It seems like everyone has a reason for postponing the task of creating an estate plan. Some believe it is too time consuming, while others may believe they do not have enough assets to make it worthwhile. Still others cannot decide on "who gets what."

One of the easiest ways to make sure that your assets—no matter how large or small--get to the people who matter is to create a trust, and within that trust to add what is known as a residual clause.

What is a Trust?

A living trust is often used in estate planning to either replace or supplement a will. There are two types of trusts: testamentary trusts and living trusts. When a testamentary trust is set up, assets are transferred into the trust after the person has died. With a living or "inter vivos" trust, assets are transferred while the person is alive.

What are Residual Clauses?

Strictly speaking residual clauses specify what happens to the "residue" of the estate. Simply put, a residual clause takes care of what is left over after the assets and debts have been accounted for in the living trust. In other words, once distributions have been made to heirs, taxes have been paid, and any other claims or debts have been settled against the estate, the money that remains is covered by a residual clause.

Residual clauses have been used to bequeath money or gifts to charitable organizations or extended family. Typically, a residual clause is written to say: All the rest, residue, and remainder of my estate, both real and personal, wherever situated, I give, devise, and bequeath to the XYZ Foundation.

Residual clauses are also used as a catchall within an estate plan. For example, what if one of your beneficiaries, a friend or family member who you wanted to give some money to, passes away before you do? Well, the money that would have passed to your deceased friend or family member will now pass back to the estate. If there is a residual clause, the money or assets will be included in the residuary if they are not used to pay down debt or taxes on the estate.

It should be noted that assets purchased after a trust has been drafted will automatically be included in the residual clause—unless the estate planning document is changed to account for these new assets prior to death.

Should You Consider Putting One in Your Trust?

Failing to include a residual clause in your living trust could pose a problem. In accordance with Intestate laws, without a residual clause, any remaining assets are disposed of in probate court. And, probate court can be a time consuming as well as an expensive process. There are court and legal fees, as well as fees paid to the executor(s) of the estate. Depending on how much the assets are worth, probate court may end up causing the estate more money than the assets are worth.

The Bottom Line on Residual Clauses

It is nearly always beneficial (at least to your beneficiaries) to include residual clauses in your trust. Fortunately, residual clauses can be added to your trust at any time, in much the same way a will can be changed at any time. There's no time like the present to plan for your estate and ensure that your heirs as well as favorite charities get the money and gifts you want them to receive.