Estate Planning Terms to Know

Estate Planning Terms to Know

For many, estate planning can seem like a daunting, complex process, which is why many of us end up putting it off until we are older. However, creating an estate plan as soon as possible is essential to protecting assets that you have worked so hard for and ensuring loved ones are taken care of after you die. In order to start building an estate plan, you will need to hire an experienced professional. However, to make for a smoother process, you should understand the following terms.


A-B Trust – A trust created by a married couple with the objective of minimizing estate taxes. An A-B trust is is a trust that divides into two upon the death of the first spouse. It is formed with each spouse placing assets in the trust and naming as the final beneficiary any suitable person except the other spouse. The trust gets its name from the fact that it splits into two upon the first spouse’s death – trust A or the survivor’s trust, and trust B or the decedent’s trust.


Administrator – (also known as ‘personal representative’) A person appointed by the court to manage an estate if there is no will or the will did not name an executor.


Annual exclusion – The amount an individual may give to someone each year free of federal gift taxes or without having to file a gift tax return. The annual exclusion is indexed for inflation and is currently $14,000 per recipient.


Attorney-in-Fact – The person allowed to handle the financial affairs of another (the principal). To become attorney-in-fact, a person must have the principal sign a power of attorney document.


Beneficiary – A person who will receive the benefit from trust assets after the trust grantor dies.


Bypass trust – Another name for the “B Trust” in A-B trust planning because this trust “bypasses” the federal estate tax in the decedent’s estate and at the surviving spouse’s death.


Charitable lead trust – A trust created during lifetime or at death that distributes an annuity to a named charity for life or a certain amount of years.


Codicil – A formal document that changes the terms of a will.


Community property – Property acquired during a marriage that is presumed to be owned jointly.  Only a few states have community property laws, and the rules can differ in these states.


Conservator – An individual who is legally responsible to care for and manage the property of an incapacitated person.


Credit shelter trust – Another name for the “B Trust” in A-B trust planning.


Creditor – An individual or institution to whom money is owed.


Decedent – An individual who has died.


Descendants – An individual’s children, grandchildren and persons who are related by blood or because of legal adoption. A spouse, stepchildren, parents, grandparents, brothers or sisters are not included.


Durable power of attorney – A legal document that allows a person to sign another person’s name on their behalf and is valid through incapacity.


Estate planning – A process that involves creating a strategy and executes a will, trust or other documents to provide for the administration a person’s assets upon their incapacity or death.


Estate tax – A tax imposed on a decedent’s transfer of property at death.  An estate tax is to be contrasted with an inheritance tax imposed by certain states on a beneficiary’s receipt of property. More than 20 states have state estate taxes that differ from the federal system, so your estate could be subject to a state estate tax even if it is not subject to a federal estate tax.


Executor – A person named in a will to carry out its terms and to administer the decedent’s estate.


Family trust – A trust established to benefit an individual’s spouse, children or other family members.  


Fiduciary – An individual to manage money or property for beneficiaries.


Generation-skipping transfer (GST) tax – A federal tax imposed on assets that “skip” a generation and are left to or for beneficiaries two or more generations younger than the donor, such as grandchildren.


Gift tax – The federal tax on completed lifetime gifts or transfers from one individual to or for the benefit of another (other than annual exclusion gifts and certain direct payments to providers of education and medical care) that exceed the gift tax exemption amount.


Grantor – A person who creates, or contributes property to, a trust.


Gross estate – Property owned by a person after they die certain property previously transferred by them that is subject to federal estate tax.


Heir –  An individual entitled by law to receive part of an estate.


Intestate – When one dies without a valid will, such that the decedent’s estate is distributed in accordance with a state’s intestacy law.


Inventory – A list of the assets of a decedent or trust that is filed with the court.


Irrevocable trust – A trust that cannot be revoked or modified once it is established.


Living trust – A trust created by an individual during their  lifetime, typically as a revocable trust.


Marital deduction – An unlimited federal estate and gift tax deduction for assets passing from the first spouse that dies to the surviving spouse.


Marital trust – A trust established to hold property for a surviving spouse in an A-B trust and designed to qualify for the marital deduction.


Personal representative – An executor or administrator of a decedent’s estate.


Per stirpes – A process for distributing property whereby descendants take the share their deceased ancestor would have taken if the ancestor were living.


Pour-over will – A will used with a revocable trust which states to pass title at death to property not transferred to the trust during lifetime.


Power of attorney – A written document that gives a person authority to act in an individual’s place as agent or attorney-in-fact for health and financial matters.


Principal – Property (e.g. money, stock or real estate) that the trust owns. Also  referred to as the corpus  of the trust.


Probate – The process of proving the validity of a will, distributing property under the terms of the will and paying debts.


Qualified Domestic Trust – A marital trust that allows a non-U.S. citizen spouse to qualify for the marital deduction.


Qualified Terminable Interest Property – Property held in a marital trust that qualifies for the marital deduction until the surviving spouse dies.


Revocable trust – A trust created during lifetime in which the grantor is allowed to to terminate, revoke, modify or amend the trust during their lifetime.


S corporation – A corporation that has made a Subchapter S election to be taxed as a pass-through entity (much like a partnership). Certain trusts are permitted to be shareholders only if they make the appropriate elections.


Settlor – One who establishes or settles a trust. Also called a “trustor” or “grantor.”


Special Needs Trust – A trust that provides for a disabled individual and eligible for government financial aid.


Spendthrift Provision – Protect assets from claims of the beneficiary’s creditors.


Tenancy-by-the-Entirety – A type of joint ownership between a husband and wife in which the entire property passes to the surviving spouse when the other dies.


Tenancy-in-Common – A type of co-ownership in which each owner possesses rights and ownership of all property, which may be transferred by gift to heirs at death.


Testamentary Trust – A trust in a person’s will comes into operation after probate and the assets have been distributed.


Testator – A person who signs a will.


Trust – An entity that holds property, which legally owned and managed by an individual, for the benefit of another (beneficiaries).


Trustee – An individual authorized to manage and distribute property according to the terms in the trust.


Unified Credit – An amount a person is allowed to deduct from federal estate taxes owed after death.


Uniform Transfers to Minors Act – A law enacted by a few states that allows you to leave assets to a minor which is managed by a custodian until minor is of legal age.


Will – A written document with instructions for distributing assets after death, names of the beneficiaries and a representative to administer and distribute property of the estate.

Once you hire an experienced professional, it is recommended that you learn the basics of estate planning prior to your initial consultation. The terms and definitions provide a high-level understand of estate planning and will help you feel prepared for when you meet with your attorney. If you are ready to create your estate plan, please contact us.

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