Abatement is the statutory order in which assets are used towards expenses, liabilities and debts. This order is dependent on whether the estate is solvent or insolvent.
Where the estate is insolvent (the estate is insufficient to meet its liabilities), all gifts in the Will fail, as everything will be used to meet the estate’s liabilities.
Where the estate is solvent (the estate is sufficient to meet its liabilities), the order in which assets are used to cover liabilities is covered by the First Schedule of the Administration of Estates Act 1925, however, to fully understand the order stated in the 1925 Act a distinction should be made between the various types of gifts that can be made in a Will.
Specific gifts are gifts of some particular identifiable possession or item that is a distinguishable part of the Testator’s estate. For example, gifts of chattels, jewellery, real property or bank accounts.
General gifts are gifts not of a precise thing, it is more an instruction for something to be provided out of the Testator’s general estate. A gift of money will nearly always be a general gift. A Testator leaving a gift of £1000 may not have such cash in their estate and their executors must raise the money to make such a gift.
Demonstrative gifts are a hybrid of the two. It is essentially a general gift that has to be satisfied from a particular fund, for example £2000 from my bank account held with RBS. Using this example, if there is only £1500 in the specified RBS account at the Testator’s death, the remaining £500 will be treated as a general gift and made out of the Testator’s general estate.
Money gifts written by WillPack will be written to be general gifts (unless made out of a particular fund, in such case they will be demonstrative) and all other gifts are drafted to be specific gifts.
The main concerns from this order is as follows:
- Assets in the Residuary Estate are firstly used to pay towards the liabilities, each person’s share in the Residuary Estate will be reduced rateably.
- If the Residuary Estate is not large enough to cover liabilities, any general gifts shall then also be used, each general gift will be reduced rateably.
- If the general gifts are also not enough to cover liabilities then specific gifts will have to be used, these will again be reduced rateably.
This statutory order can be varied, for example it can be stated that a certain gift shall have priority over all other gifts.
For the purposes of this order, demonstrative gifts are treated as if they are specific so far as they can be satisfied out of the specific fund. Anything that cannot be satisfied shall be treated as a general gift.