Testamentary vs Inter Vivos Gifting

Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on January 24, 2024

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Overview of Testamentary vs Inter Vivos Gifting

Testamentary and inter vivos gifting are two common methods for distributing assets during estate planning.

Testamentary gifting occurs upon the death of an individual, with asset distribution specified in their last will and testament.

It offers flexibility, control over asset distribution, and confidentiality, but may involve a probate process, potential challenges to the will, and delayed asset distribution.

Inter vivos gifting, or lifetime gifting, involves transferring assets from one person to another during the donor's lifetime.

It enables immediate asset transfer, potential tax benefits, and reduced estate size. Still, it may also result in loss of control over assets, gift tax implications, and potential impacts on eligibility for government benefits.

Factors such as donor objectives, financial and tax implications, family dynamics, asset types, and legal considerations should be considered when choosing between the two methods.

Consultation with professional advisors is recommended to ensure informed decision-making and proper asset distribution according to the donor's wishes.

Testamentary Gifting

Overview

Testamentary gifting refers to the distribution of assets upon the death of an individual, as specified in their last will and testament.

This method allows the individual to decide who will receive their assets and in what proportion, providing a way to distribute their estate according to their wishes.

Testamentary gifting is often appropriate for individuals who wish to maintain control over their assets during their lifetime and for those who want to ensure that their estate is distributed according to their specific wishes upon their death.

Key Advantages

Flexibility in Estate Planning

Testamentary gifting offers flexibility in estate planning, allowing the testator to update or modify their will as circumstances change. This flexibility ensures that the testator's wishes are followed even as their assets, relationships, or priorities evolve over time.

Control Over Asset Distribution

By specifying the distribution of assets in a will, the testator retains control over how their estate is divided among beneficiaries. This can help ensure that specific individuals or organizations receive the assets intended for them and prevent disputes among heirs.

Confidentiality

Wills are generally kept private until the testator's death, maintaining confidentiality over the distribution of their assets.

This can be especially beneficial when dealing with sensitive family dynamics or when the testator wishes to make private bequests to specific individuals or organizations.

Key Disadvantages

Probate Process

Testamentary gifts typically require the estate to go through probate, a legal process that can be time-consuming and expensive. Probate fees and court costs can reduce the estate's overall value, impacting the amount distributed to beneficiaries.

Possible Challenges to the Will

The validity of a will can be contested by disgruntled heirs or other interested parties, leading to legal disputes that may delay the distribution of assets or result in additional legal fees.

Delayed Distribution of Assets

The probate process can cause a delay in the distribution of assets to beneficiaries, which may be particularly problematic for those relying on the inheritance for financial support.

Inter Vivos Gifting

Overview

Inter vivos gifting, also known as lifetime gifting, involves the transfer of assets from one person to another during the lifetime of the donor.

This method of gifting allows the donor to see the impact of their gifts during their lifetime and can provide certain financial and tax benefits.

Inter vivos gifting is often appropriate for individuals who wish to provide immediate financial support to beneficiaries, reduce the size of their estate for tax purposes, or see the impact of their gifts during their lifetime.

Key Advantages

Immediate Transfer of Assets

With inter vivos gifting, the assets are transferred immediately to the recipient, allowing them to benefit from the gift without having to wait for the donor's death.

Potential Tax Benefits

In some jurisdictions, inter vivos gifts may be subject to favorable tax treatment, such as lower gift tax rates or exemptions. By making lifetime gifts, the donor may be able to reduce their overall tax liability and preserve more of their wealth for their beneficiaries.

Reduced Estate Size

Inter vivos gifts can help reduce the size of the donor's estate, potentially simplifying the probate process and reducing the overall costs associated with administering the estate.

Key Disadvantages

Loss of Control Over Assets

Once an inter vivos gift is made, the donor loses control over the gifted assets. This can be problematic if the donor's financial circumstances change or if the recipient mismanages the gifted assets.

Possible Gift Tax Implications

Depending on the jurisdiction and the value of the gift, inter vivos gifts may be subject to gift taxes. The donor is generally responsible for paying these taxes, which can reduce the overall value of the gift and impact the donor's financial situation.

Potential Impact on Eligibility for Government Benefits

Inter vivos gifts may affect the donor's eligibility for certain government benefits, such as Medicaid or other means-tested programs. It is essential to consider these implications before making substantial lifetime gifts.

Comparing Testamentary and Inter Vivos Gifting

Timing of Asset Transfer

One of the primary differences between testamentary and inter vivos gifting is the timing of the asset transfer. Testamentary gifts are made upon the death of the donor, while inter vivos gifts are made during the donor's lifetime.

Tax Implications

The tax implications for testamentary and inter vivos gifts may vary depending on the jurisdiction. It is essential to consult with a tax professional to understand the potential tax consequences associated with each method of gifting.

Control Over Assets

Testamentary gifting allows the donor to maintain control over their assets during their lifetime. Inter vivos gifting results in the immediate transfer of assets and a loss of control for the donor.

Impact on Estate Size

Inter vivos gifting can reduce the size of the donor's estate, potentially simplifying the probate process and reducing associated costs. In contrast, testamentary gifts do not impact the size of the estate until after the donor's death.

Legal Processes and Challenges

Testamentary gifts may be subject to probate and potential legal challenges, while inter vivos gifts generally avoid these issues.

Factors to Consider When Choosing Between Testamentary and Inter Vivos Gifting

Donor's Objectives and Priorities

The donor's specific objectives and priorities should guide their choice between testamentary and inter vivos gifting. Factors to consider include the desire to maintain control over assets, provide immediate financial support, and minimize tax liabilities.

Financial and Tax Implications

Understanding the financial and tax implications of each method of gifting is essential when making an informed decision. Consultation with a financial planner or tax professional is recommended to ensure all relevant factors are considered.

Family Dynamics and Relationships

Family dynamics and relationships may influence the choice between testamentary and inter vivos gifting.

The donor may wish to maintain confidentiality in distributing assets or to address specific needs of beneficiaries that may be better served by one method over the other.

Asset Types and Complexity

The nature and complexity of the assets being gifted can also impact the choice between testamentary and inter vivos gifting.

Some assets may be more easily transferred through one method than the other or may have unique tax implications that should be considered.

Legal and Regulatory Considerations

Each jurisdiction has its own legal and regulatory framework governing testamentary and inter vivos gifting. It is essential to consult with a legal professional to ensure compliance with all relevant laws and regulations.

Testamentary vs Inter Vivos Gifting

Conclusion

Testamentary and inter vivos gifting are two common methods for distributing assets during estate planning, each with its own advantages and disadvantages.

The choice between the two methods should be guided by the donor's objectives, financial and tax implications, family dynamics, asset types and complexity, and legal considerations.

Testamentary gifting offers flexibility, control over asset distribution, and confidentiality, but may involve a probate process, potential challenges to the will, and delayed asset distribution.

In contrast, inter vivos gifting enables immediate asset transfer, potential tax benefits, and reduced estate size but may result in a loss of control over assets, gift tax implications, and potential impacts on eligibility for government benefits.

Proper consultation with professional advisors is recommended to ensure informed decision-making and proper asset distribution according to the donor's wishes.

Careful planning and consultation with professional financial advisors can help donors make informed decisions and ensure their assets are distributed according to their wishes.

Testamentary vs Inter Vivos Gifting FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.

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