It can create a significant problem if a last will and testament isn't regularly updated and a beneficiary dies. The question becomes what happens to that person's share of the estate if they're no longer alive to receive it when a beneficiary dies before the "testator," the person who left the will. That depends on the language stated in the will.
When a Bequest "Lapses"
Your will might say, "I give 20% of my estate to Bob if he survives me." Bob's share of the estate will "lapse" if Bob doesn't survive or live longer than the testator so he isn't alive to receive it. Bob's 20% share would legally cease to exist because he's no longer living to accept it.
A lapsed bequest can cause a complicated ripple effect.
All states have some form of "anti-lapse" statutes on their books that would allow the deceased beneficiary's share to go to their family, provided that they were a close relative of the decedent. But these laws can vary widely from state to state, so don't depend on this provision when you're planning your estate.
The Residuary Estate
A lapsed share remains in the estate to be divided among other beneficiaries. Bob's lapsed 20% would become part of the estate's "residuary," what remains and is effectively left over after all other specific bequests have been made. The residuary estate will typically move to other surviving beneficiaries.
Residuary estates often include assets that a decedent forgot to include in their will. They can also occur because the decedent acquired additional assets, then failed to update the will to pass them on, or because a beneficiary has died.
For example, Bob might have been given 20%, while Sally received 40% and Joe received 40%. Sally and Joe's shares will grow because Bob's 20% is absorbed back into the estate, effectively making it larger than it would have been if he had been alive to accept his share. Sally and Joe would receive 50% each, each of them gaining half of Bob's unclaimed bequest.
"Per Stirpes" Provisions
Another possible scenario is that your last will and testament provided for the eventuality that all your beneficiaries might not outlive you. Your will might instead have said, "I give 20% of my estate to Bob if he survives me. I give 20% of my estate to Bob's then living descendants, per stirpes, if Bob doesn't survive me."
Per stirpes is a Latin phrase that translates to "by roots." The roots, in this case, are Bob's children, Susie and Walter. Each would inherit 10% of the estate in a per stirpes distribution, or half of Bob's share if Bob isn't living but they survive him.
Per stirpes provisions can extend for a generation. Maybe Susie is also deceased, but she's survived by her two children, Alex and Zane. Alex would receive 5% of Bob's share, and Zane would receive 5%—half each of Susie's inherited 10%. Walter would still receive his original 10%.
Each deceased parent's share passes to his or her children in equal measure in a per stirpes distribution.
State Intestacy Laws
Your state's intestacy laws would become involved if your will states, "I give 100% of my estate to Bob"...and nothing else. There are no other beneficiaries, and Bob is deceased. This makes your will null and void.
Each state has a prescribed list in its statutes as to who inherits when this happens. The process is called "intestate succession." The estate will most likely pass to the deceased's closest kin based on his state's intestacy laws—not Bob's kin as a deceased beneficiary because Bob's own death has made the will null and void.
The lion's share of an intestate estate typically goes to the surviving spouse, with the decedent's children also getting a share. It's possible that no one else—not Bob's siblings, not his parents, and not even his grandchildren—would receive anything if the deceased left both a surviving spouse and children.
The deceased's most immediate family would most likely inherit everything if they haven't also predeceased the testator. They'll get Bob's 100%, even if that's not what Bob would have wanted or intended.
The worst-case scenario would be that both the decedent and Bob leave no living kin, or that they can't be identified or located. The estate would "escheat" to the state in this case—the state would "inherit" and receive all his property.
The Bottom Line
Estate planning attorneys usually recommend that you update your will or living trust after life-changing events, such as the death of a named beneficiary. It will save your estate time and money in the long run, and your true wishes will be clear and unambiguous.