An inheritance is the transfer of property after a person passes away. Property can be transferred at any point before or immediately after the person's death. How that property is transferred depends on the wishes and priorities of the donor. One key issue is whether the donor wants to retain the use and control of the property for the duration of her life or is willing to relinquish it. Another issue is taxes. Many property transfers will be taxed as gifts or as part of an estate. Minimizing tax liability may be an important consideration when determining if and how to transfer property prior to death.
Last Will and Testament
A person’s last will and testament is a document that directs how she wants her property distributed when she passes away. A will does not transfer property before death, but it does allow the person to define what property will be given to whom. Thus, a will can act as a promise of an inheritance from one person to another. That promise is revocable. A person can modify her will by amending it through a codicil, or the will can be revoked in its entirety.
A gift is a property transfer without the expectation of payment. For a gift to legally occur, the donor must be aware that he is transferring the property and intend to do so without receiving compensation. The gift must be delivered, either in terms of actual physical transfer or through some form of symbolic conveyance. An example of symbolic delivery would be handing over the keys to a home. Finally, the recipient must accept the property for the gift to be completed. As a consequence of this transfer, the donor loses all ownership rights over the property.
A trust is a device that allows a donor to transfer property to a distinct legal entity. This entity is managed by a chosen individual, called the “trustee,” who oversees the trust’s property in a manner specified by the donor. The trust’s property and income are used to support identified beneficiaries. By having different people act as beneficiary and trustee, the beneficiaries get the advantages of the trust’s property without burdening them with the obligations of maintaining those assets. A revocable living trust can be structured so that the property’s original owner is both beneficiary and trustee, allowing the donor to retain both property control and its benefits. The donor can also change the trust’s underlying terms in a revocable trust, allowing him to choose different beneficiaries, add or subtract property, and select new trustees.
Transfers of property and assets may trigger one of two different taxes. The federal gift tax levies all transfers made by one individual to another for less than full value. The estate tax is levied on the total value of a decedent’s property as of his death, and is a tax on the right of the estate to distribute its property. As of 2012, only estates valued in excess of $5.12 million are taxed. A gift given by a donor in anticipation of his death and revocable trusts are included in the person’s estate and are not taxed as gifts.
- USLegal Inc.: Inheritance Law & Legal Definition
- USLegal Inc.: Wills Law & Legal Definition
- Lawyers.com: Will Basics
- USLegal Inc.: Gifts Law & Legal Definition
- USLegal Inc.: Gifts in Contemplation of Death Law & Legal Definition
- USLegal Inc.: Living Trusts Law & Legal Definition
- USLegal Inc.: Revocable Trust Law & Legal Definition
- Internal Revenue Service: Gift Tax
- Internal Revenue Service: Estate Tax
John Cromwell specializes in financial, legal and small business issues. Cromwell holds a bachelor's and master's degree in accounting, as well as a Juris Doctor. He is currently a co-founder of two businesses.