Bequests: What They Are and How to Set One Up

A bequest is a gift to another person, charity or institution according to the terms of a will or estate plan. Bequests typically transfer cash, accounts, real estate or personal property upon the owner’s death. They can be conditional, meaning they become effective if certain terms are met.

To make a bequest, leave written instructions behind, typically in a will. For assets to transfer to their new owners, a probate court may need to validate your will. Assets transferred to beneficiaries of life insurance policies, retirement accounts or trusts are generally handled outside of probate court.

There are five types of bequests:

  1. General bequests designate a specific quantity of assets to gift from the estate of the testator (writer of the will). For example, a will might say something like, “I bequeath $15,000 to each of my two grandchildren, John and Jane Doe.” For general bequests, the gift comes from the estate’s pool of assets rather than from one specific account.

  2. Demonstrative bequests gift a specific quantity of assets from a specified account. For example, you could gift a specific amount of cash to beneficiaries from a savings account. Demonstrative bequests can also apply to brokerage accounts (e.g., “I bequeath my 200 shares of ABC company stock to my brother.”)

  3. Specific bequests are generally for specific property items; for example, “I gift my 2019 Honda Civic to my son, Bill.”

  4. Contingency bequests give assets to a beneficiary only if specific conditions are met. For example, “I bequeath $50,000 from my estate to my son John on the condition that he graduates from an accredited law school by age 35.”

  5. Residuary bequests are typically a percentage of whatever is left in the estate after all other debts or expenses are paid. For example, a will might say, “I bequeath the remainder of my estate to my four children to be split equally among them.” In this case, the children would each receive an equal share (25%) of whatever assets are left in the estate.

What to consider when setting up a bequest

Tax implications

  • Marital deduction — Any assets or property inherited by a surviving spouse are generally exempt from estate or gift taxes due to the unlimited marital deduction, which allows married individuals in the U.S. to give an unlimited amount of assets to their spouses without incurring gift or estate taxes. This rule also applies to same-sex couples.

  • Estate tax exclusion timing — The time it takes to settle an estate can vary greatly depending on complexity, so it’s important to note that the IRS federal estate tax exclusion rules are based on the year of death, which may not necessarily be the same year beneficiaries actually receive assets. The federal estate tax ranges from rates of 18% to 40% and generally only applies to assets over $12.06 million in 2022 or $12.92 million in 2023.

  • Gift tax exclusion timing — The IRS may require a gift tax return for gifts over a certain exclusion amount: $16,000 in 2022 and $17,000 in 2023. Unlike the estate tax exclusion, the IRS rules for gift taxes are based on the year in which the gift is given.

  • Charitable gifts — Any assets you bequeath to a charitable organization are exempt from estate taxes, provided that the charity is a qualified 503(c) organization. There is no limit to how much you can donate to charities to qualify for this exemption — even if you choose to leave your entire estate to charitable organizations.

Capital gains taxes

Although gift and estate tax exclusions can prevent beneficiaries from paying taxes immediately, they could owe capital gains taxes down the road if, once they inherit the assets, the assets produce income or the value of those assets increases and the beneficiary then sells the assets. 

Crummey power

To qualify for the annual gift tax exemption, beneficiaries must have what is known as “present interest” in any assets bequeathed to them. That means the beneficiary can immediately use, possess and enjoy the property or income from the property. 

Generally, gifts to a trust don’t allow beneficiaries to access funds or property immediately; access is restricted until a future date. Under this arrangement, beneficiaries have “future interest” in the trust assets, which jeopardizes the gift tax exclusion. However, in 1968, Clifford Crummey won a landmark court case that effectively allowed irrevocable trusts to receive the gift tax exclusion by providing a temporary option to withdraw funds (typically 30-60 days) — sometimes referred to as “Crummey power” — thereby creating present interest in the assets even if no withdrawals occur. For this to work, though, you need to stipulate that the gift is part of the irrevocable trust when the trust is drafted, and the annual gift cannot exceed the annual gift tax limits.

Leave a Comment