Bequest: To Give or Leave a Gift

Bequests serve as a way to pass on financial assets, specific items, or residual portions of an estate to chosen individuals or organizations. This approach to giving can fulfill personal or charitable intentions, often offering flexibility in estate planning and potential tax benefits. Below, you’ll find detailed information on how bequests operate, distinctions from other forms of gifts, and considerations for making them a meaningful part of your estate plan. Each section will answer common questions and explore various types and benefits of bequests, providing a comprehensive guide to leaving a legacy that reflects your values and priorities.

What is a Bequest?

A bequest is a gift specified in a will that designates particular assets, amounts, or items to be given to chosen beneficiaries. This form of giving allows individuals to determine who will receive their property or funds upon their passing, which can include family, friends, or charitable organizations. Bequests are commonly used in estate planning to ensure that personal and philanthropic intentions are honored after death, providing a clear and legally enforceable method of distributing assets.

How Does a Bequest Work?

A bequest works by specifying in a will or estate plan the assets or funds to be transferred to chosen beneficiaries upon the individual’s death. When the person who made the bequest (the testator) passes away, the executor of their estate is responsible for fulfilling the instructions in the will. This involves identifying, valuing, and transferring the designated assets or funds to each named beneficiary. Different types of bequests can be specified, such as general, specific, demonstrative, or residuary, each of which determines how and when the assets are allocated depending on the availability and nature of the estate’s property.

Bequest & Estate Planning

Bequests play a central role in estate planning by enabling individuals to outline how their assets will be distributed to beneficiaries or organizations after their passing. By incorporating bequests into an estate plan, individuals can specify who receives specific items, amounts, or percentages of their estate, aligning asset distribution with personal and financial goals. Estate planning with bequests can reduce potential conflicts among heirs, ensure assets are directed according to the individual’s wishes, and allow for tax planning strategies that may reduce the estate tax burden. Beneficiaries of bequests can include family, friends, or charitable entities, offering flexibility to support both loved ones and causes that are meaningful to the individual.

Bequest vs Inheritance vs Gift: What’s the Difference?

A bequest, inheritance, and gift each represent ways of transferring assets, but they differ in timing, intention, and legal structure:

1. Bequest: A bequest is a specific provision in a will where the testator allocates certain assets to beneficiaries upon their death. Bequests are activated only after the individual’s passing and are a formal part of the estate plan.
2. Inheritance: Inheritance generally refers to assets or property received from a deceased person, either through a will or, if no will exists, under state laws of intestacy. Inheritance may include bequests, but it often encompasses all assets passed on to heirs, whether specified or determined by law.
3. Gift: A gift is an asset or amount given voluntarily by one person to another during the giver’s lifetime. Unlike bequests and inheritances, which occur after death, gifts are immediate transfers that may carry specific tax implications for the giver.

Understanding these distinctions helps in estate planning, where bequests are specifically outlined in a will, inheritance is the overall transfer of assets upon death, and gifts are transfers made during one’s lifetime.

Types of Bequests

There are several types of bequests, each serving different purposes in estate planning:

1. General Bequests: General bequests specify an amount of money or assets to be given to a beneficiary but do not identify a specific source. For example, a will might direct that “$10,000 be given to my niece,” and this amount can be paid from any available assets in the estate.
2. Specific Bequests: Specific bequests name particular items or assets to be transferred, such as a piece of jewelry, real estate, or a designated bank account. For instance, “I leave my diamond ring to my sister” is a specific bequest.
3. Demonstrative Bequests: Demonstrative bequests allocate a specified amount of money or asset from a particular source. An example is, “I leave $5,000 from my savings account at XYZ Bank to my nephew.” If the specified account lacks sufficient funds, the remainder is paid from other estate assets.
4. Residuary Bequests: Residuary bequests designate the remainder of the estate after all other bequests, debts, and expenses are settled. For instance, “I leave the remainder of my estate to my spouse” is a residuary bequest.
5. Contingent Bequests: Contingent bequests depend on certain conditions or events. For example, “I leave $20,000 to my grandson if he graduates from college” outlines a bequest that will only be given if the stated condition is met.

Residual (or Residuary) Gifts

Residual, or residuary, gifts represent what remains in an estate after all specific, general, and demonstrative bequests, as well as debts, taxes, and expenses, have been paid. This type of bequest allows individuals to distribute the leftover portion of their estate to one or more beneficiaries once all other obligations are satisfied. For example, a will might state, “I leave the remainder of my estate to my children, divided equally.” Residual gifts are valuable in estate planning as they ensure that any unallocated assets, or assets remaining after other distributions, are properly transferred according to the testator’s wishes, preventing unintended or unclaimed portions of the estate.

Benefits of Making a Bequest

Making a bequest offers several benefits, both for the individual planning their estate and for the beneficiaries:

1. Flexibility: Bequests provide flexibility in estate planning, allowing the testator to specify who receives which assets and in what form. This flexibility helps fulfill both personal and financial goals by accommodating various types of gifts, from specific items to residual assets.
2. Tax Benefits: Charitable bequests, in particular, may reduce estate taxes. When assets are left to qualified charitable organizations, the value of these gifts can be deducted from the estate’s taxable value, potentially lowering the overall tax burden on the estate.
3. Recognition and Legacy: Bequests can create a lasting legacy, particularly when directed toward charitable organizations or causes. This form of giving allows individuals to support meaningful initiatives and be remembered for their contributions, even after their passing.
4. Efficiency and Certainty: Bequests simplify the distribution process by clearly outlining the testator’s intentions, reducing potential conflicts among heirs and ensuring that the estate is managed in a structured and efficient manner.

