Estate Planning: Fundamentals and Terminology
When most people think of estate planning, they picture a will-signing ceremony and distributing someone's property when they die. This is certainly an important aspect of estate planning.
However, your estate plan can involve much more than a simple last will and testament. There are a range of estate planning documents you should consider as part of your comprehensive estate plan.
This article discusses estate planning basics. It includes an overview of common estate planning tools, tips for starting your estate plan, and a glossary of estate planning terms.
Why Is It Important to Have an Estate Plan?
Like any plan, an estate plan looks to the future. By laying out this plan, you ensure your property is handled as you like. When you can no longer express your wishes (i.e., when you die or become incapacitated), an estate plan can clearly outline what you would choose. Your family members can have peace of mind knowing that they are honoring your wishes about the distribution of your assets.
An estate plan is your legal voice providing instructions for the future. Failing to make an estate plan is like not speaking. If you do not say what you want, others will speak for you — whether you would have agreed with them or not.
What kinds of decisions can you make through an estate plan? You can decide who will have an interest in your property. You can also do the following:
- Choose through advance health care directives how you will receive medical treatment if you become incapacitated
- Pick who will care for your minor children or dependents if you cannot
- Provide for vulnerable loved ones, including those with special needs who cannot care for themselves
- Engage in tax planning to preserve the value of your estate by making sure to consider the applicability of exemption amounts
- Pick individuals you trust to carry out your wishes
Failure to make these decisions now leaves you, your loved ones, and your estate vulnerable in the future.
Common Estate Planning Tools
An estate plan should be flexible. It must meet your individual needs. Many estate planning tools can be mixed and matched to achieve your goals.
Among the most well-known legal documents, a last will and testament serves as the cornerstone of most estate plans. A will provides specific instructions on distributing your property when you die and who will carry that out.
A person who makes a will is known as a testator. You can always adjust your will as needed while you are alive. When someone dies without a will, they are said to die "intestate." If you die intestate, your estate will be distributed according to state laws of intestate succession.
There are many kinds of trusts. Trusts move property out of an estate to be managed by a trustworthy third party, a trustee. Trusts are created for someone else's benefit (e.g., a minor or incapacitated loved one). The third party technically owns the property but is strictly required to manage it according to the trust terms.
In a revocable living trust, you reserve the right to change the terms down the road. Irrevocable trusts, however, cannot be changed once created. Therefore, they are less popular.
Powers of Attorney
A "power of attorney" (POA) is your legal authorization for someone to make decisions on your behalf. Despite the name, that person does not have to be an attorney or legal expert.
The authorization can be narrow or broad, specific or general. For example, you can authorize someone to make only financial or health care decisions (medical power of attorney). You can also specify whether your POA is “durable," meaning that it will remain in effect if you become incapacitated. And you can make a "springing" POA. Upon certain conditions, the POA will take effect (i.e., "spring"), such as when you die or become incapacitated.
An advance directive provides instructions on how you would like to receive medical care if you cannot make health care decisions yourself. These documents envision situations where you are still alive but cannot communicate. This can happen when an injury or illness leaves you in a coma. Other documents in this list generally reflect your right to control your property. But advance directives reflect your right to control your own body.
A life insurance policy is a contract that allows you to pay a monthly premium in exchange for payment if you die. The sum goes to a beneficiary named in the policy. Life insurance is a particularly useful safeguard if you work in a high-risk profession. It is also helpful if the named beneficiary depends on you for their financial security.
Information Needed for an Estate Plan
Your estate plan should be as comprehensive as possible. To achieve this, you should think about your goals. Gathering as much relevant information as possible is helpful. This information gathering can include the following materials:
- Detailed information about your income, including amounts and sources
- Detailed information about your retirement plans, including amounts in IRAs and retirement accounts
- Detailed information about your bank accounts and investment accounts, including brokerage accounts, annuities, and other financial resources
- Detailed information about all debts you owe and are owed
- An inventory of your real estate and valuable personal property (e.g., vehicles, jewelry, furniture, valuable collections, heirlooms)
- An inventory of jointly owned property and the names of co-owners
- Any documents that might affect your estate plan (e.g., existing wills and trust documents, recent tax returns, real property deeds, prenuptial agreements, marriage certificates, divorce decrees)
It is also essential to have the names and contact information of the people you want to:
- List in your will
- Benefit from a trust
- Carry out your will
- Manage a trust
- Name in a power of attorney
- Name in beneficiary designations, contingent beneficiary designations, or transfer on death (TOD) orders
- Enforce your advance directives
- Be potential guardians for your minor children
The more detailed information you collect, the easier the estate planning process will be for you and your estate planning attorney.
