Bequest - Explained
What is a Bequest?
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Table of ContentsBequest DefinitionA Little More on What is a BequestEstate Planning and its Association to BequestAcademics research on Bequest
Back to: INHERITANCE, ESTATES, & TRUSTS
What is a Bequest?
Bequest is the term used to refer to giving personal property or financial assets to a person, business entity, or an organization via the provisions of a will or an estate plan. This personal property or financial assets can include stocks, bonds, jewelry, and in most cases cash. Bequests can be offered to family members, friends, organizations, and even charity. In a case where a real estate is transferred via a will, it is called a devise.
How Does a Bequest Work?
Bequests can be used as a method of tax evasion in situations where estate taxes are a concern. In such cases, the taxpayer might choose to bequest such assets to heirs via a gift in trust. Gift in trusts are financial instruments that allow grantors to have their way around taxes on gifts that are higher than the designated annual gift tax exclusion benchmark. For 2018, the IRS stated that the estate and gift tax exemption amount was $5.6 million per individual and $11.2 million for a married couple. For single individuals, the limit was increased from $5.49 million in 2017 to the present amount of $5.6 million in 2018. The annual gift exclusion amount as of 2018 was $15,000, a $1000 increase from the set amount of $14,000 in 2017. Using Crummey power, taxpayers or gift givers can prevent paying taxes on gifts in trust. The Crummey power allows beneficiaries of a charitable act to withdraw the gift for a limited time, which in turn makes a gift a current interest and qualified for the gift tax exclusion. To be clear, gifts in a trust are commonly used by parents in most cases, or even grandparents to establish trust funds for their children or grandchildren. It is also crucial to include that estate taxes can be reduced considerably via charitable gifts after death. When a bequest is transferred to a charity or any charitable organization, it may be called a legacy gift. This type of bequest can be used as great sources of fundraising for non-profit organizations or institutions. Some bequests are called endowments, and this term refers to a bequest that is intended for a particular purpose.
Estate Planning and its Association to Bequest
Individuals and families that are looking to grow or keep assets and financial property for their future children and generations should look at a formal estate plan. In doing this, the family or individual might find the help of a private lawyer as essential, given the complex nature of exchanging wealth from one generation to another generation. Also, in addition to writing a will, estate planning can include any of the following details given below:
- Assigning an executor of the estate to supervise the terms and conditions of the will being drafted.
- Setting up trust accounts in the name of beneficiaries in an attempt to mitigate estate taxes
- Setting up a guardian for living dependents (cases where the taxpayer has dependents)
- Creating and/or updating beneficiaries on plans like life insurance, IRAs, and 401ks
- Setting up annual gifting to eligible charities and non-profit organizations and institutions as an attempt to reduce the taxable estate
- Establishing a durable power of attorney (POA) to oversee other assets and investments of the taxpayer.
In some cases, estate planning can include personal arrangements like organizing funeral arrangements.
- Cy Pres Doctrine
- Exordium Clause
- Non-Contestability (No Contest) Clause
- Per Stirpes
- Elective Share
- Qualified Domestic Relations Order (QDRO)
Academics Research on Bequest
- The strategicbequestmotive, Bernheim, B. D., Shleifer, A., & Summers, L. H. (1986). The strategic bequest motive.Journal of labor Economics,4(3, Part 2), S151-S182. Although recent research suggests that intergenerational transfers play an important role in aggregate capital accumulation, our understanding of bequest motives remains incomplete. We develop a simple model of strategic bequests in which a testator influences the decisions of his beneficiaries by holding wealth in bequeathable forms and by conditioning the division of bequests on the beneficiaries' actions. The model generates falsifiable empirical predictions that are inconsistent with other theories of intergenerational transfers. We present econometric and other evidence that strongly suggests that bequests are often used as compensation for services rendered by beneficiaries.
- Valuing Option, Existence, andBequestDemands for Wilderness., Walsh, R. G., Loomis, J. B., & Gillman, R. A. (1984). Valuing Option, Existence, and Bequest Demands for Wilderness.Land Economics,60(1). Wilderness resource economics has traditionally focused on the benefits and costs of recreation use. Several studies have estimated aspects of the demand for wilderness recreation (Smith and Kopp 1980; Wetzstein et al. 1982), particularly the effects of congestion on willingness to pay (Fisher and Krutilla 1972; Cicchetti and Smith 1973, 1976; Deyak and Smith 1978; Menz and Mullen 1981; Walsh and Gilliam 1982). Others have estimated the costs of wilderness recreation management and the opportunity costs of foregone motorized recreation, timber harvest, and mining (ORRRC 1962; Tyre 1975; Milton 1975; USDA 1978; Guildin 1980; Porter 1982). While the present paper also is concerned with the benefits and costs of wilderness recreation, it differs from earlier work by introducing public nonuse values to the analysis of wilderness designation. The purpose of this paper is to illustrate a procedure for estimating the preservation value of increments in wilderness protection using the contingent valuation approach.
- Bequest motives and the annuity puzzle, Lockwood, L. M. (2012). Bequest motives and the annuity puzzle.Review of economic dynamics,15(2), 226-243. Few retirees annuitize any wealth, a fact that has so far defied explanation within the standard framework of forward-looking, expected utility-maximizing agents. Bequest motives seem a natural explanation. Yet the prevailing view is that people with plausible bequest motives should annuitizepartof their wealth, and thus that bequest motives cannot explain why most people do not annuitizeanywealth. I show, however, that people with plausible bequest motives are likely to be better off not annuitizing any wealth at available rates. The evidence suggests that bequest motives play a central role in limiting the demand for annuities.
- How strong arebequestmotives? Evidence based on estimates of the demand for life insurance and annuities, Bernheim, B. D. (1991). How strong are bequest motives? Evidence based on estimates of the demand for life insurance and annuities.Journal of political Economy,99(5), 899-927. This paper presents new empirical evidence in support of the view that a significant fraction of total saving is motivated by the desire to leave bequests. Specifically, I find that social security annuity benefits significantly raise life insurance holdings and depress private annuity holdings among elderly individuals. These patterns indicate that the typical household would choose to maintain a positive fraction of its resources in bequeathable forms, even if insurance markets were perfect. Evidence on the relationship between insurance purchases and total resources reinforces this conclusion.
- Bequest behavior and the effect of heirs' earnings: Testing the altruistic model of bequests, Wilhelm, M. O. (1996). Bequest behavior and the effect of heirs' earnings: Testing the altruistic model of bequests.The American Economic Review, 874-892. That parents transfer resources to children because of altruistic concern is a reasonable a priori assumption. However, economic theories of altruistic transfers have produced many counterintuitive conclusions, and, consequently, much debate. When applied to bequests, these theories predict that inheritances will compensate for earnings differences between siblings as well as between parents and children. This paper tests these implications. Using a new data set centered on federal estate tax returns, little support can be found for an altruistic theory of bequests. This finding has implications for macroeconomic policy, government transfer programs, and inequality.