Bequests: Understanding Their Role In Estate Planning

What Is a Bequest?

A bequest is a financial term describing the act of giving assets such as stocks, bonds, jewelry, and cash, to individuals or organizations, through the provisions of a will or an estate plan. Bequests can be made to family members, friends, institutions, or charities. When real estate is left through a will, it is called a devise.

Understanding Bequests

The Internal Revenue Service (IRS) has an estate and gift tax exemption of $12.06 million per individual for 2022 ($12.92 million for 2023). The annual gift exclusion amount for 2022 is $16,000 ($17,000 for 2023).

This essentially means that an individual may leave $12.06 million to their heirs and pay no federal estate or gift tax as of 2022.

Gift givers can also avoid taxes by exercising their Crummey power, a technique that enables a person to receive a gift that is not eligible for a gift-tax exclusion and change it into a gift that is eligible. Individuals often apply Crummey power to contributions in an irrevocable trust. In order for Crummey power to properly work, an individual must stipulate that the gift is part of the trust when it is drafted, and the gift amount cannot exceed $16,000 annually, per beneficiary ($17,000 for 2023).

Generally speaking, gifts in a trust are commonly used by parents or grandparents looking to establish a trust fund for their children or grandchildren. Charitable gifts after death, also known as legacy gifts, also have the power to reduce estate taxes. Not surprisingly, such bequests can be important sources of fundraising for nonprofit organizations. When the bequest is intended for a specific purpose, it is called an endowment.

Bequest and Estate Planning

Individuals and families looking to grow and/or preserve assets for future generations can greatly benefit from the creation of a formal estate plan.

An estate lawyer can greatly help with this process, which tends to become complicated, due to the intricacies involved in exchanging wealth from one generation to another. Some of the major estate planning tasks include the following steps:

• Drafting a will
• Naming an executor of the estate to oversee the terms of the will
• Limiting estate taxes by setting up trust accounts in the name of the beneficiaries
• Establishing a guardian for living dependents
• Creating and/or updating beneficiaries on plans such as life insurance, IRAs, and 401(k)s
• Establishing annual gifting to qualified charitable and nonprofit organizations to reduce the taxable estate
• Setting up a durable power of attorney (POA) to direct other assets and investments

Estate planning can even include more personal logistics, such as setting up funeral arrangements.