Glossary of Estate Planning Terminology
Legal jargon can be confusing. The following list of legal terms may be helpful.
- AB trust: An AB trust is also called a "bypass trust." Married couples use this kind of trust to maximize federal estate tax exemptions. This arrangement transfers a deceased spouse's assets into a marital trust for the lifetime benefit of the surviving spouse. When the second spouse dies, the trust assets pass to the next beneficiaries in line (usually the couple's children).
- Attorney-in-fact: An individual designated in a power of attorney to act as the agent of the person who executed the document.
- Beneficiary: A person who receives funds, property, or other benefits from a legal instrument like a will, trust, or insurance policy — in other words, a person who receives a "benefit."
- Codicil: A document used to clarify, modify, or revoke an existing will
- Community property: Property owned jointly by a married couple. This includes all property acquired by either spouse during the marriage except for gifts and inheritances. This form of marital property exists in only nine states.
- Decedent: A person who has died.
- Devise: The act of leaving property to someone in a will. This word is loosely synonymous with "bequest" (although a bequest is technically a gift of personal property, not real estate). Just as a testator devises property to beneficiaries in a will, they also bequeath said property.
- Durable power of attorney: A document in which an individual legally authorizes another person to make decisions on their behalf. It remains in effect even when the person authorizing the power of attorney becomes incapacitated (hence "durable"). Durable powers of attorney often limit the scope of expressed authority. For example, they may give authority to make only health care decisions or financial decisions.
- Estate: The word "estate" has many technical uses in law. For this article, an individual's estate includes everything they own. This may include real estate, tangible personal property (e.g., cars, jewelry, heirlooms), bank accounts, life insurance policies, stocks, etc. Your liabilities are deducted from your estate before any remaining property is distributed to heirs and beneficiaries.
- Estate tax: A tax imposed on someone's estate when they die. A handful of states impose an estate tax. There is also a federal estate tax.
- Fiduciary: Someone legally required to act in another person's best interest. The obligation is a fiduciary duty, which can be limited in scope. To illustrate, attorneys have a fiduciary duty to act in the best interest of their clients. Trustees have a fiduciary duty to act in the best interest of trust beneficiaries. A breach of fiduciary duty leads to significant legal consequences.
- Gift tax: A tax imposed when someone gives something of value to someone else. In addition to the federal gift tax, only Connecticut imposes a state-level gift tax.
- Grantor: In general, a person who transfers property to another. When establishing a trust, the grantor is the person who funds the trust assets.
- Gross estate: The total monetary value of an estate without deducting liabilities (e.g., debt).
- Guardian: An individual with the legal authority and duty to care for another person (e.g., a minor child or an incapacitated adult). Depending on your jurisdiction, the term often overlaps with "conservator." The technical distinction between the two terms is that a guardian tends to the day-to-day care of an individual, whereas a conservator tends to the individual's financial affairs.
- Heir: Someone who inherits based on laws of intestate succession.
- Incapacity: The inability to have legal consequences attach to one's actions. For example, a person who is not of "sound mind" is deemed incapable of making a valid will. In most cases, minors are legally presumed to lack the capacity to form a will, among other things.
- Inheritance tax: A tax imposed on someone who inherits property from a deceased person's estate, either through a will or through laws of intestate succession. Only six states impose an inheritance tax. There is no federal inheritance tax.
- Intestacy: Death without a will. A decedent without a will is said to be "intestate," in which case the decedent's estate is distributed according to state laws of intestate succession.
