Specific Asset Bequests
Many bequests transfer a specific item to a beneficiary. For example, a will might state, "I hereby give and bequeath my 1958 Edsel to my nephew, Harold Johnson." This bequest has the effect of transferring this specific property to the named beneficiary.
In some states, it is permissible to create a written list of tangible personal property and to reference that list in the will. In these states, the will could state that the tangible personal property would be transferred to the beneficiaries specified on the list. This method permits an individual to make transfers of furniture, jewelry and other personal items by a list that may then be changed as personal property is either sold or acquired.
If a specific asset is bequeathed and that item has been transferred, consumed or for any other reason is not in the estate at date of death, the specific bequest lapses. However, an exception to this rule exists if a will has alternative provisions. For example, the will could state, "I hereby give and bequeath my 1958 Edsel to my nephew, Harold Johnson; however, if at my death I do not own a 1958 Edsel, then I instead transfer the sum of $10,000 to Harold Johnson."
Specific Amount
Another common transfer within a will is the gift of a specific amount. For example, "I hereby give and bequeath the specific amount of $10,000 to my niece, Jane Johnson." This provision has the effect of transferring that dollar amount to the named beneficiary.
Testators should exercise some caution in selecting specific amounts. For example, a will might specify amounts for transfers to children, with the entire residue to charity. It is quite common for the eventual estate to be much larger than contemplated when a will is initially drafted. If the testator truly intends for the specified amounts to be transferred to the family, regardless of the estate size, then specific amounts are the appropriate solution. However, it is important for advisors to emphasize that the specific amount could be substantially reduced in value by inflation at the date of death.
One caution in transferring a specific amount relates to income in respect of a decedent (IRD). If the estate satisfies a specific amount bequest out of IRD assets, the estate will be liable for the income tax on the specific amount. In a large estate subject to estate tax with a majority of the estate comprised of IRD, it is possible that the estate tax apportionment clause would allocate the non-IRD assets to pay estate tax. If there is a bequest of specific amount and only IRD assets remaining in the estate, the estate will be subject to income tax on the distribution to charity. If the estate includes IRD, it is preferable to bequeath value to charity with a fractional formula, rather than a specific dollar amount.
Bequest of a Percent of the Residue
A fractional amount or percent of the residue may be transferred to charity. The major advantage of this method is that all beneficiaries will share in either appreciation or depreciation of estate value. Since the vast majority of estates appreciate between the date of the signing of a will and the date of death, the family and charity benefit proportionally from the growth of the estate.
If the estate consists predominantly of illiquid assets, the fractional transfer may raise administration issues. In states that permit the executor to make non pro-rata allocation, with approval by the probate court, he or she may distribute non-liquid assets to the various fractional interest beneficiaries.
Undivided Percentage of Asset Bequests
A testator may bequeath or devise an undivided percentage of a particular asset. For example, a testator with a large parcel of real property could choose to transfer an undivided 10% of that property to charity, with the balance to family. This interest will qualify for a charitable estate tax deduction, but there could be a reduction in value for the minority interests. Rev. Rul. 87-37.
Similarly, it is permissible to allocate an undivided percentage of a life insurance policy, an IRA, pension plan or other assets transferable by contract. The custodian of an IRA or the insurance company will then distribute the selected fraction to the charity, and the estate will receive the appropriate charitable estate tax deduction.
Bequest Notification
One way to encourage donors to share the amount of their bequest is to ask for a statement of intent. Donors often have a desire to benefit a specific purpose. If they have an opportunity to state that purpose and amount, donors will understand there is a better probability their selected purpose will be funded. They also have a stronger commitment to the charity if donors are able to state in writing their chosen purpose.
These donors may choose to notify the charity and then be recognized in the heritage club or legacy society. The following statements of intent may be helpful for donors who would like to indicate they are planning to leave a bequest. There is one statement of intent for a specific bequest or fractional share bequest and a second for a bequest to an endowed fund. A development executive must edit the documents to name his or her charity and show the amount (or percent of the estate) and the selected purpose. The statements of intent permit charity to fund a similar use if the selected use is impossible.
Statement of Intent to Leave a Bequest
Dear Gift Planner:
I, John Q, Donor, make this statement of intent to explain my desire to leave a gift in my will to Charity and to assist in making clear my gift purpose. I would like to inform you that upon my death, I have made a provision for Charity in my Will signed on 01/01/2008. This provision in my will transfers to you a bequest of $50,000 ( or10% of my estate or the residue of my estate or specific property) as a testamentary gift.
The purpose of this gift is to benefit your organization's XYZ fund (or state the donor's selected gift purpose). If the listed purpose for this gift becomes unnecessary, impossible or inconsistent with the needs of your organization, then Charity shall have the right to apply my gift for a similar purpose, without the approval of my estate's executor, heirs or any other party.