Making a bequest not only provides peace of mind for the testator but can also have long-term positive impacts on beneficiaries and charitable causes, creating an enduring impact that reflects personal values and goals.

Bequests to Specific Foundations or Charities

Bequests to specific foundations or charities allow individuals to support organizations or causes they value deeply. This type of bequest is often included in estate plans to ensure a portion of the individual’s assets is dedicated to furthering charitable work. For example, someone might state, “I leave $20,000 to the CDC Foundation,” or allocate a percentage of the estate’s residual assets to a charity.

These bequests can bring additional tax benefits by reducing the taxable value of the estate, which can help offset estate taxes. Many foundations offer recognition to those who contribute through bequests, sometimes creating opportunities for named endowments or scholarships in honor of the donor. Bequests to charities are an effective way to establish a legacy, contribute to social good, and ensure that the values important to the testator continue to be supported.

Considerations for Charitable Bequests

When planning charitable bequests, there are several important factors to consider to ensure they align with the donor’s intentions and provide maximum benefits:

1. Choosing the Right Charity: It’s essential to select charities that reflect the donor’s values and goals. Researching an organization’s mission, financial transparency, and impact can help ensure that funds are used effectively.
2. Specifying the Bequest: Clear instructions should be given about how the funds should be used if the donation is intended for a particular purpose, such as funding a scholarship or supporting a specific program. A general bequest gives the charity flexibility to use the funds where they are most needed.
3. Tax Implications: Charitable bequests can lower estate taxes. Consulting a tax advisor can help optimize the bequest to benefit both the estate and the charity by minimizing taxable amounts and ensuring compliance with tax laws.
4. Legal Requirements: Charitable bequests need to be legally enforceable. Working with an attorney ensures that the bequest complies with legal requirements and will be honored by the estate executor.
5. Alternative Plans: In case the specified charity no longer exists at the time of passing, it’s wise to have a backup plan, such as designating a similar organization to receive the gift. This can prevent the bequest from becoming void.

Frequently Asked Questions

When considering bequests as part of estate planning, a few common questions arise. Below are answers to frequently asked questions to help clarify how bequests work, their tax implications, and the steps involved in planning.

     1.  What is the difference between a gift and a bequest?

A gift is a transfer of assets made during the donor’s lifetime, while a bequest is a gift specified in a will that transfers assets to beneficiaries after the donor’s death.

     2.  Do I have to worry about paying tax on a bequest?

No, beneficiaries typically do not pay income tax on a bequest. However, estate taxes may apply to the estate as a whole if its value exceeds federal or state tax thresholds.

     3.  Can I refuse a bequest in a will?

Yes, beneficiaries have the right to refuse, or “disclaim,” a bequest. This may occur for personal reasons or if accepting the bequest results in an undesirable tax situation. Legal procedures for disclaiming vary by state.

     4.  Should I talk to an attorney for help with bequests?

Yes, consulting an attorney is beneficial for structuring bequests to meet your specific wishes and ensuring compliance with legal requirements. An attorney can help clarify tax implications, ensure accurate documentation, and address complex family dynamics if needed.

Next Steps to Set Up a Bequest

Setting up a bequest involves a few clear steps to ensure that your wishes are accurately documented and legally enforceable:

1. Define Your Goals: Decide who or what organizations you want to benefit from your bequest. This could include family, friends, or charities that align with your values.
2. Choose the Type of Bequest: Determine if your bequest will be general, specific, demonstrative, residuary, or contingent. This choice will affect how assets are allocated and how the bequest is fulfilled.
3. Draft or Update Your Will: Work with an attorney to create or update your will, clearly specifying your bequests. Including details, such as asset descriptions or exact amounts, ensures that your intentions are accurately represented.
4. Consider Tax Implications: Consult with a tax advisor to understand any tax benefits or obligations related to your bequests, especially if they include charitable donations that could reduce estate taxes.
5. Inform Executors and Beneficiaries: Communicate your wishes to your chosen executor and, when appropriate, to beneficiaries. This can help avoid misunderstandings and ensure the bequest is managed as you intended.

Considerations for Family Bequests

When leaving bequests to family members, it’s essential to consider factors that ensure fairness, minimize potential conflicts, and align with your personal intentions:

1. Equitable Distribution: Determine if you wish to distribute assets equally among family members or if specific individuals should receive more or less based on need or contributions. Transparent planning can help avoid family disputes.
2. Impact on Beneficiaries: Consider how the bequest might affect each beneficiary’s financial situation. For instance, a large inheritance could impact a family member’s eligibility for certain benefits or increase their tax obligations.
3. Clear Instructions: Provide clear and specific instructions in your will regarding each bequest. Avoid vague language that might lead to misinterpretation or conflict among beneficiaries.
4. Contingency Planning: Specify alternative beneficiaries or plans if a designated family member cannot or does not wish to accept the bequest. This ensures that assets are distributed as closely as possible to your intentions.
5.  Communication: Where appropriate, discuss your bequests with family members in advance to manage expectations and explain your decisions. This can prevent surprises and help maintain family harmony.

Family bequests are often the most personal part of an estate plan, making thoughtful planning crucial to uphold family relationships and fulfill individual goals effectively.