- Joint tenancy with right of survivorship: A form of real estate co-ownership between two or more parties. It is "joint" because the parties own the property together. The "right of survivorship" refers to the automatic transfer of a deceased co-owner's property rights to the surviving owners upon death. If there is only one surviving owner, they are entitled to sole possession of the property. A deceased co-owner's will cannot defeat the right of survivorship. This form of ownership is common among spouses.
- Last will and testament: A legal document that directs how a person's estate should be distributed when they die. A person who makes a will is known as a testator. A valid will meets the legal requirements to be binding and enforceable.
- Life estate: Temporary property ownership that lasts as long as a specified person's life, normally the possessor's. The person who owns a life estate is known as a "life tenant." Once a life tenant dies, the property passes to a "remainderman." In other words, the life tenant has a present interest in the property. The remainderman has a future interest. The life tenant must comply with certain restrictions meant to protect the remainderman's future interest (e.g., they must not destroy or devalue the property).
- Living trust: Also known as an inter vivos trust, this kind of trust comes into existence during the grantor's lifetime. By contrast, a testamentary trust is established in a will and only comes into existence when the testator dies.
- Living will: A living will is a kind of advance directive specifying how you would like to receive health care if you cannot express those decisions yourself. This happens if you are in an accident that leaves you in a coma.
- Marital deduction: A federal tax deduction allowing one spouse to pass their estate to the other without paying any estate or gift taxes.
- Personal representative: A person appointed to distribute a deceased person's estate. This person is sometimes known as an executor if nominated in a will. The person is sometimes known as an administrator if there is no will. The specific terminology varies from state to state.
- Pour-over will: A will that distributes ("pours") everything in an estate into a trust. This kind of transfer does not avoid probate.
- Power of appointment: A legal right that empowers a person to decide how property will be distributed, typically in the context of distributing a deceased person's property. A "general" power of appointment is unrestricted (the empowered person is given full discretion). By contrast, a "limited" or "special" power of appointment is circumscribed.
- Power of attorney: An individual's legal authorization to act on behalf of another. Despite the name, the person you support does not have to be an attorney. The authority granted in a power of attorney can be narrow, broad, general, or specific.
- Probate: Technically, probate is the legal process of determining the validity of a last will and testament. The term can also refer to the court-supervised process of distributing a deceased person's estate. Depending on the complexity of an estate, probate proceedings can be costly and time-consuming. In many cases, avoiding the probate process is a central goal of an estate plan.
- Simple will: Also called a basic will, this document explains how you want your property distributed when you die. It explains the "who gets what." This kind of will best suits small or uncomplicated estates.
- Testamentary trust: A trust that is created through a last will and testament. The trust only comes into existence at the testator's death. This contrasts with living trusts, which come into existence as soon as a grantor forms them.
- Testator: A person who makes a will.
- Trust: A legal entity created by a grantor that contains assets owned and managed by a trustee to benefit another. If a trust is revocable, the grantor reserves the power to change the terms of the trust. The terms cannot be changed without the beneficiaries' pursuit if a trust is irrevocable. There are many types of trusts.
- Trustee: A person or entity who owns property in the trust. The trustee is subject to the legal obligation to manage the trust property for the benefit of another pursuant to the terms of a trust document. A trustee owes the beneficiaries a fiduciary duty to manage the trust responsibly and in accordance with the trust terms. Trust documents may name successor trustees if the primary trustee cannot fulfill their obligations.
Need Help Setting Up Your Estate Plan?
Creating an estate plan is an important life decision that can give you and your loved ones peace of mind. At first glance, the legal technicalities of estate planning may feel overwhelming.
Hopefully, reviewing the information about basic estate planning documents and terminology has prepared you to get started. A relatively simple estate plan does not always require an attorney.
If you are setting up a will, health care directive, or financial power of attorney, Findlaw's do-it-yourself estate planning tools may save you time and money. If your estate is more complex or you still have questions, a local estate planning attorney can help.
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Can I Solve This on My Own or Do I Need an Attorney?
- DIY is possible in some simple cases
- Complex estate planning situations usually require a lawyer
- A lawyer can reduce the chances of a family dispute
- You can always have an attorney review your forms
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