What’s a bequest?

A bequest refers to a gift that is left to someone, charity or institution by the terms of a will. Most bequests transfer money, assets, or personal property to the beneficiary upon death. You can make them conditional. This means they only become effective when certain conditions are met.

How do I set up a bequest

You must leave instructions in writing to make a bequest. This is usually done through a will. A probate court may be required to validate your will in order to transfer assets to their new owners. The probate court is generally not responsible for assets transferred to beneficiaries of life assurance policies, retirement accounts, or trusts.

There’s five types of bequests.

  1. A general bequest is a designation of a specified amount of assets that the testator (the writer of the will) wishes to leave from his estate. A will could say, for example, “I leave $15,000 to each my two grandchildren John and Jane Doe.” However, general bequests are made from the estate’s entire assets pool.

  2. A testamentary bequest is a gift of a certain amount of assets from a particular account. You could, for example, gift cash from a savings account to beneficiaries. Brokerage accounts can also be used for demonstration bequests (e.g. “I bequeath 200 shares of ABC stock to my brother span>

  3. Specific bequests generally refer to specific property items. For example, “I give my 2019 Honda Civic and my son, Bill.”

  4. Only certain conditions can be met before contingency bequests are granted assets to beneficiaries. Example: “I leave $50,000 to my son John under the condition that he completes his degree from an accredited law school before he turns 35 span>

  5. Residuary bequests typically represent a percentage of what is left after paying all debts and expenses. A will could say, for example, that I bequeath the remaining portion of my estate to my children. This would mean that each child would receive 25% of the assets left.

Considerations when creating a bequest

Tax implications

  • Marital deduction

    The unlimited marital deduction allows married couples in the U.S. to gift unlimited amounts of assets to their spouses, without having to pay gift or estate taxes. The same-sex couple is also exempt from this rule.

  • Timing of estate tax exclusion — It is possible for a complex estate to be settled in a short time. The IRS federal estate tax exclusion rules, which are based on death year, may not apply to the year that beneficiaries receive their assets. The federal estate tax applies to assets above $12.06 million in 2022 and $12.92 million 2023. It generally ranges between 18% to 40%.

  • Exclusion of gift tax

    For gifts exceeding a specified exclusion amount, the IRS might require you to file a gift tax return

    $16,000 and $17,000 respectively in 2022.

    The IRS rules for gift taxes, unlike the estate tax exclusion are based upon the year the gift was given.

    There are no limits to how many gifts you can give in a single year.

  • Charitable gifts — Assets you leave to charity organizations are exempted from estate taxes provided they are a 503(c), qualified organization. You can give as much as you like to charities, even if your entire estate is left to them.

Capital gains taxes

While gift and estate taxes exclusions may not allow beneficiaries to pay taxes immediately, they could still owe capital gains tax if they have income from the assets or the asset’s value increases, and the beneficiary sells the assets.

Crummey power

Beneficiaries must be able to show “present interest” in assets that have been left to them to qualify for the annual gift-tax exemption. This means that the beneficiary can use, possess, and enjoy the property immediately.

Gifts to trusts don’t generally allow beneficiaries access to funds or property immediately. Access is limited until a later date. This arrangement gives beneficiaries a “future right” to trust assets. This could jeopardize the gift tax exemption. Clifford Crummey, a 1968 court case, allowed irrevocable trusts to be exempted from gift tax. He provided a temporary option for beneficiaries to withdraw funds, which is sometimes called “Crummey power”. This created present interest in assets, even if there are no withdrawals. To make this work, however, you must stipulate that the gift is part the irrevocable trust at the time it is drafted. Also, the annual gift cannot exceed the annual limit for gift tax.