What Is a Residuary Estate & How Does It Work?

Imagine this: You’ve thoughtfully created your will, carefully detailing the specific gifts and bequests you want to leave for your loved ones. 

But when you pass away, a chunk of your assets are still distributed based on the governmental formula. Why? What happened?

You forgot to account for your residual estate.

In this article, we’ll discuss everything you need to know about residuary estates in Canada, including common misconceptions and how to create residuary estate clauses in your own will.

What is a residuary estate in Canada?

A residuary estate, most commonly referred to as the residue, is the portion of your estate left over after your executor takes care of your lingering debts, taxes, and expenses, and distributes the bequests outlined in your will.

An example of these types of gifts could be a cash gift or a car.

Why is it important?

Without clear instructions, those remaining assets of your residue are distributed according to provincial intestacy laws, which may not align with your wishes or the preferences of your loved ones. 

Including a clause in your will that names a residual beneficiary ensures all of your assets will go to the person, people, or organizations you choose.

Any will created by a professional or through a platform like Willful has a residue clause because they are so important. 

Start your will for free and protect your assets today →

What is the difference between a beneficiary and a residual beneficiary?

A beneficiary is someone who inherits something from your will. The difference between a beneficiary and a residual beneficiary is that the former receives a bequest that was outlined in your will, while the latter inherits the remaining part or all of your residue.

Can a residual beneficiary also receive specific gifts?

Yes, you can name someone as both a beneficiary of a bequest and the beneficiary of your residual estate. For example, it’s common to leave a specific item to a spouse, like a piece of jewelry, and for a spouse to inherit the residue in addition to that specific item.

If a specific gift can’t be inherited by a beneficiary or a backup beneficiary, for example, because the intended beneficiary passed away first, then that specific gift will become part of your residue and can be inherited by the residual beneficiary as well.

Remember that naming backups for beneficiaries and the other roles in your will can help future-proof your estate and make sure your assets aren’t distributed through intestacy rules.

How a residue works

The role of the executor

Your executor oversees your funeral, manages assets including selling, liquidating, or holding on to assets, applies for probate if needed, and distributes your estate—including your residual assets.

The distribution process

1. First, they organize your funeral and burial based on your documented wishes.
2. Then the executor must gather all your assets and evaluate the estate.
3. Your executor will apply for a grant of probate if required, and pay any associate probate fees.
4. Afterwards, your executor will settle any liabilities—paying your remaining debts, filing your final tax return, and paying any taxes owing as per that final tax return.
5. Once all liabilities have been settled, the executor will distribute bequests to beneficiaries according to your will.
6. Finally, the pool of assets left form your residue, and your executor will distribute those assets as per the wishes in your will. If there is no clause, assets will be distributed according to intestate rules.

Find out how this process changes if you don’t have a will →

Common issues with the distribution process

• Missing will: Without a will, your entire estate goes through probate, and all of your assets are distributed based on a provincial formula, not your wishes. This means the courts choose who administers your estate, who becomes guardian for your dependents, and how your estate gets distributed. Plus, probate can significantly slow down the distribution process.
  • Note: While having a will doesn’t guarantee your estate will avoid probate, it does increase the chance of avoiding it
• Missing instructions: Without a residue clause for your remaining estate, your assets will be distributed as per the government’s formula, not your wishes. This can lead to disputes among family members over who should inherit which assets. In addition, provincial intestacy laws do not account for common law spouses, friends, or organizations like charities.
• Executor challenges: An efficient estate settlement starts with a good executor. Choosing someone who is trustworthy and capable can make all the difference for your loved ones. Part of the executor's duties includes keeping beneficiaries updated on the estate settlement process, which can ensure beneficiaries feel more informed about the process and more confident about when they can expect to receive their inheritance.

Why you need to include a residue clause in your will

Benefits of having a residue clause

1. A residue clause means you have the power to choose how all of your assets are distributed, including assets you may have forgotten about
2. Adding this clause helps your executor distribute your estate quicker, as it gives them guidance on how you want your entire estate to be distributed and decreases the chances of conflicts over who gets the residual estate. Plus, it helps your beneficiaries get their inheritances faster
3. Avoiding intestate distribution means you can reduce the likelihood of legal conflicts among beneficiaries and loved ones

Risks of not including a residue clause

1. Without this clause, remaining assets are distributed to heirs based on provincial rules, regardless of your actual wishes
2. Assets you forgot about may go to people you wouldn’t have chosen to inherit, and they definitely will not go to any friends or charities
3. If assets are distributed according to a provincial formula, instead of according to a will that states the person's wishes clearly, there could be more disputes among beneficiaries

Common misconceptions about residual estates

Myth: Specific gifts cover everything.

Specific gifts or bequests only cover that specific item, nothing more. Naming your sister as the beneficiary of your jewellery will not automatically ensure she can inherit your car or clothes.

Without a residue clause, the remaining assets in your estate might not be distributed according to the wishes you outlined in the bequests section of your will.

Myth: All assets are included in a will.

“Assets that form your estate are those that are not jointly owned and/or do not have a named beneficiary,” explains Joel K. Samphir, a Wills and Estates lawyer in Manitoba. 

When a beneficiary is named directly on an account or policy, the proceeds are paid directly to that person instead of falling into your residual estate. These accounts/policies could include your life insurance payouts, pension, TFSA, RRSPs, and RESPs. 

Myth: I don’t need a will because X will inherit everything anyway.

Automatic succession isn’t always straightforward, especially if you want your spouse to inherit everything but you also have children that get an automatic portion of your estate.

By making your legal will, you make sure your wishes will be followed about who gets an inheritance from your estate. 

How to create and manage a residual estate

Steps to include a residue clause in your will

1. Appoint important roles in your will: The most prudent step to making a will, before you address your residual estate, is first adding the names of your chosen executor, guardian, and specific gift beneficiaries to your will
   1. Your executor should be someone you trust to both take care of your estate and communicate with your loved ones after you’ve passed away. 
   2. Your appointed guardian must be someone you trust to give your child(ren) a stable, loving home in the event you and the other parent pass away.
   3. Your beneficiaries can inherit any asset(s) in your estate, and they will not be subject to any inheritance taxes. 
2. Identify residual beneficiaries: Clearly name who will inherit the remaining assets of your estate
3. Define distribution terms: Decide how many beneficiaries should receive your residue–for example, one person or multiple people–and if multiple people, decide whether you will be dividing equally or not‍
4. Assign backup beneficiaries: If one of your beneficiaries passes away before you, who will receive their share?

Create your own will today

It’s important to make sure no part of your estate is left to chance. Whether you’re just beginning your estate planning journey or revisiting your will to make sure it has a residue clause, online will platforms like Willful make the process seamless and stress-free.

Plus, Willful users get unlimited updates for free, which means you can add or change beneficiaries and other roles in your estate plan whenever you want.