Bequest

What Is Bequest?

A bequest is a gift of personal property or assets made to an individual or organization through a last will and testament or other estate planning document. It is a fundamental component of estate planning, allowing an individual, known as the testator, to specify how their wealth will be distributed after their death. Bequests can include a wide range of assets, such as cash, securities, real estate, personal possessions, or even specific items of sentimental value. The recipient of a bequest is known as a beneficiary.

History and Origin

The concept of a will, and by extension, bequests, has ancient roots, with evidence of their use dating back to ancient civilizations such as Egypt and Mesopotamia. Early wills often contained provisions for property, food, and clothing to ensure the deceased's well-being in the afterlife. The Romans significantly advanced the formalization of inheritance laws, introducing the idea of "testamentary freedom," which allowed individuals to dictate asset distribution after death through written testaments.¹²,¹¹

In medieval Europe, the Catholic Church played a significant role in legal matters, including inheritance. It was common practice for individuals to leave bequests to the Church, often believing such donations would secure their place in heaven.¹⁰,⁹ A pivotal moment in English legal history occurred with the Statute of Wills in 1540. This legislation allowed individuals to bequeath land through a will, a significant departure from prior feudal customs that heavily restricted such transfers.⁸,⁷ This act laid foundational principles for modern will-making, including requirements for written documents, signatures, and witnesses.⁶

Key Takeaways

• A bequest is a gift of property or assets made through a will or other estate planning document, taking effect upon the grantor's death.
• Bequests are a cornerstone of effective estate planning, enabling individuals to direct the distribution of their wealth.
• Recipients of bequests can be individuals, such as family and friends, or organizations, including charitable giving institutions.
• Bequests are subject to estate tax rules, though significant exemptions exist at the federal level in the United States.
• The terms of a bequest are legally binding and are typically administered during the probate process.

Interpreting the Bequest

Interpreting a bequest involves understanding the specific terms outlined in a will or trust document. Bequests can be structured in several ways:

• Specific Bequest: A gift of a particular item or identifiable asset, such as a piece of jewelry, a specific car, or a named bank account.
• General Bequest: A gift of a certain amount of money or a percentage of an estate that is not tied to a specific asset. For instance, "I bequeath $10,000 to my niece."
• Residuary Bequest: A gift of the remainder of the estate after all specific, general, and demonstrative bequests, debts, and taxes have been paid. This is often the largest portion of an estate.
• Demonstrative Bequest: A gift of a specified amount of money that is to be paid from a particular source, such as "I bequeath $5,000 to my nephew from my ABC Stock portfolio."

The clarity of language in the estate plan is crucial for proper interpretation. Ambiguities can lead to disputes among beneficiaries, complicating the distribution of assets and potentially prolonging the probate process.

Hypothetical Example

Consider Maria, who has meticulously engaged in financial planning. She has a diverse portfolio of securities, a family home, and several valuable art pieces. In her will, she outlines various bequests:

1. Specific Bequest: "I bequeath my antique grandfather clock to my grandson, Leo."
2. General Bequest: "I bequeath $50,000 to my long-time friend, Sarah."
3. Demonstrative Bequest: "I bequeath $25,000 to my alma mater, State University, to be drawn from my brokerage account at XYZ Investments."
4. Residuary Bequest: "The remainder of my estate, after all specific gifts, debts, and taxes are paid, shall be equally divided between my two children, Sofia and Marco."

Upon Maria's death, her appointed executor would follow these instructions, ensuring Leo receives the clock, Sarah receives $50,000, State University receives $25,000 from the specified account, and Sofia and Marco split whatever remains of the estate.

Practical Applications

Bequests are central to wealth management and estate planning, serving several key purposes:

• Asset Distribution: Bequests enable precise control over how assets are distributed to chosen individuals or entities, reflecting the testator's wishes.
• Tax Efficiency: Properly structured bequests can help reduce potential estate tax liabilities. For example, charitable bequests to qualified organizations can reduce the taxable estate. The Internal Revenue Service (IRS) provides detailed information on estate tax rules and exemptions.⁵
• Philanthropy: Many individuals use bequests to leave a lasting legacy through significant donations to charities, educational institutions, or other non-profit organizations. Such legacy gifts are a vital source of funding for these organizations.
• Avoiding Intestacy: Without a will specifying bequests, a person's assets would be distributed according to state intestacy laws, which might not align with their intentions. The probate process, although a formal legal proceeding for recognizing a will and administering an estate, is significantly smoother when clear bequests are outlined.⁴
• Protecting Heirs: Bequests can be structured within irrevocable trusts to protect assets for minors or beneficiaries with special needs, or to ensure assets pass down specific family lines.

Limitations and Criticisms

While bequests are a powerful estate planning tool, they are not without limitations or potential criticisms. The effectiveness and impact of bequests can be influenced by several factors:

• Estate Taxes and Exemptions: While substantial federal estate tax exemptions exist, these thresholds can change with legislation, potentially altering the tax implications of large bequests. The federal estate tax is imposed on transfers of property at death, with certain lifetime exemption amounts that have varied over time due to legislative changes like the Tax Cuts and Jobs Act (TCJA).³
• Probate Process: Unless structured to avoid it (e.g., through certain trusts), bequests made via a will typically go through probate, a public legal process that can be time-consuming and incur costs. While often not as burdensome as commonly perceived, an unclear will or complex bequests can lead to protracted probate proceedings.²
• Challenges to the Will: Disgruntled heirs or other interested parties can contest a will, claiming undue influence, lack of testamentary capacity, or improper execution. Such challenges can delay or even invalidate bequests.
• Asset Valuation and Tax Basis: The valuation of assets at the time of death is critical for estate tax purposes. Beneficiaries receiving assets through a bequest generally benefit from a "stepped-up basis" for capital gains tax purposes, meaning the asset's cost basis is adjusted to its fair market value at the time of death, potentially reducing future capital gains taxes if the asset is sold.¹ However, this can still be a complex area, especially for illiquid assets.

Bequest vs. Gift

The primary distinction between a bequest and a gift lies in the timing of the transfer.

A bequest is a post-mortem transfer, part of a person's ultimate legacy, while a gift is an immediate, lifetime transfer. Both have distinct tax implications and estate planning considerations. For instance, the Internal Revenue Service (IRS) outlines separate exemption amounts for gifts made during a lifetime compared to assets transferred at death.

FAQs

What types of property can be bequeathed?

Virtually any type of property can be bequeathed, including cash, real estate, stocks, bonds, personal belongings, vehicles, intellectual property, and even digital assets. The key is that the asset must be owned by the testator at the time of their death and specifically mentioned or covered by the terms of their will or trust.

Is a bequest taxable?

Bequests are generally subject to federal estate tax in the United States, but only if the total value of the decedent's estate exceeds a certain exemption amount. For 2024, the federal estate tax exemption is $13.61 million per individual. Most estates fall below this threshold and thus owe no federal estate tax. Some states may also impose their own estate or inheritance tax, which varies by state.

What happens if a beneficiary of a bequest dies before the testator?

If a beneficiary of a bequest dies before the testator, the bequest may "lapse" or fail. Many wills include contingent beneficiaries or specify how assets should be distributed in such an event. State law, often through anti-lapse statutes, may also provide for the bequest to pass to the deceased beneficiary's heirs, especially if they are direct descendants of the testator. Proper estate planning considers these contingencies to avoid unintended outcomes.