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Estate planning—it is an incredibly important tool, not just for the uber-wealthy or those thinking about retirement. On the contrary, estate planning is something every adult should do. Estate planning can help you accomplish any number of goals, including appointing guardians for minor children, choosing healthcare agents to make decisions for you should you become ill, minimizing taxes so you can pass more wealth onto your family members, and stating how and to whom you would like to pass your estate on to when you pass away.
While it should be at the top of everyone’s to-do list, it can be an overwhelming topic to dive into. To help you get situated, below are some important terms you should know as you think about your own estate plan.
1. Assets
Generally, anything a person owns, including a home and other real estate, bank accounts, life insurance, investments, furniture, jewelry, art, clothing, and collectibles. In other words, your small, personal things, and your nest egg.
2. Beneficiary
A person or entity (such as a charity) that receives a beneficial interest in something, such as an estate, trust, account, or insurance policy. Usually, this means the people or organizations that will inherit from you.
3. Distribution
This just means a payment in cash or asset(s) to the beneficiary, individual, or entity who is entitled to receive it.
4. Estate
All assets and debts left by an individual at death. You have an estate if you own anything after you die. The goal is for all your assets to pass to someone else upon your death. Otherwise, a court will normally have to get involved.
5. Fiduciary
A person with a legal obligation (duty) to act primarily for another person’s benefit, e.g., a trustee (named in a Living Trust) or agent under a Power of Attorney. “Fiduciary” implies great confidence and trust, and a high degree of good faith. Choosing these fiduciaries is among the most important things you do when we’re working together on your estate plan.
6. Funding
The process of transferring (re-titling) assets to a living trust. A living trust will only avoid probate at the trustmaker’s (i.e., the person(s) that created the Trust) death if it is fully funded, meaning it contains all of the decedent’s assets.
7. Incapacitated/Incompetent
Unable to manage one’s own affairs, either temporarily or permanently; often involves a lack of mental capacity. Part of a comprehensive estate plan should include incapacity planning in addition to death planning.
8. Inheritance
The assets received from someone who has died.
9. Living probate
The court-supervised process of managing the assets of an incapacitated, adult person. Conservatorship is another term used for this process. One way to avoid this process is by having a power of attorney in place that is activated if you ever become incapacitated.
10. Marital deduction
A deduction on the federal estate tax return, it lets the first spouse to die leave an unlimited amount of assets to the surviving spouse free of estate taxes. However, if no other tax planning is used and the surviving spouse’s estate is more than the amount of the federal estate tax exemption in effect at the time of the surviving spouse’s death (in 2020, that’s $11.58 million per individual), estate taxes will be due at that time. So, if you and your deceased spouse’s combined estate is likely going to be less than the exemption, you’ll have the benefit of passing all your assets to each other without paying any estate taxes at either of your deaths.
11. Settle an estate
The process of winding down the final affairs (valuation of assets, payment of debts and taxes, distribution of assets to beneficiaries) after someone dies. Normally, either the chosen representatives or Trustees take care of handling the estate.
12. Trust
A fiduciary relationship in which one party, known as the trustmaker or settlor, gives another party, known as the trustee, the right to hold property or assets for the benefit of another party, the beneficiary. The trust should be memorialized by a written trust agreement (e.g., Living Trust), outlining how the trust assets will be distributed to the beneficiary(ies).
13. Will
A written document with instructions for disposing of assets after death. A will can only be enforced through a probate court. A will can also contain the nomination of guardian for minor children.
If you have any additional questions about estate planning or would like to schedule a consultation to learn more about what estate planning is and can do for you and your family, please contact our offices. We can make sure you have a comprehensive plan that is tailored to your unique needs and goals. (909)377-8141
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