- Dennis Fordham
- Posted On
Estate Planning: Gifts of encumbered properties
A gift of a particular piece of real or personal property is a specific gift. If made in the context of a will or a living trust, such gifts typically take effect at the donor’s death.
Meanwhile the donor – i.e., maker of the gift – still owns the property. Events may upset or compromise the intended gift, either in full or part. Specifically, the property may be sold, mortgaged, destroyed or subject to eminent domain (i.e., the exercise of a government’s right to condemn property), all of which can result in the donee (i.e., the recipient of the gift) receiving less than what was originally intended.
When the donor subsequently dies, what then happens in respect of any specific gift that was compromised by being sold, mortgaged, destroyed or condemned under eminent domain? It all depends. In certain defined circumstances, California law may protect the donee. Let us examine the scenarios.
If the property is sold, mortgaged, destroyed or condemned due to eminent domain while the donor (owner) was incapacitated and either the donor’s conservator or agent under a durable power of attorney, as relevant, was involved, then the intended donee may be in luck.
The law tries to compensate the donee so that the intervening events do not totally disrupt the incapacitated donor’s estate plan.
Presumably, but for the donor’s incapacity, he or she would have made an offsetting gift of money to compensate the donee of the specific gift for the sale, mortgage, destruction, or condemnation of the property.
For example, consider a parent who makes a will that leaves a home to his son and leaves the rest of his estate to his daughter. Later on, the parent becomes mentally incapacitated, is conserved and the home mortgaged by the conservator in order to pay bills.
When the parent dies, the son is entitled to receive a sum of money equal to the unpaid mortgage owed at the owner’s death. The son also receives the residence subject to the mortgage.
Now with the money, the son can pay off the mortgage. This presumes, of course, that the parent’s estate is able to generate the funds after paying off any debts, taxes and expenses of administration.
Moreover, in the case of conservatorships, the foregoing rule only applies if the conserved donor dies either while still conserved or within one year of the conservatorship’s termination. Otherwise, the rule does not apply.
However, if the property that is the subject of the specific gift is sold, mortgaged, destroyed or condemned while the owner/donor is alive and has capacity then the intended donee of the property is entitled to receive any remaining unpaid consideration on the sale of the property, any unpaid insurance proceeds, and eminent domain monies owed on the property, as relevant. This is in addition to any remaining ownership rights the decedent had in the subject property at death.
Next, there is another rule regarding the specific gift of a debt instrument (e.g., a promissory note or “IOU”). Any property owned by the donor that was acquired due to foreclosure, also belongs to the donee.
So, for example, consider the situation where a creditor’s will gifts an IOU to his daughter. The IOU is secured by a deed of trust recorded against the debtor’s residence. The debtor defaults, and loses his residence to his creditor. When the creditor dies, the daughter receives the residence instead of the IOU.
Finally, as of Jan. 1, 2013, the foregoing protections will also apply to specific gifts made in a person’s living trust.
Anyone seeking to apply the rules to a specific situation should consult an attorney.
Dennis A. Fordham, attorney (LL.M. tax studies), is a State Bar Certified Specialist in Estate Planning, Probate and Trust Law. His office is at 55 First St., Lakeport, California. Dennis can be reached by e-mail at This email address is being protected from spambots. You need JavaScript enabled to view it. or by phone at 707-263-3235. Visit his Web site at www.dennisfordhamlaw.com .