Glossary of Estate Planning Terms

 

            The Vocabulary

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 Estate Planning

 

Probate

Probate is the state’s legal process for distribution of your estate after your death.  Probate is required if you have any assets when you die, and whether or not you have a Will.  A small estate (less than $100,000) can be processed in three months.  Any estate valued at $100,000 or larger requires full probate and six months or longer to complete.  A personal representative is the person designated by the court to represent the estate of a person who dies without a Will.  The personal representative acts as an officer of the court and is responsible for management and distribution of the estate, identifying heirs, handling claims, and other activities as required by the state probate statute.  The personal representative is paid a fee based on the value of the personal property in the estate.  The personal representative may also engage an attorney to assist with probate.  The attorney is also paid a fee based on the total value of the estate.  When a person dies with a Will, the Will usually identifies the personal representative which is referred to as the Executor or Executrix.

 

Will

The Will is the core document of estate planning.  A Will provides the mechanism to: specify how your estate will be distributed, choose who will make decisions, create trusts for heirs that are minors, specify guardians of minor children, reduce estate taxes, and minimize sources of potential conflicts among family members.  Even in complex estate plans, the Will is still a critical component because, if any of the other estate planning instruments fail, the Will can provide backup protection.

Codicil

A Codicil is an amendment to an existing Will and does not replace or revoke the terms of the Will except as expressly stated in the Codicil.  A Codicil may be used to make a simple change to the Will.  More complex changes should be made through a new Will.

 

Pretermitted Heir

A pretermitted heir is a child who is not mentioned in the Will of the parent.  All children should be mentioned in the Will whether they receive any inheritance or not.  Failure to identify all of your children and to state what they inherit or that they inherit nothing results in a pretermitted heir.  A pretermitted heir may take against the Will and receive their statutory share of the estate notwithstanding the terms of the Will.

 

Personal Property Transferred With the Will

Arkansas law allows the testator, the person making the Will, to add an exhibit to the Will which identifies individual items or personal property to be given to specific individuals.  This is typically used to pass on family heirlooms to specific individuals.

 

Advance Health Care Directives

Advance Health Care Directives include A Healthcare Power of Attorney, a Living Will, and a HIPAA Release.  A Health Care Power of Attorney allows you to specify who can make medical decisions for you and what decisions they can make if you are unable to communicate or make your own decisions.  A Health Insurance Portability and Accountability Act (HIPAA) privacy release authorizes a family member or other agent to communicate with health care providers about your condition and care alternatives, and provide directions for your care.

 

General Power of Attorney

A Power of Attorney is a document that grants someone authority to act as an agent for another person.  This agent is called an attorney-in-fact.  A General Power of Attorney can be used to grant the attorney-in-fact one or more specific powers, such as the power to engage in business transactions.  A General Power of Attorney becomes ineffective upon the incompetency or death of the grantor.

 

Durable Power of Attorney

A Durable Power of Attorney is a special power that grants someone authority to act on your behalf and remains effective even when you become disabled, incapacitated, or incompetent and can no longer make decisions.  All powers of attorney end upon your death.

 

Trust

A Trust is an instrument that allows you to transfer ownership of both personal and real property and to specify management and disposition of that property.  Since a Trust is treated as essentially a separate individual, it is not counted as part of your probate estate.  A Revocable Trust allows you to maintain control of the Trust during your lifetime but is generally treated as part of your estate for tax purposes. An Irrevocable Trust requires you to give up most control, but may be helpful in reducing estate taxes and planning for long term care or special health problems of you or your family.

 

 

Trustee

A Trustee of a Trust is a person identified in the Trust to carry out or to execute the terms and conditions of the Trust document itself.  The Trustee should be a trusted advisor who is qualified to manage the business and personal affairs of the beneficiaries of the Trust.  The Trustee may be an individual or a bank or both.  A Trust may provide for one Trustee or Co-Trustees.

 

Guardianship

A guardian is one who has the legal authority and duty to care for person, a person’s property, or both, because the person is a minor, incapacitated, or disabled.  A guardian may be appointed by the court and may also be designated in a Will.

