Estate planning can be a challenging experience because it requires thinking in the long-term and about one’s own vulnerability. Add the abundance of legal terms that accompany any foray into the land of estate planning and we understand why the process can feel intimidating.
That is why the team at Tseng Law Firm created this basic Estate Planning Glossary, which includes the most common estate planning terms you’ll come across when beginning to think about your estate and its future.
Before we review key terms, there is a vital estate planning concept everyone should know:
this Estate planning glossary is not exclusively for the wealthy or the old
Many people are under the assumption that only the wealthy need to worry about their estate. That is not the case. We also want you to understand that you are never too young to begin the estate planning process. And, because anyone can be an heir or beneficiary – including charities or organizations – estate planning is also for the singletons out there!
Estate planning encompasses everything from what/how you’d like to be cared for in the event of a medical emergency, who you would like to make medical or legal decisions in the case you aren’t able to do so on your own or making provisions for your minor children/step-children. It is about minimizing tax losses and ensuring you’ve planned ahead for college funds, retirement, and long-term care.
In other words: estate planning is for everyone!
Now, let’s move on to the important estate planning glossary that will help you make sound decisions for your estate planning process.
A
A-B Trust. Helping couples to avoid estate trusts, this trust is set up so that when the first spouse dies, the initial A-Trust automatically converts into the B-Trust. When this happens, it retains the couple’s original tax exemptions. An A-B Trust is also referred to as a credit shelter trust or a bypass trust.
Administrator. This is a term we hope never applies to your estate because it means you didn’t have an estate plan in place. As a result, the probate court will appoint an Administrator of their choosing – rather than yours – to distribute your estate as the court sees fit.
Advance Directive. Also called an Advanced Medical Directive or a Living Will, this is an important document that outlines everything from how you wish to be cared for (or a specific list of when not to resuscitate – called a Do Not Resuscitate or DNR) if you experience a medical trauma or scenario that renders you incapable of making decisions for yourself. It also provides legal rights to a stated person who you trust to make medical decisions on your behalf.
B
Beneficiary. This is an individual (or charity/organization) who receives a distribution from the trust’s income or from the trust itself after all other debits and distributions have been made.
C
Charitable trusts. People aren’t the only ones who can benefit from your estate. Charitable trusts allow you to contribute a portion of your estate to your favorite charities and nonprofits, or to set one up for yourself. They can also serve as a smart tax-saving strategy. Visit our post, What is a Charitable Trust? for more details.
Community Property. Property that is owned in a marriage, and was purchased or acquired during the marriage. The court views community property as a 50/50 split between both spouses. It does not include property that either spouse owned before they were married.
Conservator (also called Guardian of the Estate). If you have not already designated a power-of-attorney to handle decisions if you become incapacitated, the court will appoint a conservator to make financial decisions for you.
D
Death taxes. These are taxes your estate owes the federal and state governments after you die. While the feds only collect an estate tax, many states charge inheritance taxes as well. Smart estate planning minimizes these tax amounts.
Decedent. The person who has died (the deceased).
Durable Power Of Attorney (POA). This type of power of attorney (POA) remains in place after a person becomes incapacitated. A non-durable POA expires when a person is incapacitated. You may decide you’d like one person to be a POA while you’re out of the country or recovering from an illness), but this might not be the person you want to make all of your decisions if you were completely incapacitated.
E
Elective share. A surviving spouse has a right to claim his/her “elective share,” of the estate when his/her spouse dies if there was no prenuptial agreement in place. Elective shares vary from state to state; in California, an elective share is 50% of the deceased spouse’s estate.
Estate taxes. Beneficiaries and heirs are required to pay estate taxes on certain distributions. Read, Understanding Taxes and Trust Distribution to learn more.
Executor/executrix. Also called a personal representative, the executor is the individual the deceased chose to carry out the requests and directions of the will. Executrix is the female gender form of executor.
F
Fiduciary. This is an individual who controls or handles the assets or benefits for another.
G
Grantor. The creator of a trust, and who can also amend or revoke that trust unless it’s irrevocable.
Guardian. This is a court-appointed position, although you can initiate the guardian’s selection, who is legally responsible for a minor child, or an incapacitated adult, as well as that child or incapacitated adult’s estate. If you have children, it’s important to list who you would like appointed as their guardian in your will.
H
Heir. The person who inherits property as the result of a will or probate process.
I
Incapacity (also referred to as incompetency). A person’s inability to make decisions for him/herself as the result of a disability, medical trauma, or disease.
Income beneficiary. The person who receives the income from a trust’s assets.
