Bequests and Their Tax Consequences

 Bequests are a method for giving property to an individual or organization after your death. You can state your intention to bequeath property in your will, or you can bequeath the property while you are living. Most commonly, property is transferred in a will and is required to go through probate before it is distributed. The tax benefits are usually more favorable than other gifting options.

Charitable Bequests

Charitable bequests are popular because they offer flexibility and have few tax consequences. If you bequeath property to charity, you will receive a tax deduction. You can bequeath the property while you are alive, retain use of the property and hand it over upon your death.

Giver's Tax Liability

Anytime an individual gives a piece of property, there will be tax obligations applied to the transfer. There are two types of tax consequences. First, there is a possible estate tax on the property. The estate tax is constantly under reform. As of 2010, the estate tax remains at 35 percent, but it is only charged for very large estates. An individual leaving $5 million, or a couple leaving $10 million, will have an estate tax charged to their property. If the property is worth less than this amount, an estate tax will not be assessed.

However, there may be a capital gains tax on a property that is transferred, if the value has increased. For example, if you purchase a home for $200,000 and it is worth $300,000 when you transfer it, you are required to pay taxes on the $100,000 difference. Capital gains taxes are due and can be paid by the giver or the receiver. In either case, the cost basis is the original owner's cost basis.

Receiver's Tax Liability

A receiver does not pay income tax on any property received through bequest. Property acquired by inheritance does not count as income. Keep in mind, however, that you are required to pay estate or capital gains taxes as described above. There are a few steps you should take in order to determine your tax liability. First, determine if you owe an estate tax on the property based on its nominal value. Then, if you are receiving an asset that has changed in value, you may have to declare a capital gain or capital loss at the time of the asset's sale. You will not have to pay a capital gains tax until the gain is realized.

This means, for example, you can hold a property without paying taxes. However, you must pay the taxes in the year you sell that property for a profit. There are relatively low tax rules applied to bequests. For this reason, many individuals find that a bequest is the best option for a property transfer. You can use an attorney to help you draw up the proper forms and explain the specific rules of your tax consequences. Always cross check the information that you are given with a tax authority because attorneys are not always well versed in tax laws unless they specialize in that area of law.

What are charitable bequests?

Charitable bequests are one way to donate property to charity. When you bequest property, you are giving it as a gift. Both you,  and the recipient, receive favorable tax consequences as a result. You can donate property either while you are alive or through your will. If you decide to bequest while you are living, you can use the property for the remainder of your lifetime before turning it over to the charitable organization. This flexible structure makes bequests easy to manage. Many individuals prefer to use this method instead of allowing property to go into probate after death.

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