The Vocabulary of Estate Planning

What is estate planning? What is a trust and how do you establish one? This article explains estate planning vocabulary in simple, easy to understand language.

Probate
Probate is the state’s legal process for the 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 or above $100,000 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 with a will. The personal representative acts as an officer of the court and is responsible for the management and distribution of the estate, identifying heirs, handling claims, and other activities required by the state probate statue. 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 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, who is referred to as the “executor” or “executrix”.

Will
The will is a core document of estate planning. A will provides the mechanism to: specify the distribution of your estate, choose who will make decisions, create trusts for heirs who 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 critical – 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 their parent. All children should be mentioned in the will whatever 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 Memorandum
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 HIPPA 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 (HIPPA) privacy release authorizes a  family member or other agent to communicate with health care providers about your condition and provide directions for your care. 

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 power of attorney can be used to grant the attorney-in-fact one or more specific owners, such as the power to engage in business transactions. Under Arkansas law, powers of attorney that were created on or after the effective date of the act are considered to be durable unless the document provides otherwise. A durable power of attorney does not terminate if or when the principal becomes incapacitated, disabled, or incompetent.  However, all powers of attorney terminate upon your death.

Trust
A Trust is a legal instrument which holds assets for you or for the benefit of others and distributes those assets according to your instructions. Assets inside a trust are managed by a trustee who has legal responsibility for managing and overseeing trust proceeds in that amount, gifts will be taxed at 405. The annual exclusion is available to each spouse and is not counted toward lifetime gifts. 

Generation-Skipping Transfer Tax
Generally, a generating 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, which as of 2016 is $5,450,000.

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 planning. 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 the 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. 

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 individuals who are educated and experienced in the field of financial and investment planning. Financial planners are a valuable resource when deciding how to structure your investments in order to achieve your goals. Individual goals may 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 combined expert advice of a financial planner and an attorney will be valuable to achieve your current and future goals.  

Investment Pyramid
The investment pyramid concept of estate planning is that your safest investments should be your largest investments, and as you move up through various tiers of riskier but potentially higher income investments the amount invested in those categories should be less. The basic investment period places your home and life insurance at the bottom, then a layer of income earning investments in the middle, and ends with a thinner layer of speculative investments. Safer investments typically include your home, business, life insurance, savings accounts, and blue chip equities. The middle category of investments would include equities with potential for an increase in value over time, stocks paying dividends, safe real estate investments, etc. The smallest layer of investments would include more speculative stocks such as text stocks that would be expected to grow in value but not pay dividends, more speculative real estate investments, etc. 

IRS CIRCULAR 230 DISCLOSURE
To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice contained in this brochure was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any matters addressed herein. 

Download this article