Estate Planning Terms You Should Know
There are a variety of reasons why people postpone critical estate planning: ranging from discomfort in dealing with death or incapacitation to the belief they do not need planning. Further complicating the issue, many people are unfamiliar with the terminology associated with it. Here are some brief explanations of basic concepts that may help you feel more comfortable with this important aspect of financial planning.
1.
Will. A will directs where and how you want the property within your estate distributed when you die and who will take care of your minor children. Without one, the state will distribute the estate according to statute. A will does not control some property with beneficiary designations: life insurance benefits, retirement accounts, and assets in trust.
Will. A will directs where and how you want the property within your estate distributed when you die and who will take care of your minor children. Without one, the state will distribute the estate according to statute. A will does not control some property with beneficiary designations: life insurance benefits, retirement accounts, and assets in trust.2.Probate. This is the court process that ensures the portion of an estate guided by the will is properly distributed. During probate, heirs can challenge the validity of a will. Advanced estate planning (i.e. trusts) can reduce the amount of an estate that must pass through probate, therefore guaranteeing the correct assets go to the correct heirs.
Probate. This is the court process that ensures the portion of an estate guided by the will is properly distributed. During probate, heirs can challenge the validity of a will. Advanced estate planning (i.e. trusts) can reduce the amount of an estate that must pass through probate, therefore guaranteeing the correct assets go to the correct heirs.3.Executor or personal representative. This is the person who administers your final estate. Choose wisely. This is the person who oversees financial matters, such as filing a final tax return and distributing assets, as well as dealing with raw family emotion and conflicts.
Executor or personal representative. This is the person who administers your final estate. Choose wisely. This is the person who oversees financial matters, such as filing a final tax return and distributing assets, as well as dealing with raw family emotion and conflicts.4.Advanced directives. One advanced directive is a living will. In the event you become permanently incapacitated, a living will is your expression of what life-sustaining medical treatment you do or do not desire. Another advanced directive is a medical power of attorney. Though not always honored, a medical power of attorney gives a third party, such as a spouse or adult child, the power to make medical decisions on your behalf.
Advanced directives. One advanced directive is a living will. In the event you become permanently incapacitated, a living will is your expression of what life-sustaining medical treatment you do or do not desire. Another advanced directive is a medical power of attorney. Though not always honored, a medical power of attorney gives a third party, such as a spouse or adult child, the power to make medical decisions on your behalf.5.Power of attorney. This gives another person, such as your spouse or an adult child, the legal power to act on your behalf should you become incapacitated. This can be as restrictive (bill paying only, for example) or as comprehensive (able to sell property, file tax return) as you desire.
Power of attorney. This gives another person, such as your spouse or an adult child, the legal power to act on your behalf should you become incapacitated. This can be as restrictive (bill paying only, for example) or as comprehensive (able to sell property, file tax return) as you desire.6.Titling. Improperly titled assets could result in property being transferred contrary to your wishes or result in higher estate taxes or probate costs.
Titling. Improperly titled assets could result in property being transferred contrary to your wishes or result in higher estate taxes or probate costs.7.Trust. This is a legal entity for holding property for the benefit of the creator of the trust or other beneficiaries. Trusts are used for numerous objectives: from avoiding probate and estate taxes to helping heirs manage assets.
Trust. This is a legal entity for holding property for the benefit of the creator of the trust or other beneficiaries. Trusts are used for numerous objectives: from avoiding probate and estate taxes to helping heirs manage assets.8.Trustee. The trustee controls and manages a trust’s assets. This may be the trust’s creator, a relative, a friend, or a financial institution.
Trustee. The trustee controls and manages a trust’s assets. This may be the trust’s creator, a relative, a friend, or a financial institution.9.Types of Trusts. A revocable trust allows the creator of the trust to change fundamental aspects of the trust or even dissolve it. With an irrevocable trust the creator is severely limited in what, if any, changes he or she can make in the trust document. Irrevocable trusts typically are used to reduce estate taxes. A testamentary trust is established upon the creator’s death. An inter vivos trust, commonly known as a living trust, is established during the creator’s lifetime.
Types of Trusts. A revocable trust allows the creator of the trust to change fundamental aspects of the trust or even dissolve it. With an irrevocable trust the creator is severely limited in what, if any, changes he or she can make in the trust document. Irrevocable trusts typically are used to reduce estate taxes. A testamentary trust is established upon the creator’s death. An inter vivos trust, commonly known as a living trust, is established during the creator’s lifetime.10.Estate tax and gift exemption amounts. The amount of an estate subject to tax depends on the size of the estate. In 2003, the amount of an estate that is exempt from taxation is $1 million. The exemption amount rises to $3.5 million by 2009. In 2010, it will be temporarily repealed. Upon expiration of the current tax law in 2011, the estate tax exemption amount will revert to $1 million. Estate values over exemption limits are subject to estate taxes. Estate tax exemption amounts are reduced by any gift-tax exemption amounts used during a person’s lifetime. The maximum exemption from gift-taxes during a lifetime is $1 million. These exemptions amounts are important when designing trusts aimed at reducing estate taxes, such as marital trust.
Estate tax and gift exemption amounts. The amount of an estate subject to tax depends on the size of the estate. In 2003, the amount of an estate that is exempt from taxation is $1 million. The exemption amount rises to $3.5 million by 2009. In 2010, it will be temporarily repealed. Upon expiration of the current tax law in 2011, the estate tax exemption amount will revert to $1 million. Estate values over exemption limits are subject to estate taxes. Estate tax exemption amounts are reduced by any gift-tax exemption amounts used during a person’s lifetime. The maximum exemption from gift-taxes during a lifetime is $1 million. These exemptions amounts are important when designing trusts aimed at reducing estate taxes, such as marital trust.11.Annual gift exclusion. In 2003, anyone can donate tax-free up to $11,000 to as many people as he/she chooses. For example, you could give away a total of $33,000 a year to your three children or three friends. The annual exclusion does not count against the lifetime gift-tax exemption amount.
Annual gift exclusion. In 2003, anyone can donate tax-free up to $11,000 to as many people as he/she chooses. For example, you could give away a total of $33,000 a year to your three children or three friends. The annual exclusion does not count against the lifetime gift-tax exemption amount.12.Generation-skipping transfer tax. This tax discourages wealthy grandparents from passing estate assets directly to their grandchildren or other second – generation heirs, in order to skip a generation of estate taxes.
Generation-skipping transfer tax. This tax discourages wealthy grandparents from passing estate assets directly to their grandchildren or other second – generation heirs, in order to skip a generation of estate taxes.*May 2003 – This column is produced by the Financial Planning Association, the membership organization for the financial planning community.
