13 ESTATE
PLANNING TERMS YOU SHOULD KNOW
Families delay doing
critical estate planning for a variety of reasons: much of it deals with
death or incapacitation, they don’t think they need planning, or it raises
touchy family issues. Another reason is that they don’t understand the
complicated jargon. Here are brief explanations of a few basic estate
planning concepts and terms that may help you feel a bit less reluctant to
do this important aspect of financial planning.
1.
Will.
A will directs where and how you want your estate property distributed when
you die, and who will take care of your children. Without one, the state
will decide according to statute. A will does not control some property with
beneficiary designations such as life insurance benefits, retirement
accounts, and trust assets.
2.
Probate
estate. The
court process that ensures that the portion of an estate passed by a will is
properly settled. Advanced estate planning can reduce the amount of an
estate that must pass through probate (subject to potential challenges by
heirs), thus saving time and fees.
3.
Executor(s) or personal representative.
The person or persons who administer your final estate. Choose wisely,
because the person oversees not only financial matters, such as filing a
final tax return and distributing assets, but may have to deal with raw
family emotions and conflicts.
4.
Advanced
directives.
The two key advanced directives are a living will and a medical power of
attorney. The living will is your expression of what life-sustaining medical
treatment you want or don’t want should you become permanently
incapacitated. 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 a child, the legal power to act
financially 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 wish to make it.
6.
Titling.
Improperly titled assets could mean property being transferred contrary to
your wishes or could result in higher estate taxes or probate costs.
7.
Trust.
A legal entity for holding property for the benefit of the creator of the
trust or other beneficiaries. Trusts are used for everything from avoiding
probate and helping heirs manage assets, to saving estate taxes and making
sure certain assets go to certain heirs.
8.
Trustee.
The person who owns, controls and manages a trust’s assets. This may be the
creator, a relative or friend, or a financial institution.
9.
Revocable and irrevocable trusts.
A revocable trust means the creator of the trust can change fundamental
aspects of the trust or even dissolve it. An irrevocable trust is where 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.
10.
Testamentary and inter vivos trusts.
A testamentary trust is established upon the creator’s death and an inter
vivos trust is established during the creator’s lifetime.
11.
Estate
tax and gift exemption amounts.
The amount of an estate’s value passed to heirs subject to estate tax
depends on the size of the estate. In 2003, the amount of estate exempt from
taxation is $1 million, rising to $3.5 million by 2009. It’s repealed
completely in 2010 but returns to $1 million in 2011. These exempt estate
tax amounts are reduced by any gift-tax exemption amounts taken during
lifetime. The maximum in gifts you can exempt from gift taxes during a
lifetime is $1 million. The exempt amounts are important when designing
trusts aimed at reducing estate taxes, such as a marital trust.
12.
Annual
gift exclusion.
Each person can donate tax free up to $11,000 (indexed for inflation) a year
to as many people as they choose. For example, you could give away a total
of $33,000 a year to your three children or three friends ($66,000 a year if
your spouse joins you). The annual exclusion does not count against the
lifetime gift-tax exemption amount.
13.
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.
‑30‑
May 2003— This column is produced by the Financial
Planning Association, the membership organization for the financial planning
community, and is provided by McGuire & Co, LLP., a local member in good
standing of the FPA.
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