Inheritance taxes. Taxes that heirs pay according to a state’s tax schedule and based on the asset’s property value.
Intestate. To die without a will in place. The estate of a person who is intestate is processed through the probate court.
Issue. The children (direct descendants) of the person referred to in the estate plan.
J
Joint tenancy. Where two or more people own a property or asset together in an even divide. This can be a typical way for children to inherit a house or business from their deceased parent(s).
K
L
Letters Testamentary. This is a letter from the probate court to an individual – typically the Administrator – to distribute the estate as per the court’s or the administrator’s will.
Living Trust. Designed to ease the transfer of an estate from the primary creator(s) to the beneficiaries, and helping to mitigate resulting fees and taxes. Read, What is a Living Trust? for more detailed information.
M
Marital Deduction. An unlimited federal estate and gift tax deduction for property passing to a spouse in a qualified manner. In other words, property transfers between spouses generally are not taxable transfers because of the marital deduction.
Marital trust. A trust established to hold property for a surviving spouse in A-B trust planning and designed to qualify for the marital deduction. A commonly used marital trust is a qualified terminable interest property trust, or QTIP trust, which requires that all income must be paid to the surviving spouse.
N
Net Estate. The value of an estate after all debts have been paid. (Federal estate taxes are based on the net value of an estate).
Net Value. The current market value of an asset less any loan or debt.
O
Omitted Heir. A spouse or child that is not included in a decedent’s will, but whom the court feels was an oversight or an accident. For example, a child or step-child who was born after the estate plan was made. However, this can cause tension in a family, which is why we always recommend revisiting your estate plan to ensure it is current and to avoid omitted heirs or outdated beneficiaries.
P
Pay-On-Death Designation (POD). This is important for anyone to know, whether you’re working on an estate plan or not. Most financial accounts of all types (checking, savings, retirement, investment, etc.) have a POD designation you can complete online, ensuring the account is transferred to the individuals you designate. You can select more than one POD and determine percentages accordingly.
Personal Property. This is any property you own other than real estate (cars, art, toys, antiques, collectibles, etc.).
Probate. If you don’t have a will or trust in place, your estate will be transferred to the state, where it is distributed in accordance with the state’s probate laws. Probate courts are also used to settle disputes about a will’s authenticity or to honor the rights of an omitted heir.
Q
Quasi-Communal Property. In California, quasi-community property is property that one spouse or domestic property acquired in another state that would be considered community property in our state.
R
Real property. Real estate, including any buildings and/or land attached to them.
Revocable. A will or trust can be revoked, or changed, as long as the creator/grantor is still alive and is not incapacitated. The exclusion is if the grantor/creator creates an irrevocable trust, which is set in legal stone.
S
Separate property. This is property that was either owned by individuals before they were married, OR that one or the other inherited or received as a gift during the marriage.
Special Needs Trust. A trust set up specifically for an heir/beneficiary with special needs to provide for his/her comfort and care.
Subsequent Trustee. It is always a good idea to establish both a trustee (see below) and a subsequent trustee. The latter handles the estate if the former is deceased or unable to when the trust is being administered.
T
Transfer on Death Deed. A deed that automatically transfers ownership of property to the listed beneficiary upon proof of the previous owner’s death.
Trustee. The primary trustee is the person you name to administer your will or trust (also referred to as the administrator). Visit Naming a Trustee is A Big Decision to learn more about how to select the best trustee and subsequent trustee(s) for your estate plan.
U
Unified Credit. A credit against the federal gift and estate tax otherwise payable by an individual or estate. Frequently referred to as the estate tax exemption amount, the exemption equivalent, or applicable exclusion amount. The current exemption amount is $5 million inflation-adjusted ($5.25 million in 2013).
Unfunded. Your living trust is unfunded if you have not transferred assets into it.
Uniform Gifts to Minors Act (UUGMA). This is a state law that allows adults to contribute to a custodial account in the name of a minor beneficiary without having to establish a trust or name a legal guardian; such funds are irrevocable gifts to the minor and may only be used for the benefit of the minor.
V
Virtual Representation. A mechanism provided in a will or trust, or in some instances by state law, to permit a beneficiary to make decisions on behalf of another beneficiary who can claim or receive property only under or after them.
W
Will. A legal document controlling the disposition of a person’s property at death that defines how a person wants his or her assets distributed at death.
X
Y
Z
The end of the alphabet wraps up without any estate planning words that are worth learning for most people in the beginning phases of planning their estate.
Now that you’ve learned the basic vocabulary pertaining to wills and trusts, we invite you to schedule a consultation with us here at Tseng Law Firm, where we’ll begin walking through the estate planning steps.