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George F. Bearup, J.D. Senior Legal Trust Advisor

11-Apr-22

Lifetime Gifts: Advancements or Ademptions by Satisfaction?

Take-Away: With the emphasis on lifetime gifts to exploit the federal gift tax annual exclusion (now $16,000 per donee) and the temporary large applicable exclusion amount (through 2025), the question can arise if those lifetime gifts by a donor are an advancement of the donee’s inheritance on the donor’s death. The common law concept of an advancement of an inheritance is often confused with the common law concept of ademption by satisfaction of a bequest or a devise. They are different, but both doctrines are premised on the donor’s presumed intent.

Background: The Estates and Protected Individuals Code (EPIC) contains provisions that deal with an advancement and with an ademption by satisfaction. The key difference is that an advancement is limited to an heir’s intestate share of the donor’s estate. An ademption by satisfaction is associated with a devise under a Will. The ademption by satisfaction doctrine is extended under the Michigan Trust Code to a Trust’s dispositive provisions.

Advancement: An advancement is a gift made by a decedent during life to a family member that reduces the share of the probate estate that the family member receives under the Michigan intestate succession statute upon the decedent’s death. Michigan’s advancement statute provides:

  • If an individual dies intestate as to all or a portion of his or her estate, property the decedent gave during the descendant during the decedent’s lifetime to an individual who, at the decedent’s death, is an heir is treated as an advancement against the heir’s intestate share only under either of the following circumstances:
  • The decedent declared in a contemporaneous writing or the heir acknowledged in writing that the gift is an advancement; or
  • The decedent’s contemporaneous writing or the heir’s written acknowledgement otherwise indicates that the gift is to be taken into account in computing the division and distribution of the decedent’s intestate estate.

[MCL 700.2109(1).

The property that is advanced to the heir is valued as of the time that the heir came into possession or enjoyment of the property.

As such, the common law doctrine of an advancement is limited only to intestacy. Moreover, if a person of wealth is willing and able to make lifetime gifts, this statute with its writing requirement, effectively abolishes the advancement doctrine because those individuals who are sophisticated enough to make an advancement in writing are more likely to also execute a Will.

Ademption by Satisfaction: An ademption by satisfaction is a lifetime gift that is made by the testator with the intention that it satisfy, in whole or in part, a bequest or a devise under a Will. This satisfaction doctrine provides for the situation in which a testator decides to change the timing of a gift to permit the beneficiary to enjoy the gift before the testator’s death, in lieu of waiting to receive a bequest or a devise. As with an advancement, courts generally treat a lifetime gift as a satisfaction of a bequest or a devise only if the testator intended at the time of the gift that it be taken into account when the donor’s estate is distributed under his or her Will. Michigan’s statute provides:

  • Property a testator gave in his or her lifetime to a person is treated as a satisfaction of a devise [defined in MCL 700.1103(l) to include real or personal property; a devisee is defined at MCL 700.1103(m) to include distributions from a trust] in whole or in part only if any of the following are true:

(a)The Will provides for a deduction of the gift;

(b)The testator declared in a contemporaneous writing that the gift is in satisfaction of the devise or that its value is to be deducted from the value of the devise; or

(c) The devisee acknowledges in writing that the gift is in satisfaction of the devise or that its value is to be deducted from the value of the devise.

[MCL 700.2608(1).]

For purposes of a partial satisfaction, the property that is given during the testator’s lifetime is valued as of the time of the donee-devisee came into possession or enjoyment of the property or at the testator’s death, whichever occurs first. [MCL 700.2608(2).]

Trusts: This rule of construction with regard to ademption by satisfaction that applies to Wills under MCL 700.2608 is extended to the construction of the terms or the effect of a disposition from a donor’s Trust. “The rules of construction in sections 2605 to 2608 that apply in this state to the interpretation of and disposition of property by will also apply as appropriate to the interpretation of the terms of a trust and the disposition of trust property.” [MCL 700.7112.]

Writing Requirement: The writing requirement inserted in each of these statutes is intended to show the donor/testator/settlor’s intent of an advancement. This presumption against finding a lifetime transfer to be an advancement or ademption by satisfaction is the absence of a contemporaneous writing reflecting that intent. The comments to the Uniform Probate Code and these sections states the position that “most inter vivos transfers today are intended to be absolute gifts or are carefully integrated into a total estate plan.” Accordingly, finding against an advancement or an ademption by satisfaction is more likely to reflect a decedent’s intent. [UPC section 2-109, comment].  An example of this contemporaneous writing requirement is reflected in a 1995 Nebraska Supreme Court decision.

In re Estate of Soule, 540 N.W.2d 118 (Nebraska, 1995)

Facts: This dispute arose from a series of annual exclusion gifts made by the decedent to his children during his lifetime in order to minimize exposure to federal estate tax liability upon his death. Before being placed under a conservatorship, Mr. Soule twice made gifts of $10,000 (which was the maximum annual exclusion tax-exempt gift at that time) to each of his six living children. Mr. Soule’s court appointed conservator later continued to make annual exclusion gifts on Mr. Soule’s behalf, which gifts ultimately totaled $465,000. However, Mr. Soule’s conservator did not know that Mr. Soule had one child who had predeceased him, from whom he had five grandchildren who were excluded from the conservator’s annual exclusion gift-giving plan. On Mr. Soule death, a portion of Mr. Soule’s Will failed and thus a part of his estate passed through intestacy. The five grandchildren who were excluded from the annual exclusion gifts argued that the annual exclusion gifts made to Mr. Soule’s children were an advancement of their share of his partial intestate estate.

Court Decision: Nebraska’s advancement is the same as Michigan’s in that it requires a contemporaneous writing to rebut the presumption that a lifetime gift is not an advancement. The Nebraska Supreme Court held that the annual exclusion gifts made by Mr. Soule’s conservator, and by Mr. Soule prior to the conservatorship, were not advancements of his children’s intestate succession shares.

  • The court looked to Mr. Soule’s two series of annual exclusion gifts prior to being placed in the conservatorship and found that the were not accompanied by any contemporaneous writing by him that the gifts were to be treated as
  • The fact that all of the annual exclusion gifts were made by the conservator solely to reduce Mr. Soule’s future estate’s tax liability was undisputed and supported by probate court orders that approved the conservator’s gifts for that reason.
  • The conservator’s gifts included notes in the ‘memo’ portion of the check written that uses words like gift, annual gift, or gift, no tax. The court held that these words did not satisfy the requirement of a contemporaneous writing showing an intent to be advancements.  While the court noted that the intent to be an advancement can be expressed in the gift itself, but it again found that these brief memo ‘notations’ fell far short of expressing the intent to overcome the statutory presumption that a gift, not an advancement, was intended.
  • The court in Soule found that there was no evidence that showed that Mr. Soule had any intent to create an unequal distribution of his wealth in making lifetime annual exclusion gifts.

Conclusion: The annual exclusion gift opportunity just increased to $16,000 a year per donee, over an unlimited number of donees. Individuals are encouraged by their advisors to make large lifetime gifts to reduce their exposure to future federal estate taxes using their currently large applicable exemption amount. With this current status of the federal transfer tax laws and exclusions from gift taxes, we can expect a lot more lifetime gifts to take place over the next couple of years. In this context of tax minimization gifts we also have a decedent’s likely intent that their wealth will be distributed equitably, or with their children and/or grandchildren equally. As lifetime gifts are made perhaps to some, but not all, of the donor’s children or grandchildren, some thought needs to be given to whether an advancement or an ademption by satisfaction is intended by the donor, and what language is included in correspondence or gift documentation that might call into question whether an advancement or ademption was intended by the lifetime gift.