?

Should adopted children, stepchildren or children born after the will is signed be included?

What happens if a child survives the will-maker but dies before their entitlement is distributed?

The residue clause should answer these questions rather than leave them to assumption.

What happens if a child dies before you?

Many parents want the children of a deceased child to inherit their parent’s share.

For example, a will may divide the residue equally between three children and provide that, if one child has already died, that child’s share passes equally to their own children.

This is sometimes described as distribution by family branch.

Another option is for the deceased child’s share to be divided between the surviving children of the will-maker.

Neither approach is automatically correct. The choice depends on the family and the will-maker’s intentions.

The position should be stated clearly, particularly where:

• some children have children of their own and others do not;

• stepchildren are involved;

• a child is estranged;

• a child has died leaving a spouse or partner;

• grandchildren are still young; or

• family relationships are complicated.

The Wills Act contains rules that may preserve certain gifts to a will-maker’s child or other issue where that beneficiary dies first and leaves descendants. However, it is preferable for the will to state the intended outcome directly rather than rely on a statutory default.

Should children receive equal shares?

Equal division is common, but it is not the only option.

A person may consider unequal shares where:

• one child has already received substantial financial assistance;

• one child has worked in or contributed to a family business;

• one child has significantly greater needs;

• one child has provided extensive care or support;

• particular assets came from one side of the family;

• there is an estranged relationship; or

• the will-maker has assumed responsibility for a stepchild or another family member.

Unequal provision can increase the likelihood of disappointment, misunderstanding or a claim against the estate.

That does not mean unequal treatment is necessarily inappropriate. It means the reasons should be considered carefully, the practical effect should be understood and appropriate advice should be obtained.

In some cases, it may be useful to leave a separate written explanation of the decisions made. The wording and storage of that explanation should also be considered carefully.

Should you use percentages or fixed amounts?

The residue is usually divided by percentages or shares rather than fixed dollar amounts.

For example, the will may divide the residue equally between the children or allocate specified percentages to different beneficiaries.

Percentages adjust automatically as the value of the estate changes.

A fixed sum does not.

A gift of $100,000 may represent a modest portion of the estate when the will is signed but a much larger proportion many years later. Inflation, investment performance, borrowing, property values and residential-care costs can all change the balance of the estate.

Fixed cash gifts can still be appropriate, particularly for charities, grandchildren or other people who are not intended to share in the main estate.

However, the relationship between specific cash gifts and the likely residue should be reviewed periodically.

What happens if there is not enough money?

Estate debts and expenses are generally dealt with before beneficiaries receive the residue.

If there is insufficient money to pay all the specific gifts made under the will, some gifts may need to be reduced or may fail entirely, depending on the wording of the will and the nature of the estate.

This is one reason not to include an extensive list of large fixed gifts without considering the likely value and liquidity of the estate.

An estate may appear valuable because it includes a home or business, but the executors may have limited cash available. They may need to sell an asset to pay debts, expenses and gifts.

The will should be prepared with an understanding of:

• the approximate value of the assets;

• any mortgages and other debts;

• whether assets can readily be sold;

• whether a beneficiary is intended to receive an asset itself;

• the amount of any cash gifts; and

• how the remaining estate should be divided.

What if a specific gift cannot take effect?

A specific gift may fail because the beneficiary has died, the asset is no longer owned or another condition of the gift cannot be satisfied.

The will should ideally state what happens in that situation.

Under the Wills Act 2007, property affected by a testamentary gift that cannot take effect generally falls into the residuary estate. This makes an effective residue clause particularly important.

For example, if a will leaves a particular investment account to a beneficiary but that account has been closed before death, there may be no asset to transfer.

Similarly, a person may leave a particular property to one child but later sell it without updating the will.

Regular reviews help ensure that specific gifts still reflect the assets actually owned.

What assets do not form part of the residue?

A will controls only the assets that form part of the deceased person’s estate.

Some assets may pass outside the will.

These may include:

• property owned as a joint tenant;

• jointly held bank accounts, depending on the legal and factual circumstances;

• assets owned by a family trust;

• company property;

• assets held under another trust;

• insurance proceeds payable directly to a nominated person; and

• overseas assets governed by another country’s succession rules.

The way an asset is used does not necessarily show who legally owns it.

A person may live in a home owned by a family trust, operate a vehicle owned by a company or use funds held in a joint account. Those assets may not be available for distribution under the residue clause.

Before deciding who receives the residue, it is important to identify which assets will actually form part of the estate.

Jointly owned property

Where property is owned as joint tenants, the deceased owner’s interest will generally pass to the surviving joint owner by survivorship rather than under the will.

Where property is owned as tenants in common, the deceased person’s share usually forms part of their estate and can pass under the will.

This distinction can have a significant effect on the value of the residue.

Someone may intend to divide their estate equally between their children, but if a major asset passes directly to a joint owner, it will not be available for that division.

Ownership records should therefore be checked when the will is prepared, particularly for the family home, investment property and significant bank accounts.

Family trust assets

Assets owned by a family trust do not usually form part of the will-maker’s personal estate.

This remains the case even where the will-maker established the trust, lives in the trust-owned home or regards the trust assets as family property.

The will may still need to deal with:

• money owed by the trust to the will-maker;

• money owed by the will-maker to the trust;

• shares in a trustee company;

• the succession of appointor powers;

• personal assets intended to be transferred to the trust; and

• coordination between the executors and the continuing trustees.