 

Estate Tax

When you die, your estate must pay tax on the assets remaining in your estate that are above the exclusion amount.  The current estate tax rate for 2013 is 40%, so it is very advantageous to plan ahead to minimize taxes upon your death.  The exclusion amount is the amount of your estate that may pass tax free to family and others.  In 2013, you may pass up to $5,250,000 tax free ($10,500,000 for married couples).  This exemption amount is indexed for inflation, but is subject to modification by act of Congress.  Due to a political environment many consider unpredictable, more and more individuals are engaging in tax planning now.

 

Gift Tax

If you give gifts to anyone during your lifetime, those gifts may be taxable and may impact the taxable amount of your estate.  Gifts are generally taxable if they are above the annual exclusion amount. In 2013, you may give any number of people $14,000 each without paying any gift tax or reducing your estate exclusion.   Any amount you give an individual over $14,000 is a taxable gift.  You have to file a tax form to record taxable gifts, but, under the current law, you do not have to pay taxes on gifts until the total lifetime amount exceeds $5,250,000; once you exceed that amount, gifts will be taxed at 40%.  The annual exclusion is available to each spouse and is not counted toward lifetime gifts.

 

Generation Skipping Transfer Tax

Generally, a generation skipping transfer is a gift of assets to a person who is two or more generations away from you.  Grandchildren are the most common beneficiary of a generation skipping transfer.  At one time it was possible to completely avoid paying estate taxes on a gift of this type.  Now these transfers are taxed when the total of all transfers exceeds the lifetime exclusion amount.  This amount is the same as the estate tax exclusion amount, and is $5,250,000 in 2013.

 

Marital Deduction

Married spouses may transfer an unlimited estate to each other upon death.  No estate taxes are due for a transfer between spouses.  However, when the second spouse dies, the estate tax must be paid based on the total estate remaining.  The second spouse to die traditionally had only their own estate tax exclusion amount available to reduce the value of his/her estate.  However, under a recent change to the law referred to as portability, the second spouse to die may now also utilize any remaining unused amount of the estate tax exclusion amount of the first spouse to die.

Lifetime Transfers

Lifetime transfers may be through gifts or sales.  Gifts can be simple transactions by virtue of a deed or bill of sale.  Sales are more complicated transactions typically involving valuation, appraisals, transfer documents, promissory notes, mortgages and security agreements.  Lifetime transfers may save, defer or reduce estate gift taxes but the transferor typically loses control.  These are complex transactions involving management, legal and tax issues.

Life Insurance

Life insurance will be a valuable tool in financial plan.  A life insurance benefit can provide assets and income after the insured is gone.  Life insurance can provide liquidity to continue to operate a business after death of the owner, pay estate taxes, pay for college education, and many other things after the death of the insured.  Life insurance trusts can be created which will remove the insurance proceeds from the taxable estate. 

Irrevocable Life Insurance Trust

An irrevocable life insurance trust is designed to own life insurance policies and to hold the death benefits for the beneficiaries.  A primary benefit of this type of trust is to remove the face value of the life insurance from the creator of the trust thereby eliminating the life insurance proceeds from the taxable estate of the creator of the trust.

Special Needs Trust

A special needs trust is one which is designed to take care of special needs of a disabled child, aged parent or someone else with special needs that have to be funded.  Such trust will include a spendthrift clause which prevents creditors from taking the trust assets or income.

Inter Vivos Trust

An inter vivos trust is a trust created by the maker of the trust prior to his death.  testamentary trusts or trusts created in a Will are not effective until the death of the maker of the trust. 

Financial Planner

Financial planners are persons educated, trained and with experience in the field of financial and investment planning to accomplish the goals of their clients.  Financial planners are a valuable resource in deciding how to structure investments so as to achieve the goals of the individual.  Individual goals may vary and individual goals will vary over time.  The financial plan for a thirty year old with young children will be different than the financial plan for someone in their retirement years.  The expert advice of a financial planner will be valuable in conjunction with the attorney the achieve the current and future goals of the client.

Investment Pyramid

The investment pyramid concept of estate planning simply states that your safest investments should be your largest investments and as you move up through various tiers of more risky but potentially higher income

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