Sincerely,
_____________ _________________
John Q. Donor Date
Statement of Intent to Leave a Bequest For Endowment
Dear Gift Planner:
I, John Q. Donor, make this statement of intent to explain my desire to leave a gift in my will to Charity and to assist in making clear my gift purpose. I would like to inform you that upon my death, I have made a provision for Charity in my Will signed on 01/01/2008. This provision in my will transfers to you a bequest of $50,000 (or 10% of my estate or the residue of my estate or specific property) as a testamentary gift.
The purpose of this gift is to create a permanent endowment for the distribution of income and, at the discretion of Charity, part or all of any appreciation in the endowment for the following purpose: to benefit the XYZ Fund (or state donor's selected gift purpose).
This contribution and all additions shall be administered as an integrated fund of Charity, an exempt organization as described in Secs. 501(c)(3) and 170(b) of the Internal Revenue Code. If distributions from this fund become unnecessary, impossible or inconsistent with the needs of its exempt purpose, Charity has the right to make distributions for other similar purposes without the approval of my estate's executor, heirs or any other party.
Sincerely,
_____________ _________________
John Q. Donor Date
QTIP/Bequest
A Qualified Terminable Interest Property (QTIP) trust qualifies for the marital deduction. Sec. 2056(b)(7). The basic requirements of a QTIP trust are that all income be distributed to the surviving spouse. If there is a power of invasion, that power may be exercised only for the benefit of the surviving spouse. After the surviving spouse passes away, the QTIP trust remainder is distributed according to the provisions of the estate plan of the first spouse to pass away.
The QTIP trust is very commonly used for several purposes. It enables the surviving spouse to benefit from trust administration provisions. In addition, it generally protects the children from a first marriage. If, rather than using a QTIP, the first spouse to die left the assets outright to the surviving spouse, who then remarried, the assets could pass to the new spouse, rather than to the children of the first marriage. By creating a QTIP trust, the first spouse to pass away has the assurance that any assets remaining after the death of the surviving spouse will be distributed in accordance with the intent of the first spouse.
A QTIP may also be used to benefit the surviving spouse and then charity. After the surviving spouse passes away, the QTIP may be distributed to qualified exempt charities. Reg. 20.2056(b)-7(a). Alternatively, the QTIP could benefit the surviving spouse for his or her lifetime, and then the remaining trust corpus could be transferred to a charitable remainder trust or charitable lead trust. In this case, there would be a full marital deduction in the first estate, and a partial charitable deduction for the value of the charitable interest in the second estate.
Non-Probate Transfers
A "bequest" is the proper term for a death time transfer of property through a will. However, the term "bequest" is often informally used to refer to death time transfers that happen outside of a will. Such transfers are termed "non-probate" transfers. A trust is a prime example of a non-probate transfer. Other examples of non-probate transfers include IRA beneficiary designations, payable-on-death accounts and transfer-on-death deeds.
IRA Beneficiary Designations
IRAs are not transferred through a bequest in a will but instead through a beneficiary designation. When an IRA or other qualified retirement plan account is created, the account holder is asked to fill out a beneficiary designation form. When the account holder passes away, whatever is left in the account passes to the selected beneficiary. The account holder is able to change the beneficiary designation at any time before they pass away. While there is wide latitude in selecting a beneficiary, surviving spouses are often given rights to some or all of the money in the account.
Payable-on-Death Accounts
Much like an IRA beneficiary designation form, many banks give account holders the ability to fill out a form selecting a beneficiary of the account upon their death. While the account holder is alive the selected beneficiary has no rights to the account. The account holder can spend the money, select a different beneficiary or terminate the account. Upon the account holder's death, the beneficiary can simply go to the bank, show proof of death and their identity, and collect the remaining funds in the account. If the account is a joint account, then the account will most likely become property of the survivor with any payable-on-death designation happening only upon the death of the survivor.
Most states also allow payable-on-death designations for stocks, bonds and brokerage accounts. Typically, when the donor registers ownership of the account, they take ownership in "beneficiary form," allowing them to select a beneficiary of the stocks, bonds or brokerage account.
Transfer-on-Death Deeds
In some states, a donor can prepare a deed during life that only goes into effect upon their death. These "transfer on death" deeds must be prepared, signed, notarized and recorded just like regular deeds and must expressly state that they do not go into effect until death. However, unlike regular deeds, transfer-on-death deeds can be revoked. If a donor is interested in using a transfer-on-death deed, they should make sure their state allows such deeds to be effective.
Some states also allow transfer-on-death designations for car owners. For this designation to be effective it must be listed on the certificate of registration. As with payable-on-death accounts, a transfer-on-death designation does not give the beneficiary any rights in the vehicle. The donor still has the ability to sell or give away the car or to name someone else as beneficiary.
Donors interested in naming a transfer-on-death beneficiary of their car should consult with their state's department of motor vehicles for more information on the requisite paperwork that must be filed.
