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Transferring wealth between generations is a common goal for many families. However, it often requires careful estate planning to make it happen. A bequest, which allows for the gifting of assets through a will or sometimes a trust, is one way to achieve this.

What are bequests and how do they work?

The term bequest refers to the act of giving assets — which could range from cash and personal property such as antique furniture and jewelry, to investments such as stocks and bonds — to individuals or organizations, such as charities. This is often done through the provisions of a will, and may be part of the estate planning process. Estate planning helps facilitate the transfer of wealth from one generation to the next. These arrangements can be simple or complex, and can provide estate tax savings while aiding in the efficient settlement of an estate. Assistance from an estate lawyer can be invaluable in this process due to the complexities associated with intergenerational wealth transfer.

Types of bequests

Bequests can take several forms:

  • General bequests consist of property gifts drawn from an estate’s general assets.
  • Demonstrative bequests stem from a specific source, like a particular bank account.
  • Specific bequests pertain to gifts of particular types of property, such as artwork, jewelry, a vehicle or a designated amount of cash.
  • Residual gifts are made after settling all debts and expenses, and after executing other bequests. Residual gifts often take the form of a percentage of what remains or a share of the total.

Tax implications associated with bequests

Receiving a bequest, which is a transfer of property through a will or trust, generally does not incur tax obligations for the recipient unless the recipient lives in one of the six states that levy an inheritance tax. The deceased’s estate is usually responsible for any taxes due on the bequest, including income taxes, estate taxes, and generation-skipping transfer taxes. If the estate lacks sufficient assets to cover the tax obligations, the beneficiaries may be required to pay the taxes due on the bequest.

Each of the six states with inheritance taxes, Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania, have different exemption amounts and exceptions for family members or spouses. It’s best to consult with an estate lawyer or tax professional who practices in the state in which the decease resided for detailed information about your potential tax burden.

Reducing tax burden through bequests

Bequests are often made to family members, friends, institutions or charities. Such bequests are often allowed as charitable deductions when determining the net value of the taxable estate, which can help reduce the overall tax burden. Additionally, naming a charity as a beneficiary can result in substantial tax savings and reduce estate taxes.

How to set up a bequest

To set up a bequest, you’ll need to leave written instructions, typically in a will. Other documents such as beneficiary designations and trusts may also be part of how your estate plan is managed after your death. It’s crucial to ensure your wishes are well known to your family or a lawyer and to have systems in place that outline the acceptance, structuring and investment of the gift.

Altering or revoking a bequest

A bequest can generally be altered or revoked if the individual making the bequest is alive. Changes and alterations to wills, which contain bequests, may need to be made when a significant life event occurs, or a relationship changes. In general, a new will automatically supersedes an old one. Additionally, a codicil, or a document supplementing an existing will, can also be used to modify, explain or add to the provisions of the will. An estate lawyer can provide further assistance in completing this process.

What’s the difference between a will and a bequest?

While a bequest refers to the act of leaving something as an inheritance, typically given to the heirs of the deceased, a will is a document outlining an individual’s decisions regarding their assets and liabilities after death. This document also includes a list of people authorized to participate in different, specific transactions after death occurs.

Bottom line

Bequests are gifts of the deceased’s assets to individuals and organizations, like charities. They can be found in wills and estate plans. Depending on the type of bequest, recipients may not have to pay taxes on the assets they receive, while the estate may be able to use the bequest to reduce the overall tax burden. To ensure that your bequests are in line with your wishes, it is important to have a well-structured estate plan that is managed by a lawyer or a trusted family member.