What Is a Bequest, and How Does It Work?

When a person uses a will to leave property to their family, friends or the causes they support, the act is known as a bequest. A bequest can be the cash, investments, jewelry or other items that a person passes to beneficiaries when they die. When planning your estate and creating a will, a financial advisor with estate planning expertise can be a valuable and useful partner in the process. Below, we’ll review how bequests work and how they differ from a gift.

Types of Bequests

A bequest is the personal property gifted to beneficiaries through the terms of a will when the original owner dies. A bequest can be cash, stocks, bonds, jewelry or other personal items, but not real estate. When real estate is given to another person through a will or trust, it’s known as a devise.

There are four distinct types of bequests:

• Specific
• General
• Demonstrative
• Residuary

A specific bequest is the transfer of a particular asset, like jewelry, artwork or vehicles, to a specific person. A general bequest is a gift, typically money, that is taken from the person’s general assets, not from a specific asset. A demonstrative bequest, on the other hand, is a gift that comes from a stated source like a bank account or retirement fund. Lastly, a residuary bequest is a gift that’s made after all debts are paid by the estate and other bequests are made.

Of course, someone can direct assets to be left to a nonprofit organization, religious or educational institution, in the form of a charitable bequest. Like property left to an individual, charitable bequests can be specific, general, demonstrative or residuary.

Bequests vs. Gifts

Since bequests are technically gifts, the two terms must be interchangeable, right? Not exactly.

What differentiates a bequest from a gift is when and how one is given. While a bequest is property that a person leaves to a beneficiary through a will following their death, a gift is given when someone is still alive.

For example, if a woman chooses to leave each of her six grandchildren $10,000 when she dies, she would include this request in her will. In this case, the $60,000 would be a bequest. However, the same woman could also give each of her six grandchildren $10,000 in the form of a tax-free gift while she is still alive. That’s because the Internal Revenue Service allows individuals to give up to $15,000 to as many people as they like each year. If a gift exceeds this limit, the difference will be deducted from their lifetime estate and gift tax exemption limit. Federal gift tax is only owed when a person uses up their lifetime limit ($11.7 million as of 2021).

Are Bequests Taxed?

When a person dies, their estate may be subject to one or more taxes that are derisively known as “death taxes.” These levies include the federal estate tax, state estate taxes and state inheritance taxes, although they don’t apply to everyone.

In fact, a vast majority of Americans don’t have to worry about paying federal estate taxes because they only apply to estates worth more than $11.7 million in 2021 ($23.4 for married couples). Estates that fall below this threshold are exempt from this tax, while those that exceed the exemption limit are taxed based on how far over the cap they go. For example, an estate worth $15 million would owe taxes on $3.3 million in 2021 ($15 million minus $11.7 million).

In addition to the federal levy, some states charge their own estate taxes with separate exemption limits and rates. These states are:

• Connecticut
• Hawaii
• Illinois
• Maine
• Maryland
• Massachusetts
• Minnesota
• New York
• Oregon
• Rhode Island
• Vermont
• Washington
• District of Columbia

Lastly, several states have inheritance taxes, which are paid by beneficiaries who inherit property. This is different from estate taxes, which are paid by the estates themselves before property is transferred to beneficiaries. As a result, inheritance taxes are the only taxes levied directly on the bequests. The states with inheritance taxes are:

• Iowa*
• Kentucky
• Maryland
• Nebraska
• New Jersey
• Pennsylvania

*The Iowa state legislature voted to repeal its inheritance tax in 2021. The tax will be gradually phased out until it is fully repealed in 2025.

Bottom Line

A bequest is the act of leaving cash, stocks, jewelry or other personal property to beneficiaries through the terms of a will. While a person can give gifts to family, friends or the causes they support while they are still alive, a bequest is what is left to beneficiaries in someone’s will. There are four types of bequests (specific, general, demonstrative and residuary) that can all be given to individuals, charities, educational institutions, political causes or religious groups.

Estate Planning Tips

• When planning your estate, it’s worth working with a financial advisor with estate planning expertise, especially if you have a considerable amount of assets. SmartAsset’s free tool can match you with up to three local advisors in as little as five minutes. If you’re ready, get started now.
• For those with large estates, a trust can be a viable and effective way to transfer assets to beneficiaries and reduce the taxes that may be owed by the estate. Trusts can be revocable, meaning the terms of the trust can be changed during the grantor’s lifetime, or irrevocable, in which the trust terms are permanent.

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