A person with a family trust should review the will and trust succession arrangements together.

Otherwise, the beneficiaries named in the will may inherit the personal estate while control or benefit of the trust passes in a different direction.

Loans to children and other beneficiaries

Loans can create uncertainty when dividing the residue.

A parent may have advanced money to one child for a home deposit, business or other purpose. The financial statements may record that amount as a loan, while the family may have treated it informally.

The will-maker needs to decide whether the loan should:

• be repaid to the estate;

• be forgiven;

• be deducted from the child’s share;

• be treated as an earlier inheritance; or

• remain payable on its existing terms.

The will, loan documents, trust records and financial statements should be consistent.

Without clear instructions, the executors may be left trying to determine whether the advance was a loan or a gift and whether it affects the division of the residue.

That can create disagreement between beneficiaries.

Personal belongings

Personal belongings may technically fall into the residue unless the will deals with them separately.

Some wills give the executors discretion to distribute personal items between family members. Others refer to a memorandum of wishes or leave particular items to named beneficiaries.

Personal belongings can have relatively little financial value but substantial emotional importance.

Disagreement about jewellery, photographs, artwork and family heirlooms can delay an otherwise straightforward estate.

Where particular items matter, the will-maker should discuss how they should be dealt with and whether the will or a separate memorandum is the better place to record those wishes.

At what age should a beneficiary receive the residue?

Where a beneficiary is young, the will may provide that their share is held until a specified age.

Common ages include 20, 21 or 25, although the appropriate age depends on the value of the inheritance and the beneficiary’s circumstances.

The will can give the trustees power to use the funds before that age for matters such as:

• education;

• maintenance;

• health;

• accommodation;

• training;

• travel; or

• general advancement and benefit.

This allows the trustees to support the beneficiary without transferring the entire inheritance immediately.

For a beneficiary who may need longer-term protection, a more detailed testamentary trust may be appropriate.

What if a beneficiary needs protection?

An outright share of the residue may not be suitable for every beneficiary.

Additional planning may be needed where a beneficiary:

• has a disability;

• receives means-tested assistance;

• has an addiction;

• has difficulty managing money;

• is vulnerable to financial influence;

• is in an unstable relationship;

• is bankrupt or at risk from creditors; or

• is involved in legal or relationship-property proceedings.

Possible options include holding the inheritance in a testamentary trust, giving trustees discretion over distributions or providing income and support without giving immediate control of the capital.

These arrangements must be tailored to the beneficiary and should not be added to a will without considering the practical administration involved.

Charitable gifts from the residue

A person may leave all or part of the residue to charity.

A percentage gift can be particularly useful because it adjusts with the value of the estate.

The will should identify the intended charity accurately and allow the executors to deal with changes such as a charity merging, restructuring or changing its name.

Where several charities are included, the percentages should be checked to ensure that the entire residue is distributed.

A charitable gift can also be made as a fixed sum, but the effect on the remaining beneficiaries should be reviewed as the estate changes over time.

What happens if every residuary beneficiary dies first?

A will should include a final substitute provision.

For example, if a person leaves the residue to their partner, and then to their children if the partner has died, the will should also address what happens if the partner, children and any relevant grandchildren have all died first.

The final beneficiaries might be:

• siblings;

• nieces and nephews;

• wider family members;

• close friends;

• charities; or

• a combination of these.

This situation may seem unlikely, but a will should still deal with it.

A final substitute clause helps prevent the residue from passing under the intestacy rules and gives the executors a complete distribution plan.

Why the wording needs to be clear

Small differences in wording can produce significantly different outcomes.

For example, a gift “to my children equally” may operate differently from a gift “to those of my children who survive me”.

A gift to a beneficiary’s “children” may raise questions about adopted children, stepchildren or descendants born after the will was signed.

Terms such as “family”, “issue” and “descendants” can have legal meanings or may create uncertainty if used without definition.

The will should identify the beneficiaries clearly and set out what happens if any of them die before receiving their entitlement.

Reviewing the residue clause

The residue clause should be reviewed when there is a significant change in:

• relationships;

• family membership;

• asset ownership;

• property values;

• debt levels;

• family trust arrangements;

• business ownership;

• loans to beneficiaries;

• a beneficiary’s personal circumstances; or

• the charities or organisations intended to benefit.

A clause that was suitable when the will was signed may no longer produce the intended result ten years later.

The review should consider both the wording of the will and the way the assets are currently owned.

How we can help

We help clients decide how the residue of their estate should be distributed and ensure the will addresses the circumstances that may arise before the estate is administered.

This includes considering:

• provision for a spouse or partner;

• children from the same or earlier relationships;

• substitute beneficiaries;

• grandchildren;

• the age at which beneficiaries inherit;

• unequal distributions;

• loans and earlier financial assistance;

• vulnerable beneficiaries;

• family trust assets;

• jointly owned property;

• business interests;

• charitable gifts; and

• final substitute beneficiaries.

The residue clause is often the part of the will that determines whether the overall estate plan works.

We can review your family circumstances, asset ownership and existing trust arrangements and prepare a will that clearly records who should receive your estate.

Deeanah Winders is an Auckland based lawyer advising on wills, enduring powers of attorney, family trusts and estate administration.